CNH Industrial NV (CNHI) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CNH third quarter results conference call. [OPERATOR INSTRUCTIONS].

As a reminder, this call is being recorded today, Wednesday, October 25, 2006.

I will now turn the conference over to your host, Mr. Al Trefts, Senior Director of Investor Relations and Capital Markets.

Please go ahead, sir.

Thank you, Dan.

Welcome again everyone to CNH's third quarter 2006 results webcast conference call and I hope you can hear me this time and we don't lose any of the line connections.

We are pleased to have with us today Harold Boyanovsky, our President and Chief Executive Officer;

Rubin McDougal, Chief Financial Officer;

Michel Lecomte, President, Parts and Service Operations, and Camillo Rosotto, 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 slides, 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 will turn the call over to Michel Lecomte.

Thank you, Al, and hello everyone.

As you know, I am now running the CNH Parts Operations and visiting open operations right now.

But I wanted to take this opportunity to thank you for these past several years, good years, and to say how much I have enjoyed working with you.

Now I would like to turn the call over to the capable hands of Rubin McDougal, my successor as Chief Financial Officer, for comments on this quarter's results.

Thank you, Michel.

Good morning and good afternoon.

It's a pleasure to be with you today.

I look forward to meeting many of you over the coming months.

Starting with slide four, we see the trend of the worldwide tractor and combine industry unit volumes in the third quarter.

The worldwide tractor industry remains near the historic high levels we experienced in 2005.

The overall combine industry declined in the quarter.

However, it declined less than we expected.

The industry was better than expected in rest of world markets and in Latin America, about as expected in Western Europe, but below our expectations in North America.

On slide five, please note the change in worldwide tractor industry retail unit sales by market.

In North America, within the over 40 horsepower category, industry sales of tractors in the 40 to 100 horsepower range were down about 4%.

Sales of over 100 horsepower tractors were down 24% and four wheel drive tractor sales were down 20%.

While tractor industry sales in Western Europe on a preliminary basis were down 1%, markets in Germany, Spain and the U.K. were up, whereas markets in France and Italy were down, as were the other Western European markets in aggregate.

In Latin America, the tractor market decline halted in the quarter, as industry sales were up 1%.

Brazil was up almost 20%, under 100 horsepower tractor sales were up 11% and over 100 horsepower tractor sales were up 34%.

This strength was offset by Argentina and other Latin American markets, which were down between 10 and 20% in aggregate.

Worldwide combine industry unit sales declined 6% -- 16% in the quarter.

With the continuing decline in Latin America, Brazil was down 41% and Argentina was about 34%.

In aggregate, the other Latin American markets were down about 42%.

The combine market in Western Europe slight -- gained slightly in the third quarter, up 1%, after two successive quarters of decline.

Market performance varied significantly by country.

Markets in France, Italy and the U.K. declined, continuing their first cap trends.

Germany was up strongly, around 14%, and Spain was also strong.

Other Western European markets in total were down.

The market in North America was down more than our expectations, while industry sales in rest of world were down less than our expectations.

On a unit basis, our tractor market share improved in Latin America, was stable in Western Europe, while North America declined.

Our combine market share improved in Latin America and rest of world markets.

On slide six, we see the trend of the total worldwide tractor and combine industries for the nine months.

The worldwide tractor industry was up 10% on a strength -- on the strength of a 29% increase in rest of world markets, primarily China, Pakistan and Turkey.

The market in Western Europe was flat, while the North and Latin American markets were down more than we expected.

The worldwide combine industry was down; it was better than expected in Latin America and in rest of world markets but below expectations in North America.

On slide seven, we see the percentage change in worldwide tractor industry retail unit sales by market for the year-to-date period.

In North America, within the over 40 horsepower category, industry sales of tractors in the 40 to 100 horsepower range were up 1%, over 100 horsepower tractor sales were down 14% and four wheel drive tractor sales were down 15%.

Tractor industry sales in Western Europe, on a preliminary basis, were about the same as last year with Germany, Spain and the U.K. and all other countries except for France and Italy up.

In Latin America, the tractor market in Brazil was up for the nine months, with under 100 horsepower tractor sales flat and over 100 horsepower tractor sales up 21%.

