CNH Industrial NV (CNHI) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the CNH 2006 Second Quarter Results conference call. Hosting the call today will be Mr. Al Trefts, Senior Director of Investor Relations and Capital Markets. At this time I would like to turn the call over to Mr. Trefts.

Thank you, Naomi. Welcome, everyone, to CNH's Second Quarter 2006 Results webcast conference call. We are pleased to have with us today Harold Boyanovsky, our President and Chief Executive Officer, Michel Lecomte, Chief Financial Officer, and Camillo Rossotto, 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 three. 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 on the slide, the Appendix contains reconciliations to U.S. GAAP of various non-GAAP measures we use in analyzing our performance.

Finally, this conference call and webcast are being recorded, the contents are the property of CNH Global N.V., and are not to be re-recorded or re-broadcast without our express written permission.

Now I would like to turn the microphone over to Michel for his comments.

Thank you, Al, and hello, everyone.

On slide four, we see the trend of the total worldwide tractor and combines industries in the second quarter. The worldwide tractor industry was up 10% in the quarter on the strength of a 37% increase in the rest of the world markets. All other markets were down, about as we had expected.

The combines industry, however, was slightly stronger than expected. It was better than expected in North America but still slightly down, and in the rest of the world markets, but worse than expected in Latin America, primarily Brazil, which had its eighth consecutive quarter of year-over-year decline in combines industry sales.

On slide five, we see the worldwide tractor industry retail unit sales change by markets. In North America, within the over-40 horsepower category, industry sales of the utility tractors in the 40 to 100 horsepower range were up about 2%. Sales of over-100 horsepower tractors were down 15%, and four-wheel drive tractor sales were down 29%.

Tractor industry sales in Western Europe, on a preliminary basis, were down 3%, but with strength in Germany and in the U.K. The markets in France, Italy and Spain were down, as well as all of the other Western European markets in total.

In Latin America, the market decline continues. Tractor industry sales were down 7%, worse than we expected. Brazil was up about 1%, with under-100 horsepower tractor sales down about 10% and over-100 horsepower tractor sales up 24%. But Argentina and all the other Latin American markets were down between 10 and 15%.

Worldwide combines industry unit sales declined 3% in the quarter, with the continuing decline in Latin America offsetting some strength in the rest of the world markets. Brazil was down 66%, Argentina was down about 20% and all of the other Latin American markets also were down in total.

The combines market in Western Europe declined about 2% and market performance varied significantly by country. Markets like France, Italy and the U.K. were down, while Germany was up almost 20% and Spain was up over 30%. All other Western European markets in total were down. The market in North America was down less that -– than we had expected, while industry sales in rest of the world were up rather than down, as we had expected.

On a unit basis, our worldwide tractor share was essentially the same as last year, but our combines market shares were up nicely compared with last year's in all regions.

On slide six, we see the trend of the total worldwide tractor and combines industries in the first six months. The worldwide tractor industry was up 15% on the strength of a 43% increase in the rest of the world markets. The market in North America was flat, Western Europe was virtually flat and Latin America was down, as expected.

The worldwide combines industry, however, was down. It was better than expected in North America and in the rest of the world markets, both of which were up, but was worse than expected in Latin America.

On slide seven, we see the same chart as in slide five but for the six months. In North America, within the over-40 horsepower category, industry sales of utility tractors in the 40 to 100 horsepower range were up about 3%. Sales of over-100 horsepower tractors were down 10% and four-wheel drive tractor sales were down 13%.

Tractor industry sales in Western Europe, on a preliminary basis, were down 1% with strength and weaknesses similar to what we saw in the second quarter. Germany and the U.K. were up, while everything else in Western Europe was down. In Latin America, the tractor market in Brazil was flat for the six months, with under-100 horsepower tractors down about 7% and over-100 horsepower tractors up about 11%. Argentina and all of the other Latin America markets were down, and in the rest of the world markets, again, China, Pakistan and Turkey were the major drivers.

