CNH Industrial NV (CNHI) 2007 Q3 法說會逐字稿

Please standby, we're about to begin.

Good morning ladies and gentlemen and welcome to today's CNH 2007 Third Quarter Results Conference Call.

(OPERATOR INSTRUCTIONS).

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 Andrea.

Welcome everyone to CNH's third 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 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 another 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 in the Company's businesses that are subject to change and could cause actual results to differ materially from our expectations today.

As noted on the slide, the Appendix contains reconciliations to U.S.

GAAP of various non-GAAP measures we use in analyzing our performance.

Finally, this conference call and webcast are being recorded.

The contents are the property of CNH Global N.V.

and are not to be rerecorded or rebroadcast without our express written permission.

Now I'd like to turn the call over to Rubin.

Thank you Al.

Good morning and good afternoon everyone.

Beginning with slide four, I'd like to review the highlights of another record quarter, starting with our diluted earnings per share before restructuring, net of tax, which at $0.62, more than doubled from $0.30 last year.

Net income before restructuring net of tax increased 108% to $148m.

Equipment operations gross margin increased to 19.4%, the best third quarter result in CNH's history.

Favorable volume and mix in the Agricultural Equipment area included combines and headers worldwide, high horsepower tractors, our new cotton picker packagers and sugarcane harvesters.

In addition, construction equipment markets outside of North America remain strong in the quarter.

These, together with lower costs associated with continuously improving quality, all contributed to the margin increase.

Agricultural Equipment market share improved in the quarter, while Construction Equipment market share was stable.

Financial Services net income grew 16% to $72m compared to the third quarter last year - its best quarterly result ever.

Retail originations were up 33% and the quarter end service portfolio of retail loans and leases was up 14% from September 2006.

On August 1st we redeemed our 9.25% senior notes due in 2011 to better manage our liquidity and reduce future net interest expense.

Equipment Operations remained in a net cash position throughout the quarter.

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

The worldwide tractor industry increased again for the fourth consecutive year, up 2% from last year despite a decline in the under 40 horsepower segment in North America and a decline in rest of world markets.

The increase was driven by the over 40 horsepower segment in North America and improvements in Western Europe and Latin American markets.

The combine industry also increased.

In total, up 11% in the quarter.

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

Additionally, in North America, within the over 40 horsepower category, which represents 45% of the North American market in the quarter, industry sales of tractors in the 40 to 100-horsepower range were up 3%.

And in categories where Case IH is particularly strong, sales of the over 100-horsepower tractors were up 40%.

And four-wheel drive tractors were up 12%.

Preliminary tractor industry sales in Western Europe were up 7%, with the markets in France, Germany, Spain and the UK up.

In Latin America, where the tractor market was up 49%, Brazil was up 64%, other Latin American markets were also up, with Argentina up 35%.

Driven by continued strength in the markets in North America and Latin America, worldwide combine industry unit sales improved 11%.

The Brazilian market was up 2.5 times from last year's low level.

Argentina almost doubled.

The market in Mexico was up 40%, while in aggregate, other Latin American markets were also up significantly.

The combine market in Western Europe was flat in the quarter, with Germany down, while France, the UK, Italy, Spain and all other Western European markets in total were up.

The combine market in North America was up 17% and, as in the second quarter, the Class 7 segment was up almost 25%, driven by sales of our new entry, the Case IH Axial Flow 7010 Combine.

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

In total, our share was up from last year and our combines sold -- sales, were very strong in every market.

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

Worldwide, the tractor industry is level with last year despite the decline in the under 40 horsepower segment in North America.

The combine industry increased in most markets and in total was up 17%.

Next, on slide eight are the worldwide tractor industry retail unit sales changes year over year by market for the first nine months 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 4% from last year.

Sales of the -- of over 100 horsepower tractors were up 17% and four wheel drive tractor sales were up 10%.

Preliminary tractor industry sales in Western Europe were up 3% with the markets in France and the UK up and Germany, Italy and Spain down.

All of the other markets outside of these five countries in aggregate were up.

In Latin America, where the tractor market was up 36%, notably, Brazil was up 52% and Argentina was up 28%.

Driven by the continued strengthening of the markets in Latin America, rest of world markets and North America, worldwide combine industry unit sales improved 17%.

The Brazilian market more than doubled.

Argentina was up 30% and in aggregate, other Latin American markets also were up sharply.

The combine market in Western Europe declined about 1% in the nine months.

With France, Italy, Spain and the UK up, while Germany and other Western European markets in total were down.

The combine market in North America was up 11%, with the Class 7 segment up 22%.

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

In total, our tractor share was up from last year and our combine retail sales were very strong in every market.