Argentina and other Latin American markets were down.

In rest of world markets again China, Pakistan and Turkey were the major drivers.

Worldwide combine industry unit sales declined 9%.

Rest of world markets were up, while all other markets were down.

On a unit basis, our combine market share was stable while our worldwide tractor share was down slightly compared with last year.

Turning to slide eight, the trend of construction equipment industry retail unit sales continued to strengthen in the third quarter.

In total, up about 8%.

Heavy equipment industry unit sales were up 11% and light equipment industry sales were up 6% compared to last year.

On slide nine, third quarter 2006 year over year percent changes in construction equipment industry retail unit sales by region.

The backhoe loader market was up 5% with strong increases in Latin American and rest of world markets, including Brazil, Eastern Europe and China.

The skid steer loader market was down 11%, as the second quarter decline in North America continued into the third quarter.

The heavy construction equipment market was up 11% with strong increases everywhere except North America.

Germany was the largest driver of the increase in Western Europe although most markets registered increases.

China had the strongest performance in rest of world markets.

In Latin America, Brazil was up but it was the other Latin American countries that delivered most of the improvement.

Our worldwide market share of total light and heavy equipment was roughly equal to 2005, with some gains for backhoe loaders and skid steer loaders.

Slide 10 shows the trend of construction equipment industry retail unit sales for the nine months, with total industry unit sales up 11%.

Heavy equipment industry unit sales were up 13% with sales of light equipment up 10%.

Slide 11 shows the nine month year over year percent changes in construction equipment industry retail unit sales by region.

The backhoe loader market was up 4% with strong increases in Latin American and rest of world markets.

The skid steer loader market was down 3%, as the decline in North America was not offset by increases in other markets.

Heavy construction equipment was up 13%, with strong increases everywhere, driven by strong construction spending and growth in China and other rest of world markets.

Our worldwide market share gain of light and total -- light -- total light and heavy equipment held steady with 2005, with gains for backhoe loaders and skid steer loaders.

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

At $2.7b, net sales of equipment in the quarter were down 3% from last year and down 6% in constant currency.

Worldwide net sales of agricultural equipment were down 10% in constant currency, principally in North America, following the industry softness in that market.

Last year we under-produced retail unit sales in North America; this year we under-produced retail unit sales in North America by 8%.

For the quarter, agricultural sales increased by $49m [technical difficulty] pricing and $52m for currency translation, each up about 3% of net sales.

These increases were offset by a decline of $218m for volume and mix of both products and markets, with North America as the principal driver.

On a forward month of supply basis, at quarter end, estimated worldwide tractor and combine, dealer and company inventories were up about one half month of -- or about one half month of supply lower than last year.

Speaking to construction equipment, net sales increased 1% in constant currency.

Pricing was positive in all major markets, increasing net sales by $22m or about 2%.

Currency translation increased net sales about 3% or $28m.

Volume and mix was negative $19m, primarily in North America.

During the quarter we also experienced several supply base issues, curtailing shipments of construction equipment products in the quarter.

Worldwide, on a forward month of supply basis at quarter end, estimated dealer and company inventories were down 1.5 months of supply from a year ago for both combined total heavy and light construction equipment.

Slide 13 is in the same format as slide 12 but covers the nine months.

At $9.1b, net sales of equipment were up 2% from last year and up 1% in constant currency.

Worldwide net sales of agricultural equipment were down 3% in constant currency.

The change in agricultural net sales included increases of $114m for pricing, or about 2%, and $34m for currency translation, offset by a decline of $279m for volume and mix.

Speaking to construction equipment, net sales increased 9% in constant currency.

Volume and mix was positive $188m, primarily in Western Europe and Latin America.

Pricing was positive in all major markets, increasing net sales by $86m or about 3%.

Currency translation added $23m.

Slide 14 shows the segment split of industrial operating margin for the third quarters of 2005 and 2006.

We measure business segment performance using IFRS accounting principals, followed by Fiat, as explained in press release footnote 13.

At the top of the slide we see $95m in total industrial trading profit for the third quarter of 2006, as reported to Fiat.

