CNH Industrial NV (CNHI) 2005 Q4 法說會逐字稿

Good day everyone, and welcome to the CNH 2005 year end results conference call.

This call is being recorded.

Hosting the call today will be 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.

Thank you Philip.

Welcome everyone to CNH's fourth quarter and full year 2005 results webcast conference call.

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

In recognition of Regulation FD we have provided public guidance in this morning's press release which will be elaborated on in today's call.

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

We 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 on the important risk factors and uncertainties in the Company's businesses that are subject to change and could cause actual results to differ materially from our expectations today.

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

Finally, this conference call and webcast are being recorded.

Their contents are the property of CNH Global N.V. and are not to be rerecorded or rebroadcast without our express written permission.

Now to Michel for his comments.

Thank you Al and hello everyone.

On slide 4 we see the trend of the total worldwide Tractor and Combines industries in the fourth quarter.

The worldwide tractor industry was up in the quarter compared to recent years mainly from strong sales in China and other Rest of the World markets.

The Combines industry however was weak as expected.

On slide 5 worldwide Tractor industry retail unit sales increased about 12% in the fourth quarter 2005 on the strength of a 57% increase in industry sales in Rest of the World markets.

In North America industry sales of utility Tractors in the 40 to 100 horsepower range were unchanged.

Sales of over 100 horsepower tractors were down 1%.

And four wheel drive tractor sales were down 18%.

Industry sales of under 40 horsepower tractors were up 4%, significantly better than expected.

Tractor industry sales in Western Europe on a preliminary basis were down 10%.

We have witnessed in Spain down 17% because of the drought.

Italy down 14% and France which was down 12%.

Although the market in Germany was ahead of industry.

In Latin America, the market decline continued with Tractor industry sales down 20%.

Brazil was down 41%, where the over 100 horsepower tractor market was down 50% filling up the decline in Combines.

Argentina was up almost 20% but all other markets combined were down.

Worldwide the Combines industry unit sales declined 24% in the quarter with the continuing decline in Latin America.

Brazil was down 65%, and Argentina was down approximately 5%.

The Combines market in Western Europe declined about 2% and market performance varied significantly by country.

There were increases in some of the larger markets like Germany up 21% and France up 9%, whilst Spain was down 62%, Italy was down 14% and the U.K. market was down 27%.

The market decreased by about 16% in North America and 19% in the Rest of the World.

On a unit basis our worldwide Tractor share was down but our Combines share was up.

However, on a margin basis, our total AG volume and mix was up $30m in the quarter.

On slide 6 you see the trend of our total worldwide Tractor and Combines industry retail sales on a full year basis.

And as we have seen on a quarterly basis the worldwide Tractor industry was strong but Combines industry sales were weak.

As you know, already, much of the change of the Combines industry sales was driven by Latin America.

On slide 7 we see the year-on-year percent changes for full year 2005 Agriculture industry per unit volumes.

Worldwide Tractor industry sales increased about 5% on the strength of a 26% increase in Rest of World market primarily in China which was up over 50%.

In North America industry sales of utility tractors in the 40 to 100 horsepower range were up 6%.

Sales of over 100 horsepower tractors were up 1%.

And four wheel drive tractor industry sales were the same as in 2004.

Industry sales of under 40 horsepower tractors were down 4%, as the strong fourth quarter could not reverse the decline of the first three quarters.

Tractor industry sales in Western Europe, again on a preliminary basis were down 6%, with significant weakness in Spain down 17% and France which was down [inaudible].

The Italian market was down only slightly, why the market in Germany was up about 7%.

In the Latin America, Tractor industry sales were down 19%, the market in Brazil was down 39%, with the over 100 horsepower market down 60% similar to the decline of the Combines market as these products share the same large farmer customer base.

The market in Argentina was up 5% and all the other markets combined were up 4%.

Worldwide Combines industry unit sales declined 16% led by the decline in Latin America with the market in Brazil down 73% and Argentina down about 37%.

