CNH Industrial NV (CNHI) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to today's CNH 2008 second quarter results conference call. For your information today's conference is being recorded. I would now like to turn the call over to your host today, Mr. Al Trefts. Please go ahead, sir.

Thank you, Elaine. And welcome everyone to CNH's second 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. Marco Casalino, our Treasurer.

In recognition of regulation FD, we have provided public guidance in this morning's press release on which we will elaborate in today's call. After this call guidance will not be updated until CNH issues a press release on the subject.

During the course of today's presentation and in answering your questions we will be making some forward-looking statements concerning the Company's plans, projections and objectives for the future. 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 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 live webcast over the internet are being recorded for future transmission. Contents are the property of CNH Global N.V. 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 the earnings call.

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

Thank you, Al. Good morning and good afternoon everyone. I realize it's quite early in the United States, certainly on the east coast but even earlier in the west. So for those of you joining us, thank you very much.

I'd like to start today from page four. And I'd like to start first by saying it's great to be in a good industry. CNH is reporting its best top line ever, best quarterly earnings per share, its best operating margin.

During the quarter pricing actions more than offset higher input costs and actions taken earlier in the year and during the quarter took effect partially earlier and partially during the quarter. And the effect of those will continue to grow as we go through the year.

Agricultural Equipment gross margins benefited from those price actions and offset a decline in the Construction Equipment margins in the quarter. Net sales overall were up 29%, with sales in Agricultural Equipment up 38%. We had increases in all regions. Net income was up 52%. That's a record for us to be at $347m, and that's also up 42% for the half year.

The increase in operating profit drove an increase in our diluted earnings per share and we reported $1.48 in the quarter. This is compared to $1.04 last year. First half earnings per share before restructuring, net of tax, are at $2.01. That puts us solidly on track to build our full-year outlook of $3.40 to $3.60. You'll note that we have increased the bottom end of our range and narrowed it by $0.10.

Turning to page five, we'll talk a little bit about the continuing improvement in our operating profit story. Full year price -- full year -- the first year, the first -- excuse me, first of year pricing has added to our margin. And the cumulative effect of this margin is adding $107m during the quarter. During this quarter we announced a 5% increase. This takes effect at various points during the quarter. And as we go through the year it will compound to that amount.

The effect in the quarter was $107m, which was partially offset by $68m for economic currency costs and materials and left us a net price recovery of $39m. This compares to $25m in the first half -- our first half, and you can note the trend there that in the second quarter we were $39m and the first half was $25m, so we are seeing a favorable trend as the year develops.

During the quarter we controlled our SG&A to grow at a rate less than our revenue. So we've seen SG&A decline as a percent of revenue from 7.9% to 7.5%. These factors combined contributed to the 33% increase in operating margin in the quarter and 29% in the half.

Looking at page six you can see that operating equipment -- Equipment Operations operating profit increased from $441m in 2007 to $585m in 2008. This $144m increase in operating profit came from $229m of volume and mix, and $107m of pricing that I referred to moments earlier.

Offsetting that are purchasing and materials product cost purchasing, about $48m, some increases in SG&A and R&D, and you'll note that we're continuing to invest in our business as we grow. And we're investing in customer care, network development, systems and processes so that we become easier to do business with and so that we can better operate our business. We had in the other category favorable movements in warranty and negative effect of currency on the transaction side of the operation.

Bottleneck costs, you've heard us refer in the past to industrial inefficiencies. I will talk about that as I go to the next page. Overall, this improvement is something that we are quite proud of. If you look at the pricing in the bottom right-hand -- bottom left-hand corner of the page, you'll see that price offset purchasing and economics and left us with the positive recovery we talked about earlier. All in all, a record operating profit margin of 11.1%.

Speaking of the bottleneck costs, we thought we would update you on industrial optimization at CNH. We have a number of issues and we've talked about them in the past. We have increasing costs due to supplier constraints. We have issues of our own capacity and we are temporarily outsourcing to deal with those and incur higher costs when we outsource those needs to third parties. We've had a capacity constraint and operational challenges due to the load in our factories as we run at or near capacity. And internally we've had some manufacturing bottlenecks.

What are we doing with those items? Well first we're working with all of our suppliers. We are investing in the suppliers. We're signing forward commitment agreements wherever it's appropriate and prudent. And we are working with them to develop the appropriate tooling and quality capacity to deliver our needs. To deliver on the volumes internally, we're investing to debottleneck our own facility. We're investing in tools, painting, actual raw square footage to give us the ability to increase our capacity and run more efficient operations.