Worldwide combines industry unit sales declined 6%, with the continuing decline in Latin America offsetting some strength in the rest of the world markets and a slightly better North American market. Western Europe in total also was down.

So, on a unit basis, our worldwide tractor share was essentially flat but our combines market shares were up compared with last year.

The trend of construction equipment industry retail unit sales, on slide eight, continued to strengthen in the second quarter, in total, about [86]%. Industry unit sales of heavy equipment were up 6% and sales of total light equipment also were up 6% compared to the second quarter last year.

Slide nine shows the second quarter 2006 year-over-year percent changes in the construction equipment industry retail unit sales by region. The worldwide backhoe loader market was down 2%, but with strong increases in Latin America and rest of the world markets, including Brazil, Mexico, China and Eastern Europe.

The skid steer loader markets went down 5% as the decline in North America, respecting some slowdown in the rental markets, was not offset by the increases in all the other markets.

Heavy construction equipment was up 6% with strong increases everywhere except North America, which was essentially flat. Germany was the driver of the increase in Western Europe, as was China in the rest of the world markets. In Latin America, it was countries other than Brazil that were up. Our worldwide market share of total light and heavy equipment was essentially flat with 2005, with gains for backhoe loaders and skid steer loaders.

Slide 10 shows the trend of construction equipment industry retail unit sales for the first six months, with industry unit sales up about 11% in total. Industry unit sales of heavy equipment were up 12%, with sales of light equipment up 10%.

Slide 11 shows the six months year-over-year percent changes in the construction equipment industry retail unit sales by region. The worldwide backhoe loader market was up 1% with strong increases in Latin America and rest of the world markets. The skid steer loader market was flat, as the decline in North America was offset by the increases in the other markets.

Heavy construction equipment was up 12% with strong increases everywhere, driven by strong construction spending and growth in China. Our worldwide market share of total light and heavy equipment was essentially flat with 2005, with gains for backhoe loaders and skid steer loaders.

Slide 12 shows our second quarter net sales of equipment for the past three years. At $3.5b, our net sales of equipment in the quarter were up 3% from last year at incurred conditions, up 2% at constant currency.

Worldwide net sales for agricultural equipment were down 2% at constant currency, principally as a result of actions taken by the Company in North America to reduce dealer and Company inventories, primarily in the higher horsepower categories, to adjust to the industry environment. This year, in the second quarter, we under-produced our retail unit sales in North America by 15%, while last year in the second quarter our production was essentially equal to retail.

For the quarter, our change in AG sales by causal factor was an increase of $41m for pricing, $21m for currency and $20m for new products, offset by a decline of $109m for volume and mix, which was more than explained by the decline in North America, as we just said.

AG pricing of about 1.8% of net sales was mostly a carry-over from last year. Pricing was positive in all markets and strongest in the North American and rest of the world markets. The currency change represented about 1% of net sales.

On a forward-month supply basis, we estimate our worldwide tractor and combine inventories at quarter end were more than one and a half months of supply lower than at the end of the second quarter last year.

Turning to construction equipment, net sales increased by 12% at incurred conditions, up 11% at constant currency. By causal factor, volume and mix was positive $93m in both North and South America and in Western Europe, when we are recovering from our New Holland brand rationalization undertaken last year. Pricing was positive in all major markets, increasing net sales by $26m or about 2%. Currency increased net sales by 1 point or $12m.

We also experienced some shortages of components in the quarter, which we believe restricted our construction equipment shipments. Worldwide, on a forward-month's supply basis at quarter end, we estimate that our inventories were down slightly over one half month of supplies from a year ago for total heavy and light construction equipment.

Slide 13 is the same format as slide 12 but for the six months. At $6.4b, our net sales of equipment in the half were up 4% from last year at incurred conditions, and up about the same at constant currency. Worldwide net sales of agricultural equipment were essentially flat at constant currency because of the second quarter actions in North America to reduce dealer and Company inventories, and the market decline in Brazil.

Over six months, we over-produced retail sales by 8% compared with 16% of our production last year, and this year was an overall stronger retail industry environment with higher CNH retail unit sales.