The market in Western Europe was up about 6%, as increases in Germany at 33% and France at 19% more than offset the declines in Spain, down 48%, Italy down 36% and in the U.K. market which fell down 17%.

And the market was flat in North America, while Rest of the World markets were up about 10%.

So as you can see the picture of the industry was one of significant variances among the markets.

The trend of Construction Equipment industry per unit sales on slide 8 continued to strengthen in the fourth quarter.

Industry unit sales of heavy equipment were up 7% as were sales of total light equipment compared to the fourth quarter last year.

Slide 9 shows the fourth quarter 2005 year-over-year industry changes in Construction Equipment industry per unit sales by region.

The worldwide Backhoe Loader market was up 8% with a 22% increase in the Rest of the World market.

The Skid Steer Loader market was flat and Heavy Construction Equipment was up 7% driven by 15% in Rest of the World markets.

Industry sales in both China and Eastern Europe were up over 70%.

Our world wide market share of total light and heavy equipment was essentially flat with 2004 with some gains for Backhoe Loaders in North America.

For the full year, Construction Equipment industry unit sales on slide 10 continued its strong upward trend.

In total, industry unit sales in heavy and light equipment were up 11% compared to full year 2004.

Slide 11 shows the full year 2005 year-over-year percent changes in Construction Equipment industry unit sales by region.

World wide the Backhoes Loader market were up 15% including a 29% increase in the Rest of the World market.

The Skid Steer Loaders market was up 4% and the strength of the market outside of North America including a 15% increase in the Rest of the World market.

Heavy Construction Equipment was up 8% driven by the 15% increase in North America.

And in addition [Backloe Loader] markets were up 4% with an 11% increase in Spain, 7% increase in the U.K., 5% almost in France, while the Italian market was down 11% and Germany went down slightly, perhaps 1%.

The Rest of the World markets were up 5% despite a market decline in China of around 15%.

In total, our world wide market share of light and heavy equipment was down slightly from last year, but with some gains for Backhoes Loaders in North America.

Also note that the Skid Steer Loader market numbers do not include the new track loader product so that could be something there which is not being considered.

Slide 12 shows our fourth quarter net sales of equipment for the past three years.

At [$200b] our net sales of equipment in the quarter were essentially the same as last year.

World wide net sales of Agriculture equipment were down 4% and were impacted by declines in the Tractor and Combines market in Western Europe and Latin America.

In total, AG sales declined $93m per volume including new products but mix was favorable and margin effect of the volume and mix change was $30m.

AG pricing increased net sales by $53m or 3%, primarily in North America and Europe.

Currency accounted for about 2% of decrease in sales.

And on a 4-1-1 supply basis our worldwide Tractor and Combines industries inventories at year end were about 1.5 months higher then the end of 2004.

Turning to Construction Equipment, net sales increased by about 7%.

Volume and mix were positive $15m, primarily in North America.

Pricing was positive in all major markets increasing net sales by $41m or about 4%.

Sales including net sales by 2 points.

World wide on a 4-1-1 supply basis at year end inventories were up at 1.5 months on the year end 2004 for total heavy and light construction equipment.

On slide 13 we see the same format as on slide 12 for the full year net sales of equipment. 2005 net sales of equipment were ahead by $8b, about the same as last year, excluding currency variations.

AG sales were down 2% while Construction Equipment sales were up 12% compared with 2004.

Currency accounted for 2 point increase for AG and a 1 point increase for Construction Equipment.

Net pricing was a significant [percent] on the period up about 5% in Construction Equipment and about 4% in AG.

Slide 14 shows the segment contribution of our operating margin for the fourth quarter of 2004 and 2005.

As you know, we measure the performance of our businesses -- business segment using IFRS accounting principles, followed last year, as explained in a press release footnote 14.

At the top of the slide we see $108m of total industry operating profit for the fourth quarter of 2005 as reported this year.

