CNH Industrial NV (CNHI) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's CNH 2008 first quarter results conference call.

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

Your host today will be Al Trefts, Senior Director Investor Relations and Capital Markets.

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

Trefts.

Please go ahead, sir.

Thank you.

Welcome, everyone, to CNH's first quarter 2008 results webcast conference call.

We are pleased to have with us today Mr.

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

Rubin McDougal, our Chief Financial Officer, and Mr.

Camillo Rosotto, who is now responsible for our European Financial Services operations and continues as Chief Financial Officer of Financial Services ad interim.

Replacing Camillo as Treasurer is Mr.

Marco Casalino, who is joining us for the first time today.

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 concerning the Company's plans, projections and objectives for the future 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 and our annual report on Form 20-F for the year ended December 31, 2007, as filed with the U.S.

Securities and Exchange Commission, 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.

The Company, except as required by law, undertakes no obligation to update or revise its forward-looking information.

As noted in the slides, the Appendix contains reconciliations to U.S.

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

Finally, this conference call and live webcast over the Internet are being recorded for future transmission.

Contents are the property of CNH Global NV and are not to be rerecorded or rebroadcast without our express written permission.

Participants in the call, including the Q&A session, agree that their likenesses and remarks and all media may be stored and used as part of our earnings call.

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

Thank you, Al.

Good morning and good afternoon, everyone.

Starting with slide four, I'd like to review the highlights of another record quarter.

First quarter 2008 was the best quarter in CNH history.

Revenues were up 26%, net income up 18%.

The agricultural business was particularly strong, with net sales up 38%, including increases in all regions.

We increased worldwide market share for agricultural equipment and maintained share in construction equipment.

Our operating profit increased 21% to $264m, driving a 20% increase in our diluted earnings per share, before restructuring, net of tax, to $0.53 per share.

Agricultural equipment's operating profit increased by over $100m or 1.7 percentage points, to 8% of net sales.

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

Construction equipment's operating profit decreased by $57m and as a percent of sales to 2.5%, as another strong performance in Latin America was overshadowed by the continuing decline in North America.

First quarter EPS was consistent with our expectations and we will be confirming our full year outlook for diluted earnings per share before restructuring, net of tax, of $3.30 to $3.60 per share.

Turning to slide five, we see the trend of worldwide tractor and combine industry unit volumes in the first quarter.

The worldwide tractor industry increased slightly, up 1% from last year, despite an 11% decline in North America.

The combine market also improved dramatically, in total up 40% in the quarter and in every market.

Additionally, in North America, within the over 40 horsepower category, industry sales of tractors in the 40 to 100 horsepower range were down 15%.

And in categories where Case IH is particularly strong, sales of over 100 horsepower and four wheel drive tractors were up 30%.

Preliminary industry data in Western Europe had the markets there up 1%, with markets up in France, Spain, Germany and the U.K.

up, while Italy was down.

In Latin America, where the tractor market was up 44%, Brazil was up 47%, while other Latin American markets were also up, with Argentina up 63%.

In the markets in the rest of the world, Poland and other Eastern European markets were up strongly.

Australia and New Zealand were also up.

Worldwide combine industry unit sales improved 40%.

The Brazilian market more than doubled and Argentina was up more than 40%.

In Western Europe, all the major markets were up.

On a unit basis, our worldwide tractor and combine market shares both improved.

Based on these movements, our worldwide net sales of agricultural equipment increased 38%, including 8 percentage points related to currency, and increased in every region.

In total, agricultural equipment net sales increased by $571m for volume and mix and new products, and $215m for currency translation, with agricultural pricing finally positive.

Turning to the first quarter worldwide trend of heavy and light construction equipment industry unit sales, on slide six, the total market was up 5% and up in every region, except for North America, which was down 25%.

Our industry unit sales of heavy equipment were up about 13%, with sales of light equipment down 1%.

Within light equipment, the worldwide backhoe loader market was up 11%, with strong increases in Brazil and Argentina.

The Latin American market was up 31%.

And with strength in China, Poland and Australia, the markets in the rest of the world were up 24%.

The market in Western Europe was flat, as strength in France, Germany and Italy was offset by weakness in Spain, the U.K.

and in the other markets in aggregate.

