CNH Industrial NV (CNHI) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to today's CNH 2007 second quarter results conference call.

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

Your hosts today will be Rubin McDougal, Chief Financial Officer, Camillo Rossotto, Vice President and Treasurer and CFO CNH Capital, and Al Trefts, Senior Director Investor Relations and Capital Markets.

At this time I would like to turn the call over to your host today, Mr.

Trefts.

Please go ahead, sir.

Thank you, Durla, and welcome, everyone, to CNH's second quarter 2007 results webcast conference call.

We are pleased to have with us today Harold Boyanovsky, our President and Chief Executive Officer, Rubin McDougal, our Chief Financial Officer, and Camillo Rossotto, our Treasurer and CFO of Financial Services.

In recognition of regulation FD, we've 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 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 where various non-GAAP measures were used in analyzing our performance.

Finally, this conference call and webcast is 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'd like to turn the call over to Rubin.

Thank you, Al.

Good morning and good afternoon to everyone.

Beginning with slide four, I'd like to review the highlights of the quarter, starting with our diluted EPS before restructuring, net of tax, which increased 60% to $1.04 per share from $0.65 last year.

Net income before restructuring, net of tax, also increased 60% to $247m.

Favorable volume and mix of agricultural equipment, including combines and headers worldwide, high horsepower tractors in Europe and sugar cane harvesters in Latin America, new products, positive net price recovery, strong agricultural equipment markets, strong construction equipment markets outside of North America, and lower quality costs contributed to a 70-basis-point increase in Equipment Operations gross margin to 20.3%, the best result in CNH's history.

Agricultural equipment market share improved in the quarter and construction equipment market share was stable.

Financial services net income grew 18% to $58m compared to the second quarter last year, with retail originations up 27% and the quarter end service portfolio of retail loans and leases up 13% from June 30 of '06.

Equipment Operations' strong cash flow turned our net debt position into net cash of $531m.

We announced the August 1 redemption of our 2011 notes to better manage our liquidity and reduce future net interest expense.

Taking a look at slide five, we see the trend of worldwide tractor and combine industry unit volumes in the second quarter.

The worldwide tractor industry increased 4% from the high levels we experienced last year, despite a decline in the under-40 horsepower segment in North America.

The increase was driven by a 6% improvement in rest of world markets and a 33% improvement in Latin America.

The combine industry increased in every market and in total was up 15% in the quarter.

Turning to slide six, we have the worldwide tractor industry retail unit sale changes year over year by market.

Additionally, in North America which -- within the over-40 horsepower category, which represents almost half of the North American market, industry sales of tractors in the 40 to 100 horsepower range were up 2% from last year.

And in categories where Case IH is particularly strong, sales of the over-100 horsepower tractors were up 21% and four-wheel drive tractors were up 27%.

Preliminary tractor industry sales in Western Europe were down 2%, with the markets in France and U.K.

up and all others down.

In Latin America, where the tractor market was up by 33%, Brazil was up 54%.

Other Latin American markets were also up, with Argentina up 31%.

Driven by the continued strengthening of the markets in Latin America and rest of world, worldwide combine industry unit sales improved 15%.

The Brazilian market nearly tripled from last year's weak level.

Argentina was flat, but on aggregate other Latin American markets were up significantly.

The combine market in Western Europe improved about 4% in the quarter, with France, Italy, Spain and the U.K.

up, while Germany was down.

Other Western European markets, in total, were up.The combine market in North America was up 1% and the Class 7 segment, where we recently launched the Case IH Axial-Flow 7010, with its industry exclusive variable feed rotors and feeder drives, was up almost 25%.

On a unit basis, our tractor market share improved in Western Europe, was flat in North America and rest of world, and declined slightly in Latin America where we are capacity constrained.

In total, our share was essentially flat to up slightly from last year and our combine sales were very strong in every market.

Slide seven shows the June year-to-date trend of worldwide tractor and combine industry unit volumes.

Worldwide, the tractor industry increased 3% from last year, despite the decline in the under-40 horsepower segment in North America.

The combine industry increased in every market and, in total, was up 16%.

Next, on slide eight, are the worldwide tractor industry retail unit sale changes year over year by market for the first half of the year.

Additionally, in North America within the over-40 horsepower category, industry sales of tractors in the 40 to 100 horsepower range were up 5% from last year.

Sales of the over-100 horsepower tractors were up 11% and four-wheel drive tractor sales were up 9%.

Preliminary tractor industry sales in Western Europe were up 1%, with the markets in France and the U.K.

up and Germany, Italy, Spain and all others in aggregate down.

In Latin America, where the tractor market was up 29%, Brazil was up 44%.

Other Latin American markets were up, with Argentina up 23%.

