CNH Industrial NV (CNHI) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's CNH 2006 fourth quarter results conference call.

For your information, today's conference is being recorded.

At this time I would like to turn the call over to Mr. Al Trefts, Senior Director Investor Relations and Capital Markets.

Please go ahead, sir.

Thank you, Cara.

Welcome, everyone, to CNH's fourth quarter and year end 2006 results webcast conference call.

We are pleased to have with us today Harold Boyanovsky, our President and Chief Executive Officer, Rubin McDougal, 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 when 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 NV and are not to be re-recorded or re-broadcast without our express written permission.

Now I would like to turn the call over to Rubin.

Thank you, Al.

Good morning and good afternoon, everyone.

We appreciate your participation.

Beginning with slide four, I would like to review the highlights of the quarter, starting with our diluted earnings per share before restructuring, which more than doubled to $0.39 per share from $0.17 last year.

Net income before restructuring, net of tax, also more than doubled, reaching $93m.

New products, including quality, manufacturing efficiencies and a strong construction market outside of North America contributed to a 1.9 percentage point increase in Equipment Operations gross margin, which increased to 18%.

Our Agricultural Equipment market share improved in the quarter, although our Construction Equipment share was off slightly.

Financial Services also improved, as net income grew 7%.

A good quarter relative to recent performance and progress towards our long-term objectives.

The fourth quarter completed a year in which every quarter exceeded the year-ago quarter and capped a solid performance.

On slide five those full-year highlights include earnings per share before restructuring, up 61% to $1.53 per share, net income before restructuring up 63% to $363m, Equipment Operations gross margin up 2.1% to 18%.

Both the Agricultural and Construction Equipment markets were up for the full year, with stable Agricultural and Construction Equipment market shares.

Financial Services contributed an 11% improvement for the year.

In total, the best financial performance since the creation of CNH and a meaningful step towards best-in-class performance.

Taking a look at some of the details on slide six, we see the trend of worldwide tractor and combine industry unit volumes in the fourth quarter.

The worldwide tractor industry increased 4% from the high levels we experienced in 2005, with increases in every market except North America.

The overall combine industry declined 4% in the quarter.

Turning to slide seven for the details by market, worldwide tractor industry retail unit sales changes year over year by market are shown on the slide.

Some additional detail.

In North America, within the over 40 horsepower category, industry sales of tractors in the 40 to 100 horsepower range were flat with last year, while sales of over 100 horsepower tractors were down almost 12% and four-wheel drive tractor sales were down 15%.

Preliminary tractor industry sales in Western Europe were up 11%.

All major markets in Europe, excluding France, were up.

In Latin America, where the tractor market was up 14%, Brazil was up 55%.

Over 100 horsepower tractor sales were up 41% -- excuse me, under 100 horsepower tractor sales were up 41% and over 100 horsepower tractor sales were up 73%.

Other Latin American markets were down.

One of the key markets, Argentina, was down 11%.

Driven by continuing decline in the Latin American market, worldwide combine sales and industry unit sales declined 4%.

The Brazilian market changed course during the year and was up 12%.

Argentina was down about 40%.

In aggregate, other Latin American markets were down in excess of 45%.

The combine market in Western Europe gained, although the performance varied significantly by market.

In Italy and Spain, we are up.

France, Germany and the U.K. we are down.

Other Western European markets in total were up.

The combine market in North America was flat, while industry sales in rest of world markets were substantially stronger than our expectations.

On a unit basis, our tractor market share improved in Latin America, Western Europe and rest of world markets, while North American share was flat.

Our combine market share improved everywhere except rest of world markets.

On slide eight, we see the trend of worldwide tractor and combine industries for the full year.

The worldwide tractor industry was up 9%, driven by the continuing strength in rest of world markets.

The worldwide combine industry was down for a second consecutive year, particularly driven by a influence a year ago from Brazil.

On slide nine, worldwide tractor unit or industry retail sales -- excuse me, on slide nine we are going to see worldwide tractor industry retail unit sales changes year over year by market.

On that page, you can see North -- in addition to those details, North American highlights.