Below that are the adjustments from trading profit under IFRS to the $158m industrial operating margin in U.S. GAAP.

At the bottom is the margin split between our equipment businesses, with agricultural's industrial operating margin increasing by $18m to 4.7% of net sales.

This was mostly driven by solid operating performance in Western Europe and favorable price recovery, partially offset by volume deterioration in North America.

Construction equipment's margin improved by $9m to 7.9% of net sales, driven by solid performances in Western Europe and Latin America.

Slide 15 -- pardon me just one moment.

Just one second.

Operator, we seem to have a feedback loop here.

Is there something you can do to clean up the quality?

That echo actually is coming from the line of Mr. Lecomte, sir, because there is a delay between the U.S. and the U.K.

What I could do is I could mute his line during your presentation and when he is ready to speak, if he presses the star 0, I could un-mute his line?

That would be great.

Alright sir, I'll take care of that now.

Thank you.

Sorry, Rubin.

Certainly.

Turning to slide 15, slide 15 shows the year over year changes to third quarter industrial operating margin, which is defined as net sales, less cost of goods sold, SG&A and research and development.

The year over year improvement was driven by pricing, favorable economics in currency and manufacturing efficiencies.

Volume and mix was down by $91m, primarily in North America.

Gross margin as a percent of net sales increased 1.8 percentage points in the quarter, with improvements at both agricultural and construction equipment operations.

Excluding currency impact, research and development costs increased $16m, reflecting our investments in product quality and innovation, including new tier three emission compliant products.

Slide 16 shows the segment split of industrial operating margin for the first nine months of 2005 and 2006.

Industrial trading profit for the first nine months of 2006 was $459m under IFRS.

In U.S.

GAAP our industrial operating margin was $636m, with agricultural's industrial operating margin increasing by $39m to 5.8% of net sales and construction equipment's margin improving by $119m to 9.2% of net sales.

Slide 17 shows the year over year change in year to date industrial operating margin.

Again, most of the margin improvement was driven by pricing and manufacturing efficiencies.

Volume and mix was down as margins on new products, construction equipment market share and better construction equipment industry volumes were offset by a weaker agricultural industry in North America.

Gross margin as a percent of net sales increased by 2.2 percentage points, again with improvements at both agricultural and construction equipment operations.

Excluding currency impacts, research and development costs increased by $50m and SG&A costs increased by $19m.

The third quarter and first nine months net income before restructuring, net of tax, for the last three years are on slide 18.

The year over year increase of $90m in the year to date net income before restructuring charges demonstrates progress to our targets for the year.

Turning to equipment operations changes in net debt on slide 19, $180m of cash used by operating activities and $58m used for CapEx during the [technical difficulty] drove the $241m increase in net debt during the quarter.

At $178m -- a $178m increase in working capital was the principal use of cash by operating activities.

This change in working capital was $313m worse than the third quarter last year, reflecting three elements.

First, higher construction equipment inventories necessitated by the stronger industry.

Second, last year in the third quarter we increased the scope of our receivable sales to financial services in Western Europe to centralize receivables management.

This is now in the base; there were no further changes this year.

Lastly, receivables were higher because of change in our geographic mix of sales between North America and Western Europe.

At quarter end, equivalent operations net debt totaled $378m.

Equipment operations' position with Fiat affiliates was net cash of $260m.

On a consolidated basis, the net position with Fiat affiliates was net cash of $27m.

Next, the change in net debt for the nine months on slide 20.

As expected, improved financial results contributed $112m additional cash this year.

Again, the $243m year on year change in working capital can be split into distinct pieces.

Last year we increased the scope of equipment operation sales and receivables to financial services to centralize management of those receivables, as I mentioned earlier.

As reported last year, those actions in the second and third quarters improved working capital by $405m.

Looking at the year over year change excluding incremental sales of the receivables -- sale of receivables to financial services in 2005, our working capital has improved by $162m in the first nine months.

In total, net debt declined by $341m during the first nine months, in line with our full year target of a $400m reduction.

On slide 21 are the highlights of the past quarter.