Turning to the third quarter construction equipment industry, retail unit sales trend on slide nine, we see continued strength.

In total, up about 12%.

Industry unit sales of heavy equipment were up about 15%, with sales of light equipment up 10%.

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

The worldwide backhoe loader market was up 28%, with strong increases outside of North America.

The skid steer loader market was down 1%, with North America down and all other markets up.

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

Germany and the UK saw the largest percentage increases in Western Europe, where all major markets were up, except for France, which was flat.

Latin American markets were also up, except for Mexico, as were most markets in rest of world.

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

Next, the September year to date construction equipment industry retail unit sales trend on slide 11 where we see the markets up in total about 13%.

Heavy equipment was up about 16%, with sales of light equipment up 11%.

Slide 12 shows first nine months, year over year percent changes in construction equipment industry retail unit sales by region.

The worldwide backhoe loader market was up 25%, again with strong increases across most markets outside of North America.

The skid steer loader market was down 3%, driven by the decline in North America.

The heavy equipment market was up 16%, with strong increases outside of North America, just as we saw in the quarter.

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

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

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

At $3.6b, net sales of equipment in the quarter were up 33% from last year, including 6% related to currency variations.

Once again, our presence in virtually all of the agricultural and construction equipment markets throughout the world helped us increase sales despite the weakness in North America.

In the quarter, 62% of our sales came from markets outside of North America.

Worldwide net sales of agricultural equipment increased 36%, including 6% related to currency.

Net sales increased in every region.

In North America, our production was equal to our retail unit sales in the quarter.

Our trailing month of supply for North American tractors at the end of September were about 0.5 month lower than the industry and more than one month lower than we were at the end of the third quarter last year.

For North America combines, at 3.6 months at the end of September, our trailing month of supply was more than one month lower than at the end of September last year.

In total, agricultural equipment net sales increased by $514m for volume and mix of new products and $124m for currency translation.

Worldwide, on a forward month of supply basis, at quarter end, estimated dealer and company inventory -- tractor and combine unit inventories were 3.3 months down, almost two months of supply -- down almost two months of supply from a year ago.

Speaking to construction equipment, net sales increased 28%, including 6% related to currency variations.

Sales increased significantly in every region except North America.

Volume and mix and new products increased net sales by $172m despite the industry driven decline in North America.

Currency translation increased net sales by $68m.

Worldwide, on a forward month 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 nine months of the past three years.

At $10.9b sales of equipment in 2007 were up 19% from 2006, including 5% related to currency variations despite the weakness in North American construction equipment markets.

Worldwide net sales of agricultural equipment increased 22%, including 5% related to currency and increased in every region.

In total, agricultural equipment net sales increased by $993m for volume and mix in new products and $328m for currency translation.

Taking the construction equipment, net sales increased 15%, including 5% related to currency variations and increased in every region except North America.

Volume and mix and new products increased net sales by $251m.

Currency translation increased net sales by $175m.

Slide 15 shows the segment split and industrial operating margin for the third 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 $211m in total equipment operations trading profit for the third quarter of 2007.

Below, are the adjustments to move from trading profit in IFRS to the $300m 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 $95m, 7.6% of net sales.

This was driven by better operating performances in every region of the world, led by improvements in the Americas.

Favorable volume, mix and new products and improvement -- and improved quality costs were the key drivers of the improvement.

Construction Equipment's industrial operating margin increased by $47m to 9.9% of net sales and strong performances in Western Europe and Latin America were only partially offset by the decline in North America.

Volume and mix was favorable, similar to the second quarter.

As we cut Construction Equipment production in North America and raised it in Europe we incurred incremental costs for under absorption and inefficiency.

Slide 16 shows the components of the $142m year over year improvement to the third quarter total industrial operating margin.

The improvement was driven by $196m of favorable volume, mix and new products.

Net whole goods pricing was neutral, as price increases outside of North America were driven -- were offset by declines in North America.

Changes in economics and currency were favorable by $23m.

SG&A and R&D costs increased in dollars, but declined as a percent of net sales.

Improved quality costs were offset by manufacturing inefficiencies.

Gross margin as a percent of net sales increased 190 basis points in the quarter, reflecting improvements at both Agricultural and Construction Equipment market -- equipment operations.

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

At the top of the slide we see $743m in total equipment operations trading profit for 2007.

At the bottom is the $960m of industrial operating margin in U.S.

GAAP.

Split between our operating -- between our equipment businesses, with Agricultural Equipment's industrial operating margins increasing by $294m to 8.8% of net sales.

This was driven by improved operating performances in the Americas and Western Europe.