Driven by the continued strengthening of the markets in Latin America and rest of world, worldwide combine industry unit sales improved 16%.

The Brazilian market nearly doubled.

Argentina was up 15% and in aggregate other Latin American markets were also up.

The combine market in Western Europe improved about 2% in the first half, with France, Italy, Spain and the U.K.

up, while Germany and other western markets in total down.

The combine market in North America was up 5%, with the Class 7 segment up 23%.

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

In total, our share was in line with last year.

Our combine retail sales were very strong in every market.

Turning to the second quarter construction equipment industry retail unit sales trend, on slide nine, we see the continued strength in total up about 10%.

Industry unit sales of heavy equipment were up about 13%, with sales of light equipment up 7%.

Slide 10 shows second quarter 2007 year-over-year percent changes in construction equipment industry retail unit sales by region.

The worldwide backhoe loader market was up 19%, with strong increases outside of North America.

The skid steer loader market was down 5%, with North America down and all other markets up.

The heavy construction equipment market was up 13%, with strong increases outside of North America, just as we saw in the first quarter.

Spain and U.K.

saw the largest percentage increases in Western Europe, where all major markets were up.

Latin American markets were also up across the board, as were most markets in the rest of the world.

Our market share of total light, including all other light equipment products, and heavy equipment was unchanged from the second quarter of 2006.

Next, the June year-to-date construction equipment industry retail unit sales trend on slide 11, where we see the market's up in total about 12%.

Heavy equipment was up about 15%, with sales of light equipment up 11%.

Slide 12 shows first half 2007 year-over-year percentage changes in construction equipment industry retail unit sales by region.

The worldwide backhoe loader market was up 22%, with strong increases across most markets outside of North America.

The skid steer loader market was down 4% because of the decline in North America.

The heavy construction equipment market was up 15%, with strong increases outside of North America, again just as we saw in the first quarter, in the quarter.

The U.K., Spain and Germany saw the largest percentage increases in Western Europe, where all major markets were up, as were the Latin American markets and most markets in rest of world.

Our worldwide market share of total lights, including all other light equipment products, and heavy equipment, was essentially unchanged from the first half of 2006.

Switching now to equipment net sales, slide 13 shows the second quarter trend for the past three years.

At $4.1b, net sales of equipment in the quarter were up a robust 17% from last year and up 12% net of currency variations.

Our presence in virtually all of the agricultural and construction equipment markets throughout the world helped us increase sales despite the weakness in North American construction equipment.

In the quarter, 64% of our sales came from markets outside of North America, up about 10 percentage points from the second quarter last year, due to robust markets outside of North America, the weak U.S.

dollar, and weak construction equipment markets in North America.

Worldwide net sales of agricultural equipment increased 17% in constant currency, an increase in every region.

In North America, we continued to under-produce retail unit sales in the quarter, keeping our trailing months of supply for North American tractors and combines at the end of June about one half-month lower than the industry, and more than one month lower than we were at the end of the second quarter last year.

In total, agricultural equipment net sales increased by $385m for volume, mix and new products and $123m for currency translation.

Worldwide, on a four-month supply basis at quarter end, estimated dealer and company tractor and combine unit inventories were down about two months of supply from a year ago.

Speaking to construction equipment, net sales increased 2% net of currency variations and increased in every region except North America.

Volume and mix increased net sales by $26m, despite the industry-driven decline in North America.

Currency translation increased net sales by $61m and pricing added an additional $7m.

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

Next, slide 14 shows the trend for the first six months of the past three years.

At $7.3b, net sales of equipment in the quarter were up 14% from last year and up 9% net of currency variations, despite the weakness we saw in the North American construction equipment market.

Worldwide net sales of agricultural equipment increased 12% in constant currency, an increase in every region except North America, which was flat.

In total, agricultural equipment net sales increased by $480m for volume, mix and new products and $204m for currency translation.

Speaking to construction equipment, net sales increased 4% net of currency variations and increased in every region except North America.

Volume, mix and new products increased net sales by $79m.

Currency translation increased net sales by $107m and pricing added an additional $14m.

Slide 15 shows the segment split of industrial operating margin for the second quarters of 2006 and 2007.

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 $371m in total equipment operations trading profit for the second quarter of 2007.

Below are the adjustments to move from trading profit in IFRS to the $441m industrial operating margin in U.S.

GAAP.

At the bottom is the industrial operating margin split between our equipment businesses, with agricultural equipment's industrial operating margin increasing by $145m to 11.7% of net sales.

This was driven by improved operating performances in every region of the world, led by Western Europe and Latin America.

Favorable volume, mix and new products, positive net price recovery and improved quality costs were the key drivers of the improvement.