The skid steer loader market was down 2%, with declines in both North America and Western Europe, where strength in France and Germany was offset by the other markets.

However, markets in Latin America were up 49%, led by Brazil and Argentina and rest of world markets, which were up with strength in China, Poland and Australia.

In heavy construction equipment, markets in Germany, France and Spain saw the largest percentage increases in Western Europe, with Italy flat and the U.K.

down.

The Latin American markets were up in total, except for Argentina and Mexico, as were most major markets in rest of world except for Japan.

Our worldwide market share of total light equipment, including all other light equipment products and heavy equipment, was essentially unchanged from the first quarter of 2007.

Speaking now to construction equipment net sales, we saw an overall increase of 4%, down 6% excluding the impact of exchange rate changes.

Net sales increased in every region except North America.

Robust sales outside of North America and currency variations increased construction equipment's net sales by $240m.

Currency translation added $106m to revenue.

These improvements were more than offset by the North American market weakness and competitive pricing, primarily in the form of low-rate financing, which was negative in the quarter by $21m.

Next, the equipment operations gross profit evolution from $601m in 2007 to $700m in 2008.

This $99m increase in gross profit was fuelled by $139m from volume, mix and new products and $18m from pricing.

They were offset in part by $68m of higher costs.

These included increased material costs, as we dealt with extremely tight supplies of key components, higher labor and overhead as we adjusted schedules for volatile material availability, and added shifts at plants and adjusted schedules, and compensated for ongoing weakness in the U.S.

dollar.

During the fourth quarter earnings call, we shared our concern about the gross margin decline and discussed many of the industrial inefficiencies that contributed to that decline.

We also discussed some of the actions that are, and will be, taken to improve our operations, so that we deliver appropriate margins including the necessary benefit from incremental sales.

We are installing world-class manufacturing systems in our plants, in concert with Fiat Group initiatives and with Fiat Group assistance, which will improve in-plant processes and efficiencies.

We are investing $88m in 2008 to reduce bottlenecks and increase capacity, both internally and to address our key supplier constraints, while we are leveraging Fiat Group resources and technical skills for capacity planning.

We have stabilized demand management of production by firming production schedules in our plants for eight weeks and have increased our production workforce.

We have also addressed pricing, both in the immediate term and as we roll out seasonal order writing programs, particularly for products in short supply.

In addition, we will be expanding production in Brazil to increase capacity for combines, specialty harvesting equipment and backhoe loaders.

These actions are ongoing and we expect to see improvement in the second quarter, when we expect a more favorable year-over-year comparison.

Our operating profit in the quarter increased by $45m, as the $99m increase in gross profit was partially offset by $54m of increased investments in SG&A and R&D for enhanced customer care programs, and product innovation and quality.

On slide eight, we see the change in equipment operations' net cash position in the first quarter of 2008 and for the comparable period last year.

$174m of cash was used by operating activity, as earnings and seasonal decreases in other assets and liabilities were more than offset by the seasonal changes in working capital, which increased by $437m in the quarter.

While we invested that $437m in working capital, in dollar terms the days of sales remained stable.

In that $437m, we did see seasonal increases in inventories and receivables, which were partially offset by higher payables, including the dividend which was declared earlier this year.

We increased our parts inventory to improve after-sales availability, and in light of higher volumes and our commitment to enhance customer service by all of our brands.

Finished goods inventory increased to facilitate product transitions, notably the introduction of a new skid steer loader and a repowered tractor loader backhoe, and additional production in China and the addition of a joint venture in the second quarter -- sorry, I apologize there -- addition of a new venture in China in the second quarter of last year, which is now in our total working capital and was not in the first quarter a year ago.

Shifting gears for a moment, our worldwide estimated dealer and company tractor and combine unit inventories at quarter end, on a forward month of supply basis, were 2.9 months, down slightly from a year ago.

For construction equipment, estimated worldwide dealer and company unit inventories were down almost one half month of supply from a year ago, at 2.9 months.

$51m of cash was used for capital expenditures in the quarter, as we continued to invest in new products and to support our brands, also in capacity to remove bottlenecks and address operational efficiencies and to improve our systems.