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

Construction Equipment's industrial operating margin improved by $30m as strong performances in Western Europe and Latin America were partially offset by the decline in North America.

The margin declined as a percentage of net sales from 9.2% to 8.8%.

Volume and mix was favorable, as was net price recovery.

Manufacturing inefficiencies and higher production costs were a partial offset.

Slide 18 parallels slide 16, showing the components of the $324m year over year improvement in year to date industrial operating margin.

The drivers were favorable volume, mix and new products at $354m, positive net pricing of $18m and favorable economics and currency totaling $118m.

The improved quality costs were offset by manufacturing inefficiencies and production costs.

Gross margin, as a percent of net sales, increased 150 basis points in the first nine months, reflecting the improvements at both Agricultural and Construction Equipment operations.

Excluding currency, SG&A increased $94m.

Transport and trade shows and equipment fairs for our dealers throughout the world, investments in customer care programs and incentive compensation and economics were the principle drivers.

Turning to Equipment operations changes in third quarter net cash on slide 19, $120m of cash was used by operating activities, primarily by working capital and seasonal decreases and accruals.

Working capital increased by $123m in the quarter.

$80m of cash was used for capital expenditures as we continue to invest in new products and capacity.

The net of these factors was a $118m decrease in net cash giving the Equipment operations a net cash position of $413m at quarter end.

The Equipment operations position with Fiat Affiliates was net cash of $53m.

On a consolidated basis, the net position with Fiat Affiliates was net debt of $2.8b, as financial services funding from Fiat offset the Equipment operation's net cash position.

On August 1st, we redeemed all of our 9.25 senior notes due in 2011.

The change -- the charge we took in the quarter associated with the early extinguishment of this debt was 57 -- $57m pretax.

The discharge 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.

We financed the redemption using a combination of cash and new financings from Fiat, including $500m of fixed rate financings and $300m of floating rate financings, both due in 2017.

In European Financial Services in the quarter, we acquired sole ownership in a special purpose trust that we had been using to securitize certain wholesale receivables.

Financial Services also took over funding the trust, repaying the third party financings and accordingly, consolidated the associated receivables and debt on our books, accounting for the increase in net debt during the quarter.

As a final note in this section, I'd like to talk about taxes.

The press release provides certain information on our consolidated effective tax rate for the quarter and full year.

Now I know that many of you model us on an Equipment operations basis.

Let me give you some additional information for our Equipment operations and Financial Services segments.

In the third quarter, the Equipment operations effective tax rate was 28.8%, excluding restructuring costs and 27.8% for restructuring.

For our full year, our forecast Equipment operations tax rate should be about 37% excluding restructuring costs and about 28% for restructuring costs.

Financial Services tax rate should be about 33%.

These rates represent a decline in the tax rate of Equipment operations before restructuring of about 2 to 2.5 percentage points and about 1 percentage point reduction for Financial Services.

The rate reduction is driven by our higher expected profitability in tax jurisdictions where no previous tax benefit has been recognized, a favorable geographical mix of our earnings and the utilization of additional tax credits and incentives around the world.

In the third quarter, our lower Equipment operations effective tax rate of 28.8% was a result of reducing our annual rate to about 37% from the roughly 43 percentage rate -- percent rate in the first half of the year.

Slide 20 shows the picture for the first nine months' change in Equipment operations net debt.

$793m of cash was generated by operating activities, primarily from earnings.

Working capital increased by $47m.

$170m of cash was used for capital expenditures.

The net of these factors was a 677 -- $676m decrease in net debt.

Our agricultural industry outlook for the full year 2007 is on slide 21.

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

Western Europe should be slightly better than in 2006.

We expect the markets in Latin America to be up 35 to 40%.

The rest of world markets are now expected to be down, perhaps as much as 5%, based on what we have seen in the last quarter.

Under 40 horsepower tractors in North America should be down, perhaps as much as 5% in the full year, following the year to date trend.

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 light and heavy equipment industry unit sales will be up about 10% and 10 to 15% respectively, for the full year, driven by strong markets outside of North America.

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

housing spend and weak construction activity levels.

In the press release we provided a recap of some of the important third quarter new product launches and other initiatives, which will also contribute to our results for the balance of the year.

We now expect net sales of equipment to be above $14.5b.

Our U.S.

GAAP industrial trading -- industrial operating margin of 17 -- 7.6% to 8.4% for the full year is unchanged.

So we'll probably be in the higher end of that range.

We are increasing our full year 2007 outlook for diluted earnings per share before restructuring, net of tax to a range of $2.55 to $2.60.