Below that are the adjustments for trading profits for industrial operating margin in U.S. GAAP.

At the bottom of the slide is the margin split between our two equipment businesses.

And as you can see our AG industry operating margin increased by about $1m, 2.1% of net sales.

And for Construction Equipment margin improved by $26m or 8.7% of net sales.

Slide 15 shows the factors contributing to year-over-year change in our fourth quarter industry operating margin.

Our industry operating margin is defined as net sales less cost of goods sold, SG&A and added expenses.

Volume and mix were up by approximately $32m primarily because of new products launched in the last year and better AG product mix.

Volume and mix at Construction Equipment was essentially flat excluding new products.

Pricing net of foreign currency economic impact was negative $1m.

Gross pricing went up $94m while cost increases from the economics and currency including higher steel costs totaled $95m.

Net price recovery was negative for AG but positive for Construction Equipment due to the relatively higher pricing of Construction Equipment.

Gross margin and cost of net sales increased by 1.9 percentage points in the quarter, with improvements at both Agriculture and Construction Equipment operations.

Unit costs excluding currency variations increased $18m in the quarter for higher marketing and supply chain initiative spending.

R&D costs increased $11m reflecting our investments in new tear free omission compliance products.

Manufacturing efficiencies and other savings were approximately $25m in the quarter mostly in AG and reflect both improvements in efficiencies and manufacturing costing savings.

A quick point on our economic increases in the quarter.

Currency increased year-on-year by about $95m, slightly less than 4% of our cost of goods sold.

About 20% of the increase in AG was related to steel purchases.

And we continue to see some steel cost increases from the third to the fourth but at a smaller rate of increase.

We also saw increases in sheet steel, utilities and plastic costs going forward.

On slide 16 we see the segment contribution to our industrial operating margins of full year results in the same format as slide 14.

By unit our AG industrial operating margin declined by $47m to $340m or 4.3% of net sales, mostly the result of the activities of the first nine months of the year as we discussed last quarter.

While Construction Equipment improved by $85m to $265m or 6.7% of net sales.

Slide 17 shows the factors contributing to the full year, year-by-year change in our 2005 industry operating margin compared with 2004 levels.

Volume and mix went down by approximately $97m and this decline was principally because of AG's performance in the first nine months of the year which was strongly impacted by the decline in the Brazilian Combines industry and by Western European Combines restocking.

Construction Equipment volume and mix was positive as was the contribution from new products.

Pricing net of currency and economic impacts was positive $107m, net pricing was up $478m while the cost increases from economics and currency including higher steel costs totaled $371m.

Net price economy was positive for both AG and Construction Equipment, however, it was stronger at AG despite Construction Equipment's positively higher pricing on a custom basis.

Fuel cost increases were more significant for Construction Equipment as plate steel prices have continued to increase throughout the year.

Gross margin as a percent of net sales increased by 0.6 percentage points with improvements at both Agriculture and Construction Equipment operations.

S,G&A costs excluding currency valuations increased $27m for higher marketing and supply chain initiatives spanning as we have been discussing all year.

R&D cost increased $26m or about 10% reflecting our investments in new [TFE] omission compliance products.

Manufacturing efficiencies and other were up approximately $81m of full year savings, mostly in AG, and they include significant improvements in efficiencies, manufacturing footprints savings and [inaudible] savings.

A quick point on our full year economic increases.

Cost increased year-by-year by about $731m.

That's 3.8% of 2004 cost of good sold. 50 to 55% of the increase was directed related to steel purchases.

Slide 18 shows our results for the fourth quarter and full years of 2003, 2004 and 2005.

At the top of the slide we see business operations profit before taxes, minority interest and restructuring charges.

The [inaudible] improvements on the fourth quarter to fourth quarter 2005 reflects the Combines improvements of its business operations operating margin and our unconsolidated subsidiary net income.

For the full year 2005 the total improvements is $74m or 35% compared with the same period last year.