Within the over 40 horsepower category, industry sales of tractors in the 40 to 100 horsepower range were up 1%, while over 100 horsepower tractor sales were down 13% and four-wheel drive tractor sales were down 15%.

The preliminary tractor industry sales in Western Europe were up about 3% from last year, showing strength in all markets except France and Italy.

In Latin America, the Brazilian tractor market was up 15%, with under 100 horsepower tractor sales up 7% and over 100 horsepower tractor sales up 32%.

Other Latin American markets were down.

In rest of world, once again China, Pakistan and Turkey were the major drivers, but markets in Eastern Europe, South Africa and Poland also improved.

The worldwide combine industry unit sales decline of 7% was the result of weakness in most markets except Eastern Europe, South Africa and Japan.

On a unit basis, our tractor and combine market share in our major markets was stable with last year.

Turning to the fourth quarter construction industry retail unit sales trend on slide 10, we see continued strength in heavy -- excuse me, we see continued strength in heavy in total about 10%.

The heavy equipment industry unit sales were up 16% and light equipment industry sales were up 7%.

Slide 11 shows fourth quarter 2006 year-over-year percentage changes in Construction Equipment industry retail unit sales by region.

The worldwide backhoe loader market was up 9%, with strong increases across most of Western Europe, Latin America and many rest of world markets.

The skid steer loader market was down 12%, as the decline in North America continues.

The heavy construction equipment market was up 16%, with strong increases outside of North America.

Germany, again, saw the largest increases in Western Europe, as all markets were up.

China and Japan had the strongest performances in rest of world markets.

Latin American markets were also up.

Our worldwide market share of total light and heavy equipment was down slightly from 2005 in the quarter.

Moving to the full-year trend of Construction Equipment, industry unit retail sales on slide 12, total industry unit sales were up 11% to record levels.

Heavy equipment industry unit sales were up 14%, with sales of light equipment up 10%.

Slide 13 shows the year-over-year percentage changes in Construction Equipment industry retail unit sales by region for the full year.

The backhoe loader market was up 7%, driven by strong increases in Latin American and rest of world markets.

The skid steer loader market was down 5%, as the decline in North America was not offset by the strength in other markets.

Heavy construction equipment was up 14% with increases in all regions, driven by strong construction spending and growth in China, Japan, Germany and other markets in Latin America and rest of world.

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

Switching now to equipment sales, slide 14 shows the fourth quarter trend for the past three years.

At $3b, net sales of equipment in the quarter were up 6% from last year, up 2% in constant currency.

Worldwide net sales of Agricultural Equipment increased 2% in constant currency.

Constrained by the softness of the North American market, in the quarter we under-produced retail unit sales in North America by 27%.

For the quarter, agricultural net sales increased by $50m for pricing, $80m for currency translation and $15m for volume, mix and new products.

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

Speaking to Construction Equipment, net sales increased 2% in constant currency.

Pricing increased net sales by $35m or about 2%, although volume and mix, largely in North America, were unfavorable by roughly $15m.

Currency translation increased net sales by $38m.

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

On slide 15, for the full year, at $12.1b, net sales of equipment were up 3% from last year and up 2% in constant currency.

Worldwide net sales of Agricultural Equipment were down 1% in constant currency.

The change in agricultural net sales included increases of $164m for pricing, or about 2%, and $110m for currency translation, offset by a decline of $263m for volume and mix.

Speaking to Construction Equipment, net sales increased 8% in constant currency.

Volume and mix was positive $138m, primarily in Western Europe and Latin America.

Pricing was positive in all major markets, increasing net sales by $121m or about 3%.

Currency translation added another $61m.

Slide 16 shows the segment split of industrial operating margin for the fourth quarters of 2005 and 2006.

We measure business segment performance using IFRS accounting principles followed by Fiat, as explained in footnote 14 of the press release.

At the top of the slide we see $153m in total industrial trading profit for the fourth quarter of 2006, as reported to Fiat.

Below that are the adjustments from trading profit under IFRS to the $164m industrial operating margin in U.S. GAAP.