Construction equipment's industrial operating margin declined by $28m to 8.7% of net sales, as strong performances in Western Europe and Latin America were offset by the decline in North America.

Volume and mix was unfavorable, more than explained by North America.

Additionally, as we cut construction equipment production in North America and raised it in Europe, we incurred incremental costs for under-absorption and inefficiency.

Positive net price recovery and improved quality costs were partial offsets.

SG&A and R&D costs were also higher compared with the second quarter last year.

Slide 16 shows the year-over-year changes in second quarter industrial operating margin.

The improvement was driven by $98m of favorable volume, mix and new products, positive net pricing of $4m and favorable economics and currency totaling $62m.

Improved quality costs were offset by manufacturing inefficiencies.

Gross margin as a percent of net sales increased 70 basis points in the quarter, reflecting improvements at agricultural equipment operations.

Excluding currency, SG&A increased $10m for economics and increased investment in customer care programs.

Slide 17 shows the segment split of industrial operating margin for the six months -- first six months of 2006 and 2007, similar to slide 15 for the quarter.

At the top of the slide we see $532m in total equipment operations trading profit for the first half of 2007.

At the bottom is the $660m of industrial operating margin in U.S.

GAAP split between our equipment businesses, with agricultural equipment's industrial operating margin increasing by $199m to 9.4% of net sales.

This was driven by improved operating performances outside of North America.

Favorable volume, mix and new products, positive net price recovery and improved quality costs were the key drivers of the improvement.

Construction equipment's industrial operating margin declined by $17m to 8.2% of net sales, as strong performances in Western Europe and Latin America were offset by the decline in North America.

Volume and mix was unfavorable, as were manufacturing efficiencies and production costs, similar to the quarter.

Positive net price recovery was a partial offset.

SG&A and R&D costs were also higher compared with the first half of last year.

Slide 18 parallels slide 16, showing the year-over-year changes to year-to-date industrial operating margin.

The improvement was driven by favorable volume, mix and new products of $158m, positive net pricing of $18m and favorable economics and currency totaling $97m.

Improved quality costs were offset by manufacturing inefficiencies and production costs.

Gross margin as a percent of net sales increased 130 basis points in the quarter -- or in the half, reflecting improvements at agricultural equipment operations.

Excluding currency, SG&A increased $40m for brand support at trade shows and equipment fairs for our dealers throughout the world, investment in customer care programs and variable compensation and economics.

Turning to slide 19, equipment operations change in the second quarter net debt, we have $583m of cash generated by operating activities, primarily from earnings and seasonal increases in accruals.

Working capital decreased by $12m in the quarter.

$51m of cash was used for capital expenditures.

The net of these factors was a $537m decrease in net debt, giving equipment operations a net cash position of $531m at quarter end.

Equipment operation's position with Fiat affiliates was net cash of $1.2b.

On a consolidated basis, the net position with Fiat affiliates was net debt of $830m.

At financial services, funding from Fiat offset the equipment operation's net cash position.

On June 28 we announced the August 1 redemption of our 9.25% Senior Notes due in 2011.

The charge associated with the early extinguishment of this debt is expected to be approximately $60m, but this charge will be more than offset by future interest expense savings.

This redemption will allow us to better manage our liquidity and improve our balance sheet structure.

Slide 20 shows the picture for the first half of the year change in equipment operations net debt.

$913m of cash was generated by operating activities, primarily from earnings and seasonal increases in accruals.

Working capital decreased by $76m.

$90m of cash was used for capital expenditures.

The net of these factors was a $794m decrease in net debt.

Our agricultural equipment -- our agricultural industry outlook for full year 2007 is on slide 21.

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

Western Europe should be about the same level as in 2006.

We expect the markets in Latin America to be up 25% to 30%, notwithstanding the current payment moratorium on agricultural loan repayments recently announced by the Brazilian government.

We expect details of the new program to be announced later this quarter.

Rest of world markets are also expected to be up, perhaps as much as 5%.

Also supported by high corn prices, industry sales of combines are expected to be up throughout the world, led by the rebound in Latin America.

Turning to construction equipment on slide 22, we believe heavy and light equipment industry unit sales will be up about 10% for the full year, driven by the markets outside of North America.

We expect North American equipment sales will continue to be adversely impacted by the decline in U.S.

housing starts and general construction activity levels.

In the press release, we provided a recap of some of the important second quarter new product launches, customer care activities and marketing initiatives which will contribute to our results throughout the year.

We now expect, as shown on page 23, net sales of equipment to be slightly above $14b.

Our target industrial operating margin of between 7.6% and 8.4% for the full year is unchanged.

And we're increasing our full year 2007 outlook for diluted earnings per share before restructuring, net of tax, to a range of $2.30 to $2.45.