This change requires continued improvement in Agricultural Equipment volume, mix and new products and quality, our new tax rate outlook of 37% and a continuation of the less robust pricing environment coupled with continuing supply constraints and continuing pressures on material costs and a deeper decline in North American Construction Equipment than previously anticipated.

Finally, our outlook for restructuring charges for the full year is $90m net of tax.

This concludes my comments.

We're now ready to begin the question and answer session.

Thank you Rubin.

(OPERATOR INSTRUCTIONS).

Andrea, could you please retrieve the first question?

Certainly sir.

(OPERATOR INSTRUCTIONS).

We take our first question from Terry Darling with Goldman Sachs.

Please go ahead.

Thanks, good morning.

First question, a clarification on guidance.

If we exclude the restructuring and debt redemption items, the full year guidance, 270, 275, if we take the high end of that range and we subtract out $0.77 on the third quarter, 104, second quarter, 44, first quarter, we end up with something close to $0.50, which is a big sequential decline in the fourth quarter.

Can you take us through first does that math tie with the way you are thinking about it?

And number two, can you take us through the drivers of that big sequential decline?

Because I think you're operating a margin guidance and revenue guidance for the full year, less the first three quarter is kind of in line so there must be some things below the operating line we don't understand.

If you look at the guidance that we're giving, if you take 255 to 260, we were concerned as the community saw these numbers they would say that, exactly what you're saying.

We're going to try to give you a little bit of clarity here, but we'll struggle a little bit when we get done.

First of all, you need to think about the $14.5b as sort of a target number that we're reasonably comfortable with.

You will see that that would be a little less growth than we have had in prior quarters.

That is being driven in part by the fact that the currency movement that we benefited from at the revenue line during the course of the year really started in the fourth quarter of last year.

So the comparables are more challenging in the fourth quarter than they have been in the prior quarters, so you need to factor that in.

And you need to look at the incremental margin and -- the guidance we're giving is the 7.6% to 8.4%.

As I've said, we expect to be in the higher end of that range, but I don't believe we will exceed that range.

So if you look at the $14.5b for the year, you use the higher end of that range you would come out with a number that is going to be not too far off of what we are giving you in the guidance.

If you put into those numbers as well that we expect the SG&A in the fourth quarter to also be higher than a year ago, driven by many of the same factors that you saw in the third quarter.

Clearly we're very pleased with the results and we are at or above the targets we've established internally.

So we will have some currency influence but because of the performance we will have some incentive compensation adjustments that will increase the results.

They increased it in the third quarter.

They'll increase it in the fourth quarter again versus a year ago where we were falling off of our expectations.

And given a year ago we fell below our targets.

This year we're going above our targets.

You'll see some material changes there.

And then again in the fourth quarter I think you mentioned this, you'll not see the same tax rate benefit you saw in the third quarter.

We will be accruing at something near the 37% year to date rate.

Okay, and Ruben can you maybe talk us through how we should be thinking about the Financial Services net income, where the year over year change was sort of similar to the second quarter at the net income level, but cut in half at the pretax.

I think your tax rate guidance suggests that you're going to see a big increase in the fourth quarter in the Financial Services tax rate.

And then maybe you can also talk about sort of as we look into '08, how you're thinking about financing the overall business here and whether the ABS market continues to be less of a source for you and Fiat parent continues to become -- continues to fill that void?

Yes, I will deal first with this little bit of outlook on the capital company and then I'm going to turn it over to Camillo Rossotto who is both the Treasurer for CNH, but also the CFO for the capital company.

First of all, if you think about the earnings for capital, we feel a little more volatility in those numbers than in the industrial business year on year due to the ABS markets which, as you know, play a significant portion of our funding activities in capital.

In the third quarter we did a smaller transaction and -- than a year ago and then we have to compare what are the transaction expectations in the fourth quarter?

You will not see, in my opinion, the same kind of year on year favorability in the capital company in the fourth quarter that you did in the third quarter, primarily because of the timing of some transactions.

And yes, you will probably see in the capital side, a little different tax progression than you are seeing on the industrial side.

With that, I'm going to turn it over to Mr.

Rossotto to talk about the Capital Company and the ABS markets, specifically.

Yes Terry.

It's going to be lower.

I think you still see us as a frequent issuer to tap the U.S.

and most of the U.S.

retail ABS market.

So in that perspective, when you look at 2008 you should still expect us to go up to market twice a year as we've been doing historically, as we build the portfolio on bulk we put into the warehouse and then we go out to the market.

What we've done in 2007, and I think we've pretty much done with that program has been a simplification and a reduction of our dependence on the wholesale side from the ABS market.

That typically has a lower impact in terms of income acceleration just because of the short term nature of the portfolios that we were selling.