The bottom of the slide shows net income before restructuring charges, the year-over-year change for the quarter and the year as expected and reflects our higher tax rate this year.

Now let's turn to Equipment operations change in net debt on slide 19.

Equipment operations net debt declined by $120m during the quarter.

Contributions from net income, depreciation and amortization and changes in working capital were partially offset by changes in other assets and liabilities.

In the quarter, equipment operations we paid about $400m of trans debt otherwise due to Fiat in May 2006.

This was funded by a return from financial services of $433m of its borrowing from Fiat operation.

At the end of the quarter Fiat Equipment operations had debt with Fiat [inaudible] totaling $853m and deposits in Fiat [inaudible] cash management pools totaling $578m.

Making these amounts CNH has net borrowing from Fiat of about $275m.

Next, slide 20, shows the $566m net debt reduction for full year 2005 and the $617m reduction in 2004.

Changes in working capital were a significant contributor to cash generation.

Changes in working capital improved the consequences of consolidating ownership and management of accounts receivables at financial services, totaling about $400m in 2005 and $600m in 2004.

Excluding the receivables transfer, working capital increased by about $90m in 2005, but net debt declined by about $160m.

On slide 21 I would like to review the pluses and minuses of the past quarter.

First is what happened in our market during the fourth quarter.

Construction Equipment industry remained strong as generally expected.

The world wide agricultural equipment market were up 10% in the quarter, better than what we had expected especially for under 40 horsepower tractors in North America and for tractors in the Rest of the World market.

A continuing weakness in the Western European and Latin America AG markets however, was a disappointment especially for Combines.

Material cost increases did not decline as expected.

We were expecting that these cost increases would start a decline and that didn't happen.

On the other hand, pricing recovers cost increases in total.

Finally manufacturing efficiencies contributed significant cost reductions in the quarter.

On slide 22 I would like to review the pluses and minuses for the full year.

First, of course, is our reorganization to focus on our global brands as we discussed last quarter.

Next is what happened in our markets.

One year ago we believed that the worldwide tractor markets would be essentially flat, up slightly for full year 2005.

At the end of the year slightly better than expected particularly for under 40 horsepower tractors in North America.

The North American high horsepower tractor market was up about 5% as expected.

We can expect that the worldwide Combines market to be down 10 to 15% and the ended-up down slightly more than expected.

The Construction Equipment industry was significantly stronger than what we had expected for both light and heavy equipment, especially in North America.

As I said a few minutes ago the continuing increases in material costs has been disappointing.

But we did manage to more than offset poor economics and cost increases for the full year exploiting that price recovery at both AG and Construction Equipment operations.

Manufacturing efficiencies contributed significant cost reductions for the year totaling $130m, about two-thirds from AG and one-third for Construction Equipment.

And remember that we closed both [inaudible] [Marine] and [Krepee] in 2004 giving us a full year of savings in 2005.

The biggest minus for last year was the significant loss in industry values in Latin America for both tractors and the weakness of the tractor industry in Western Europe.

Turning to our industry outlook for the first quarter and full year 2006 on slide 23, we expect full year Agriculture world wide industry sales to be flat or down slightly compared to the high levels of 2005.

We expect worldwide Tractor industry to be down, perhaps as much as 5%, with industry sales of Combines down a bit more, perhaps 5 to 10%.

As you can see on the slide our expectations are very similar for every market -- major markets.

For the first quarter we expect Tractor markets to be weak in line with the full year expectations and the Combines market to be slightly worse as the full year trend particularly in Western Europe and Latin America.

On to Construction Equipment industry on slide 24 we announcement for slightly stronger industry trends in 2006 then in 2005 for both heavy and light equipment.

We believe light equipment industry unit sales could be up as much as 5% for the full year and heavy equipment to be up above 5%.

In general we expect that the North American and Rest of the World markets would be stronger than in 2005 while the Latin American and Western Europe markets would be weaker although still at high level compared to recent years.

The first quarter 2006 industry unit sales should be in line with the expected trends for the full year.