This change reflects improvements in agricultural equipment volumes, mix and new products, and in our cost of quality, tempered by our call -- tempered by the cost of calling our 2011 bond, a less robust pricing environment, coupled with slightly higher supply constraints and costs, and the possibility of a stronger than anticipated decline in North America's construction equipment in the second half of the year.

Our estimated restructuring charges for the year remain unchanged at approximately $60m net of tax.

This concludes my prepared comments.

We're now ready to begin the Q&A session.

Thank you, Rubin.

For the Q&A session, may I ask that everyone please limit themselves to one question and one follow-up at a time?

Durla, could you please retrieve the first question?

Thank you.

(OPERATOR INSTRUCTIONS).

We've got a question now from Andrew Obin from Merrill Lynch.

Please go ahead.

Yes.

Good morning.

Great quarter, guys.

Good morning, Andrew.

Thank you.

Thank you.

Just a question.

You used to have a chart in your handout which indicated long-term margin and revenue projections, and I've noted that it's out.

Does that mean that you have changed those projections or does it mean something else?

If you look at the chart we've been previously showing, it showed revenue in '07 being at approximately $13b and we are saying in the current outlook that revenue will be in the $14b range.

As such, we felt it appropriate to take the chart out.

I guess I'm focusing on longer-term projections.

This is Harold and we have not revised the long-term projections that we shared with the team in Lengado.

And just a follow-up question.

In terms of your comments on pricing, our channel checks indicate that actually New Holland dealers, particularly on the construction side, are gaining market share.

And is market share gain and your conservatism on pricing, are those related?

You have to -- there is some inverse correlation, I believe, between the two.

Obviously we would like to get both pricing and market share.

We have been very cautious with each of the brands' presence, have been working to not trade off pricing for significant -- significantly trade off pricing for share.

But certainly we have not seen the increase in pricing that we had really wanted to get, but we have not also -- have also not been aggressively cutting price.

And we haven't seen the increase in material economics that would drive a pricing increase either.

I'll let others ask a question.

Thank you very much.

Thank you.

We've got a question now from Terry Darling from Goldman Sachs.

Please go ahead.

It's a point of clarification before I ask the question, if I could.

Does the new EPS guidance include the interest savings from the re-financing?

It includes both the cost of the call and the interest savings.

Okay.

And those two are roughly the same over the back half of the year?

No, they are not.

If you look at the cost of the call, it's approximately $60m.

If you expect that the bond cost 9.25 -- had a interest rate of 9.25 and we replaced a significant portion of that bond with a new Senior Bond and we had it in the, let's call it roughly 7% range, you'd have an interest savings in low double digits, closer -- let's call it between $10m and $15m.

Okay.

But you would not have a net neutral effect in the year.

Okay.

And fair to assume roughly half cash, half refinance with the new bond, or is there a bias one way or the other you can (multiple speakers)?

There will be a bias towards refinancing.

It's not -- we won't -- we probably will not put it all in fixed rate, but I'll say we will refinance probably three-quarters of the bond with a bias -- have that refinancing biased towards fixed rate but also some floating in there.

Okay.

That's helpful.

And then, I guess a question to talk a little bit about margins.

You talked about gross margin pressures from some supplier constraints and raw material costs.

Your R&D and SG&A numbers were much lower than what we were looking for and certainly lower as a percent of sales.

As we think about your new forecast for the back half of the year, can you talk to us about the mix between the gross margin and some of the other items, SG&A and R&D, as it relates to the new assumptions you're making?

Yes.

Let me make a couple of points.

First, let me step back on the bond call.

The numbers I gave are all pre-tax, so if you were to apply that, you look at the net cost in the year, it would be about $45m.

And that would be about the $60m minus the $15m I gave before, and that's pre-tax still.

Okay.

If you then go back to the SG&A and R&D, first of all, I think you'll see increases in both of those in absolute dollar terms in the second half for a couple of reasons.

One is we are ramping up R&D, are continuing to as we're looking and saying, "We need to have the appropriate position to take advantage of market opportunities and continuing to improve quality." And frankly, we just think it's a good thing to do for us in the current position the business is in.

Secondly, on SG&A we will continue to support brand and sales driving initiatives.

We've recently announced an alliance with Juventus where we're supporting them, things like that to get the brand more visible, give them more support.

On S&A you'll also see some increases just due (technical difficulty).

Rubin, we lost you.

Please stand by as we are experiencing a momentary interruption in today's conference.

Thank you for your patience and please continue to hold.

The speaker's line is open now.

Please go ahead, sir.

Hello.

Rubin, it's Terry Darling here.

I can hear you again.

All right.

Sorry.

Yes.

Fiscal -- completing my answer and I -- apparently many of us dropped off.

