CNH Industrial NV (CNHI) 2007 Q4 法說會逐字稿

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

For your information, this conference is being recorded.

At this time, I turn the call over to the host of today's conference, Mr.

Al Trefts, Senior Director Investor Relations and Capital Markets.

Please go ahead, sir.

Welcome to CNH's fourth quarter and full year 2007 results webcast conference call.

We are pleased to have with us today Mr.

Sergio Marchionne, our Chairman of the Board, Mr.

Harold Boyanovsky, our President and Chief Executive Officer, Mr.

Rubin McDougal, our Chief Financial Officer, and Mr.

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 slides, the appendix contains reconciliations to U.S.

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

Finally, this conference call and webcast are being recorded.

The contents are the property of CNH Global NV and are not to be re-recorded or rebroadcast without our express written permission.

Now I will turn the call over to Mr.

Marchionne.

I don't know whether I'm on but I'm going to start talking.

Good afternoon.

This is the first time I've attended a financial results analyst call in connection with CNH.

I'm doing this for a couple of reasons and I'm going to make reference to slides four and five of the pack, although I will not be speaking about them in particular.

I just wanted to give you a flavor for the way in which I think 2007 has closed for us, and try and deal with Q4 and what may be some of the concerns that you could, I think, definitely have in terms of the gross margin performance of the business.

Overall, 2007 has been an outstanding year for CNH.

Certainly, in terms of earnings and cash flow generation, it has been totally in line with the expectations that CNH had and they were totally in line with the expectations that Fiat had and effectively presented to the market back in the fall of 2006.

I think it is a record year.

I think it is the highest earnings that this Group has had since its formation back in 1999, and therefore I think that notwithstanding the issues that I'll talk about in a moment, I think that we recognize that there's been a phenomenal turnaround and it is certainly an indication of the fact that the targets that we set for ourselves going forward are effectively achievable.

We have had issues that have impacted on Q4 performance and I think have been spread throughout 2007, although the intensity with which we've experienced them in Q4 is probably the most relevant item to be discussed this morning.

There has been -- these are markets that have been rather benevolent in 2007 and you've seen very strong demand in the Ag side across most of our trading regions.

Construction equipment has done well with the exception of North America, as you've seen from the press release.

And this pent up demand which we have tried to satisfy in Q4 has caused both logistical and manufacturing inefficiency in a system which tried to cope with commitments that we have made to the marketplace.

We have ideas as to what the relative value of these inefficiencies is.

Our expectations are that within the CNH industrial structure today, between logistics and structural manufacturing inefficiencies due to the way in which the footprint has reacted to the demand in 2007, that in all likelihood compared to an ideal state we are probably about 200 basis points away in terms of IFRS margins in terms of actual delivery.

It's been a problem that has been experienced in a very dominant way in Q4.

The numbers that we have seen at the low end of the potential estimate as to what these inefficiencies could have cost is around $60m.

I think the number structurally, when you take all the elements combined, is probably in excess of this value.

But I think it indicates the fact that these are items that are potentially remediable by the house.

I think we have identified the causes of these inefficiencies.

And I think we're working diligently in 2008 and 2009 to remove these structural bottlenecks on the industrial side that have prevented us from achieving the full operating margins that we're expecting from the business.

This is especially important, given the fact that we expect 2008 to continue to be a strong demand year.

The press release makes reference to the fact that we are expecting double-digit volume increases in 2008.

And therefore, the industrial system needs to get ready to try and answer this demand efficiently.

We are carrying out some pretty extensive studies today as to how we can cope with this demand.

I think we have made all the necessary manufacturing allowances during the last six months of 2007 to try and deal with volumes, especially in Q1 of 2008, which would be historically high.

So I really have nothing else to add, other than the fact that obviously we believe that the targets that we've set for ourselves are achievable.

We are quite happy about the volume, both the turnover and the trading profit number that has been achieved by CNH in 2007, and we think it's a good basis on which 2008 will be built.

And I think -- I obviously will be sitting here listening to the comments that Rubin will be making but I'll be here to take calls in case there are any at the end of the presentation.

Rubin?

Thank you, Mr.

Marchionne.

And I'll turn to page six and start to comment a little bit about the trend in the industry.

As you can see on slide six, the worldwide tractor industry increased again, up 8% from last year despite a 6% decline in the under 40 horsepower segment in North America.

Every major market improved in the quarter.

The combine industry also improved.

In total, up 32% in the quarter and up in every market except rest of world.

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

In North America, within the over 40 horsepower category which represented more than half of the North American market in the quarter, industry sales of tractors in the 40 to 100 horsepower range were roughly at the same level as last year, up less than a percentage point.

In the categories where Case IH is particularly strong, sales of the over 100 horsepower tractors were up 42% and 4-wheel drive tractors were up 55%.

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

up.