During the quarter we announced that we were re-opening our Sorocaba, Brazil facility. We're actually in the process today of getting that ready to reopen and when opened it will increase our capacity substantially in that region for high horsepower equipped tractors and for combines. At the same time it will allow us to improve our efficiency in our other operations as it allows us to make them less complex and we will receive benefits both in volume and efficiency across the region. And, as we've talked before, we're improving our own manufacturing in addition to the capacity debottlenecking by using world class manufacturing in concert with the Fiat Group.

If I look at second quarter Agricultural Equipment industry on page eight, again I'll comment -- my first comment, it's a great thing to be in a good industry. Agricultural Equipment trends are very good. The tractor and combine industry is up 8%. The tractor industry alone is up 7%. Down 3% in North America but up in most of the rest of the world, up 31% in Latin America, for example. Brazil is up almost 50%. Combines are also up substantially, up 31%. The largest contributor to that growth is also Latin America.

In the tractor business we gained share in the quarter. In the combine business we lost some share in the quarter. This was a function of our limited ability to produce units in the quarter. We expect that we will solve some of those production issues as we go through the year.

During the quarter Agricultural Industry supported our revenues and we grew $700m for volume and mix and new products, $228m for currency, and $66m from pricing.

Looking at the first half, just a couple of brief comments. We again were favorable in market share. In tractors for the first half we were flat in market share in the first half. Based on these movements our revenue in the first half in Agricultural Equipment grew 38%, $1.2b for volume and mix, $428m for currency and $95m for pricing. Again you'll note the increase in pricing sequential quarters.

Turning to page 10, the second quarter trend of Construction industry -- Construction Equipment industry volumes, you'll notice that we've seen a softening of the markets in Northern -- in Western Europe. Also the trend in the North American market has continued. However, industry sales were up 23 -- we were up [23%] in Latin America and 16% in rest of world markets. On its own, China was up almost 45%. Industry unit sales of heavy equipment were up 11%, with sales of light equipment down 11%. Within the light equipment category the backhoe loader market was down 5% driven primarily by North America and Western Europe. But the backhoe loader market in Latin America was up 17% and up in rest of the world markets.

The skid steer market was also down 5%. But markets in Latin America were up 29%, led by Brazil. And rest of world markets were up 26%. But these positives did not offset the declines in North America, down 10%, and Western Europe, down around 37%.

In Heavy Construction Western European markets were up in Germany and France, but most of the rest of Europe was down. The Latin American markets were up, again driven largely by Brazil. Our worldwide market share for total light was flat in the quarter, we were down for heavy.

So we will again just summarize what this means for us on a revenue basis. Construction Equipment sales grew about 10%. That was largely driven by currency as far as the revenue line. Net sales did, however, increase in every region except Western Europe. Pricing was favorable in all markets totaling $41m. Volume and mix added $35m.

On page 11 you'll note that on the first half light equipment and heavy equipment share was flat for the period. What that did to our revenue, we saw an overall increase of 8%, which was largely accounted for by exchange rates. Net sales in Latin America and rest of world markets were up substantially and offset the decline in the other regions. Currency variations added $234m, pricing was favorable by $30m, and volume and mix were unfavorable by about $82m.

Now one of the important differences between CNH today and CNH of the not-too-distant past are the tools we're giving our brands. We've already mentioned some of them. Investments in network, investments in customer care, improved industrial operations, systems and processes.

On slide 12 I'm going to talk about another important factor. We're giving our brands the product portfolio they need to compete in the market. Highlighted in the press release this morning, the new Case IH Quantum 65C and 75C utility tractors, the New Holland 523 horsepower CR9080 Twin Rotor Combine which was launched in North America. And we've got some additional products here including the mid-range Case IH combine which we'll launch later in the year, and a new bidirectional tractor in the 100 and 140 horsepower class, a product unique to the New Holland brand.

On page 13 we're continuing to add the tools and products we're giving our brands on the construction equipment side. In the quarter New Holland launched the new E485B Crawler Excavator, and Case launched the new Series E compact wheel loader. And we'll be launching additional new products in the coming months. A new wheeled excavator from New Holland [for Delta], a new hydraulic excavator from Case which features [tier 3] engines and emission upgrade. All of these products are configured to allow our brands to succeed in the market.