On the S&A I was just saying that a relatively easy comparison to (technical difficulty) in the first half will be more difficult than the second half.

We had some favorable items.

We've started certain new initiatives.

We have a customer care program which will add some new costs, some dealer network development costs.

And frankly, there's probably some variable compensation that will compare unfavorable to a year ago.

So you should expect higher S&A and R&D costs in the second half compared to the first half, especially on the relative comparisons.

Probably continuing about the levels we saw in the second quarter.

Yes, that would be fair.

In absolute terms?

In absolute terms.

Okay.

So no increase in absolute terms in the back half of the year.

I thought, Rubin, you'd indicated you expected that.

Well, there might be a little bit here and there but we're, relatively speaking, we're talking levels of the second quarter this year rather than the kinds of levels we saw in the back half of last year.

Okay.

And then in terms of the higher costs associated with the supply chain issues, can you talk in more detail there?

Is that raw materials more than supply chain or vice versa?

Can you help us with that?

Yes.

This is -- material costs we treat separately.

But as we talk about some of our ramp-up and ramp-down costs, for example we are hitting internal capacity constraints.

So we may have processes that are just absolutely at the limit, a paint capacity line or certain cutting, things like that.

When we hit the limit, in many cases we're trying to meet market demand.

We will take that process outside and we will incur higher transportation costs to take the component or sub-component out to be painted or to source a product or part that we formerly did inside.

Those costs were material in the second quarter.

We expect to incur some of those costs in the second half as well.

And frankly, as you look at some of our supplier capacity constraints, we have to go to a second or third supplier to find adequate volume to meet our needs.

The brands are doing very well.

[We're trying to] keep them comfortable.

Those extraordinary costs we typically treat as other costs as opposed to pure economics because that would deal more with a supply increase from an existing -- or cost increase from an existing supplier.

I don't know if that helps you at all, but that's -- those are the kinds of things we're talking about.

We saw those in the second quarter.

We'll see those in the third and fourth quarters as well.

Rubin, where would you expect the year-over-year comparison in gross margin to come from -- to trend in the second half of the year?

So you're up 70 basis points year over year in 2Q.

You have 200 in the first quarter.

Are we somewhere in between, as you work through some of the issues in the second quarter that maybe were transient, or are we going to stay more towards where we were in the second quarter?

I'm just trying to figure out to what extent were second quarter cost pressures transient versus continued.

I'm hearing you say there's some in the back half of the year, but I'm trying to get a little better clarity than that.

Rubin, I think it's fair, as we look at the industry forecast and the supply constraint issues, that those will continue into the second half of the year.

So I'd expect the pricing to be closer to the second quarter than the first quarter.

And what -- absolutely, Harold is accurate.

Going specifically -- you mentioned the 70.

You mentioned 200.

It's going to be closer to the 70-point improvement than the 200.

But it will be -- remain in the range, but closer to the 70 than the 200 we saw in the first quarter.

Okay.

That's helpful.

And then lastly, if we just look at the industry retail commentary for the back half of the year versus where CNH has been performing, so CNH versus industry.

We've talked about a little bit of loss of share in CE in the first part of the year.

It looks like in the second half of the year that should reverse.

But I'm still struck by the extent to which you're assuming a deceleration in some of those markets relative to your performance.

It's a huge differential.

I'm wondering if you could talk a little bit about Latin America and rest of world in particular for the construction equipment assumptions, industry versus your recent growth there.

We are not anticipate -- from our view, a huge deceleration.

Now, part of the comparisons are, of course, year on year and the relative baselines change.

First quarter of -- or the first half we were comparing to a very strong first half in construction.

That actually goes a little against what you're saying.

But as we look at this, we're saying the 35% growth increases will not continue but they'll still be very strong in the second half and for the full year.

I'm not adding much clarity to your answer here.

Maybe you could narrow down your question one more time (multiple speakers).

If we just take Latin America heavy, I think the full-year industry change, you were up 41% in the first half.

You're saying 30% to 35% for the full year, so the second half has got to obviously decelerate a fair bit there.

Obviously you talked about -- there are no currency effects in these numbers.

No.

These are unit numbers, Terry.

Why does Latin America decelerate?

When we look at the tractor industry in Latin America, we're saying, hey, in the second half it's going to continue to be up slightly more than 30% if you -- if that's the implied number in what we gave you.

So as compared to a 40% --

If we look at the numbers, Terry, Latin America heavy in the first half was up 41% and that's off of an increase last year in the first quarter of 19%.

But the second half last year was a lot stronger.

It was up 29%.

And so our -- what's implied in our Latin American second half for heavy is an increase of 25% off a 10-point higher base.

So --

You're not really looking for a deceleration.

It's really the way the comps run for you.

Right.