As far as our Company outlook is concerned on slide 25, CNH expects that its net sales of equipment for the full year will increase by about 2 to 5%.

Improvements in market share, continuing pricing and ongoing margin improvements at the Equipment operations will drive the margin growth.

Profitability at Financial Services and at CNH joint ventures we expect them to remain in line with 2005.

And the benefit of improvements at CNH operations will be partially offset by another increase in CNH effective tax rate.

CNH has recently undertaken a strong and comprehensive review of its global operations designed to close its performance gap to best industry competitors.

It has designed and is in the process of implementing its three year plan to achieve this objective.

As a result CNH anticipates net income before restructuring for 2006 will improve [inaudible] and the full benefit of this plan will not be visible until 2008.

In addition to the restructuring costs, net of tax, are expected to be slightly higher than 2005 as CNH complies with the balance of the cost for efforts to plan the decline in manufacturing in [Lyon].

The Company expects to contribute approximately $120m to the U.S. defined benefits pension plan in 2006 and that's a continuing contribution.

Equipment operations expect to generate cash and to use that cash to further reduce its net debt by approximately $250m.

That's compared with year end levels.

This concludes by comments and I believe that we are ready to begin the Q&A session.

Thank you Michel.

For the Q&A session we ask everyone please limit themselves to one question and one follow-up at a time.

Phil, could you please retrieve the first question.

[OPERATOR INSTRUCTIONS].

First we go to Jeff Gobans, with UBS.

Can you hear me?

Yes, we do.

I was wondering if you could maybe discuss the break out on revenues and EBITDA between guarantor and non-guarantor groups for full year 2005?

If I understand the question you're asking the breakdown of the EBITDA for 2005 between the guarantor and non-guarantor, right?

Yes.

Okay, because I did not understand you, I'm sorry.

So we have not finalized the detailed calculation at this point, but I believe that the ratio should have improved compared to the previous year.

As you know, we have been improving the profitability in North America and probably the contribution of the Latin America which is part of non-guarantor group which is less.

So I think for the sales and assets the ratio of the past year which is about two-thirds the guarantor and one-third non-guarantor is still valid.

And on the EBITDA side I would say probably slightly more than the half of the guarantor group versus the non-guarantor.

But it is preliminary view and not based on detailed calculation at this point.

And one quick question on your free cash flow forecast of $250m for '06.

How much of that comes from an expected working capital reduction, and I was also wondering what do you think cash passes will be?

I believe that if I was to answer your question I would a make federal comment.

In measuring our performance compared to best competitors we believe that we have improvements possibilities in management of the working capital.

So as part of our plan for 2006, and as I mentioned in my speech, we have dedicated some resources to improve the supply chain profit.

The other way to answer your question is also to look at how production is going to be compared to retail, and we expect in 2006 to be producing slightly less then retail.

And the plans will be from about 3 to 6% [inaudible] equipment of the AG business.

So in other words we expect to be under-producing the retail activity and therefore have an impact on the working capital.

Could you quantify that?

I would say over $100m.

Of working capital improvements this year?

Right.

Thank you.

We go next to David Raso with Citigroup.

I just wanted to try and delete the three different points you make about costs having gone down as much as you anticipated which was to necessitate a little more pricing action in '06.

At the same time you state that you focus on market share is gaining.

In the other direction you're still looking to under-produce in retail in '06.

Can you pull us together on where you're focusing the market share gains and what are you thinking about pricing in '06 relative to '05?

And obviously any earlier feedback on how it's ticking would be helpful.

This is Harold Boyanovsky.

I'll comment first on the market share.

As you know in 2005 we restructured the European Construction organization and focused on two brands, CASE and New Holland.

So for most of the year we've been in the process of working through the distribution change and as we move into 2006 our emphasis is on improving the overall retail and performance of the distribution network.

Secondly, on the CE side we have two major activities that will provide some inertia to the brands.