On page 14 our industry volume outlook. We expect worldwide Agricultural Equipment industry unit sales to be flat to up 5%. We expect tractor industry sales over 40 horsepower to be flat to up 5%. Within that, high horsepower tractors in North America are expected to remain robust. Over 100 horsepower tractors up in the range of 15% to 20%, helped by high commodity prices, particularly corn, wheat and soybeans. We will see continued strength in the under -- or continued weakness in the under 40 horsepower market, which we expect to be down perhaps as much as 15% to 20% for the full year, impacted in part by continuing weakness in the residential markets -- residential housing markets.

Also supported by high agricultural commodity prices, industry sales of combines are expected to be up throughout the world. In total, approximately 30%, led by strong markets in Latin America and the rest of the world.

Turning to construction equipment, we now believe that total light equipment industry unit sales in 2008 will be down 5% to 10% as a downturn in the Western European market and a softening North American market have tempered our outlook. Our heavy equipment market outlook has improved slightly but it's still in the up 5% to 10% range. Growing strength in Latin America and rest of world markets and a slight reduction in the decline in the North American market are offsetting our change in outlook for Western Europe from our up slightly, which we mentioned last quarter, to our current view of down 5% to 10%. Overall we think the construction industry will be flat to up perhaps slightly.

On page 15 you can see some of the Agricultural Equipment unit volume trends that we expect in the coming year. The preliminary outlook for 2009 is for continued growth in key areas. While the worldwide tractor industry unit sales are expected to be comparable to 2008, continued strength in higher horsepower units in North America and markets outside of North America are stable to stronger than this year. Again, we expect the under 40 and perhaps the 40 to 100 to be softer. The sales of combines are expected to grow robustly, continuing the trend we saw this year.

On page 16, our view of the future of the Construction Equipment industry is very similar to what we've seen in the second quarter of this year. We expect to see continued weakness in North America and Western Europe, mitigated by continuing strength in Latin America and rest of world markets. In total, the heavy and light markets should be about the same level as this year, potentially up as much as 5%. You will note on these charts, particularly if you look at Western Europe and North America, although the industries are off they're still remaining at very high levels in historical terms.

On page 17 our Equipment operations change in net debt or, in our case, cash. Equipment Operations net cash in the second quarter and for the first half of the 2008 to the comparable periods of last year. We have focused or are focusing on the quarter, $819m of cash was generated by operating activities as earnings and an improvement in working capital and seasonal decreases in other net assets and liabilities were all cash generators in the quarter. Net working capital improved in terms of days of sales.

And speaking of working capital, our worldwide estimated dealer and Company inventory or dealer and Company tractor and combine unit inventories at quarter end on a forward month of supply basis were 2.9 months, down one half month from a year ago. For Construction equipment, estimated dealer and Company inventories on a forward month of supply basis were 4.1 months, up slightly from the end of March and up about on half a month of supply from a year ago. We have announced production reductions in several Construction equipment factories, primarily in Europe, to reduce our inventories and forward months of supply.

We generated or we used $103m of cash for capital expenditures. This is part of our effort to improve the [amount of the] product portfolio, improve capacity, remove bottlenecks and address operational efficiencies and to improve our systems. Net of these factors and the $118m dividend to shareholders which was double last year's level, we had a $623m increase in net cash, giving Equipment Operations a net cash position of $829m at quarter end. For the half our cash position improved by $343m.

Also of note, during the quarter we've completed two retail ADF transactions totaling $1.2b in our CNH Capital subsidiary. These transactions, and a renewal and extension of approximately $1.9b of credit facility, provided liquidity to support the ongoing growth of our financing and the higher levels of retail demand for Agricultural Equipment and Construction Equipment throughout the world.

On page 18 you can see our outlook for earnings per share for the full year. We now expect our revenues to be up around 25%. This is the top end of the range we gave last quarter of 20% to 25%. We expect our full year operating margin to be approximately 9%, close to the same level we achieved in the first half of the year. We will continue to invest in new products, capacity and enhanced processes while leveraging our global footprint, including the re-opening of Sorocaba, investments in Agricultural and Construction equipment products, systems as we grow the earnings.

As I said at the beginning of my comments, we are narrowing the range and we have reduced the range to $0.20 and are now expecting net earnings per share, net of tax, to be $3.40 to $3.60. And that compares to $2.61 last year.

That completes my comments, Al, and I'll turn it back over to you.

Thank you, Rubin. We're now ready for the Q&A session. Before we start though I'd like to remind everyone to please try and limit themselves to one question and one follow-up so that we can accommodate as many questions as possible. Elaine, could you get the first questioner, please?