In Latin America, where the tractor market was up 44%, Brazil was up 61%.

Other Latin American markets were also up, with Argentina up 55%.

Driven by the continued strengthening of the markets in North America and Latin America, worldwide combine industry unit sales improved 32%.

The Brazilian market more than doubled from last year's low level.

Argentina was up over 80%.

The market in Mexico was up 46%, while in aggregate other Latin American markets almost doubled.

The combine market in Western Europe was up 28% in the quarter.

France, the U.K., Germany and Spain were up, while Italy was down.

The combine market in North America was up almost 19%.

And again, the class 7 segment almost doubled, driven by sales of our new entry, the Case IH Axial-Flow 7010 Combine.

On a unit basis, our worldwide tractor market share improved, despite dipping slightly in the North American under 40 horsepower segment.

Our combine sales were very strong in every market and in total were in line with the industry.

Slide eight shows the full year trend of worldwide tractor and combine industry unit volumes.

Worldwide, the tractor industry is up slightly from last year, despite the decline in the under 40 horsepower segment in North America.

The combine industry increased in all major markets and in total was up 21%.

Next, on slide nine are the worldwide tractor industry unit sales changes year over year by market for the full year.

In North America, within the over 40 horsepower segment, industry sales of tractors in the 40 to 100 horsepower range were up 3% from last year and sales of over 100 horsepower and 4-wheel drive tractors were up 22%.

Preliminary tractor industry sales in Western Europe were up 3%, with the markets in France, Spain and the U.K.

up, while Germany and Italy were down.

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

In Latin America, where the tractor market was up 39%, Brazil was up 53% and Argentina was up 36%.

Driven by the continued strengthening of the markets in Latin America, rest of world and North America, worldwide combine industry unit sales improved 21%.

The Brazilian market more than doubled, Argentina was up 46% and in aggregate other Latin American markets were also up sharply.

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

up, while Germany and other Western European markets in total were down.

The combine market in North America was up 13%, with the class 7 segment up 36%.

On a unit basis, our tractor market share improved in North America and rest of world markets and was flat in Western Europe and 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 fourth quarter worldwide construction equipment industry retail unit sales trend on slide 10, we see continued strength, in total up 12%.

Industry unit sales of heavy equipment were up about 14%, with sales of light equipment up 10%.

Slide 11 shows fourth quarter 2007 year-over-year percent changes in construction equipment industry retail unit sales by region.

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

The skid steer loader market was up 2%, despite a drop in both North America and Europe -- Western Europe.

The heavy construction equipment market was up 14%, with strong increases outside of North America, just as we experienced in the first nine months of the year.

Germany, Spain and the U.K.

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

The 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 fourth quarter of 2006.

Next, on slide 12 the full year construction equipment industry retail unit sales trend, where we see the markets up in total about 13%.

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

Slide 13 shows the full year year-over-year percent changes in construction equipment industry retail unit sales by region.

The worldwide backhoe loader market was up 26%, again with strong increases across most markets outside of North America.

The skid steer loader market was down 2%, driven by the decline in North America.

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

The U.K., Germany and Spain saw the largest percentage increases in Western Europe, where all major markets continued to be up, as were all the Latin America markets and 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 2006.

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

At $4.1b, net sales of equipment in the quarter were up 36% from last year, including 7 percentage points related to currency variations.

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

In the quarter, 66% of our sales came from markets outside of North America.

This is up about 5 percentage points from the year-ago period.

Worldwide net sales of agricultural equipment increased 44%, including 7 percentage points related to currency.

Net sales increased in every region.

In North America, our production was 1% higher than our retail unit sales in the quarter.

Our trailing months of supply for North American tractors at the end of December were about one half-month lower than the industry and two-thirds of a month lower than we were at the end of the fourth quarter last year.

For North American combines, at 1.8 months at the end of December, our trailing months of supply were more than one month lower than at the end of December last year.

In total, agricultural equipment net sales increased by $630m for volume and mix and new products, $179m for currency translation and $20m for pricing.

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

Speaking to construction equipment, net sales increased 23%, including 8 percentage points related to currency variations.

Sales increased significantly in every region except North America.

Volume and mix and new products increased net sales by $169m despite the industry decline in North America.

Currency translation increased net sales by $98m and pricing was positive $8m.

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

Next, slide 15 shows the annual sales trend for the past three years.

At $15b, net sales of equipment in 2007 were up 24% from 2006, including 5 percentage points related to currency, despite the weakness in North American construction equipment markets.

Worldwide net sales of agricultural equipment increased 27%, including 5 percentage points related to currency, and increased in every region.

In total, agricultural equipment net sales increased by $1.6b for volume and mix and new products, and about $0.5b for currency translation.

Ag pricing was slightly positive.

Speaking to construction equipment, net sales increased 17% including 6 percentage points related to currency, and increased in every region except North America.