And what you see when you look at our outstanding securitized portfolio, we're currently at $7.2b of which $5b is retail and $2.2b is wholesale.

And that number was $2.7b at the beginning of the year, so we've been taking on bulk wholesale receivables and related debt for $1.4b.

We've been, in the last quarter, been internalizing this European securitizational structure with a goal to simplify the platform and achieve some bid offer spread savings there.

And that they've done.

It's $700m.

And there we have been taking on additional portfolios in the course of 2007 from Equipment operations, particularly in the trade finance area.

So net, that explains the $2.5b increase in net debt to Financial Services.

We should be pretty much done with that program again and you will still see us go to the retail market as spreads tighten.

Okay.

And last question--

Did that help?

Yes, thank you Camillo.

Last question on the Equipment operations incremental margins.

As we think forward to 2008 should we continue to think about upper teens, low 20s and I guess, more pointedly, you have been successful in gaining share in the Ag business as you had talked about wanting to do.

There are some others showing better price improvement year over year.

As you shift into 2008, does the focus for you increase in terms of trying to push price where we might see incrementals bump higher from here?

Or should we continue to expect the kind of levels we've been running here in the third quarter?

This is Harold.

Let me address that because the question on pricing and market share was raised at the last quarterly conference call also.

So it's a good question.

But I want to be clear that we're not buying market share.

If you look at what's really happening is our brands, our distribution are executing a lot better.

We're adding new products, filling gaps such as the 7010 combine, which has been a big winner for us this year, and improving our overall product quality service to the dealers such as the top service program we've launched in Europe and North America for our brands.

So all of this is adding additional value for our brands, for our products and services to the customers.

And so we're earning this business back the hard way.

We're earning it.

And I'd like Rubin to give you a little bit more color on the pricing side.

And maybe this will be helpful for you.

Terry, this is Rubin.

Let me also just add to that that we do expect some more margin improvement this year or next year over this year.

And that will come from both some pricing, but also continued operational improvements.

I don't want to lose the fact that we still have significant opportunities to improve our margin from continued focus on operations.

We do expect to remove some of the inefficiencies we've had on ramp up this year.

That alone will contribute material to our results.

But then going to pricing, again, I cannot speak to how some of the other folks in the industry calculate their pricing.

But we focus, when we talk about pricing, on the whole goods only.

We do not include pricing for other components in Parts business where we are certainly seeing some favorability.

And it includes everything in whole goods, however.

So that includes in addition to tractors and combines, it includes harvester products, and forage equipment, crop production equipment, soil preparation, just a laundry list of products.

We do not include new products in our calculation, even when that new product may have a higher price position than the product in which it replaces.

That goes into our new products category and not in pricing.

And that's particularly, I think, relevant in a year such as this year where we've had a significant number of new product launches.

Second, our pricing is positive for the Construction Equipment industry in every region of the world, including North America where the industry has been weak.

So in the Construction industry, through September, our market share is flat and our pricing is up.

But then you come back to your question.

Well what about the Ag industry?

Well in the Ag industry, pricing is positive in all of our markets outside of North America as is our market share performance.

So we've increased pricing and market share outside of North America.

And, as Harold said, we're earning the share because of the new products, better quality and more focus, frankly, on our dealers and customers.

But within the North American Ag market what's going on in pricing?

We don't -- we are not going out and aggressively cutting pricing for this share.

Yes, our pricing variance is negative.

But most of that is related to hand forage equipment, crop production, soil preparation equipment, consumer products and components, categories which we do not talk about share in our external releases.

So we're certainly not cutting prices in those categories because you talk about share.

The rest of the decline relates to tractors and combines and you'll see much different trends there in the over 40 and under 40 horsepower tractor market.

So our view right now is we are pricing to fully recover the cost pressures we're facing.

And yes, there is an opportunity for additional pricing but we have not -- we are not badly positioned vis--vis the competition in most of the major markets and most of the major segments around the world.

I don't know if I've answered your question, but right now we're feeling pretty good about our pricing position.

We could do better and plan on doing better, but we will continue to see, going back full circle to your question, we will see some continued expansion in our margins as we go into 2008.

Very helpful detail.

Much appreciated and look forward to those other incrementals next year.

Thanks much.

Thank you.

Our next question will come from Mark Koznarek from Cleveland Research.

Please go ahead.

Hi.

Good morning.

Good morning, Mark.

Just a question in the guidance.

Does that include the cost of the debt refinancing?

Yes, it does.

Okay.

And that's the big swing in the interest expense for the quarter.

That $57m is up in that line item?

That is correct.

Okay, thank you.

The question I had has to do with your order book in both sides of your business.