There were significant operational positives in the quarter, including a 1.8 percentage point increase in gross margin, positive net price recovery, positive manufacturing efficiencies and new products.

These strengths were offset in part by weak markets for North American agricultural and light construction equipment and for combines in Brazil.

On slide 22, the additional highlights of the first nine months include a 2.2 percentage point increase in gross margin, improved backhoe loader and skid steer loader market shares, manufacturing and purchasing efficiencies and a significant number of new products launched.

We also saw some declines in North American agricultural markets and in Western Europe and in the North American backhoe loader and skid steer market -- let me restate that section.

We saw some declines in the agricultural equipment markets in North America and Western Europe and in the North American backhoe loader and skid steer markets, as we have already mentioned.

Our industry outlook for the fourth quarter and full year is on slide 23.

We expect full year worldwide industry unit sales of major agricultural equipment products to be up compared with 2005.

This is a slightly weaker outlook than last quarter for every market except Western Europe, which is now expected to be flat year over year.

We expect full year worldwide industry unit sales of tractors to be up 5 to 10%, driven by the strength of the rest of world markets, with all other markets and segments flat to down.

Industry sales of combines could be down 10 to 15% with declines in all regions except rest of world, which could be level with last year.

Turning to construction equipment on slide 24, we now have a slightly stronger outlook for full year industry sales in 2006 for both heavy and light equipment.

We believe total heavy and light equipment industry unit sales could be up 10% for the full year, with North America a little weaker than our last outlook and all other markets stronger.

On slide 25, our full year 2006 highlights.

Year to date our financial results have been tracking about as expected, despite a weaker agricultural industry environment.

We have been performing well in a strong construction equipment industry.

Pulling this -- or putting this all together, we are improving our full year 2006 outlook for earnings per share before restructuring.

We now expect a range of $1.40 to $1.50 diluted earnings per share before restructuring net of tax, compared with $0.95 per share last year.

Although the agricultural markets remain soft, we expect better revenue performance in the fourth quarter due to favorable comparisons to a Katrina influenced 2005 and to reduce supplier bottlenecks.

We also expect higher full year results from financial services and our joint ventures to contribute to the improved outlook.

This concludes my comments.

We are now ready to begin the Q&A session.

Thank you, Rubin.

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

Dan, could you please retrieve the first question?

Certainly, sir. [OPERATOR INSTRUCTIONS].

And our first question comes from the line of David Raso with Citigroup.

Please go ahead, sir.

Good morning.

Good morning, David.

A question on the impressive performance of core sales down but profits up.

When I run through my numbers, the difference for me is that the 2.6% of pricing that you received this quarter versus the 1.9%, the 2.0% of the last two quarters, that alone can add $0.03, $0.04 right there.

I'm trying to figure out why the pricing was stronger this quarter than the last two.

Is it a function of mix geographically?

North America being down is usually a negative for pricing.

Is it an issue of some -- maybe the track loaders that weren't shipping that well a year ago this time, now really starting to ship well and those are higher priced machines than skid steers for mix?

Is there something I'm missing on your pricing or is there simply a price increase you've put through a couple months ago that's showing up in the third quarter?

David, this is Harold.

Clearly you're correct about the improved mix of the track loaders, as we continue to launch and to move into full production.

Those are excellent margin machines for us versus the normal wheeled skid steer.

Also there is a lag effect between some of the pricing actions with this in the regions, as we cover the retail price guarantees on the [whole good] side and that's particularly true of Latin America region.

In addition to that, we've been a little bit more aggressive on the parts side of pricing year over year than what we'd planned.

So, going forward in the channel, we've even heard of a price increase for October 1 on some products.

I'm just trying to digest North America which, especially with skid steers and backhoes and the bigger tractors in North America down, again obviously I'm impressed that they have two very profitable areas down.

Product mix wise and even geographically, to have profits up for the whole Company.

I am just trying to think through the sustainability of it when it comes to pricing.

Should we look for further price increases, though some markets are weakening?

I'm just trying to digest the pricing impact, which is obviously very powerful when it comes to margins.

Well, David, a lot of the pricing this year we had indicated before was carryover pricing from last year.