Volume and mix and new products increased net sales by $421m.

Currency translation increased net sales by $273m.

Construction equipment pricing was also positive.

Slide 16 shows the segment split of industrial operating margin for the fourth 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 $234m in total equipment operations trading profit for the fourth quarter of 2007.

Below are the adjustments to move from trading profit in IFRS to the $265m industrial operating margin in U.S.

GAAP.

At the bottom is the industrial operating margin split between our equipment businesses, with the agricultural equipment's industrial operating margin increasing by $92m to 6.5% of net sales.

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

Whole goods margins increased slightly, while margins in parts decreased, primarily due to mix, obsolescence and inventory value.

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

Margin growth, however, was constrained by manufacturing and other industrial costs, as Mr.

Marchionne alluded to in his opening comments.

Currency, although favorable in dollars, had a negative impact on the margin percent due to hedging and transaction costs.

Economic cost increases were substantially higher than we experienced in prior quarters and overall net price recovery was only slightly positive.

We will improve in these areas in order to deliver our 2008 guidance.

Construction equipment's industrial operating margin increased by $9m but declined as a percent of net sales to 6.5%.

Continuing strong performances in Western Europe and Latin America were essentially offset by the ongoing decline in North America.

Volume and mix in total were favorable in dollars, but with an unsatisfactory incremental margin as product mix in North America deteriorated and the competitive landscape became more challenging.

While growth outside of North America was very strong, non-North American incremental margins did not offset the North American industry decline.

Similar to prior quarters, with lower construction equipment production in North America and significantly higher production in Europe and Latin America, we incurred incremental costs for under absorption and inefficiencies associated with production ramp-ups.

Slide 17 shows the components of the $101m year-over-year improvement to the fourth quarter total industrial operating margin.

We are adopting this new format, which is consistent with how we measure the business and how Fiat shows CNH's results.

Our analysis uses the components in U.S.

GAAP, so it will be slightly different than the Fiat presentation.

In order to allow those who have been following us for some time to make the conversion, we have provided the old format in the appendix for this release.

The improvement was driven by $171m of favorable volume, mix and new products.

Net whole goods pricing was up slightly, driven primarily by Ag pricing, which was positive in North America this quarter.

Changes in product costs and purchasing negotiations were unfavorable by $37m.

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

Improved quality costs and favorable currency impacts were offset by economic and other cost increases.

Gross margin as a percent of net sales decreased 90 basis points in the quarter, reflecting declines of both agricultural and construction equipment operations.

Slide 18 shows the segment split of industrial operating margin for the full years 2006 and 2007, similar to slide 16 for the quarter.

At the top of the slide we see $977m in total equipment operations trading profit for 2007.

At the bottom is the $1.2b of industrial operating margin in U.S.

GAAP split between our equipment businesses, with agricultural equipment's industrial operating margin increasing by $386m to 8.2% of net sales.

Agriculture's gross margin for the year increased by 1.2 percentage points.

Whole goods margins improved as a percentage of sales, while parts margins declined, primarily a result of mix.

Improved operating performance in the Americas and Western Europe drove the increase in dollars.

Favorable volume, mix 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 $39m but declined as a percentage of net sales to 8.2%.

Construction equipment's gross margin for the full year was the same as in 2006.

Strong performances in Western Europe and Latin America were offset by the decline in North America.

Although volume and mix was favorable in dollars, (technical difficulty) margin was not.

Net price recovery was positive.

Manufacturing inefficiencies and higher production costs, particularly in Europe and Latin America, were a partial offset.

Slide 19 shows the components of the $425m year-over-year improvement in full year industrial operating margin.

The drivers were favorable volume, mix and new products of $525m, and positive net pricing of $45m.

Product costs and purchasing negotiations were unfavorable by $88m.

Improved quality costs and favorable currency impacts offset economic and other cost increases by $74m.

Total gross margin as a percentage of net sales increased 80 basis points in the year, reflecting the improvements at agricultural equipment operations.

Construction equipment operations margin was unchanged from 2006.

Excluding currency, SG&A increased $104m for brand-supported trade shows and equipment fairs for our customers and dealers throughout the world, investments in customer care programs and variable compensation and economics.

We continue to invest in research and development and expect additional investments in 2008.

Turning to equipment operations change in fourth quarter net cash on slide 20, $208m of cash was generated by operating activities, primarily by earnings and by working capital, which decreased by $260m in the quarter.

$161m of cash was used for capital expenditures, as we continue to invest in new products to support our brands, capacity to remove bottlenecks and address operational inefficiencies and improve systems, to make CNH easier to do business with.

The net of these factors was a $73m increase in net cash, giving equipment operations a net cash position of $486m at year end.

Equipment operations' position with Fiat affiliates was net cash of $94m.

On a consolidated basis, the net position with Fiat affiliates was net debt of $3b, as financial services funding from Fiat offset the equipment operations net cash position.