(OPERATOR INSTRUCTIONS). We will take our first question today from Ann Duignan of JP Morgan. Please go ahead.

Hi. Good morning, guys.

Good morning, Ann.

How you guys doing? I guess I'll start my question. Your outlook for revenues is at the high end of your prior guidance, so about $19b in revenues expected. I'm just curious as to why you didn't raise the top end of your outlook for earnings? I would have expected you to kind of put a bell curve around $3.60 instead of $3.40 to $3.60 given your confidence and the good second quarter you've just delivered. Can you talk about your outlook and why you didn't raise the earnings by more?

Yes, a couple of things, Ann. First of all, we are, at this point, at $2.01, would be -- if we look in historical terms we typically earn between 57%, 58% of a year in the first half. This would put us right in the middle of our range as we're giving, just looking at the balance of the seasonality in our balance.

We do expect a very strong second half in Agricultural Equipment. Construction Equipment we are expecting some softer business. And, as I mentioned in the call, we've announced some reductions in production plans particularly in Europe to deal with reducing our days of inventory in Company and dealer inventory. That could be in the range of production compared to retail down in the almost 20% range as we deal with the inventory and our expected outlook for the European business in the second half. And given the uncertainty in material costs we feel that this is a good range and we're comfortable with the range, and we think that we'll end up in there.

Okay and that makes sense. I think if I look at your charts on slide 16, particularly if I look at Construction Equipment Western Europe, it looks like you're showing a very steep decline in '08 in light and heavy equipment sales. And you're saying that for the back half you could be down 20% more than the industry. Is that how I interpret that?

No, you should interpret that -- what I said is we're taking down the production plans by 20%. And that is not -- our sales will be down more than the industry, but our production will be down as we reduce inventory.

Okay, okay. So you're not looking [8%] down in retail sales and you're down an additional. Okay, I think I understand that.

Yes, we are not expecting to be down more than the industry as far as retail sales.

Okay. And then my follow up question is on your financial services business. Can you talk a little bit, particularly on the Construction side, can you talk a little bit about past dues and loan losses and reserves and anything that you might be seeing in North America? And could we expect things to worsen in Europe just given how quickly the Construction markets are falling, particularly in places like Spain and Ireland?

I won't comment on Ireland specifically. But as we look at the portfolios we're seeing two offsetting trends. We are seeing some increase in delinquencies in construction equipment. One of the metrics we measure is over 90 days. And we've see about -- an increase by 1 point or 1 percentage of the portfolio in that category.

On the other hand, we've seen improvements in our Ag portfolios, and our wholesale portfolios globally are doing very well. Both, particularly in the Ag, of course, but the overall average, our weighted average is very good. So if we look at our combined business we're not uncomfortable with the business.

We adjust and we look at reserves of course every quarter, every month, and we feel like we're comfortably reserved, appropriately reserved, for the delinquencies we see right now. And, as you know, many of our receivables are in asset-backed transactions. And those portfolios are performing reasonably well.

No increase? Sorry I didn't mean to [interrupt].

And I was going to say, concerning Spain or Italy, trying to answer the rest of your question. We're not -- or Ireland, not Italy. We're not going to give specific details at the country level. But clearly as the European markets slow down we've seen some increases in delinquencies. Primarily that would be in wholesale because many of our retail assets are joint ventures managed by other parties and they hold the assets.

Okay. And just you said that your delinquencies on the construction side are overall increased by 1 point. Can you tell us what the actual is for the Company?

I could not right now, Ann.

Okay. I'll get back in line. I do want to circle back with a few more questions. Thanks.

Certainly.

Thank you. We will take our next question from Mark Koznarek of Cleveland Research. Please go ahead.

Hello. Good morning.

Good morning, Mark.

I've a question on your bottleneck costs. And I imagine that these, what you're referring to as bottleneck in the first quarter you had is, I think, manufacturing inefficiencies. But the question is the momentum of those costs seem to be moving in a positive direction, looks like $68m in the first quarter and now $50m in the second quarter. Could you offer any kind of insight as to what we should expect in the second half and when those costs would likely to become a more immaterial part of the overall cost structure?

Yes, we expect continued improvement as we go through the year on those costs. And when we talk about them, we're talking suppliers, spot buys to cover supplier shortages, we're talking about just temporary outsourcing. As we invest with the suppliers, as the tools come on board, as the paint lines that we're installing become -- are put on line, we reduce the outsourcing, we reduce the spot buys and we reduce these bottleneck cost that we're talking about. And some of the associated expedite costs.