At the bottom is the industrial operating margin split between our equipment businesses, with agriculture's industrial operating margin increasing by $48m to 4.5% of net sales.

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

Construction Equipment's margin declined by $11m to 7.1% of net sales, driven by the volume decline in North America.

Slide 17 shows the year-over-year changes to fourth quarter industrial operating margin.

The year-over-year improvement was driven by pricing, favorable economics and currency totaling $57m and manufacturing efficiencies of $9m.

Volume and mix were down by $47m, primarily in North America.

Gross margin as a percentage of net sales increased 1.9 percentage points in the quarter, with improvements at both Agricultural and Construction Equipment operations.

Excluding currency impacts, research and development costs increased $12m, reflecting our investment in product quality and innovation, including new Tier 3 compliant products, while SG&A increased $24m.

Slide 18 shows the full-year split of industrial operating margin for 2005 and 2006.

In total, our industrial operating margin was $800m, with Agriculture's industrial operating margin increasing by $87m to 5.5% of net sales, and Construction Equipment's margin improving by $108m to 8.7% of net sales.

Slide 19 shows the year-over-year change in the full-year industrial operating margin.

The margin improvement was driven by $285m of favorable pricing, supported by product repositioning, enhanced product features, improved product quality and better pricing on parts.

Manufacturing efficiencies added $66m and favorable net currency and economics, including purchasing savings, was $57m.

Volume and mix was down $119m, as margins on new products and better Construction Equipment industry volumes were offset by -- excuse me, weaker combine, hay tools and crop production industries.

Gross margin as a percentage of net sales increased by 2.1 percentage points, again with improvements at both Agricultural and Construction Equipment operations.

Excluding currency impacts, research and development costs increased $62m and SG&A costs increased by $43m to approximately 8.4% on net sales, below our target level of 8.5%.

Turning to Equipment Operations change in fourth quarter net debt on slide 20, $191m of cash was generated by operating activities.

A $160m decrease in working capital was the principle driver of the cash generated by operating activities.

This is very similar to last year's level. $98m of cash was used for investing activities, primarily capital investment.

The net of these factors, plus foreign exchange impacts, was a $115m decrease in net debt.

At quarter end, Equipment Operations net debt totaled $263m.

Equipment Operations position with Fiat affiliates was net cash of $236m.

On a consolidated basis, the net position with Fiat affiliates was net cash of $7m, basically a balanced position.

Next the change in net debt for the year on slide 21.

Improved financial results contributed $139m additional cash this year.

Working capital was a $58m source of cash in 2006, $261m below 2005, which included a $408m non-recurring benefit in that year.

In total, net debt declined by $456m during the year, slightly better than our full-year target of a $400m reduction.

Moving on to our expectations for 2007, our agricultural industry outlook for the full year 2007 is on slide 22.

The agricultural tractor industry is expected to continue running at high levels, with higher horsepower tractor sales in North America helped by higher corn prices and increased demand for corn for fuel ethanol.

Western Europe should be at about the same level as in 2006, while the markets of Latin America and rest of world are expected to be stronger.

Also supported by high corn prices, industry sales of combines are not expected to experience the declines of recent years.

Latin America in particular should rebound.

Turning to Construction Equipment on slide 23, we believe heavy and light equipment industry unit sales will be up slightly for the full year, although North American light equipment will be impacted by the decline in U.S. housing starts and Latin America is expected to be down from its record sales level in 2006.

On slide 24, we have provided a recap of some of the more important new product launches of 2006 and 2007.

These include new, repowered and upgraded products and product line extensions covering tractors, combines, backhoe and skid steer loaders and heavy equipment products.

These launches should assist us in improving our market positions in 2007.

We reiterate our full-year 2000 outlook consistent with guidance provided at November -- on November 8's Fiat investor and analyst day.

Updated for 2006 results, slide 25 was presented at that time.

We expect net sales of equipment of approximately $13b and an industrial operating margin of between 7.6 and 8.4%.

This represents a significant improvement over 2006 results.

This concludes my comments.

We are now ready for the question and answer 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.