For the half, our change in AG net sales by causal factor was an increase of $71m for pricing and $34m for new products, offset by a decline of $109m for volume and mix, entirely in the second quarter, as already explained. AG pricing represented about 2% of net sales.

Turning to construction equipment, net sales increased by 13% at incurred conditions and currency had virtually no impact. By causal factor, volume and mix was positive $109m -- $191m, sorry, primarily in the Americas and in Western Europe. Pricing was positive in all major markets, increasing net sales by 69 -- $65m, or about 3%.

Slide 14 shows the segment contribution of our industrial operating margin for the second quarters of 2005 and 2006. We measure the performance of our business segments using IFRS accounting principles followed by Fiat, as explained in press release footnote 13. At the top of the slide we see the $265m total industrial trading profit for the second quarter of 2006, as reported to Fiat. Below that are the adjustments from trading profit to industrial operating margin in U.S. GAAP.

At the bottom of the slide is the margin split between our two equipment businesses. As you can see, our AG industrial operating margin increased by $15m to 8% of net sales. This was mostly driven -– being driven by good performance in North America and overall favorable price recovery offsetting the deterioration in Latin America.

Our construction equipment margin improved by $61m to 11.6% of net sales, driven by a solid performance in North America. Western Europe and Latin America also contributed to the improvement.

Slide 15 shows the factors contributing to the year-over-year change in our second quarter industrial operating margin, which is defined as net sales less cost of goods sold, SG&A and R&D expenses.

Looking at the chart we see that most of the improvement was driven by pricing and manufacturing efficiencies. Volume and mix was down by approximately $12m, primarily because of North America. Gross margin, as a percentage of net sales, increased by 2.7 percentage points in the quarter, with improvements at both agricultural and construction equipment operations. Excluding currency impacts, R&D costs increased $18m, reflecting our investments in quality initiatives and new Tier 3 emission-compliant products.

Slide 16 shows the segment contribution of our industrial operating margin for the first six months of 2005 and 2006, as we just saw on slide 14 for the second quarter. At the top we see the $364m total industrial trading profit for the first half of 2006. At the bottom are the margins of our equipment businesses. And in the half, our AG industrial operating margin increased by $21m to 6.2% of net sales and our construction equipment margin improved by $110m to 9.7% of net sales.

Slide 17 shows the year-over-year change in our first half industrial operating margin in the same format as slide 15. Again, most of the margin improvement was driven by pricing and manufacturing efficiencies. Volume and mix for the half was flat, reflecting improvements for share, new products and better construction equipment industry volumes, offset by AG de-stocking actions in North America. Gross margin as a percent of net sales increased by 2.4 percentage points again, with improvements at both agricultural and construction equipment operations. Excluding currency impacts, R&D costs increased $34m and SG&A costs increased by $30m.

Our second quarter and first half results for the last three years can be seen on slide 18. In the top box we see equipment operations profit before restructuring charges, taxes and minority interests. The $64m improvement from the second quarter of 2005 to the second quarter of 2006 primarily reflects the improvements in equipment operations operating margin. Similarly, the $108m improvement for the first six months primarily reflects improvement in the operating margin.

At the bottom of the slide is net income before restructuring charges net of tax. The year-over-year change for the quarter and for the half reflects our higher tax rate this year as a consequence of our geographic mix of products, with fewer jurisdictions now generating losses.

Now, let's turn to equipment operations change in net debt on slide 19. Our $582m of cash generated from operating activities was used for capital expenditures and to pay our annual dividend to the shareholders, with the balance going to reduce net debt by $484m. Last year improvements in working capital of $406 -- $472m included an improvement of $345m for one-time increase in scope of our receivable sales to financial services in Europe and North America for a net operating improvement of $127m. This year's improvement of $158m in working capital was slightly better.

At quarter end, equipment operations net debt totaled $137m and equipment operations position with Fiat Affiliates was net cash of $43m. On a consolidated basis, CNH’s net position with Fiat Affiliates was a net debt of $247m.

