CNH Industrial NV (CNHI) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to today's CNH 2009 first quarter results conference call.

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

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

Al Trefts.

Please go ahead, sir.

Thank you.

Welcome, everyone, to CNH's first quarter 2009 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've 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 forward-looking statements concerning the Company's plans, projections and objectives for the future that are subject to risks and uncertainties.

Please refer to this morning's press release and our Annual Report on Form 20-F for the year ended December 31, 2008, as filed with the US Securities and Exchange Commission, for additional information on 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 of generally accepted accounting principals of the United States, or US GAAP, of 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 and for use by CNH, Thomson Writers and third parties.

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

and are not to be re-recorded 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'd like to turn the call over to Rubin McDougal to make a few remarks on the quarter.

Rubin.

Thank you, Al.

Good morning and good afternoon to those who have joined us on the call.

Since our last earnings release in January, we've seen a very turbulent market.

We talked about, in our earnings release at year-end, that we expected a turbulent 2009 and indicated that we felt that the first quarter would be particularly challenging, and indeed it has been.

The CE market is off to a much weaker start than we'd anticipated in that call, and the agricultural market is also softer.

Overall, our revenue was down 25%.

When we split that into two pieces, the agricultural market was essentially flat, with pricing offsetting some declines in volume in some markets.

As reported, it's down 12%.

That is a function -- 10 points of that is due to currency.

If we look at the CE market, we see a different picture.

The overall market was down about 57%.

Our revenues were off about 54%, excluding currency.

So, as we look at the quarter on a revenue basis, overall, as I said, we are down 25%.

But we are feeling that we have more than offset the industry in many cases, in our pricings and our other actions, to make sure that we are delivering what we should be delivering over the course of the year.

If you turn to page five, we talk about equipment operations operating profit, a couple of key points.

The industry decline has largely erased prior-year operating performance in the comparable period.

Our volume number, at $195m, includes the impact of significant closures of our factories in the CE business during much of the quarter and a lowering of our production rates in agricultural equipment, about $35m.

Important for us is these actions were taken intentionally to maintain our working capital levels and to make sure that our dealer network had the appropriate levels of inventory going forward in this new industry in which we are finding ourselves.

Year-on-year pricing was favorable, almost to the tune of about $180m to $200m.

And this more than offset the impact of raw materials, transaction on raw materials and FIFO adjustments that caused us to report higher material costs, significantly higher material costs, than the year-ago quarter.

We will start to see those material cost impacts decline as we go across the year.

During the first and the second quarters of 2008, we saw limited impact in the highly volatile commodities market.

That impact increased as we went through the year.

This year, we'll see the inverse of that as we go through the year.

Product costs were held very close to the 2008 levels, which included some bottleneck costs.

Translation, largely the euro, sterling and real against the US dollar, reduced results by about $51m.

Exchange rates also had some impact in other areas, such as our whole goods exports.

We will continue to focus on SG&A through the year.

We saw a benefit during the first quarter, as we significantly curtailed projects around the world in every brand and in every region.

Those efforts will continue and in fact accelerate, in association with some other restructuring and reorganization actions we are announcing today.

In addition to the operating volume -- or the operating result decline as shown on page five, a couple of other comments.

CNH Capital had net results of about $50m lower than the prior year on a US GAAP basis.

Part of that is due to lower volumes, higher rates, but a bigger piece is due to the fact that we had an ABS transaction in the first quarter that had significantly -- a significant impact compared to the year-earlier period.

Equity earnings in our unconsolidated joint ventures were also down in the year.

Those were primarily driven by results in our unconsolidated construction equipment joint ventures.

And during the course of the quarter we saw a high degree of volatility in our tax rate.

You should expect that that volatility will continue through certainly the first half and start to smooth out as we exit -- or in the second half of the year.

Turning to page six and looking at the first quarter agricultural equipment industry, a couple of comments.

First, there is some additional detail in the appendix on slide 20.

We did see some volatility in market share.

Latin America combines is a good example.

In that case, as we exited the year, we saw a dramatic decline in volume.

We reduced wholesales, in order to maintain the strength of our dealer network and their liquidity.

And we'll see some volatility during the course of the year in those things, as we do continue to take actions to reduce dealer inventory.

This is true both in agricultural and primarily in the construction equipment side.

At these new lower industry volumes, we feel it's important that both CNH and its dealers reduce inventory, to protect our network and to protect CNH.

Inventory worldwide months of supply is up marginally from a year ago.

Tractors are at 4.3 months, compared to 3.8 a year ago.

Combines are up at 4.2, compared to 3.5 a year ago.

Important to note, in Q1 production of tractor and combines was up -- was 15% higher than retail during the year -- during the quarter.

This, however, compares to production that was 28% above retail in the first quarter a year ago.

Now, many of you know our business and know that we have -- the agricultural business is seasonal.

And so we always during the first quarter have higher production levels than retail, because we build product ahead for sale during the strong revenue months of April, May and June.