If you could characterize that, as things stand right now, relative to where you were a year ago and what kind of visibility does that provide into 2008?

In particular, do you have any programs on now, early order programs that you're actually booking for the forward year?

And how does that compare to trends that you would have been observing a year ago?

Sure Mark.

This is Harold.

Let me take that one.

If we look -- let's talk about the Agricultural business.

The order board, year over year, particularly for the above 40 horsepower tractors, combines and also hay and forage products is stronger year over year in all regions.

And on the agricultural side of the business, the brands are actively engaged now in pre-sale for the spring season.

So we anticipate that that will further strengthen the order board prior to the end of the year.

On Construction Equipment, the order boards are stronger in Europe, flat in America.

Or to say it another way, all regions with the exception of North America and North America is being driven by the continued softness in the housing market.

But the order book in North America is below year ago levels?

Yes, that's correct.

But again, we are addressing that proactively by reducing the production schedules, in some cases, in the fourth quarter relative to Construction Equipment.

If we look at fourth quarter production versus retail, we'll be down double digit.

So we're adjusting the inventory appropriately.

Okay.

And then Harold, just one final detail.

I think you mentioned that your dealer inventories for Construction Equipment were below year ago levels.

Does that include the impact of rental purchase options?

In other words is there potential risk in the fourth quarter that RPO conversions will be light and your dealer inventories would surge beyond expectations because of that market dynamic?

The dealer network, and again, as well as the national rental companies, have been adjusting their fleets throughout the year.

So we don't see any extraordinary adjustment.

Quite honestly, if you ask what surprised us, we didn't anticipate the heavy equipment industry being down as much as it is.

We thought the light equipment industry, of course, directly related to the housing would be down more than the heavy but it hasn't proven to be that way.

Okay.

Thanks very much.

We now move to David Bleustein from UBS.

Please go ahead.

Good morning and good afternoon.

Hi David.

The $0.12 was not -- I'm just trying to understand.

The arbitration proceeding $0.12 was not included.

The $0.62 includes the hit from the $0.12 that you talked about related to the arbitration proceeding but excluding the (inaudible)?

No.

The arbitration proceeding was booked and partially indicates where reflected claims for services received, it was booked as an operating impact.

In the case where it was claims related to contract termination and lost future profits, that was booked into restructuring.

So you should think of about $0.08 of the total impact of PGN being in restructuring.

Okay.

That's helpful.

And then that same -- so that piece is also in the $90m.

(Inaudible) press release.

Okay.

That's the principal reason it went up.

Okay, terrific.

That's helpful.

And then you mentioned the year to date pricing in Construction Equipment in North America was positive, but I'm betting it was negative.

If you look at the third quarter result all by itself, it looks like it was negative.

Can you split what pricing was in the U.S.

in Construction Equipment in Q3 by region?

Say the last part of your question again.

I'm looking for Construction Equipment pricing by region in the third quarter.

In the third quarter, Construction Equipment industry was positive but I don't have in front of me region by region right now.

But overall, it was positive in the quarter as well as in the year to date period.

Okay, terrific.

Congratulations.

Thanks much.

Yes we're -- thank you very much.

The next question will come from Ann Duignan with Bear Stearns.

Hi.

Good morning.

Good morning, Ann.

Of the $0.12, could you just break that down into pretax dollars?

How much was in operations and how much was in restructuring in pretax dollar terms.

And then was it in SG&As that will -- we picked it up on the operating line?

Your first part of your comment got lost a little bit there.

Can you say it again?

Oh yes, sorry.

Of the $0.12 arbitration charge, can you break that out into pretax dollars for us, what showed up in operations and what showed up in restructuring in dollars, not earnings?

Again, we booked a provision in the quarter of $45m.

$31m went into restructuring related to the insourcing activities lost.

Again, the provision for value not received.

$14m went into operations and it was in a cost of goods sold line because that's where we typically book freight costs.

Okay.

And can you just expand on what the actual charge was or what the arbitration is about?

And do you expect it's going to happen, it's done or how should we look at that?

No.

Again, as we noted in our press release, it is not done.

Basically, right now, the PGN handled most of our freight and logistics needs in Europe.

We believe that we can insource that service and then substantially change how we handle freight.

And we believe that we had a valid legal basis for terminating the contract.

Unfortunately, as you'll note in the press release, the arbitration has held that we did not have a right to do so.

And so it's essentially, at this point, it's a vendor dispute of breach of contract arbitration that's going on.

Now we're in the process.

I can't say much more about it.

We have accrued to what we believe is the ultimate outcome of the Hearing.

But there is certainly -- they're claiming a much higher number than we had booked.