It's a much more difficult comparison and that is the same in a lot of the construction equipment industries in the second half.

Okay.

Thanks very much.

Thank you.

We'll take a question now from David Bleustein from UBS.

Please go ahead.

Good morning and good afternoon.

Hi, David.

In the Ag business it looks like you gained share in every market in the world except Latin America tractors.

Should we assume it's just you're ramping up or is something else going on there?

I think --

This is Harold.

In Latin America in the first half we had some supply constraints, namely transmissions for agricultural tractors.

And with our key suppliers we're working through those and we don't anticipate having that issue in the second half.

All right.

What can you tell us about the health of the German tractor market today?

Just a second, David.

In the --

I guess a really broad question for Harold maybe, while Al is looking that one up, is obviously if you look back to the last cycle, $2.50 was considered by a good, good slug of farmers to be a good price of corn.

Is $2.50 still a good price for corn or is the new $2.50 now $3, given higher input costs and what-have-you?

Well, clearly, David, the input costs have risen from the last up-cycle, when corn hit $2.50.

So I think the breakeven point is going up a little bit.

What that is exactly, I don't have top of mind.

But clearly their input costs are increasing.

As far as the German market, David, we saw it down 12%, 13% in the quarter, which means that for the half it's down about 3%.

But that's probably a little bit inflated by some strength in the first quarter that was probably due to carryover 2006 registrations in anticipation of the VAT increase.

But the market was pretty much in line with where we expected it to be.

So Q1 was down 3%, first half down 12% to 13% --

No.

No.

No, I got it wrong.

Two was down 12% to 13%.

So Q2 was down 12% to 13%, okay.

Half was down 3%.

Half was down 3%, first half down.

Okay.

Got it.

Perfect.

Thanks a bunch.

Okay.

Thank you.

We'll have our next question from Mark Koznarek from Cleveland Research.

Please go ahead.

Hi.

Hello, everybody.

Hi, Mark.

A question on the pricing.

Could you review again the pricing, especially the split between Ag and CE?

I got on the call a little bit late but I thought I heard you say that CE price was up $7m but then the total, as we can see from slide 16, is $4m.

And so could you review that?

And maybe there's a definition issue, because I'm wondering whether that is net pricing or whether those economic factors, raw materials, etc., are somewhere else in your waterfall chart.

No, that's net pricing, Mark.

Ag pricing was down $3m.

And so that's -- as we say, it's net pricing, which is the change in pricing, net of the change in discounts.

And the -- we saw weakness in pricing, Ag pricing, pretty much across the board except for Europe.

How is that possible in an environment with such robust unit growth in -- everywhere except some pockets of Europe that you were pointing out?

It also seems like competitors are being pretty disciplined with their own price increase announcements and realization of that, from what we hear.

Are you guys offering more incentives or something like that that's eroding your realized price?

Well, as we talk pockets, we have -- pricing is probably soft to negative on under-40 horsepower tractors in North America, where that segment of the industry is down.

And yes, as Rubin indicated before, there is some tradeoff between pricing and market share but we are vigorously attuned to both the bottom line impact of what we're doing and keeping our margins going up, as you've seen we've done on the Ag side, and at the same time trying to regain our market position.

Yes.

I think, if I could summarize for you, Mark, clearly in the second quarter we set all time for the quarter record retail sales in tractors, combines and construction equipment as a whole.

And it's really been driven by three things - our increased focus on brands and building our brands, the filling of product voids that each of our brands had for their core customer segments like the 7010 combine that Rubin mentioned earlier, and improving the customer delivered quality of our products.

All of those things are continuing to improve.

We're on track to the direction that we committed to go.

And that's driving our increase in retail sales more than anything.

Thank you.

Harold, I don't want to debate this too much more but it seems like all three of those factors usually are used as arguments for getting improved price realizations.

So I'm wondering if in the second half we should expect a better price realization performance out of the Ag group because of the further unfolding of those three dynamics you just mentioned.

We are expecting (technical difficulty) and planning on some improved price realization in the second half.

Okay.

And just a final question is you mentioned the Brazil repayment moratorium.

Could you describe what the terms of that are?

The final terms of that are not -- have not been announced.

Basically, as I understand it at the present time, there is an indication of what will happen, and that is there could be some incentives to the farmer.

Actually, I may have Camillo Rossotto on the phone.

Sure.

Rubin, if you can hear me, Mark, indications coming from the Minister of Agriculture in Brazil is that a plan will be devised and will -- it's already been announced.

It will be finalized by the end of August, whereby they're talking about a 15% percent bonus on the payment due in 2007 for those who pay on time and, alternatively, a 30% down payment for those who elect to defer the payment to the end of the contract.