One is in North America where we will have a re-launch of the new global styling in the first quarter of the New Holland product range and secondly we will have, in 2006, a full year of our new compact tracks Skid Loader which has been received very well by the market place.

On the Construction equipment side -- excuse me, on the Agriculture Equipment side we're looking for performance improvement in both North America and Europe particularly as we look at the first half of the year where in 2005 we did have some spot shortages of mid range tractors but overall we're in the process of launching, towards the end of the first quarter, a complete replacement of the Magnum or Cash Crop High range of high horsepower real crop tractors and also our large four wheel drive range.

At the same time while doing obviously the pressures of the new AG tractors are going to have the new emission engines so you, especially with higher products as well, are going to need to raise prices on those.

While we're thinking of market share, and obviously it's critical given the gross margins cycle haven't rebound as much we would have thought due to, in part, the market share loss.

How does that all fit in with getting the pricing licked?

Can you give us some quantification of what you're thinking for pricing between Construction and AG in '06 whilst still accomplishing your market share goals?

First, let me comment on the emission engines.

Any pricing we take relative to the new products will be equated to performance to the contractor or farmer customers.

And in those new model launches that we talked about, particularly the high range Row Crop tractors and four wheel drive tractors there is incremental performance improvement in those vehicles in addition to the engine.

Relative to pricing between AG and CE.

We were up about 3.8 points in 2005 and we see about 3+ in '06.

CE we were up about 5, as Michel commented.

And we see that moderating to something over 1%.

That's interesting.

The demand is obviously stronger in construction right now than for Ag.

Why such a lower price increase on construction or is that -- should I just read into it that's a big growth on the market share gain?

Well clearly we have been very aggressive, as we indicated throughout 2005.

And Michel's [program] on the CE side of the business.

And we're more cautious as we enter the new year because we need to approve the overall share performance.

You say aggressive in '05.

You say you're raising your price at 5% number?

So, okay.

And sorry, one last quick related question --

David, can you get back in the queue?

That's fine.

I understand.

Thank you Al.

We go next to [Chris Von Carrs] at [Safe Asset Management].

Hi.

Good morning gentlemen.

I was hoping to get some more color on what you're seeing demand-wise in light construction equipment in North America.

How did the pace of sales progress through the quarter?

Did they start slow and get fast or vice versa?

And related to that, why do you see it going from a down comparison in Q4 to an up comparison in Q1?

In --

North American light construction.

North American light equipment, and for us in the industry, October/November was relatively strong.

December was down versus expectation.

But we all had in mind the change in the accelerated tax investment credits that contractors were getting in the fourth quarter of 2004, which ended.

And so we're cautiously optimistic because overall construction spending will be up, although residential construction is forecast to be down a little in 2006.

But overall, the indicators are still very solid in North America.

And we think the fourth quarter was impacted by the year-over-year investment tax credit buying that we had in 2004.

Thank you very much.

We go next to Andrew Obin with Merrill Lynch.

Hi.

Good morning.

Morning Andrew.

In regard to this long-term plan to get the margins up by 2008, what is your underlying view about global agriculture for the next three years?

And do you need relatively flat volumes in global Ag to make these targets?

Well, I think that based on the swings and performance on the various agricultural segments and the regions, we're cautiously optimistic about the next several years in the market.

Clearly the biggest change has been the Brazilian situation.

And, as we indicated, we're not expecting a recovery of that situation in 2006, at least.

But, having said that, that impact was already with us in 2005 and we don't see much change in 2006.

But, in general, the emphasis is in several areas.

One is taking a look at our product cost configuration versus the best-of-class competitors in each sector.

And so we have initiatives focused on complexity reduction and also reducing the cost of goods sold, which has nothing to do with the industry change.

Also we think we have an opportunity in our spare parts business to grow the top line and get some more efficiency in our depot operation cost.

If I may add a few comments to your questions.

I believe that as we indicated in our outlook review, the Latin American market being down in 2006, that frankly speaking then it would be the trough of the cycle in Latin America.