I won't give you a specific number. But I will say that as we look at the trend we expect it will continue to improve. As we look at the business we expect that these kind of costs would be about 30% in '09 as what they are in '08. That said, we won't solve them this year but we'll certainly have made a significant dent in them. We expect improvement in the next two quarters as well.

Okay, good. That's helpful. Then I'd like to ask about the outlook slide -- that is slide 16. Because you're now offering 2009 [stocks] for some of the markets. And the Construction Equipment outlook is pretty interesting in terms of further declines both in North America and Western Europe. I'm wondering if you can review some of the macroeconomic assumptions that underpin those forecasts for Construction Equipment.

The -- I'll comment first on North America. And that is very much being tempered by our view of housing starts. And basically our -- that is the number one factor. And then we're, of course, looking at GDP growth and other factors. But the biggest use, the biggest driver for us in North America is housing starts and its ripple effect through the industry.

In Europe I can't point to housing starts as so far we've certainly seen trends in construction that are declining, but particularly in -- it started in Spain, Ann mentioned that in here question. We've seen it in some, particularly more in the south. But we've seen other countries slowing and we think it's a trend that will continue. Again we're looking at some GDP and construction more than housing per se in Europe. But those are the two big things we're looking at, Mark.

Okay. I understand that there's some pretty significant price increases planned as we talk with your dealers on both sides of the business. Do these forecasts include the possibility of demand destruction based on a significant price increase for '09?

These outlooks do include our view of pricing. We do -- we have seen significant increases in steel, natural rubber, oil, as have many industrial entities, and we are pricing to offset that. And we are building our view of the industry to accommodate those prices.

Okay, that's great. One clarification please. When you answered Ann's question, the increase in past dues, is that versus prior quarter or a year ago?

That's a year ago comparison.

Okay, thanks very much.

Thank you. We will take our next question from Terry Darling of Goldman Sachs.

Thanks Rubin. I'm wondering if you could update the outlook for '08 for CNH capital profits. Previously you talked about a 20% increase.

And then can you also talk about how you're thinking about financing the business over the balance of the year, including any comments on access to ABS markets?

Certainly. The 20% I would stick with. I think that we're not surprised by the results in the second quarter. We don't expect that same kind of jump in subsequent quarters. So the range, 20% range is one I'm still comfortable with. I wouldn't change it.

As far as financing, we did do the two ABS transactions in the first half and -- or in the second quarter. And I do need to just -- one clarifying comment, when I mentioned in my comment $1.9m of credit lines, I should of mentioned credit and conduit facilities. They're much the same thing, but just clarify that.

As far as how we finance ourselves during the second half of the year, right now we're looking at the same tools we've used in the first half. We've had some success in the ABS market. We expect that to continue. We would expect to continue issuances in the ABS market in the very near future. And we are working with bank facilities and also with Fiat to finance the operation. We'll continue to do those. We continue to look at alternative sources. But this point we've not had any pronounced difficulties in financing.

I'd rather not go any deeper into financing at this point. Sorry, Terry, go ahead.

Okay. No, that's helpful. I want to switch back to the pricing question on the equipment operations and just to get set in my mind here. If we assume that as we roll forward the initiatives that you've implemented here take hold by the fourth quarter, on a year-over-year basis, what are we looking at there in terms of percent year-over-year improvement, if we sort of roll all the various initiatives together? Can we just talk about the about the Ag side in that context please?

What I'd rather do is stick at a total enterprise level. For second half versus first half we would expect about $300m in pricing.

Okay. And then Caterpillar had announced a January '09 increase in construction equipment yesterday. Is something that you're looking to do as well as early in '08 as they are doing, or do you look to see how the market plays out as we move along?

Terry, this Harold. Both for the agricultural and construction equipment brands clearly we've been first mover, recognizing the input costs are increasing. And we will continue to monitor the market position and the costs. And we will continue to, if you may, lead in taking the necessary pricing action to recover any unforeseen costs.

And then lastly, Rubin, it may be helpful if you could give us the same second half versus first half comparison on just the raw material inflation?

Right now as we look at it it's going to be -- I'm going to use the $150m to $200m range.

Okay. Thanks very much.

(OPERATOR INSTRUCTIONS). We will take our next question today from Andrew Obin of Merrill Lynch. Please go ahead.

Hi. How are you? Just a clarification on your costs. How should I be thinking about costs flowing through P&L given that you're using FIFO and how much inventory you guys have? Should I expect -- should I be thinking that in second quarter we did not really see much of the impact from rising costs in the second quarter, just from how accounting works, is that the right way?