The net of these factors was a $280m decrease in net cash, giving equipment operations a net cash position of $206m at quarter end.

Equipment operations' position with Fiat affiliates was net debt of $427m.

On a consolidated basis, the net position with Fiat affiliates was net debt of $4.05b, as financial services funding from Fiat increased by approximately $525m during the quarter.

Next, slide nine shows our new agricultural products in the quarter, as highlighted in the press release this morning, and some additional new products expected later in the year, including new utility and row-crop tractors from Case IH , and a new forage harvester from New Holland.

These new products feature technological advances in key components, including the introduction of a CVD transmission, new engines and enhanced new product capabilities.

Slide 10 shows our new construction equipment products, some of our new construction products, launched in the quarter and additional new products to be launched in the coming months, such as new wheel loaders from New Holland, a new crawler excavator from Kobelco and new backhoes and dozers from Case, featuring additional product capability, new tier three engines and improvements to key components, such as drive lines and hydraulics.

Turning to slide 11 for our industry volume outlook, the worldwide agricultural tractor industry is expected to continue running at the high levels we experienced in 2007.

High horsepower tractor sales in North America are expected to remain robust, helped by high commodity prices, particularly corn, wheat and soy beans.

We may see continued weakness in the utility tractor segment.

Western Europe should be up 0% to 5%.

And again this year, we expect the markets in Latin America to be up around 20% to 25%, with rest of world markets also up, perhaps as much as 5%.

Under 40 horsepower tractors in North America may be down, perhaps as much as 10% to 15% for the full year, impacted by the continuing weakness in residential development.

Also, supported by 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, we believe total light equipment industry unit sales in 2008 will be up as much as 5%, with the heavy equipment market up 5% to 10%, 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 starts and weak construction activity levels, and down in total 15% to 20%.

On slide 12, in our financial outlook, we expect our net sales of equipment to be up 20% to 25%.

Our gross margin should improve in comparison with last year.

And, consistent with previous guidance, our full year U.S.

GAAP target industrial operating margin should be in the range of 9.2% to 10%, with much of the improvement later in the year.

Overall, we expect substantially improved revenue, with improving margins over the course of the year.

We are reaffirming our full year 2008 outlook for diluted earnings per share, net of tax before restructuring, for an improvement of 26% to 38%.

In the range -- I'm being corrected here, it's 26% to 28%.

In any case, to the range of $3.30 to $3.60.

Our outlook for restructuring charges for the year is about $30m net of tax.

This concludes my comments.

We're now ready to begin the Q&A

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.

Sandra, could you please retrieve the first question?

Thank you.

(OPERATOR INSTRUCTIONS).

We will take the first question from Terry Darling with Goldman Sachs.

Please go ahead.

Thanks.

I actually had a point of clarification first off.

I guess it was our perception that the guidance previously included the restructuring.

I think you're excluding it now, but can you clarify that for us?

That is correct.

The guidance of $3.30 to $3.60 excludes restructuring.

But previously it included it, correct?

Yes, it did.

Okay.

So we've actually lowered guidance at midpoint, adjusting for the restructuring?

The restructuring is actually up slightly from the last announcement, where we said it was going to be about $10m.

It's $30m.

Not that we've undertaken new actions, but as we've completed some actions we continue to reevaluate the cost and complete those actions and right now it looks like it will cost about $30m in the quarter -- sorry, in the year.

And Rubin, in terms of the industrial inefficiencies, the waterflow chart, can you break that down, Ag versus Construction?

It looked very heavy on the construction equipment side.

And then can you give us the path of your expectations for improvement in these inefficiencies?

I think you've mentioned in your comments that you expected a favorable margin comparison for equipment ops in the second quarter on a year-over-year basis, but maybe you can clarify how we should think about the improvement through the year.

Yes.

First of all, on the last point, what we expect is a more favorable comparison to the prior quarter in the second quarter.

That doesn't mean we will necessarily be up a great deal, but certainly we will not be down in the range we are in the first quarter, as we deal with those inefficiencies in the first quarter.

So, I don't expect a huge improvement in the second quarter, but certainly not down like we are.

You're talking equipment operations?

I'm talking equipment operations.

Margins?

Margins.

All in?

All in.

Yes.