And we think -- frankly feel that we'd be justified at zero.

But we've accrued to what we think, or estimated the Tribunal will hold.

Okay.

And any idea of the timing on when--?

We certainly expect it be over before the end of the first quarter.

We'd like to think it would be done by the end of the year, but in any of these things where we're depending on a third-party, it's very difficult to predict.

We certainly expect by the end of the first quarter, however.

Okay.

That's helpful.

And your commentary on pricing is helpful.

Most of your competitors do include new products when they talk about pricing, so it's helpful to know that you don't.

Could you just talk a little bit about your recently announced joint venture with Hyundai Heavy Industries?

Should we expect (inaudible)?

Yes.

There's a product joint venture there.

It is an alliance and frankly, what we're doing is we are in the wheel loader business, working with them on certain key product lines to the advantage of both companies.

So it is more of an alliance than it is a joint venture.

There is no legal entity in this thing.

And so we are working with them on certain key gaps in our product line and helping them, frankly, with some things as well.

But it's primarily to the advantage of both companies to fill gaps in the CNH product portfolio.

And is that--

And that we won't see any -- won't see any significant impact until the second quarter of next year.

And it is relatively low volume.

Okay.

Those are helpful.

I think most of my other questions have been answered.

So I appreciate it.

Okay.

Thank you.

Massimo Vecchio with Mediobanca will have the next question.

Please go ahead.

Good morning to everybody.

Just two quick questions.

Good afternoon.

Good afternoon.

Can you expand a little bit on the Brazilian situation regarding the incentives and also which kind of impact can it have on the EUR1.7b of monetary that you had there.

And just give me --- expand a little bit on that.

And second question is on the special purpose vehicle that you bought, will it have any impact on your P&L and on your equity?

Thank you very much.

Okay.

Massimo, this is Camillo Rossotto again.

Take it from the last one, there's going to be no impact on the P&L for the securitization, consolidation activity because it's really a minimal equity SVD that we're incorporating in the Financial Services side of the balance sheet.

As far as Brazil is concerned, the monetary -- the National Monetary Council in Brazil has announced its plan and we're buying multiple orders which are part of our portfolio.

50% of our portfolio is affected by this type of resolution.

So most borrowers are paying at least 15% of their scheduled 2007 installments.

We see the matching credit for an additional 15% provided by the Brazilian government through BNDES with the financing arm of the Brazilian government for agricultural financing.

And those that will make at least a 15% payment will be allowed to reschedule the remaining part of their 2007 installment to the end of the term of the loans and these are typically four to five year term loans.

However, the borrowers who reschedule any portion of that 2007 installment will be not eligible for additional BNDES financing until they make their 2008 installment payment.

So what we see, that this provision coupled with the reduction in the cost of new financing with BNDES that has been announced earlier in the year represents a real economic incentive for borrowers to make their payment in 2007.

Now as far as our portfolio is concerned, we have reserved at a rate of approximately 5% against this portfolio.

The -- you need to consider that all of these receivables are secured by equipment and the provisions for credit loss reflect the fact that we have set this portfolio in terms of frequency and severity and we feel comfortable at the level where we're at right now.

The domestic market is very strong.

Corn prices and soybean prices are very strong, even though the market growth for farmers was less advantage in terms of logistic costs, and now in a cash flow positive situation and so we think that this measure will help accelerate collections in 2007.

So if I understand correctly, it will help your Equipment operation and it can be a small risk, this 5% you were talking about on the Financial Services.

Yes.

We actually don't think we have a risk to our P&L because we've considered this portfolio to be adequately provisioned as it stands.

And in terms of the sales of our equipment, like I said, there is going to be a small matching credit mechanism to incentivate collections in 2007 (inaudible), so a favorable development.

Thank you very much.

You're welcome.

Our next question will come from John Buckland with MS Global.

Please go ahead.

Good afternoon.

Thank you so much.

I just wanted to understand the development of the sales in a little bit more detail because obviously the third quarter rise is very strong.

You talked about volume.

You talked about mix.

You talked about new products.

Some (inaudible) in Brazil.

[I need] a comparison and obviously your OpEx.

And can you not tell us the dollar amount that came from these various categories and on where you did a lot better than perhaps you expected in the third quarter?

We typically would not get into that level of detail, so I'm going to have to ask you to allow us not to answer that question at this point.

You can see region by region in our release what we did by quarter, or fourth quarter and the year to date period.

So you can look at that and then if you look across Ag and CE and back in the European -- or North American weakness in CE you'll see -- you can get reasonably close.

But we're not specifically giving that level of detail.