Slide 21 shows the picture for the full year change in equipment operations net debt.

$1b of cash was generated by operating activities, primarily from earnings, our best year of earnings and cash generation ever.

$333m of cash was used for capital expenditures, also our highest level ever.

The net of these factors was a $749m decrease in net debt, our best improvement ever from internally generated funds.

Also during the year, we redeemed our $1.05b 9.25% senior notes due in 2011, taking a $57m charge in the third quarter for early extinguishment.

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

Financial Services took over funding the trust and we consolidated the associated receivables and debt on our books, accounting for $1b of their increase in net debt during the year.

Financial Services' debt also increased in the year because of our reduced year use of wholesale ABS conduits to fund higher levels of retail financings generated from equipment operations' sale of equipment.

Now, turning to our outlook for 2008 on slide 22, our agricultural equipment industry outlook for 2008 is on this page.

The agricultural tractor industry is expected to continue running at the high levels we experienced in 2007.

We will see increased high horsepower tractor sales in North America, helped by high corn, wheat and soybean prices and increased demand for corn for fuel ethanol.

Western Europe should be about the same level but slightly weaker than we saw in 2007.

Again this year we expect the markets in Latin America to be up, this year about 5% to 10%.

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

Under 40 horsepower tractors in North America should be down, perhaps as much as 5% in the full year, impacted by the continuing weakness in residential development.

Also supported by the high agricultural commodity 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 23, we believe total light and heavy equipment industry unit sales in 2008 will be up as much as 5%, driven by strong markets outside of North America.

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

housing starts and weak construction activity levels, and will be down in total 5% to 10%.

In the press release we provided a recap of some of the important fourth quarter new product launches and other initiatives which will also contribute to our results in 2008.

In our financial outlook, we expect net sales of equipment to be up 10% to 15%.

Our full year 2008 outlook for diluted earnings per share net of tax is expected to be in the range of $3.30 to $3.60.

This reflects continued improvements in agricultural equipment volumes, mix and new products and quality, new products from our construction equipment operations, reductions in our manufacturing inefficiencies and expediting costs, revenue growth of 10% to 15% and a return to a more normal rate of our tax rate, to something in the range of 37%.

Finally, our outlook for restructuring charges is $10m net of tax.

This concludes my comments.

We are now ready to begin the question and answer session.

Thank you, Rubin.

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

George, could you please retrieve the first question?

Thank you very much, sir.

I'll just give the people here instructions at this time, sir.

(OPERATOR INSTRUCTIONS).

Today's first question is coming from Terry Darling of Goldman Sachs.

Please go ahead.

Could help us with a little bit more detail on the assumptions you're making in the guidance, specifically on gross margin and Financial Services income.

First, on gross margin, we are expecting an increase in more -- of more than 1%.

And we'll be working to get back to -- we look at both IFRS and U.S.

GAAP, and we are in the bracketed range that we'd given in October of 2006 in U.S.

GAAP.

We will be below -- we are below the band in IFRS.

And for next year we will improve in both metrics, but the improvement will be between 1% and 2%.

For the capital company, we expect a return to a more normal trajectory.

What you saw in the fourth quarter is you saw we, in U.S.

GAAP, went from -- we went down about $30m.

This was primarily driven by margins in the ABS market on transactions we did and on the year-ago period we also did not -- we did a transaction in Canada which was not repeated in 2007.

And as we go through 2008, our outlook is based on capital company having earnings more consistent with the first three quarters of this year in U.S.

GAAP, with roughly a 10% growth, and we are doing so with an expectation that the ABS markets will not be as strong as the first half of the last year nor as weak as the latter half.

No, we think -- we're comfortable with our outlook and we believe that the capital company will do well in 2008.

If I can elaborate (multiple speakers) up 10% overall?

Yes.

Okay.

Sorry, let me clarify that.

It's not 10% against the 2007 number because of the unusual decline in 2000 -- in the fourth quarter.

When I said up 10%, I was talking about against the normalized rate.

So we would see it up closer to 15% overall.

Okay.

And then foreign currency assumptions and guidance, if I recall you don't make any, is that right?

That is correct.

And what was the foreign currency benefit to the bottom line in total in '07?

To the bottom line at the trading margin level, it was around $160m.

If you drop down to the net earnings, it was substantially smaller, around $140m.

Thanks very much.

Thanks very much, sir.

We now go to Mr.

Paolo Mosole of Intermonte.

Please go ahead.

Good afternoon.

I have one question on the tax rate, which in the fourth quarter increased.

Could you give more flavor on that?

And if I understand correctly, you are forecasting a tax rate for 2008 of 37%.

Is that right?

That is correct.

We expect for the full year 2008 the tax rate to be around 37%.

In the fourth quarter, we -- every period we value our tax assets, and as we were revaluing our U.S.

state tax assets we determined that they needed to be significantly reduced in value.