Cara, could you please retrieve the first question?

Thank you, sir. [OPERATOR INSTRUCTIONS].

Our first question today comes from David Raso with Citigroup.

Please go ahead, sir.

Yes, good morning.

First a question --

Morning, David.

Good morning.

First a question on the fourth quarter and then '07 as related to the guidance.

The currency was a big benefit to the top line.

The sales were up only 1.8% ex-currency.

In the slide when it comes to profits, where you cite $57m benefit in the quarter from economics and currency, can you help us with how much actually was currency when it comes to helping the profits?

It was $42m of that.

So it was a $42m benefit?

Yes.

And that's essentially the euro strengthening.

Okay.

And then we had purchasing savings of $16m and economics of minus $1m.

Okay.

So if we look at the ex-currency, sales were up 1.8 and profit margins were in fact about 4.3.

So the profits were essentially flat ex-currency.

When I look at '07's guidance, we're looking at roughly margins going up 140 bps, right, 6.6 up to your mid-point 8.

What's the thought on the currency in that number?

The predominance of that number is not currency.

It is primarily coming from -- there's a small -- obviously there's a volume impact, as we talk about manufacturing efficiencies, as we put some more volume in, but the predominance has to do with some cost control and, frankly, some of the pricing and new product launches that are expected to have better margins on them than the products they replace.

Okay.

I was just a little surprised that the quarter revs were up but the profits were down.

Obviously it was Construction that appeared to take the lump of the hit in the quarter.

When I look at '07, the revenues, up $13b?

Pardon me?

Hypothetically, if you look at the $13b number as AG sales up 10 and Construction up 5, just to make it simple, that gets you to roughly $13b of revenue.

Your industry numbers, though, obviously are a lot weaker than that.

I'm essentially looking at AG globally to be largely flat and Construction up mid, low-single digit at best.

So clearly your revenues are showing a lot stronger performance than what you think your industries are going to do.

Can you help explain the outgrowth that you're looking for and especially if you can maybe break it out between AG and Construction?

Because, again, AG up 10, Construction up 5 gets me to $13b, and your industries blended are low single digit.

Just as a -- coming back to you there, I wouldn't say that your numbers on either the Agriculture or the Construction, David, are off a great deal.

Clearly the implication in this forecast is some market share gains.

One of the points that we've been reinforcing, or tried to reinforce as we went through some of the release, is that this year represented a stable market share position for us, which is a change from historical market share performance for the past several years.

And having now arrested that market share decline, and having spent -- and continually, and we will do this again next year, putting more money into research and development and frankly trying to change the mix of where we're spending our S&A dollars into more things that support revenues, we are expecting some pricing -- or some share improvement.

We're also expecting some pricing improvement to continue.

So of the number you're seeing, you should be thinking about pricing being up in the 1 to 2% range, market share turning and going up.

And that is -- that's the two things that are driving this number -- revenue number to be much better than the industry number you're seeing.

And just to summarize, we all have our optimistic views at the start of the year, but again net/net, unless maybe you're being conservative in your industry outlook, I think especially for AG, but if we take your industry forecast at face value we are looking for outgrowth of 6, 7% in each business.

Especially, I guess, AG in particular, if you said my numbers were not that far off, AG sales up 10, Construction up 5 for the year.

But then at the same time they have the margin improvement of 140 basis points and you're going to get pricing, the market share wins with that kind of pricing.

It just -- I guess maybe help us understand where the share gain's going to come from.

Is it non U.S., is it big equipment?

You have some new combines out, some cotton -- some of your cotton pickers I've seen in the field are pretty interesting product that could take share, so I appreciate that.

But that's a big number to put out there on the share win, unless again you're being conservative on the industry outlook.

This is Harold.

Let me try to give you a little bit of framework.

We've continued, as Rubin said, the investment in new product development.

And you mentioned a key product for the cotton farmers, which is the new cotton module -- modular builder, which not only will, we think, will change the gain, but also will bring with it some tractor business for those big farmers that are using those machines.