Then, if you talk about the industrial inefficiencies, I'll split them into two categories.

They are split between Ag and CE.

And the reason I say that, on the CE we obviously are having some inefficiencies to do with the reduction in volumes in North America and rebalancing the plants, as we continue to do a ramp-up in Latin America and continue to shift volume and optimize our plants in North America, but deal with that issue.

In the Ag side, however, we are dealing with a lot of inefficiencies as well, due to the supply base issue that we mentioned in our earnings release and as I alluded to.

What we're finding is that we have very limited capacity of certain key components and what that is driving us is it's causing a lot of schedule changes.

It's causing a great deal of incremental costs, as we deal with the -- actually bringing the material in, we're having higher cost of material to bring it in, as we're dealing with these shortages.

And we're having higher costs associated with the expedites.

All of those things combined are causing a lot of pain.

On top of that, of course, when you're dealing with those availability issues and those -- they spread across machine components, tires and other categories, were also causing some disruptions to our commercial efforts and were causing us to reschedule deliveries to allow us to get the parts and the raw materials into the factories.

Can you break down the inefficiencies, then, between Ag and CE?

If you look at them in total, you're going to say that the -- if you split them up, depending on how you bucket them, but about half and half.

The inefficiencies associated with the rebalancing of production is almost all on the CE, because they don't have any factories that are reducing production.

In the Ag, the costs associated with these rescheduling efforts, the higher -- well, we have higher material costs in both sides, but the higher logistics costs are almost all in the Ag side as we expedite components and in fact incur air freight in many cases, to get the components in the right place.

And just because of the very high demand, for example for tires, just the sheer number of those against which we are having availability issues and paying higher costs of material for the incremental volume, you've seen a lot of that show up in the Ag side.

And any sense of what the revenue loss was because you couldn't get the product out the door?

I guess I'm thinking specifically of North America CE, where your decline was pretty dramatic.

No.

I would say that in North American CE the revenue loss was not due to any of these industrial inefficiencies.

The revenue loss would deal more in Latin America and in the Ag, the heavy -- the higher horsepower end of tractors and combines.

And some of that is not loss, it's a timing issue.

As we deal and we prioritize the production to deal with seasons and various markets, it has caused a little bit of a difference in our timing.

Okay.

And lastly, the debt that was up quite a bit in the quarter, can you help us with your capacity to continue to ramp that up?

Can you also explain why we didn't have a gain on the ABS transaction in April?

First, on the debt, that's really a function of -- well, first of all, due to the increases in working capital which, as I mentioned, if you look at them in terms of days or as a percent of revenue that's really a function of the higher revenue and the fact that there is some translation going on in the balance sheet that is affecting my working capital numbers.

Secondly, we did declare a bigger dividend.

That moved some equity out and put that into a liability.

And thirdly, we are increasing some of our inventory to deal with some of these issues and we had a couple of product launches in the quarter that are causing us to build some inventory.

Skid steer loaders and the TLBs I mentioned, as we are going from one product line to the other we have some pre-builds of inventory and so that's going on as well.

Now, to your second question, which was about the ABS transaction, we had no gain in the quarter because we didn't do a transaction in the quarter.

I think in footnote four you indicated there would not be a gain on the transaction that you have just done.

That's what I'm trying to understand.

Again, on a U.S.

GAAP basis, that's a function of the spreads in the transaction against any hedges we have of the transaction.

The comparable -- the closest comparable would be transactions we did in the fourth quarter of last year.

We also saw a similar position without much gain on a U.S.

GAAP basis.

But there's a hedging loss that nets against that.

Is that right?

Basically, yes.

Understood.

Okay.

Thank you very much.

We will move on to our next question from Ann Duignan from Bear Stearns.

Please go ahead.

Hi, guys.

Hi, Ann.

Can we talk about construction equipment and can you give us some color on how New Holland performed versus Case in North America and the rest of world?

We normally do not split down the brands.

We stay within construction equipment, Ann, so I would rather we move on to your next question.

Okay.

Can we talk a little bit about your outlook?

How much of your inefficiencies and your component shortages do you think were driven by your overly conservative outlook for the market, and thus an inability for your suppliers to ramp up quickly enough?