Next, we see the change in net debt for the first six months on slide 20. As you know, during the first half we had the one-off -– the $500m bond issuance, the proceeds of which were used to repay debt owed to Fiat. And the $704m of cash generated by operating activities was used almost entirely, except for capital spending and dividend, to reduce net debt by $582m.

The first quarter conversion of the preferred stock into common stock really didn't change the structure of our balance sheet. The improvement in net debt to net capitalization ratio from 12.5% at the end of last year to almost zero at June 30 is all related to the reduction in net debt.

On slide 21, we have the highlights of the past quarter. First, negatives. Weaker agricultural equipment markets in North America, especially in the over-100 horsepower segment, and in Western Europe. And a weaker light construction equipment market in North America, and a weaker overall Brazilian AG economy which we don't expect to recover soon.

On the other hand, there were some significant operational positives in the quarter, including our 2.7 percentage point increase in gross margin following the 2 percentage point increase in the first quarter. Net price recovery once again was positive, including purchasing efficiencies, and manufacturing efficiencies also were positive. Finally, net debt declined by $484m to $137m.

On slide 22, the additional highlights for the first half, starting with the positives. A 2.4 percentage point increase in gross margin with positive contributions from both construction and agricultural equipment, and our improved combine market share in all regions, except Western Europe, and our manufacturing and purchasing efficiencies.

However, we also saw some softening in agricultural equipment markets in North America and Western Europe, and in North America in the light construction equipment market, as we already discussed.

Turning to our industry outlook for the second half and full year of 2006, on slide 23, we expect the full year worldwide industry unit sales of major agricultural equipment products to be up compared with the high levels of 2005. This is a slightly stronger outlook than last quarter for every market except Latin America.

We expect worldwide tractor industry to be up 5 to 10%, driven by the strength of the rest of the world markets, with all other markets to be flat to down. However, we do expect the North American over-40 horsepower tractor market to be up slightly compared with last year. Also, industry sales of combines could be down 5 to 10% with a decline in all regions.

Turning to page -- to slide -- to construction equipment on slide 24, we have an outlook for stronger industry sales in 2005 than in 2004 -- in 2006 than in 2005 for both heavy and light equipment. We believe combined heavy and light equipment industry unit sales could be up 5 to 10% for the full year. This is approximately the same outlook in total as last quarter, but a little weaker for North America and a little stronger in all the other markets.

In general, we expect that light equipment will be stronger in all markets. Heavy equipment industry sales should be strongest in North America and rest of the world markets, with Western Europe and Latin American markets flat to up as much as 5%.

Overall for 2006, on slide 25, we now expect our net sales of equipment for the full year to increase in the range of 2 to 5%, down from 5 to 10% in our last outlook. We expect to under-produce retail in the second half more than last year, to continue to manage working capital. However, we have not changed our bottom line guidance.

We expect that carry-over momentum of prior years, pricing actions and ongoing manufacturing efficiencies and other margin improvement initiatives at equipment operations will drive better growth and operating margin. The favorable trend in gross margin we saw in the first half should continue in the second half. Results of financial services at our joint ventures will be better than last year. Interest expense should be lower, but this will be offset by an increase in interest compensation to financial services.

As I just said, our outlook for 2006 diluted earnings per share before restructuring, net of tax, is unchanged from last quarter, in the range of $1.30 to $1.40 compared with $0.95 per share for the full year 2005. The Company’s previously announced $120m contribution to its U.S. defined benefit pension plan was made in April.

After considering this contribution for the full year, equipment operations expect to generate cash, to reduce its net debt by approximately $400m, as compared with year-end 2005 levels, and this is an improvement of $150m from our outlook provided last quarter.

This concludes my comments and we are now ready to begin the Q&A session.

Thank you, Michel. For the Q&A session we ask that everyone please limit themselves to one question and one follow-up at a time. Naomi, could you please retrieve the first question?

[OPERATOR INSTRUCTIONS]. Our first question is from David Bleustein with UBS. Please go ahead.

Good morning and good afternoon.

Morning, David.