And that had an impact of almost $50m in the quarter.

And that's part of a routine valuation of those assets and we just determined that they were overvalued.

Okay.

And just one clarification - did you say that you confirm the margin range in U.S.

GAAP terms that you gave in October 2006?

I'm referring to the 9.2% to 10% margins.

We believe we will be in the range indicated in October 2006, yes, under U.S.

GAAP.

Okay.

Thank you.

Thanks very much, sir.

We now move to Mr.

David Bleustein of UBS.

Please go ahead.

Good morning, good afternoon.

In your prepared remarks, you mentioned that you'll be working on removing these inefficiencies in 2008 and 2009.

So, first, I'd like to get some sense for whether or not you really think this will take through '09.

And then second, I guess complicating the issue, is that in '08 you have more volumes where you are busy in Europe and less volumes in the U.S., where you're already probably somewhat underutilized.

Do you really think you'll make any progress at all in 2008?

Absolutely.

We are undertaking efforts to move some of the production volume, as opposed to where the sales volume sits, to make sure we more effectively utilize our U.S.

assets.

And those actions will keep some of the occupation up in those factories and therefore we'll get benefit there, and will take some of the pressure off of our European factories at the same time.

Excuse me, David.

This is Harold.

How are you doing today?

Well, thank you.

How are you?

Good.

Just to Rubin's comment, we started in the second half of the year, as we saw the industry demand and volume going up commercially, identifying bottlenecks that we had internally in the production system, also with the supply base, and have been working in the fourth quarter and continue to work on freeing the bottlenecks from the industrial system; one.

Number two, we feel that we are significantly in closer alignment with the industry growth forecast.

And therefore we have communicated, not only internally to our plants but to our suppliers, the increased volume that Rubin referred to, the 10% to 15%.

Third, we are also, throughout the industrial system within CNH, beginning to implement, in conjunction with the Fiat group, world-class manufacturing which is going to improve the efficiencies within the operating system.

So, we're comfortable that some of the issues that we faced in the fourth quarter will not repeat itself.

And as Sergio said, we are diligently working on recovering.

Okay.

I guess the follow-up is you're going to be shifting production, it sounds like, from Europe and Brazil potentially to the U.S.

Are we talking about tens of millions of dollars of production or hundreds of millions of dollars of production?

I do not believe in 2008 we'll be in the hundreds of millions of dollars, but we will certainly be approaching.

We'll be higher than $10m or $20m but we do not have those numbers finalized.

Perfect.

Thanks.

Thank you, Mr.

Bleustein.

We'll now go to Mr.

John Buckland of MF Global.

Please go ahead, sir.

Good afternoon.

Thanks for taking my questions.

Can you hear me okay?

Sure.

Great, okay.

I just want to address this issue of the financial targets and the apparent inconsistencies between the U.S.

GAAP and the IFRS numbers in euros.

Now, it seems as though the Company is going to exceed the nominal values in U.S.

GAAP and dollars, because obviously the revenue is coming in much stronger than the previous targets.

But the big issue is you failed to do it under IFRS.

But this is not an operational reason; it's an accounting adjustment reason.

So, I wasn't quite understanding the comment about the gross -- the margins being below the IFRS targets because of operational inefficiencies.

It's more an accounting thing, isn't it?

And is it not time, at this time now, to make the adjustments to the IFRS targets such that, going forward, we can see that you are meeting realistic figures for both accounting and both currencies?

Hi.

This is Sergio Marchionne.

Can you explain to me the accounting issue?

I'm a bit baffled.

Well, if you -- just simply, if you take the difference between the reported operating profit under U.S.

GAAP and U.S.

dollars, and you take the difference there in the IFRS figures in U.S.

dollars because CNH reports both numbers in U.S.

dollars, there is a roughly, this year, $248m difference.

And I understand that that difference will be that going forward.

And there is an accounting adjustment, which as I understood it, have got -- are different now to what they were when you made the target in the beginning.

And these differences, I don't know what they are but there's line items which are different, which mean that it is, under the current regime, even if you meet or exceed the U.S.

GAAP, U.S.

dollar figures and say the Company is performing well, which is what the management is basing their business on, they cannot possibly meet the numbers under the -- under current IFRS targets as presented in the November '06 numbers.

It just seems mathematically not possible, especially as also the currency has gone against you and that translation means that the euro values are much lower now.

Let's agree on a couple of things.

I think what the -- for 2006 process that has been highlighted on the basis of then available information on exchange rates, what we thought volumes and margins would be.

And I think that we derived an IFRS trading profit number based on those assumptions.

And so, what is undoubtedly true from what you've said is that, as a result of the decline in the dollar against the euro, the absolute reported number and trading profit would suffer as a result of the devaluation of the dollar.