So there would be a lot of rebound in this market for sure later on, especially once the fees of the farmers will have to be improved, especially for productivity reasons.

But we are seeing also in the recent past is a consistent strength of some of the Eastern Europe markets.

And I think this is also an effort too, with a significant investment that these countries are making in large equipment.

Also looking for productivity.

And as I mentioned also, we have been also surprised to a certain extent by the strength of the Asian market that we probably don't speak a lot about these days, but are going to be part of our long-term view anyway.

And can I just follow up on another long-term question about your capital structure?

What do you think is the appropriate level of net debt for the Company, going into a downturn, assuming it's for the next several years?

And is anything going to happen between you and Fiat.

Or Fiat are still so much focused on resolving the order issue that this is just on the back burner for them?

I cannot answer for Fiat obviously.

But speaking of CNH, what we have been saying and I think this would be the best for CNH is to -- and hopefully we will be at the top of the cycle for the industry, mostly in North America and Western Europe who have as little debt as possible.

So I'm not saying that the target is zero.

But I would say it has to come down again and to be at the minimum possible when we would be at the top of the cycle.

Okay.

And no resolution with Fiat, at least.

You're not seeing anything moving ahead from your side with the type of structure with Fiat, right?

I think perhaps that's a question best asked of Fiat, Andrew.

Thank you very much guys.

Charlie Rentschler, Foresight Research.

Yes, good morning.

Morning Charlie.

I want to talk some more about the restructuring.

Essentially it seems to me CNH has been restructuring its business since the merger back in 2000, and closing -- going from 60 something factories to 34 or 35.

And now you're talking about cranking up the restructuring program again.

And it's been ongoing, but I'm a bit confused or bemused by what's involved here.

Harold, a few moments ago you talked about looking at product costs and trying to get more competitive in that regard.

But what about brick and mortar?

Is there more downsizing or rightsizing involved here?

And why can't this be done in 18 months instead of 36 months so that we can get through this and finally get gross margins up where we've been led to believe they can get to in, let's say, the low to mid 20s?

I think I'll add a comment and then let Michel add some commentary.

One, in our three-year plan, we're not planning on significant footprint changes.

We've announced the closure of a facility in Europe and we're under way as we speak in that negotiation.

So we're really focused on designing cost out.

And, as you know what the complexity of our products and the many crop applications that we have, it's not something that you can just get done in a 12 to 18-month period without having the adequate reliability that we demand and our customers demand.

Okay.

For my follow-up, totally unrelated, but back to Brazil and South America, the chart on page 23 would imply that the first quarter's going to be pretty ugly.

But then 5 to 10% down for Latin America for the full year that would suggest that things would begin to recover.

Do you guys think that Brazil might hit bottom some time in the, say, second quarter, third quarter and then come back up.

And would that augur pretty good year for '07?

The situation in Brazil is mostly related to commodity pricing and also the currency status.

As you know, the Reais has been appreciating in the last few months.

And a little this is also impacting the large farms which are exporting significant.

So, it's true that we are believing that the first quarter is not going to be good for that particular reason.

But keep in mind that also the situation, we are comparing to the prior year, and a significant [up] of the market in Latin America took place part in first quarter, but also especially afterwards.

So we are not comparing quarters which are exactly equal.

For the time being, as we are in Latin America in the summer season, we haven't seen yet any sign of importance.

Thank you.

We go next to David Bleustein with UBS.

Good morning.

Most have been answered.

I just wanted to make sure I understood the pricing right.

In 2006 you're looking for 3% pricing, 1% in construction and 5% in Ag?

No.

We said about -- in 2005 we said that Ag did increase about 3.8 to 4%.

And we believe that the pace of the increase will be slightly less than Q3.

For construction equipment we achieved about 5.

Close to 5.

And we believe that we will be probably around 1.5 points.

Okay.

So overall in '06 you're looking for closer to 2% growth?