A quick question. It looks like you walked through some weakening in light construction equipment in North America in the second quarter, but it looks like you expect it to pick up in the back half. I just wonder if you could put some color behind that forecast.

Harold, why don’t you answer this question?

Yes, David, that’s a very good point. If you look at the second quarter and first part of the year, it’s a traditional build period for the rental outlets. And year over year, we’ve seen some softening in that direct rental channel, from a direct consumer sale to the contractor, etc. We see that growing. So it’s really the mix, first half/second half, to the deliveries into the rental channel versus commercial retail.

Got you. And what percentage of that North American light construction would you say is more non-residential construction related, and how much is housing?

I really don’t have that split, but I would say there’s been more talk on non-residential construction, defining then the reality that we’ve seen. So, for the full year, we see residential housing starts, etc., to be around the 1.8, 1.9 range. The first quarter they were up above 2, so -- and last year, they were a little over 2. And so, at 1.9, we don’t see that much of a change. There’s some softening but there isn’t a significant change.

Okay, terrific. Thank you.

Our next question today, ladies and gentlemen, is from Gary McManus with JP Morgan.

Hi, everybody.

Morning, Gary.

When I look at your second half North American AG outlook for over-40 horsepower, it’s up zero to 5%. Can you break that down between the 40, the 100 and the row crops and four-wheel drives?

I can do that directionally.

Yes, just give me a sense. Do you expect them all to be up modestly, or do you expect the bigger stuff to be down? Just give me some sense on direction.

We expect that the over 100 will be down, and the higher the horsepower, probably down more. The row crops probably down more in the range of 5 to 10, four-wheel drives probably higher than that.

Okay. And so obviously that means the 40 to 100 would have to be up maybe double digit or something like that, just mathematically?

I’m not sure if it’s quite double digit, because 40 to 100 is such a larger segment than the over 100.

Yes, okay, but it would have to be up more than the zero to 5%?

Right, yes.

Yes, okay. And just looking at your guidance, you kept your earnings guidance unchanged, despite a lower revenue outlook. Taking all things considered, you slightly raised the industry outlook. Granted, most of that is outside of North America and Europe. Does this suggest that CNH is under-producing in the second half of the year to a greater degree than you were planning before, or are there other factors that are causing earnings to be up -- or the guidance to be unchanged for the lower revenue outlook?

Yes, we are -- we’re over -- we’re under-producing more than last year, and compared to the last outlook, we’re under-producing more as well.

But is that because there’s too much inventory, or is it just greater focus on working capital management?

I believe that it’s primarily driven by the focus on working capital and also because, as we indicated earlier, we have seen some segments of the market weakening in North America. So we have to anticipate the change in the industry.

Okay, thank you very much.

Our next question today is from John McGinty with Credit Suisse.

Good afternoon, good morning.

Hi, John.

Hi. The first question on the construction equipment, where you talked about heavy equipment in the quarter in North America being down 1%, if I’ve got this correctly, and that your market share was flat. One of your competitors reported sales last Friday with North American sales up about 13, 14% and they are almost exclusively in the heavy side of the market. That would suggest either that you’ve lost some share, or there’s something at odds with the data. Can you reconcile those two factors?

I will pass to --

Yes, John, let me comment. This is Harold.

Hi, Harold.

Clearly, from a retail performance, we’re very pleased, I think Michel said, with the industry growth in heavy. Share was essentially flat, and we’re positive on tractor loader, backhoe and skid steer share, so from the retail we’re okay. The difference there can be is the mix of production versus retail. Someone may be over-producing more than what we have done.

It also depends on how you define the industry.

Okay.

In the mining business.

We define it as excavators, wheel-loaders, dozers, graders and haulers.

But only in the horsepower categories that you produce?

Right, we’re not -- we don’t include the mining equipment.

But, I mean --

We include up to excavators of about 90 metric tons.

But how high do you -- but you don’t go up in dozers as large as some of the other dozer manufacturers, for example?

But we do report the full dozer industry.

Oh, it is the full industry?

Right. Now, if you pick one product, for example, and you only reported crawler excavators –-

Right.