It will have absolutely no impact on the trading profit margin associated with a particular year, because both the numerator and the nominator will be equally impacted by the decline.

What Rubin McDougal made reference to earlier, about the transfer of workload out of existing Latin American and European plants back into the U.S.

to try and -- to deal with underutilized positions in the U.S.

and over-utilized assets in Europe and Latin America, really had to do with the issue of construction equipment, which has come about as a result of the decline in the U.S.

construction market.

Yes, I understand --

No, if I understand, it is not impacting at all on the agricultural side of the business, which continues to develop profitably in every geographical area.

Yes, I understand that.

What I'm trying to say to you is the Company CNH is performing well.

It's giving good numbers, it's meeting its financial targets under U.S.

GAAP and U.S.

dollars, and that's great.

But under the reported figures by Fiat Group, it's not.

And, just for example, in 2008 you have a 9.2% to 10% margin range under U.S.

GAAP.

Under IFRS, the margin range is 10.8% to 10%.

Those two -- that's from your own figures, in your own presentation.

And I think what we should be doing is I think we should be waiting until the conference call tomorrow, at Fiat level, to give you what Fiat's view is on the IFRS trading profit margin expectations for 2008.

So, you think there will be an adjustment, then?

I think that we need to be -- I think we need to reflect what has effectively happened in 2007.

And I think that it will not impact on the absolute number being delivered by the Group, but the margin will be adjusted accordingly.

Okay, okay.

I think that's quite important from a perspect -- from the -- someone looking at the numbers and saying 'Are you meeting your targets, or are you not meeting your targets?'

No, but having said this, I wholeheartedly agree with you.

I'm not sure that I'm as enthusiastic as you are about the gross margin performance of CNH in Q4.

No, no, I'm not saying that I'm enthusiastic about it but --

I'm not and I think that's -- and that's the reason why I think -- that's why I think that the number under IFRS on a margin basis, on an absolute margin basis, has come underneath our target and that's what needs to be fixed.

And we know the cause of that problem, and the cause of the problem is an industrial inefficiency problem within -- especially within Ag and at the edges on the construction equipment side, but mainly on the Ag side, which has been driven by this increase -- phenomenal increase in volumes that we pushed through the system and has caused inefficiencies.

The issue is understood and I think we'll talk about this more when we get on the conference call tomorrow for Fiat.

Okay.

Just to --

Was that helpful?

That's helpful.

Just on that gross margin, though, in the third quarter the guidance was, if I remember, something like 8% to 8.4% for the year and you delivered 8.2%, I think.

So, actually, that is still quite close to the guidance that was given in October.

So, but the fourth quarter has obviously been a big disappointment to everyone.

What went wrong between October and November and December?

It seems quite a short period in which the numbers deteriorated much more than the Company expected.

It's a litany of issues which have to do with constraints imposed by the unavailability of component parts for manufacturing which has caused dislocation.

In manufacturing schedules, to simply -- the logistical process of running that much volume through the plants in a period of 90 days, which the organization had never done.

And so there has been a huge amount of learning involved here.

But we understand -- I think we did stretch the limits of the manufacturing capabilities of the house in Q4 of last year and we paid the price.

The parts were being flown in to try and show that we could deal and that -- with particular requirements.

And there's been a huge list of issues that have caused the backup.

And obviously, our primary objective has been to satisfy market demand, one of the things that CNH was able to do successfully in 2007.

And Rubin made reference to this in his comments, the fact that we were able to lighten up dealer inventories, which purely reflects our ability to have retailed most of what we produced in 2007 and work off some of the inventory that was sitting at the end of 2006.

So, there's been an effective -- we're getting stuck, unfortunately, on some unpleasant issues of the P&L.

What it does -- what all of this hides is the phenomenal work that has been done by the brand and repositioning, the four brands within CNH, and the amount of market penetration and market share gain that has been obtained in 2007, including the fourth quarter of last year.

So, we understand all these things.

I opened my remarks by telling you that I felt quite comfortable with the result for 2007, and I continue to be so because of the phenomenal achievements that we have made in terms of the ability to effectively place products in the marketplace and gain share.

Where I think we have fallen behind on is the issue of the industrial efficiency to match that level of penetration, and we understand that that issue needs to be cured in 2008.

We have had -- we are working our way through those issues.

Q1 and Q2 of 2008 are important quarters for us.

We have got to make sure that the industrial machine delivers what the market needs.

And we have been able to grow the business extensively across -- outside the U.S.

Our international region operations are performing very well.

And so we need to make sure that the machine can produce what the market is now demanding and I think we haven't done that great of a job in Q4.

And it's a concern at peer group level, because obviously that's the issue that's going to impact quickly on our ability to make margins; I mean our IFRS margins.

And if we cure the industrial issues, then I think we are back on track in terms of the 2010 objective.

Right.

Okay.

Thank you.

Thank you, Mr.