Hi, Ann.

This is Harold.

How are you today?

Good, thanks.

Good.

I'd like to -- prefer to think that our brands are performing extremely well, as we design the organization.

The commercial team are doing everything that we've asked them to, which is improving distribution, earning new customers and launching products that add great value to our customers.

I think everyone in this industry has similar issues relative to the growth, particularly the high horsepower tractors and combine.

I don't think that's an exclusive CNH issue in that pattern.

But having said that, the order boards are quite strong through the first half.

The pricing that we have, we've put some new pricing in the marketplace in North America, March 1, around 3%.

We'll be doing the same in Europe, about 2%.

We won't get the full calendarization of that because we are protecting our customers and dealers that have retail orders, but we will see more favorable pricing on the agricultural side as a result of the strong market and our position.

Okay.

And just a follow-up on your order boards.

You said they were strong in the first half.

What are you seeing out there or what is your organization doing to maybe incentivize some spending as a result of the stimulus package and the tax incentives?

We're already working with -- closely with the capital company on educational material, not only for our people and dealer organization, but we'll be doing some promotion direct to the customers to make sure that everybody's aware of the opportunity.

And do you expect to see an impact in the back half of the year?

I'm not -- I'm sure we will in the -- for sure the cash grain markets, the large row crop markets.

And what about on the construction side?

And I'll leave it there.

I appreciate that your customers have to be making money to spend money, but do you expect any kind of a pickup on construction equipment back half of the year or towards the end of the year, just because of the tax incentives?

Well, we're always optimistic, but it does take jobs, right?

Right.

So -- and unless there's a movement in permits and housing starts, I don't see any robustness in the near future.

Okay, thank you.

I'll get back in line.

Thanks, Ann.

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

Please go ahead.

Hi.

Good morning or --

Good morning.

(Multiple speakers) maybe.

Just a clarification on the price increases - is that solely ag equipment or does that include construction?

I was talking solely of agricultural equipment.

The construction markets that are down strong double digits, it's tough to get much pricing and make it stick in the marketplace.

So where we do have opportunity in markets outside of North America where we have a robust demand, we will take that opportunity to increase some pricing.

And in many cases have already started that process.

Okay.

Is there an actual announcement of a certain price increase effective a certain date, or is it really something that's more informal, market by market, that you're adjusting things?

Market by market, machine category by machine category.

Okay.

All right.

That leads into the outlook for raw materials.

How has that changed versus 90 days ago?

We are continuing to see pressure on many of the raw materials that are critical to us, of course, plate steel, some of the other commodities.

And again, you have to look at not just the commodity price.

Obviously we are applying much less than those changes.

But if you look at the overall pressure, it's in the 1% to 3% range, if you look at the aggregate level.

And that, of course, varies by equipment and it also varies -- we see a big difference on the commodity price and just the input price differences in North America and Europe.

Primarily, in one currency, we're buying -- or one region we're buying in a very strong currency, in the other region we're buying in a weak currency.

So overall, we have to deal with both the commodity prices and the currency movement as it affects our footprint.

But I think if you use the 1% to 3%, you'll be in pretty good condition.

What would that estimate have been after the fourth quarter?

We would have been closer to flat to up slightly, as far as commodity prices.

So 0% to 1%, or something like that.

In that general range, yes.

Okay.

So then, in aggregate, we've -- the raw material outlook is increased.

You're doing some off-schedule price increases as well.

But you're protecting customers and the increases are occurring --

Exactly.

Go ahead.

So I'm basically wondering if you expect to offset the increased raw material expense with the price, or are you still lagging?

We will offset the increased cost in the full year.

We will see some pressure as we deal with the order board, where we are protecting retail orders.

Remember, we have a seasonal business where, in some product categories, we go out and do annual order writing programs, so where we've sold that forward.

Now, as we get into the later in the year, in fact, we'll do order writing programs for the next season in combines, they start in the near future.

And we then deal with the -- so as we have the old orders roll off, those will have the protection, the new orders will be priced to accommodate these costs of materials.

Okay.

And of course, as Harold already mentioned, we've taken price increases and surcharges immediately on products where we don't have that commitment.

I see.

And one final thing, Rubin.