In the quarter, that would be up 13%, but if you look at all the products, it’s down 1%.

If you dollar-weighted it versus unit-weighted it, would there be a difference? In other words, some of the product --

Probably. Probably, yes.

Because the crawler excavators are probably not only the most expensive but they’re up the most, so --

Okay.

On a dollar-weighted basis, they probably would be up, as opposed to down slightly.

Okay. and the other question I had, getting back to your forecast, with the point that Gary made where you have slightly reduced the volume forecast and not changed the earnings forecast at all. If we go to either the six months and we look at the operating variance, one of the most positive factors in there was the price at $136m for the six months, and you said it was about 2%, I think. But the point was that -- you also made the point that all of those price increases were price increases that were the carry-over effect of the increases a year ago.

I guess the question is, as we look at the second half, do you still have that same, let’s say, 2% year-over-year kind of increase, or does it begin to anniversary and start to come down? And therefore, is the profit improvement in the second half driven by something other than price and, if so, what’s it driven by?

I am speaking off the top of my head, because I don’t have the figures in front of me, but I would say clearly that the carry-over impact on pricing is going to stick in the second half, and maybe slightly down compared to the first half. But, on the other hand, we expect the manufacturing efficiencies to continue to improve in the second half.

So if pricing is a bit less of a contributor, the manufacturing efficiencies would become more of a contributor?

Yes.

With mix, due to under-production not being a factor one way or another?

Yes.

All right. Thank you very much.

This is Harold, Michel. I think we might comment. I think that in the first quarter we said pricing would be about 2 to 3 points, and I think that’s still within the range that we’re looking at for the full year.

Thank you.

Our next question today comes from David Raso. Please go ahead.

Yes, hi. A quick question, Harold, on the AG outlook on pricing. Can you give us a feel for North America, how pricing is trending? It definitely seems to be somewhat reminiscent of the green sweep that you did when you guys first merged. There’s definitely some programs out there that are going to be pretty aggressive for your dealers to take from 8,000 or 9,000 to your customers and convert them.

Can you give me a little flavor for where the strategy is on pricing for the back half of the year? And how should we really think about that 2 to 3% pricing that you just said hasn’t changed for the full year, but how does it relate to North American AG in particular, versus what you were thinking?

I would say that the brand -- the presidents or Case IH in Holland currently have the full scope of the revenue, pricing and cost side. And from what Michel and I have seen and discussed in the forecast for the second half, we’re consistent with the business plan that is -- that we gave you in the first quarter. So I don’t see any relevant change.

But as you know, the key driver of what we’ve done in dissolving, if you may, the AG business and the CE business to focus on our four core brands and to bring those brands to the marketplace, to the customers, with the brand presidents determining the breadth and scope of the product portfolio, is continuing to gain traction. And so effectively, what we’ve said with the team is we’re drawing a line in the sand, and you’ve got to go out and earn the business the old-fashioned way, and that’s on the farm.

David, also what I would like to say is that the better we manage our working capital, the less pressure we get on pricing anyway.

I think it’s a fair point, just in terms of the marketplace, especially on the Case side of the business in North America. There’s definitely some pretty aggressive programs and I think recently it even -- the [Bounty] even tacked on the AGCO Challenger brand as well, to the discount you’re giving the dealers for conversion of customers. And I’m just trying to think through the pricing in the back half of North America. Is it fair to say you’re expecting out-performance in retail versus the industry data in the back half of the year?

David, I would say the best way to look at what you hear from the grassroots is that we’re looking at targeted customers, targeted areas. There’s not a program, as you’ve referenced, across North America.

But I’m just hearing more regional programs, trying to really focus on some Deere customers to convert, maybe some AGCO Challenger, but it’s not a pervasive strategy of pricing across the country?

That’s correct.

Thank you very much.

[OPERATOR INSTRUCTIONS]. We will take our next question from Charlie Rentschler with Wall Street Access.

Good morning, everybody. Can you hear me okay?

You’re a little faint, Charlie. Could you speak up, please?