Buckland.

We'll now take a question from Ann Duignan of Bear Stearns.

Please go ahead, ma'am.

Hi, good morning.

Golly, I didn't think I was going to get in with a question there.

Sergio, I'll start out with a question to you.

It's great that you are on the call this morning.

What should we really read into you being on this call?

Is it your commitment that CNH will improve its profitability and you want us to take that message away, or is there some other fundamental reason why you've chosen to be on the call this quarter, versus any other quarter?

Ann, the reason -- I am on the call for two reasons.

One, because I think the numbers needed an explanation and I have seen the market's reaction to the earnings release and to our earnings forecast.

And to be perfectly honest, I found the reaction to be overdone.

This has been the best trading year of CNH in its history since 1999.

It's generated the highest level of cash that it's ever done.

It's re-established itself in the marketplace as being a lead contender in the Ag business and has been able to successfully turn around construction equipment from the 2006 performance.

When I look at these factors, I felt the obligation to intervene to make sure that we understood the magnitude of the achievements that were made in 2007, and that these should not be overshadowed by what people may have considered to be a disappointment on the gross margin line.

The second issue -- the second reason why I came on is to reinforce the comments that Rubin and Harold made earlier about our commitment to get these operational inefficiencies out of the system at the speed of light.

We have said, and I've said in my opening remarks, that we expect to both -- to remove most of these inefficiencies out of the system within 2008 and 2009.

Obviously, our objective is to get most of them done within the current year.

But they do exist.

I made the comment on the Fiat call in Q3 that we needed to invest, not just in terms of money but we needed to invest resources in strengthening the industrial backbone of CNH.

It does have a global footprint.

I think it's one of the most valuable things it has.

But it is something which must be nurtured and it must be cured, and we've got to ensure that these plants within CNH start acting in a parallel fashion to the other peer group plants which have embraced world-class manufacturing.

My honest assessment today, having spent as much time as I have within CNH, is that of all the sectors that Fiat manages today, CNH is the one that is in most need of a world-class manufacturing push.

We have rolled it out in two plants in 2007.

We are beginning a complete rollout of these processes within 2008 and hopefully will be completed by the early part of 2010 in terms of its full implementation.

But we are paying a dire price for what I consider to be a state of neglect of this industrial backbone, which happened in the early part of the 2000s.

We're fixing it now.

We are confident that we can get it done.

The combination of the pent-up demand and the desire to fulfill that demand, together with the structural inefficiencies in the system, has caused this aberration in gross margins in Q4.

And I think we need to be careful that we don't read anything into this Q4 number other than the result of what I just said and a recognition on the part of management that the issue will be cured.

And that's why I'm on; that's the only reason.

Okay.

I appreciate the color.

That's very helpful.

One follow-up, then.

Could you just give us some more color on where specifically the issues were - which regions, which product lines?

And do you think that they were primarily CNH-specific issues or are they industry issues?

Well, to begin with, most of the problem has been Europe and Latin American based.

And a lot of this has to do with the fact that the burst in demand has happened in both of those jurisdictions, as you heard from Rubin in his remarks.

I think it's very easy for me to sit here and blame strategic suppliers as being the cause for the hiccups.

There's not a single doubt in my mind that there's a list of five or six strategic suppliers that have, because of industry conditions and not because of their inability to fulfill CNH demand.

It's simply been the volume that has been thrown at them.

They've not been able to adequately deal with CNH's requirement.

And so, that's ignorance on our part.

I think our ability to flag the increase in demand to them early enough is probably the cause for the lack of some -- lack of supplies, some strategic components in the manufacturing piece.

I don't have to tell you what happens to a manufacturing line when on two days of a particular month you run short of a particular crucial component of the manufacturing piece.

It throws the manufacturing process into convulsion.

And I think that we have lived through a few of those instances, mainly on the European side, that have caused what I consider to be abnormal, unusual, non-recurring manufacturing costs.

I think we have lined up the supplier base now.

We do have people inside the suppliers that are working directly with our planning department in production to ensure that we do get the right input into manufacturing in 2008.

And I think that we're going to work our way out of the problem within -- hopefully, within the next 12 months.

We should see some decent improvement in performance in Q1 '08 as a result of what we've done, but it will get better as we work our way through the year.

And both Europe and Latin America were construction equipment related, not agricultural equipment, or was it a mix of both?

I think it was a mix of both in both areas.

Obviously, the one that was not suffering was the U.S.

construction, because the U.S.

construction business, in terms of being able to provide product, because we did have capacity in the U.S.

plant.

And as Rubin mentioned in his remarks earlier, we are (multiple speakers).

I'm sorry.

Any color on the big shortages?

We've heard about tires; where else are the shortages appearing?

It's been in a variety -- gears, issues that have impacted on transmission.

Tires have not been a huge -- they have been an issue but they've not been the biggest issue that we've been facing.