But you had this -- in third quarter was much higher than people expected in terms of revenue, wasn't it?

Yes it was and, again, we nailed at least one of the points.

The Brazilian comparison was much easier in the quarter.

Not so much easier as the fact that the market is up so substantially.

But just overall, it was a very good quarter.

We were very delighted with the revenue in the quarter.

All right.

And when you look at your financial goals, the longer term goals, where do you get to in terms of shipping more than $14.5b and maybe even towards $15b?

That means you're essentially (inaudible -- technical difficulty).

Looking ahead, you're expecting a $3.5b increase between 2007 and 2010.

Have you -- is this based on growth?

Is that brought forward from your demand?

Is your demand in this third quarter level going to be sustainable?

Should we think about the 2010 targets being increased by some substantial amount?

And when we look at the relationship between equipment sales and commodity prices, how much of a spike have we got now?

Going on the vendor presentation you presented, what you said was stable commodity prices.

But clearly your figures are above previous peaks in some of them.

So I wondered how you could explain how this is all going to change the longer term targets.

The longer term target remains unchanged versus what was presented at the Fiat Investor's Day presentation in Lingotto in November.

Clearly, we are feeling very good about being above the number on revenue in '07.

But clearly, formally changing where our commitment is to be in that band and we have a -- have we -- we'll have some better revenue this year.

Clearly, we're starting at a higher number this year going into next year on revenue.

Now the challenge is to make sure we get in the band on the operating earnings through the trading profit level.

But no, we are not changing the long term commitment at this point.

But at the one -- how well did you do?

This is a short term spike and actually in a big decline in growth from now on or is it already something that you can really be sure that's going to be sustainable?

Well clearly, as we look at the markets, we are not giving, at this point, our outlook for '08 or beyond.

But if you look at the ethanol markets and whatnot, we have to assume that this is a little longer term cycle.

So we're not expecting the abrupt drop in the markets in any sense.

We're expecting the ethanol demand for corn to continue to support the market.

The demand -- the use of corn acreage will help keep other commodity prices in a reasonable range.

But we're not giving guidance beyond '07 at this point.

That being said, we do not -- we expect the market share remains relatively strong as we go into '08, North American construction aside.

Yes, okay.

So when do you think you're going to revise your numbers?

Well right now our commitment is through the numbers and we have no expectation to revise them.

Right.

Okay.

Thank you.

Perhaps we can talk about this further offline, John.

All right.

Thanks.

We are running a little bit long, Al.

Andrea, I think we have time for one more and then we're going to have to adjourn.

Our last question will come from Paolo Mosole with Intermonte Capital.

Please go ahead.

Good afternoon, everybody.

Good afternoon, Paolo.

I have a couple of questions.

The first one, I would like to understand which is the impact of the better tax rate and currency on the better EPS guidance for 2007.

We generally don't split the impact of the tax rate out.

In fact, we haven't given a specific quantification in any of the factors.

But that's all included in what we've provided.

Okay.

And the other question I would like to ask you is the margins -- investment margin in the third quarter, which assuming that it will reach the high end of your target for 2007, you would still have a margin in the fourth quarter which will be still below the margins in the third quarter while last year was the opposite.

Is that correct or -- and if it is, why -- what is it driven by?

Thanks.

Yes, that is -- that will be correct.

If you look at -- right now we're running about 8.8% year to date operating margin.

The target for the full year is somewhere -- a max at 8.4%.

So the mathematics say the margin in the fourth quarter will be lower.

But we already had impacts from the good news currency last year in the fourth quarter.

So we won't see that improvement in the year over year.

We are investing additional monies in R&D this year.

We are going to have incentive compensation expense in the fourth quarter versus not having any last year in the fourth quarter.

And we do have the manufacturing inefficiencies and bottlenecks that we're trying to break that are giving us some additional cost on the manufacturing side.

And those items will drag the margin down in the quarter, but hopefully give us some opportunities for next year.

The other one I would point out is, as we mentioned in the commentary, Heavy Equipment Construction we believe will be down more than we had anticipated.

We expect that to continue in North America for the balance of the year.

And Heavy Construction in North America is an area that will have an impact on our margins.

Okay.

Just one follow up on what will be the gross margin better than the third or -- because you mentioned many items which are below the gross profit.

The Heavy Construction industry decline is in the gross margin.

That will affect that.

Some of the other items we mentioned are between gross and operating margin.

Okay.

All right.

Well, we'd like to thank you all for participating with us in the call today.

And as usual, if you have any further questions that we weren't able to get to, please don't hesitate to give me a call.

Have a nice rest of your day.

Bye bye.

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

Thank you for your participation.

You may now disconnect.