How’s this?

Much better.

Okay. A very superior performance. I think it’s terrific how gross margins are getting close to that 20% level. And, Al, over the years you’ve talked, maybe dreamed, about gross margins getting back to where they were before the merger, in the low to mid 20s. But is there some basis for believing, in the next year or so, that you might push them up over 20% and get there? And, in connection with that, can you give us some little bit of detail on the improvement in manufacturing efficiencies? What constituted that?

Harold, about the commitment on improving gross margin beyond the 20% threshold, would you please take the lead?

Yes. It is clearly within our objective. What we’ve said that to 2007/2008, as far as our three-year plan, we want to be fully competitive on the financial key ratios and that includes improving the gross margin. So we have to work hard on making sure that the new product features’ quality and cost is fully competitive with the rest of the industry players, as well as driving the industrial efficiency [inaudible] in our manufacturing system. So yes, it is within our scope and objective.

For my follow-up question I’m looking at slide 23, which is the AG outlook, and it occurs to me that what you call the rest of the world has had, or will have, a very large influence on things. I grant you that over-40 horsepower in North America, as you’re saying, is flat to up 5. Everything is flat or down 5. The rest of the world up 20, 25, and it’s driving the whole tractor thing 5 to 10 up. And I’m wondering, I think you mentioned China and Pakistan, but is there something out there going on that we don’t fully realize? Can you help us understand, what is the rest of the world? What are the real significant pieces of that?

First of all, when we speak about rest of the world, here we are talking units, number of units.

I understand.

But if you consider China, India and even Russia, to a certain extent, we are talking about big markets in terms of numbers of units. They are not all at a standard, let’s say, of the Western world today. But nonetheless, it’s a significant market in units, whether we speak about tractors or combines. So, Harold, do you want to comment more on this?

No, I think that’s fine.

Could you just rank them in order? You say China, Russia. What were the top three, in order?

Probably China, Turkey and Pakistan.

Okay, thank you.

Essentially, Charlie, rest of world is everything for us outside of North America, Latin America and Western Europe.

Right.

So it’s Africa, Asia, Middle East. It’s Australia, and then all of Russia and the former CIS countries.

Thank you.

Just to give you a flavor, China is a market of about 200,000 units, almost as big as Europe.

Our next question today is from [Frank Diss] with [Pilot]. Please go ahead.

Yes, hi. Forgive me if you’ve already discussed this, but can you talk about, I guess, Europe, Western Europe was up, I think you said 2% in your release. Could you talk about France and Germany, what you’re seeing there, and I guess you have Western Europe down in units for the rest of this year?

Yes. I think, as far as France is concerned, the market is down, probably 10%, around 10% for tractors. And for combines, it’s probably about the same. Germany is, on the other hand, up, probably between around 15% for tractors and slightly up for combines.

And Germany up 15% for tractors, that is what - that is your Q2?

That is the industry for the second quarter, yes.

And where do you see France and Germany third and fourth quarter?

I think France might recover a little bit in the second half for tractors, but will probably be down on a full-year basis. And Germany is going to continue to be strong in the second half, probably at the level that we have today.

Thank you very much.

Okay.

We will now take a follow-up question from David Raso with Citigroup.

Actually, my question has been answered. Thank you very much.

Okay.

We also have a follow-up question from David Bleustein with UBS. Please go ahead.

Just real quick, the strength in the equity income of the unconsolidated subs, what was the biggest contributor?

Basically two areas. One is the joint ventures that we have in the construction equipment market in North America, and the second is basically Turkey.

Basically Turkey? Okay. Sure, thanks a lot.

[OPERATOR INSTRUCTIONS]. It appears there are no further questions at this time, so I would now like to hand the call back over to you for any additional or closing remarks.

We’d like to thank everyone for participating with us today on the call. And if you have any further questions, please don’t hesitate to call me when we’re done. Thank you very much.

Thank you very much.

Bye-bye.

Bye-bye.

Ladies and gentlemen, that will conclude today’s conference call. Thank you for your participation. You may now disconnect.