In addition to that, we talked a lot about the combine business, particularly for the Case IH brand where we did not have a Class Seven vehicle, which represents 25% plus of the market.

And we will be in production for the harvest season with that vehicle.

As well as we have new planting and seeding equipment that will be in the market for the planting season.

On the Construction Equipment side, both North America and Europe we have continued to evolve the technology of pilot controls on the skid steer loaders, which will be a big help for both of the Construction brands.

And this year, with the closure of Berlin facility, we've been constrained in Europe and also North America on rubber tired excavators as well as compact excavators.

But the brands will have new dozers and a new series of wheel loaders, as well as a new series of excavators.

And with these major product launches we're planning to increase share, as Rubin said.

So there's some real meat behind the plan.

It's not just a wish.

I'll stop here with one last comment.

Your inventory appears to suggest you have confidence in your production schedules at the start of the year.

Your finished goods inventory is up only 6, but your raw materials are up 20, your WIP is up 37% on a year-over-year basis.

Is the confidence in that mix of your inventory, obviously you're gearing up for some pretty big production at the start of the year, are your orders commensurate with the out-performance that you're looking for for the full year?

Are you seeing order rates that are that much above your industry forecast already, to have your inventory looks like it's gearing up for some pretty big production at the start of the year?

From a production standpoint, the order board is clearly strong in North America on both the Agricultural and Construction side.

If you recall, a year ago we were just launching new magnums and four-wheel drive tractors with some delays in the first quarter.

So the sold retail order board, in addition to the dealer order board, on those products is stronger than a year ago.

And for the first quarter, the Construction Equipment looks good in North America and very strong in Europe and also in Latin America.

Okay.

Thank you very much for the time.

We will take our next question from Mark Koznarek with Cleveland Research.

Please go ahead.

Hi, thanks.

Good morning.

Morning, Mark.

Just one detail - the tax rate that you're assuming for 2007?

We expect to see some slight improvement again over this year's rate.

You'll notice we decreased the rate by about 5% in '05 to '06 and we expect another couple of point drop.

So I think if you were to be in the 38% range you would be reasonably close to our expectations.

Okay.

Then, on your '07 outlook for the industries, I'm wondering if you could split them a little bit differently for us, to give us some insight into some of the segments with regard to Construction Equipment.

The light equipment, up 1 to 4, what do you expect for the categories you'd look at in light equipment skid steers versus backhoe loaders and then some of the other categories that aren't often cited by you guys, but I know are in the overall market index?

The big categories for us of course are the skid steer loaders and the tractor loader backhoes.

Our expectations for both of those are to be essentially flat for the year.

Now, that varies markedly by region, but in the worldwide average, that is our expectation.

I could -- if we were to dig into that, for example in North America we expect the tractor loader backhoes to be down several digits, in the 10% range.

But if you go into the tractor loader backhoe market in other areas, it should be better.

Latin America, although again we expect to be down.

Big -- and skid steer loaders will be down in North America, but up in Europe, for example.

And we don't have -- we aren't going to get into some of the other categories where we're not as significant a player, but those are the big areas for us.

Skid steers in North America would be down 10% as well?

No, we do not expect nearly that decline.

We expect a small decline in skid steer loaders, in the 0 to 2% range.

Again, it depends if there's different use -- utilization or uses for these products and there are also some shifts in use which -- so the trends are different by product.

It's not a uniform rate.

Okay.

And then as we look at your AG Equipment outlook, we kind of jumped over that quickly, but does seem to be a big disconnect between the really robust commodity price environment and relatively cautious equipment environment.

Can you help bridge those two for us?

There's a couple of things that you need to look at.

The very high commodity prices very clearly will help some segments of the business.

The high horsepower tractors and the combines will be helped by that.

On the other hand, the high commodity prices will also be negatively impacting certain farm segments as they -- it becomes a feedstock for other sections.

So, absolutely, great help on one section of the market.

On the other hand, it will actually negatively affect other segments of the market.

Another unknown that is out there right now is the Farm Bill and that could have other impacts on us.

And as you go around the world, that was a U.S. comment, if you look in Latin America, for example, as important as commodity prices are, the exchange rate with Brazil is at least as important as the commodity prices.