As you were going through the outlook, the market outlook for the year, you mentioned North America ag equipment remains robust, but with the large tractors down 0% to 5%.

Seems to be a negative revision from prior expectations.

That doesn't sound too robust.

Could you clarify that?

Well, first of all, the overall tractor market will not be robust.

We're not talking about a big increase there.

The --

The overall down 0% to 5% is really driven by the 40 to 100 horsepower category, where we've seen weakness in the first quarter, particularly through the livestock and dairy segments, where the high corn and grain prices are really hurting them as far as input costs.

But we do expect to see a lot more strength in the over 100 horsepower category, where that segment of the market is probably going to be up in the range of 10% to 15%.

And in that segment, we -- between Case IH and New Holland, where we both have a presence in the high horsepower market and in combine, we'll benefit, disproportionately to a decline in the small horsepower tractors.

So from a CNH perspective, it's robust.

Great.

Okay.

Thank you.

We take the next question from John Buckland with MF Global.

Please go ahead.

Morning to you, sorry.

From MF Global.

Hi, Al.

Just a bit of an off-the-wall question, a little bit.

There's been some talk about cooperation with Iveco, some -- maybe a long-term plan to start up truck sales or manufacturing.

This is something that's not really been talked about by CNH management.

I just wondered if the CNH management there have got anything to say about what the Fiat Group have suggested might happen in the future on the heavy truck side.

To your specific question, obviously CNH management consults with them, but I would suggest this is a question you direct to the Fiat Group.

Right, okay.

Clearly, obviously, we will do the right things for the Group and for CNH, but your question here is something -- it's preliminary and it's something I would direct to the Fiat Group.

But there have been discussions, though.

That's the first thing, just to establish that you have talked about it.

We are always exploring opportunities to increase our efficiencies or enhance things as we deal with the Fiat Group.

They have a great presence and we're using their procurement operations.

We lever them a great deal on systems.

I won't go into any other detail on that and I suggest you talk to the Fiat Group.

Okay.

And just on these bottleneck issues, you talked about tires.

Maybe wheels is another thing.

But are these the only components?

Are there other -- what are these components where you've got supplier constraints and -- presumably, if the market is strong in certain categories and you've got shortages, and you say it's affecting everyone, then isn't there a greater ability to pass on these costs to the customers, if they really --?

Some of these -- sorry, I interrupted you, but finish -- please finish.

No, I'd basically finished.

Some of these things are common to everyone.

Tires is a good example.

Nobody does -- in the industry does their own tires, so that's common to everyone.

A couple of the other areas in which we're facing constraints are castings, which tend to be common.

But some of the highly machined components, there's a different degree of verticalization in various players in the industry and even in our own shop between different products.

And some of those areas, it takes a little bit more time to ramp up increased productions because of the tooling involved.

And those would disproportionately, in the near term while we ramp up, have some impact.

So is it --?

But to answer your question relative specific to pricing, we are looking for every opportunity that we can where we have strong demand and supply constraints.

Right.

And all of these costs, you're suggesting by the end of the year all the constraints will be gone and therefore this is why you're suggesting that the final two quarters will be significantly stronger than the first two quarters.

Is that what you've intimated?

I will go back to just our fourth quarter call.

Mr.

Marchionne mentioned there that some of these costs you can't remediate even in two or three quarters and some of them will take a little longer.

But certainly, as we go through the year, we will see progress on all of them.

And so will we be done with the efforts to streamline, become more efficient and resolve some of these bottlenecks?

No, but we'll make significant progress in that direction.

Okay.

Great.

Thank you very much.

We are moving on to our next question from Xavier Smith with Calypso Capital.

Please go ahead.

My question's been answered, thanks.

We'll take our next question from Ted Richardson with Merrill Lynch.

Please go ahead.

Hi.

It's actually Andrew Obin.

A couple of questions, first on raw material costs.

Talking to your suppliers on the steel side, do you expect or is anybody bringing up the topic of breaking off contracts and just raising prices?

There are always talks about raising prices and it depends on the length of the contract.

I couldn't get any more specific than that at this point.

But are they being more aggressive given the recent -- let me rephrase it.

Are they being more aggressive given recent price increases in February?