So either we're going to be seeing a robust collection activity in September to catch up for this moratorium period or, in any case, there's going to be a realignment of the long-term value of the outstanding loans.

Okay.

And so that sounds like there's a lot of moving parts, so that's why you can't probably tell what the impact is going to be, because some payments could accelerate and others could be deferred.

Is that right?

Yes.

No.

What's going to happen is they can make a payment and get a discount or they may have a deferral.

And so until the pieces are together it's hard to say how it will end up.

Yes, I see.

Okay.

Thanks very much.

Thank you.

(OPERATOR INSTRUCTIONS) We'll take our next question from Ann Duignan from Bear Stearns.

Please go ahead.

Hi.

Good morning, guys.

Good morning.

I'm out in Iowa in the cornfields, so if I lose you it's just the reception out here.

A quick question on your tax rate outlook.

What tax rates should we use for the back half of the year?

We gave an earlier estimate of a 38% for the full year.

And at this point, we're not changing the formal outlook, although I would have to say that we expect that to be improving as we go through the second half.

I would care -- I would rather not quantify it right now but we expect some favorability to the 38% rate for the full year.

Okay.

So perhaps using the Q2 rate would be most appropriate?

That is directionally correct.

Okay.

Well, we can figure that.

One other little one.

You noted that you have about $10m to $15m in the back half of lower interest expense on the refinancing.

What should we -- how should we think about that for 2008, then?

Should we think about $40m in lower interest expense?

I believe that's all -- go ahead, Camillo.

$35m is probably a very good number.

$35m.

Okay.

Thank you.

And then finally, on your outlook for combines for Latin America, I think you've told me before that you don't include the sale of sugar cane combines in your outlook?

That's right.

And what -- we just came back from Brazil and obviously, that market is exploding.

What do you -- what volumes do you expect to see down there this year in sugar cane harvesters?

And then, would you expect to see a continuation of that market expand into 2008?

What I understand, Ann, is that we're looking at that market on a unit basis somewhere between doubling and tripling.

A lot of it depends on the capacity of the two manufacturers, which we're both trying to ramp up as much as we can.

And certainly, to the extent that corn and ethanol and sugar cane stay hot, we will probably see continued strength in that market.

We have heard indications that a number of the producers of sugar cane down there are looking to increase their percentage of mechanization in their fields and that would certainly indicate continued strong demand.

Yes.

Well, couple that with the fact that the Sao Paolo government has mandated the use of mechanization over the next 10 years, so it's not necessarily that they want to increase their mechanization, just the government's mandating it.

That's good.

And then I guess that does bring me to my final question.

If you look out and you see how robust commodity prices are and how strong they're expected to stay, at what point - Harold, I guess this question is for you - at what point would you consider adding capacity to eliminate some of these supply constraints internally?

Well, Ann, that's a good question.

And we're looking at that right now.

We're starting with the brands to getting a view, regionally, of 2008 and we're in the process of assessing all of those bottlenecks in our production facilities.

And we will be making some added investments, not only internally for our production facilities but if we need [tooling] suppliers for our components.

So we're looking at that right now and we will be making added investments to break the bottlenecks.

Okay.

So I guess that would support our thesis -- or you would support our thesis that we're in the early innings of an agricultural cycle and it's not a one-year blip but it's going to be more -- we're going to have a lot of tailwind.

Absolutely, Ann.

The only question is what does that cycle look like?

But clearly, the momentum in agriculture is building for sure.

We agree with you.

It will be a cycle.

No doubt.

Okay.

That's my questions for now.

I'll keep the others for offline.

Thank you.

Okay.

Thank you.

Thank you.

We have our final question from David Raso from Citigroup.

Please go ahead.

Two quick questions.

Just a clarification, really, is in the back half of the year.

Looking at your full-year revenue guidance, it implies the back half of the year is going to grow 18%, 19% after the revenues grew 14% for equipment in the first half.

Given your comments on construction, tougher comps, a little slower growth, should we think of it the same way with your revenues, that Ag is going to accelerate the growth significantly enough to drive the total Company from 14% first half to 18% to 19%?

Or do you actually look for construction, for you, to actually accelerate as well?

Well, I'll come back -- come at it from a little different direction to start with.

If you look historically at our revenue pattern, we typically have done slightly more than half of our revenue in the first half, 50%, 52%, somewhere in that range percent.

But I am talking year over year, though.

If you look at the normal pattern, you'd see that this is about right.

But if then you look at what are the pieces doing, yes, you should expect the Ag business to continue to have some very good numbers in the second half.

I am talking year over year, though, so the seasonality's accounted for, the acceleration of the Company revenue growth (technical difficulty) your construction equipment will accelerate in the second half despite your end market (technical difficulty) deceleration?

Yes.

I think there's a couple of points here.