We have been looking at this quite extensively, obviously, as has everybody, as we look at the commodity prices and try to balance the view of what happens in one segment and the other and what has been described as a relatively conservative forecast is based on the weighted impact of the various segments.

Harold, would you like to add anything to that?

No, I think the comments are appropriate.

If you look at number two corn December futures at just under $4 and even cash price is at $3.85 versus a year ago at under $2.

And soy beans has started to move from a -- November futures are up $7.67 and cash price is 26% above last year.

So, clearly, this will have more impact on the second half of the year as farmers -- number one, in March, April when we determine the planting intentions.

And only after the farmers make that decision will we know how much more corn acreage comes in and how many bean acres come out.

But clearly this is a real positive trend helping us in '07, but even more so I think in 2008.

The comments, Rubin, that you just made a second ago about the commodity prices helping the row crop farmer but offsetting some of that is pressure on the livestock guys.

It seems like that is not really reflected in the forecast, if we have row crop tractors flat in North America and combines actually down.

So where's the disconnect there?

Well, I think, Mark, what we have is over 40 horsepower tractors flat, which is going to be translated into utilities, from 40 to 100, probably down a little.

And then the over 100 is up.

The category that you see on there is all over 40.

Okay.

And then what about the combines out?

Combines, what we're probably going to see is a stronger second half of the year than first half of the year.

And --

But again, particularly North America our combine growth is going to be driven by the new Class Seven product.

Okay, great.

Thank you.

[OPERATOR INSTRUCTIONS].

We will take our next question from David Bleustein with UBS.

Please go ahead.

Good morning and good afternoon.

Hi, David.

A quick question.

David Raso's question on the market share gains, who do you expect to be taking the market share from?

And I guess in those markets where you are taking market share and finding success, are you not expecting fairly significant price competition?

Well, that's the good thing about a global marketplace, right.

There's a number of players clearly, and I don't think it's appropriate to be positioning about where we're headed but I think that the share will come from various other competitors.

We're not targeting on one single competitor.

But where you start to gain some market share, wouldn't you expect those competitors to defend, either with product if they can or, if they can't, with price?

I would say that there are obviously some anticipation of that, but there's also, as we are expanding our product offering, for example in the tractor -- skid steer loaders, and we introduce more Tier 3 compliant products, yes, there will be competition, yes, they will try and defend their share.

But we're actually going into segments where we haven't had a viable offering before, including the Class Seven combines that Harold mentioned, the cotton builder -- or cotton module builder.

So, yes, we expect them -- there will be competition.

We expect to continue to get our own efficiencies and leverage.

But I remind that as we are expanding our product offerings, both in segment and across segments, that we become a more viable option for the customer.

And so, some of those sections we just haven't had an offering and we do expect to get our fair share of those new segments.

And so --

And how could you --

We don't have to aggressively price cut.

In some of those categories, we just have to give them a viable offering.

Let me [try to] -- Harold, forgive this question.

But could you walk me through the senior management incentive compensation structure for 2007, and what relation it bears to the $13b revenue target and this operating income margin range?

Yes.

I won't go through the details of the structure, but it's fair to say that we're equally balanced on trading cash flow and trading profit.

So for the senior team it's about 50/50.

And clearly everybody has share targets also that we're looking at for the brands.

What I'm struggling at is do you get paid flat if you fall below the low end of these targets, because right now the consensus forecasts are really below the low end of the targets, using our math?

I think it's fair to say that we're very aggressive in our internal goal setting.

All right.

Thank you very much.

And there is an impact on the incentive costs if the goals are not met.

[OPERATOR INSTRUCTIONS].

As we have no further questions, I would like to turn the call over to Mr. Al Trefts for any additional closing remarks.

Thank you, Cara.

Thank you all for joining with us today.

I hope we were able to answer all your questions.

And if you have any more -- further points of clarification, please give me a call after the call.

We'll talk to you again soon.

Thank you.

Bye, bye.

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

Thank you for your participation.

You may now disconnect.