And we have not announced anything yet in terms of future pricing but certainly we retain our commitment to price to recover material economics and other things like that.

That was my question.

Was there any comment from you or Harold or anybody there on January 1 type price increases, especially on big tractors and skid steers and backhoes, which are obviously critical profit drivers for the Company?

David, I think it's fair, as we're working through our budgeting assumptions for 2007 and will be participating in the Fiat analysts' conference on the 8th and 9th of November, and I think at that time there'll be outlooks given on how we see '07 and beyond.

Okay.

And one last question on the big tractors.

The market's weak, you're taking the necessary production cuts.

Is there any [inaudible] call bottoming or even improvement yet on the order book looking forward towards spring, or are we still generally in a -- I won't say freefall, but we're still in a declining environment, even on current day's order book?

Yes, I would say at this point in time we have not seen a strengthening in the order book.

And most of the indicators we have is that for the first half of next year will remain relatively weak, depending upon what happens with commodity prices and interest rates as we move into the second half.

I'm sorry to hog the call here but to follow up on that, given what we are seeing in crop prices, given your history with obviously crop prices now at levels that are not even just strong, we're at a historically high level, any disconnect that you are seeing that's unique this time around that's -- it's only October now.

But you just made the comment first half.

Would you be surprised five months from now, springtime, still not seeing the order book pick up, given that crop prices are what they are and obviously farmers are feeling a little bit better about their cost structure, given where fertilizer and diesel was?

Well, clearly there are input variables that are changing as we speak.

But, having said that, I'd defer my comment until we participate in the November analysts' conference.

Thank you very much.

And our next question comes from the line of Andrew Obin with Merrill Lynch.

Please go ahead with your question.

Hi, yes.

Can you -- I'm sorry if I missed it.

Can you guys comment on dealer inventory on construction equipment in North America?

Has that been going up?

Just a second here, Andrew, let us get the numbers.

For the end of the --

While Al is looking at the numbers, relative in total on construction equipment forward month's supply, we've improved about 30 days from where we were last year in the third quarter.

I guess the question I have, given the recent announcement from Caterpillar, do you think there is an inventory issue in the industry in North America and how long would it take to solve that?

You know I can't answer Caterpillar's question but clearly at CNH we have been monitoring the inventory in forward month supply closely and under-producing to retail as planned.

While you are looking for that data, let me ask you another philosophical question, more long term.

It seems that Deere is pursuing a strategy where they are raising prices and keeping their inventory in the field very, very tight.

And I would imagine that would create a market share opportunity for you but you know that your market share in North America is down slightly.

Why is that?

Is that deliberate?

Are you guys also trying to track down your inventory and just follow the pricing strategy?

Or is there something else going on?

Well, Andrew, we have been trying to cut down our inventories and that's normal in this part of the year as we under-produce retails.

We are committed to maintaining our pricing.

I don't think that we have voluntarily given up any market share opportunities.

We are certainly not following a strategy to do that.

I think we are trying to take every opportunity we can.

Back to the construction dealer inventories, we were down this September on our total North American light and heavy dealer inventories at the end of the quarter by probably 600 or 700 units compared to last year.

Let me just follow up on the ag industry itself.

I guess I'm just a little bit surprised at how disciplined the industry is right now, that people are very much focused on pricing and inventory reduction.

Is that a fair observation?

I don't think that it's fair for us to comment about the competitors but certainly within CNH that has been part of the intent.

Okay.

Thank you very much.

And the next question comes from the line of Mark Kosnarek with Cleveland Research.

Please go ahead with your question.

Hi, Mark.

Morning and afternoon respectively.

Question on Brazil, the agricultural equipment market down there.

It seems like there's some peculiar things unfolding here, with tractors apparently having bottomed and still a deep decline unfolding in the combine part of the market.

And here we are in the middle of the ag crop season in Latin America and so presumably there is some insight into the second half of their crop year.

And I am wondering if you can play out what dynamic is unfolding here and what the second half of their crop season might look like with regard to equipment demand.

Well, I can just comment, Mark, one, there isn't any really strengthening in the row crop, soy bean market areas.

Where there is strength in Brazil is in sugar, coffee, citrus, which is driving some of the tractor improvement but clearly not the additional soy bean farmers.