I wouldn't say you didn't see much of the material cost. Certainly as we run FIFO it tends to delay the impact. In my view what it's done in fact is made it so it lines up very well with the pricing. As we introduce new pricing we often have a delay due to contractual obligations or commitments in various countries or price increase, [even sell] programs. So yes, we will see some more material costs in second half, and yes we have the FIFO favorability, but in all it's just lining up the price increase with material cost.

Got you. The second question I have, what's your -- what do you think is going to be net cash position for CNH by the end of the year?

I'll look that up if you have an additional question. Yes, we'll turn that over, frankly, to Mr. Casalino.

Marco, are you there? He must have dropped off the line.

Right. I can't answer that question right now.

Should I -- I guess should I be thinking about your net cash position, you've done a very good job on cash flow, should I be thinking that that carries over to second half of the year or there's a payback on working capital?

You should think that we will continue to manage that through the year and there'll be a payback on cash flow as we manage the components of working capital, yes.

Okay. And finally for your Ag business, how big is Russia and Eastern Europe for you in terms of percent of revenue? What kind of growth are you seeing in those markets?

I've got someone looking that up right now, Andrew. It's a very important piece of the business to us. It's growing rapidly. But I don't have it as a percent of total.

Just that to an aside on that, very recently we've been increasing our focus on what we call the -- we've created an international business to increase our presence in Russia and some of the other key markets. And we've recently opened what we call a hub in Russia and staffed it up to deal with that business. And we're adding a parts operation there as well so we're much more able to deal with the local business on a timely basis. So we're seen some robust sales. But I can't give you the number. I don't have it right here.

Let me get back to you on that, Andrew.

Is financing an issue, because we've heard that a year ago financing was a big issue in these regions? And how is it working out now or are people just flush with cash now?

Well, there is some flushed with cash purchasers who are out there, quite few of them. I would say in what we're considering rest of world markets there's always opportunities where financing exists to help. This is one of the benefits we have by being part of the Fiat Group is that they are also going into these markets and working on financing packages and plans.

Do we have everything in the [kit bag] we'd like right now? No. But are we working on financing? Yes. It has not been an impediment at this point.

Thank you very much. And I'll follow up on cash and thank you very much.

Thank you. Our next question today is from John Buckland of MF Global. Please go ahead.

Thanks for taking the call. I just didn't understand this, what you said about leading the pricing actions. Obviously I should think CNH is known to be a price leader, but perhaps you can characterize where you are in relative price and how you have been a leader and continue to be the leader? The Caterpillar price increase did seem to be quite a long way in advance of actual price increase.

Yes, I can't speak to what the rest of the industry is doing. But certainly we, and also because of the benefits of the Fiat Group, are staying very close to the material cost increases that we were seeing.

And when we saw those escalating on in the first quarter, and in our belief no immediate relief of the material cost, we took action that we deemed appropriate March and April. Costs continued to move. We looked at it in June and took a further action. So when I say lead, we're leading. We made a commitment to recover our material cost and we're doing that. So it's being driven by our management practice.

Right, so can you just -- what were the -- remind us what the price increases were in March and April and then in June.

Rubin, you may have an average, but it varied globally and it varied by product line. But effectively it was 3 and 5.

Right. And you're expecting further increases in the second half in a similar magnitude then given -- or even higher given what Caterpillar has done, or announced they're going to do?

Caterpillar for sure operates in part of our segment, but also in mining and other industries that we're not operating in. But we will continue to monitor the market, the material increases and we'll respond accordingly.

Right. Okay. And just to clarify, on that, when you said the bottleneck costs you said will be 30% of 2008 costs. So 70% down, is that what you're saying?

What I'm saying is if you took the total, if the total was 100, next year would be 30.

Right. Okay. Understand that. And then -- but how conservative are you being with that 30? Could we think about the second half being zero?

If is said I was being very conservative and I'd have to change my number, John. It's certainly something we think we can deliver.

Right, okay. Very good. Thank you.

Thank you. That will conclude today's question-and-answer session. I would like to turn the call back over to Mr. Al Trefts for any additional or closing remarks.

Thank you Elaine. And thank you all for joining with us this morning or this afternoon. And if you have any further questions, please don't hesitate to contact me. Have a nice day. Goodbye

Thank you, ladies and gentlemen. That will conclude today's conference call. Thank you for your participation. You may now disconnect.