Yes, I've not made the weighted average, but I think that's probably right.

Okay.

And as for improvement in market share, you mentioned mid range, world class and four-wheel-drive tractors as target areas.

Would that be in the States, in Brazil, in Western Europe?

Where do you think the biggest opportunities are?

North America, and also Western Europe.

And the same with CE.

Who is vulnerable?

Where do you think the competition is soft and your new products will -- ?

I would refrain from commenting on that.

I don't want to give any competitors an advantage.

I had to try.

Okay, thanks.

We go to Jamie Cook with Credit Suisse.

My first question, one, could you just talk a little bit about what your material cost assumptions are in 2006?

And then second, if you could just talk about what your assumptions are.

Are you assuming any benefits or will you benefit from the hurricanes down in the Gulf Coast area?

On the material cost side, what happened in 2005 has been a significant increase compared to 2004 of the steel costs.

We see -- we have seen recently some moderation in price of steel.

And potentially we believe that will have some reaction in the sales costs in 2006.

What's happening now is the consequence of the rise of the oil derivative materials.

So basically plastics.

But also, of course, utility price [increase].

So overall, we firmly believe that the total material costs level that we have achieved at the end of ‘05 will be stable in 2006.

Or there will be some carry over of increase of '05 into '06.

But there is not probably that what we expected in what we got in 2005.

On the Katrina subject, it's very hard to measure the consequences.

What we believe is that this could probably have some impact on our long period.

I agree with Michel.

And fundamentally we have had increased enquiries of construction equipment, both from the national rental companies as well as our dealer organization.

And the amount of increase really depends upon the funding and the speed of the rebuilding to the areas impacted by the hurricane.

But, having said that, again, residential construction is forecasted to be a little soft in 2006 and so there may be an offset there.

I'm sorry, last, did you guys give a tax rate for '06?

I know you said it should increase but --

The statutory tax rate in Netherlands, as we are a Dutch company, is 31.5%.

But I believe that as most of our operations -- a significant part of operations are in North America, the tax rate will be probably north of 35% in 2006.

Great.

Thank you very much.

Operator, I think we have time for one more question.

This is our final question and is a follow-up from David Raso.

Yes, hi.

This is the last question I had again.

The track loader market, I know it's never in the industry data for the [inaudible] [tiers].

Could you help me understand, the progress in that market appeared to be very robust in '06 after a very strong growth the last couple of years.

Can you help me understand what kind of growth rate do you think the industry for track loaders can put up in '06?

That's a little difficult, David, because, as you indicated, it's not reported to the association.

But for us it's significant because we just really effectively got the units into the market in the second half of the year, still in the pipeline.

But the growth for us will be 1000 plus units year over year.

That's coming from a small base, so we're talking multiples of --?

Yes.

Yes.

And in competitively, obviously [inaudible] in Europe and [inaudible] are strong.

In North America we've got obviously [inaudible] with his presidents and [ADSI].

How shall we think about what you think is a realistic opportunity to get your share to extend 15% quickly?

Or is the market growing so fast there should be nothing about the market share.

This is just throwing a [hat] in the ring and going with the growth?

Yes, right now it's in an accelerated growth mode and could clearly -- for us, the opportunity is to participate through our strong distribution network with both of our brands, Case and New Holland Construction in North America.

And the reason of the growth is it just provides the customer more flexibility to work in climate conditions where rubber tires, [skid steers] are not able to go.

And wet weather, etc. etc.

And lastly, how much was it cannibalizing your real [inaudible] sales?

Hard to tell.

This last year I don't think it had an impact.

We're aware of the potential cannibalization but it's really too early to tell.

But these are more profitable than the [wheels]?

Yes, absolutely.

Great.

Thank you very much.

Okay.

Thank you everyone for joining with us today.

If you have any further questions, this is Al Trefts, please don't hesitate to give me a call.

Good day.

That concludes today's conference call.

Thank you for your participation.

You may now disconnect.