But it's really been on the mechanical side of the tractor, where we have not been able -- it's been tractors and combines where we've not been able to get most of the equipment that we wanted.

Not to mention the fact that we still suffered some dislocation consequences out of the closure of the Berlin plant, and that's hopefully come to an end at the end of Q4 '07.

Okay.

That's great.

I'll hand it back.

Thank you.

Thank you, ma'am.

We will now go to Mr.

David Raso of Citigroup.

Please go ahead, sir.

Yes.

I have a question on pricing.

Can you flesh out for us your thoughts on '08 pricing and relate that to your cost pressures?

To you, Rubin.

Yes.

Right now, we are assuming pricing across the board, across most of our -- well, actually, all of our regions, products and markets, and they exceed our cost pressures, primarily, of course, inflation and commodity prices.

And, right now, that magnitude is varied by margin -- or by country, product and market, but it's around 2%.

Can you provide more color between Ag and construction, and maybe some geographic help?

Right now, I could not do that.

How about North America construction, which I suspect is your toughest pricing market?

Can you give us color there, as well as Ag in North America?

Do you at least have that marketplace?

North American construction, actually, pricing has not been as adverse as you might infer given the down market.

Certainly, in the fourth quarter result it was not as negative as you might have thought, because it was actually -- it held in there.

But North American pricing in the year is closer to 1% net than the 2% we are talking about everywhere else.

And production versus retail?

Then I'll hop off.

Thank you.

Production versus retail for -- are you talking '07 or '08?

'08.

Right now, our production versus retail, we are assuming that we're going to produce about at retail in the agricultural area and we will be producing slightly less than retail in construction equipment.

And that's consistent across all of the product categories in construction equipment.

In tractors I should say that, while we're talking about a flat, we're talking about actually producing more than retail in the larger tractors.

We need those tractors in our supply chain.

And we're talking under producing in the less than 40 horsepower, where we have a different pressure.

Thank you very much.

Thank you, Mr.

Raso.

Today's final question is coming from Mr.

Mark Koznarek of Cleveland Research.

Please go ahead, sir.

This is Joe Calvello for Mark.

I'm wondering if you can provide some -- the geographic revenue split for your CE business, and maybe also indicate where you might expect to outperform your underlying market forecast, based on new products and/or distribution expansion?

We don't give guidance on that.

We provide the actual on a full year basis in the 20-F.

I don't -- I can comment just overall, as I mentioned in my comments, we're now two-thirds international and that would be roughly true.

I can say that for '07 in CE, in construction equipment, the full year, using a $5b number, that about $1.7b was North America, $2.5b was Europe, about $700m was Latin America and the balance is in Asia Pacific.

With your -- considering your market outlooks in those regions, are there any areas where you think you would be likely to outperform those underlying market outlooks?

We expect to outperform most of the underlying market outlooks.

If you look at the revenue numbers, we talked about in the 10% to 15% range where we gave guidance, and you contrast that with both Ag and CE markets, we are planning on the brand organizations continuing to perform as they have.

And Mr.

Marchionne commented about the success of those organizations in focusing our organizations on the customer and delivering results.

They have succeeded, we think, very well in 2007 and the latter half of 2006, and we would expect to perform better than the underlying markets around the world.

Yes, this is Harold, just to comment.

As we've mentioned in the prior quarterly discussions, one of the things that we're very pleased with is our brands continue to gain momentum, to reinforce their identity.

And as we were successful across the globe this year, we are planning on earning additional customer business driven, one, by continued improvement in our quality of our product and value we're offering to the customers, as well as we will have another year of significant new model launches, both in the agricultural side and the construction equipment side.

Secondly, looking at the Latin America Ag outlook, can you provide some color on the discrepancy between like the slower tractor growth and the stronger combine growth, given that the comps are actually reversed, might face a tougher comparison?

No, I would actually say that the Ag market, the tractor industry in Latin America is running at an all-time high in '07, as opposed to the combines which peaked back in '04.

So, year on year the comps might appear more challenging but if you look at the longer-term cycle in Latin America, tractor businesses that is -- has continued to grow over a period where combines plunged as a result of commodity prices in '05.

Yes.

Rubin, if I can just add, I think the real issue in '07 for us has been capacity.

In tractors in Latin America there's not been a demand issue at all.

Mr.

Calvello, has that answered your question, sir?

Yes, thank you very much.

Thank you very much, sir.

Ladies and gentlemen, that will conclude today's question and answer session.

I'd like to turn the conference back over to Mr.

Al Trefts for any additional or closing remarks.

Thank you, George.

We'd like to thank everyone for attending.

And as always, if you have any additional questions after the call, please don't hesitate to give me a call.

Thank you and good day.

Ladies and gentlemen, that will conclude today's conference and thank you very much for your participation.

You may now disconnect.