One is Rubin indicated, both in the agricultural sector and construction, we've been very successful in bringing the inventories down to where, in some cases today, we're below the industry average and certainly, as Rubin said, at least a month below where we were at the end of the quarter last year.

So we have that.

Our inventories are in good shape.

And looking towards the future, we have the opportunity to move more production through to the network.

On the construction equipment side, particularly in Europe, we see a continued strength in Europe, Africa, Middle East on construction equipment.

And we have had some production constraints in the first half and we're working through those bottlenecks.

So that's going to help us.

And the real -- if you made a wildcard, is what happens with housing starts in North America?

But, having said that, in the first half of 2006 the market was up double digit in the first quarter.

North America was about flat in the second quarter and began the decline until we reached the fourth quarter last year, which was a double-digit decline.

So year over year the comparables, I think, get a little bit better in construction equipment but the real wildcard is when the housing market starts to recover.

All right.

We'll talk offline.

That really did not answer the question.

We'll discuss that later.

Basically, coming back, your construction equipment will be up more -- or be more favorable in the second half than the first half.

Harold mentioned de-stocking.

Don't underestimate that influence.

And the construction equipment capacity of ours in the second half is much stronger because (technical difficulty).

Okay.

That's helpful.

And a second question.

Philosophically, obviously the first couple of years after the merger, potentially the (technical difficulty) kept disappointing.

The markets weren't great (technical difficulty) share loss.

Now clearly, we could argue you want more pricing, but at the end of the day, you're getting great incremental margins on Ag, so obviously you're recognizing better volumes the more that you're earning than trying to get (technical difficulty).

Where are we, Harold, or whoever wants to answer the question, philosophically on how much farther do we have to go on the volume story and (technical difficulty) process?

You kind of meet an equilibrium where '08, '09 that you're comfortable where you are on the volume but now it's a matter of maybe going back to price.

Just seeing the evolution.

Plus 24 months from now, getting the brand, getting the share, getting the volume (technical difficulty) utilizations.

It's been very difficult to hear you, David.

Let me try and re-summarize your question, so that we all know what it is.

There's some very bad background noise there.

I believe you were asking when are we going to feel more comfortable with the volume level that we have and the share improvements that we have, take more on price and using price to improve margins?

Correct.

Yes.

Al, let me just comment.

Quite clearly, over the last several years we've been very successful in moving inflation pricing into the marketplace to improve the margin.

And then, having said that, I see more growth in earning our customer business back and increasing the retail sales and, therefore, the production over the next several years than trying to do it just through pricing.

Thank you very much.

Thank you.

We have a question now from Paolo Mosole from Intermonte.

Please go ahead.

Good afternoon, everybody.

Paolo Mosole from Intermonte.

Just a clarification on an issue that I haven't understood clearly because of the not-very-clear signal.

You're basically increasing the guidance for 2007 revenues and -- but you're keeping the profitability indications.

I didn't understand whether this was related to the fact that you're expecting to increase market shares but with lower pricing effect, or that it's related to higher costs.

No.

We -- what we said was the revenue we expect to be slightly higher.

We said the margin range we will perform in will be the same.

And we are, therefore, taking the guidance up, notwithstanding -- we're taking the guidance up to $2.30, $2.45.

So margin stays in the same range, the revenue goes up, earnings are going up.

Am I missing something?

I would have expected maybe some stronger operating leverage impact on profitability.

Well, we're in the same range that we had given before in terms of the operating margin but I believe now we're going to be at a higher end of the range.

But we're still in the target range that we set.

And I would say on the operating leverage, that gets to some of the discussion we had about Q2 of some of the inefficiencies associated with our ramp-up, where we're having to compensate for internal capacity with some of these less-efficient means of getting the production.

So we will not see as much leverage as we might hope in -- associated with that volume.

Okay.

And just a follow up.

Should we expect a further improvement in net debt in the second half and roughly give an indication?

Right now, we are not giving a formal indication on net debt.

I will say that if we talk about some of these production inefficiencies and ramp-ups, we're also looking forward to a strong industry in the -- or a strong (technical difficulty) going forward and we may need to improve our inventory levels which are, right now, in certain key markets below an aggregate level to meet demand, and determining what we need to do to deal with that.

We're comfortable (technical difficulty).

Okay.

Thank you.

Thank you.

That concludes the question and answer session today.

At this time, Mr.

Trefts, I'll turn the conference back over to you for any additional or closing remarks.

Thank you, Durla.

I would like to thank you all for participating in the call with us today and, as always, if you have any further questions after the close of the call please don't hesitate to give me a telephone call.

Thank you very much and have a great day.

That will conclude today's conference, ladies and gentlemen.

Thank you for your participation and have a good day.

You may now disconnect.