Also, isn't the season for combines really more in December, January, February as opposed to right now?

I think it's a little early to see any of those sales really have any meaning in terms of what the farmers are thinking about the harvest.

Okay.

Another driver often down there is government policy with regard to financing incentives or low cost credit access.

Is there any change that is anticipated over your planning horizon over the next six months or so in those government policies that might affect equipment demand?

There is no change that I am aware of.

We are not anticipating any change.

Okay.

And then final question here is a broader one.

You've mentioned several times new product introductions.

And have we seen the bulk of those for the year or is there still actions that will unfold during the fourth quarter?

And what's the pipeline also look like for next year?

Have you discharged most of the new model updates and will be in a lull next year, or will this pace continue?

I don't believe you've seen most of the launches yet, there'll be more launches -- some happen near the end of the third quarter.

There will be launches in the fourth quarter.

And there'll be a number of launches of the new tier three engines and a number of products as we go through next year.

And you'll notice in the -- remember from the remarks I made earlier, our research and development spending is up significantly.

That is for both quality but also new products and we'll continue to see a stream of new products through the course of 2006.

During the course of 2006?

2007, my apologies.

Yes, okay.

Great.

Thanks very much.

Thanks.

[OPERATOR INSTRUCTIONS].

Our last question comes from the line of [Alan Rosinos] with UBS.

Please go ahead with your question.

Hello, everyone.

It's actually Dave Bleustein.

A couple of quick questions, first on Brazil and the market down there.

Commodity prices have come up but, given the shift in the value of currencies and some of the other things going on down there, what level of soy bean prices on the CBO tier, what level of corn prices, do you think would be strong enough to cause a bottoming out and really more so a recovery in that market?

That's a really difficult question to answer, David.

And I think, particularly when you are looking at Brazil, it's especially difficult because what's more important right now, I think, is the value of the real.

And quite honestly, I don't think we have any answer for you on that one.

But if you hold it constant, do you think current commodity price levels are strong enough?

No, otherwise we'd have seen probably some kind of resurgence in the market already.

Got you.

Second question.

In North America we have seen a resurgence in commodity prices but the machinery sales continued to slip.

What do you think is the normal lag between a big recovery in commodity prices and when you actually start to see it show up in your U.S. row crop tractor sales?

Could the same thing be happening in Brazil?

Well, I think that if you're going to look at the U.S. market it depends a lot on what time of year the recovery -- the commodity prices change.

Right now we're just getting out of the harvest.

We don't know what kind of year end impact we might or might not see this year.

And I find it difficult to believe that the farmers are going to be thinking much about next year's crops and next year's prices until the spring selling season.

So I think what we're going to see from here till year end is probably going to vary by external factors like tax incentives, how well they did, things like that.

And it's going to be very hard to predict.

And I think if you look at most of the net farm income projections that there is not any improvement year over year going forward versus the decline this year.

Clearly there's a lag effect but, as Al says, it will depend also on other variables but clearly we all know the decline in net farm income this year.

Got you.

And then the last one is really on the market share in construction equipment.

Was it easy comps?

Is it terrific product momentum?

And are the changes in the market share large enough that your competitor has to admit to losing share?

I won't answer that last part but, as you know, as we've refreshed the new products with the backhoe adding pilot controls, the skid steers adding pilot controls and the compact track loaders, all of those taken a very solid product for our brands, both Case and New Holland construction, and positioned the dealers in a lot better competitive position this year and that will continue to unfold.

Alright.

Is it measured in tenths of basis points or is this measured in round and big numbers, ones and twos and threes?

Well, I think we all would agree when you get tenths and hold it and earn it the old fashioned way, that's significant.

Okay, terrific.

Thank you.

[OPERATOR INSTRUCTIONS].

Okay.

If we have no more questions, we would like to thank you all for joining with us this morning, this afternoon for this call.

And if you have any further questions, please don't hesitate to give me a call afterwards.

That's the end of our call.

Thank you very much.

And again, ladies and gentlemen, that does conclude our conference for today.

We do thank you for your participation and have a great day.

You may now disconnect.