The answer is everyone who's got a commodity in short supply is being more aggressive.

On another question, just looking at your forecast on the construction side for North America and Europe, I guess, listening to other companies, it seems that people are saying that North America is -- I guess things are getting worse at a slower rate.

But looking at your forecast, it seems the decline is accelerating.

Could you give us more color?

And I apologize, I missed the first couple of minutes of the call.

What are you seeing?

Is it just because of your exposure to small and medium contracts in particular that you're seeing this or is there something else going on in the industry?

Again, when we talk about the industry -- Harold?

Yes.

This is Harold, Andrew.

Let me answer that.

We're actually assuming that the declining slope will improve as we move into the second half of the year, because in the first quarter heavy equipment in North America was down over 28% and light equipment about 24%.

So overall, heavy and light was off about 25% in the quarter.

And in terms of -- okay.

And what about Europe?

I guess I was a little bit surprised, if I'm looking at my numbers correctly, that everybody else is talking about slowdown in Europe and it looks like your guidance has improved on the margin for Western Europe, if I'm correct.

Well, what are you -- which markets in particular?

Is it Germany and Eastern Europe, or what else is going on?

Well, Andrew, I think that we had a much more conservative outlook than anyone else did three months ago.

And what we've seen is that, in the first quarter, the market in Western Europe performed a little bit better than we expected.

The light market was down about 3%, but the heavy equipment market was up about 16%.

So for our full year outlook, we are still looking at the light equipment in -- we're looking at light equipment now to be flat to up and heavy equipment to be flat to up, which is an improvement from our last forecast.

But it's really based on what we're seeing in terms of the individual country strengths.

And for the full year in total, we think that we're probably going to see continuing strength in France and Germany, which will offset weakness elsewhere.

And just a final clarification on North America, and this will be my last question.

What is the level of over/underproduction on construction equipment relative to retail sales that you guys envision in '08?

(Technical difficulty) question is North America.

We are moving on to our next question from Steven Volkmann --

No, hang on.

No, just one second.

Al has the answer, but he wants to be specific versus --

No problem.

That's fine.

-- general.

Just take me a second here to find it.

Well, we could go on and then come back to Al to answer the question.

Yes, that's fine.

Thank you, guys.

Okay.

So let's take the next question, please.

The next question is from Steven Volkmann with JP Morgan.

Please go ahead.

Mr.

Volkmann, your microphone is now open.

Thank you.

Good morning.

Can you hear me?

Yes, we can.

Hi, good morning.

So just a couple of quick follow-ups.

I think you mentioned something about some kind of low-cost financing that you were doing, and I'm sorry I missed the details but could you just elaborate on that a little bit?

Absolutely.

We mentioned that one of the pricing pressures we're facing was the increase in low-rate financing in the construction equipment in North America.

We alluded to this at the fourth quarter.

We had just seen some competition start to expand low-rate financing into the heavy end of the construction business.

Traditionally, it had only been in the light end.

That extension of low or zero rate financing for 36 or 42 months into the heavy equipment was the primary contributor to the pricing drop -- and again, we measure pricing net of any of these low-rate programs -- in the quarter.

Great.

And that was North American construction only?

Yes.

Now, there are other financing programs out there, but the area that is a change that reflected in our pricing in the quarter was in heavy in construction.

Okay, great.

That's helpful.

And is there anything going on with respect to your construction receivables and charge-off rates and non-performers and so forth that we should be sensitive to?

We are seeing, actually, continued reasonably good performance in our construction portfolio in the over 90 day category delinquencies, which is our primary measure of the portfolio performance.

There has been some degradation in the over 30, but we have adequate systems and processes and we stay right on top of that.

And so, monitoring that closely, we've not seen much change in the over 90.

Okay, great.

And then, I'm just trying to square what I'm hearing from you guys versus what I'm hearing from other folks in the industry.

We really haven't heard a lot of issues with supply chain constraints and parts availability and so forth.

Do you think -- as you talk to your suppliers, are you using suppliers that are perhaps different than some of your competitors, do you think, or is there some reason that you might be getting less allocation than they are, or --?

I guess I'm just trying to figure out how to square this, something that looks sort of CNH-specific, as we talk to other folks.

I can't obviously answer for other folks.

We do know that some of these shortages are very common in the industry.

We -- tires is an example that we see everywhere.

In some of the other components, we were asked earlier about had somebody made a longer commitment or committed to higher volumes.

I can't address that.

They could have and therefore have some prioritization in allocation.

And there can be some cases where someone has done some more -- is more vertically integrated and they produce inside, where we're dealing with a supplier.

So it could be any of the above.

Okay, great.

Thanks very much.

Okay.

Before we go to the next question, let me go back to the question asked by Andrew Obin for our construction equipment underproduction in North America for the full year.

And the answer to that is, in total, we expect underproduction in the range of 10%, which will probably be a lot more than that on the heavy equipment and probably in the range of 5% for light equipment.

I hope that answers your question, Andrew.

If not, why don't you get back in the queue and we'll do it again.

Okay, operator, let's go on to the next question.

But Andrew, that compares to 5% underproduction worldwide, underproduction in the retail.

We are moving on to the next question from Nick Bos with Calypso Capital.

Please go ahead.

Morning, guys.

Good morning, Nick.

I've got a question about the existing capacity under the credit facilities and asset-backed facilities you guys have now.

It's $3.4b at the end of the first quarter, is that right?

That sounds correct, but let us -- hang on just one minute.

While we look that up, is there any other questions?

Sorry, I didn't want to cut you off, Nick.

Go ahead.

So I guess the remainder of the question is, if you guys continue to grow accounts receivable at the same run rate as the first quarter of '08 and the credit markets continue to be -- I guess fluctuate and the ability to tap the ABS markets is constrained, what are the additional sources of funding you guys are looking at?

And I guess, related to that, what's Fiat's appetite to continue to provide funding?

Is there any --?

We won't speak for Fiat's appetite, because obviously there are specific commitments.

We are a key member of the Fiat family, of course, and we'll always be working with them.

But let me just step back.

Yes, we had $3.4m available of credit lines and asset-backed facilities -- billion, $3.4b at the end of March.

And that is open capacity in those combined lines.

Then, going back to your question, we did do an ABS transaction in the first part of April, as we found the market to be more receptive and as we started to get what we felt was a better reception for the high-quality assets that we have to sell.

In the ag equipment portfolio particularly, we had some very attractive assets that the market did give us a much better valuation for, so we went ahead and did a transaction.

As we go forward -- and I could introduce Mr.

Casalino, our new Treasurer.

He can tell you a little bit about what we are doing.

But we always try to maintain a variety of alternatives to fund the operation.

Marco?

Absolutely.

That's exactly what we're doing.

The ABS market, although it's not as liquid as the previous year, is still an interesting market for us.

And certainly we are monitoring it with attention and would be ready to exploit any opportunities on the market whenever they arise.

At the same time, we are interested in strengthening our choice of options and we're looking at the same time at our alternatives, like bank credit lines, private placement, a mix of receivables securitization and [on book] financing in the different areas of the world where we are active.

So certainly ABS market continues to be of most interest to us, but we are open to other markets as well.

Right now, we remain comfortable with our ability to finance the operation.

Right.

I guess it's just a very simple analysis and it's (technical difficulty), but if I just take the first quarter '08 run rate and assume that for four quarters and then assume that $500m of ABS deals are done per quarter, then you come close to tapping out the remaining $3.4b of financing, which is what drove the question.

Again, as we look at this, and Marco mentioned, we're looking at a variety of funding sources.

And we won't get into any specific transactions, but we have a variety of things we're looking at now that would provide incremental financing over and above the $3.4b.

And of course, we will tap the ABS market at such times and quantities as we find it attractive.

Great.

Thanks, guys.

Certainly.

And just a follow-up note on that, the detail on the credit lines and availability is included on slide 18 in the appendix section of the slide presentation.

Great.

Thank you.

That will conclude today's question and answer session.

I would now like to turn the call back over to you, Mr.

Trefts, for any additional or closing remarks.

Great.

Thank you, Lydia.

We'd like to thank you all for participating with us today.

And as usual, if you have any further questions that come up after the call, please don't hesitate to give me a call or send me an email.

Have a good day, everyone.

Thank you.

Bye, bye.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.