Turning to first quarter construction equipment, on page seven, the decline is dramatic.

And in fact, it was a substantially larger decline than we anticipated in our earnings call three months ago.

That's true in most regions, particularly in Europe.

We have reduced production.

We talked about this three months ago.

But we've taken further reductions, to make sure that again our network has the right level of inventory and that CNH has the right levels of inventory.

As we look at our current supplies, both in heavy and light, they are up two to three months versus a year ago and our continued under-production will reduce those levels of inventory.

In fact, one year ago in the first quarter, we produced at 118% of retail in the quarter.

This quarter, or in the first quarter, we produced 45% of retail.

So you can clearly see that, during the first quarter, finished goods in construction equipment were reduced, due to this under-production, in the total chain between Company and dealer inventories.

Turning to page eight, equipment operations change in net debt, a couple of comments.

The inventory increase was about $180m, about a $400m smaller growth than a year ago.

This reflects the impact of the two items I just mentioned, reductions in CE finished goods and increases in agricultural equipment, but smaller increases than the year-ago level.

During the quarter, our accounts payable also decreased significantly.

This reflects a trend in production that was going up a year ago and going down this quarter.

So we have about a $300m use of funds as we reduced accounts payable in the quarter.

Our receivables also declined about $100m.

Overall, as you look at the working capital performance at the bottom line, it largely reflects the net income attributable to the equipment operations.

A couple of notes, as well.

You'll note that we spend about $46m of CapEx in the quarter.

This reflects some investments that we are continuing to maintain in new products.

We are spending money still on factory efficiencies.

Those are important to us, because the agricultural business is cyclical and we want to be in a position to take full advantage on the next upswing.

We are selectively continuing to expand in capacity improvements, as some of our factories, and certainly some of our components, are still running at full capacity as we deal with selective demand in key markets.

Turning to page nine, I mentioned a few minutes ago that we are continuing to invest in areas where we think we have an excellent portfolio and a very good industry over the long term.

Case IH, as part of its preparation for the future, has just introduced in North America the Magnum 180, 190 and 210 product.

These are large row crop tractors which fill a critical gap for the Case IH brand in North America.

Also, just as an example there, this new product has the best operator controls in the industry, a shorter -- the shortest turning radius and is more fuel-efficient than the product it replaces.

And just while I am on this -- the areas of strength here, as we look at it the North American industry remains very strong in some key areas.

The combine industry is very strong.

Crop production equipment is forecast to be up about 20% in the year.

And four wheel drive tractors are another area of strength in North America.

Continuing on some of these key products that we have to position ourselves for future performance, on page 10, a couple of the new products being launched by the New Holland brand.

They also have some exciting new products that are filling key gaps for them, as they deal with an evolving industry.

The new BOOMER has the EasyDrive CVT, which fills a gap in their product line and just won a Silver Medal at the 2009 Paris Show.

And the T7000 is now coming out with a new SideWinder Armrest, which gives far better control and puts New Holland brand at the leading edge of controllability on their tractor product.

Turning to page 11, restructuring actions.

As part of this earnings release, we are announcing that we will be spending approximately $250m to reduce our costs and improve efficiencies.

This will include a consolidation of operations and a 10% to 15% reduction in our salaried workforce, and a specific review of the construction equipment business.

While we are doing this, we are paying close attention to the future.

I mentioned earlier, and I'll say again, that we are looking at this not as a reduction in permanent structure but as a way to get our structure aligned to the business and be able to grow when the industry rebounds.

We intend to make CNH simpler and easier to do business with, and we will not remove capacity necessary to handle volatile agricultural markets.

We expect that the impact of these reductions will be a $125m to $175m reduction in operating costs on an annual basis, once implemented.

Most of these actions will be implemented during the course of 2009 and it will happen at various times and various points during the year, as we work with our various constituencies.

We will be having consultations with Works Councils in Europe and with our employees around the world.

Getting specifically, on page 12, a little bit into the construction industry conditions, a couple of comments.

We have what we feel to be a structural concern with the construction equipment industry.

The profitability of our business has been significantly impacted by the financial and credit crisis and the overall reduction in industry volume.

The current and the future prospects, or certainly the medium-term prospects, for the construction equipment industry do not support our current structure, and require that CNH take a preemptive role in restructuring and reshaping its activities.

We believe that CNH can play a critical role as part of this view of the industry and dealing with the issues that are currently faced.

We do expect that the stimulus packages announced by various governments around the world will have effect, but don't expect to see some of the benefits of those lower costs until we get later into the year or into 2007.

We don't -- 2010, my apologies.

We have in the meantime taken actions to appropriately reduce volume and are using all of the available tools to keep production volume down in the US.

And our objective is to maintain and find a solution that puts a solid basis under our future growth.

Next steps in that process are listed on page 13.

Our objective is to find a sustainable level and a sustainable model for us to have a viable, vibrant construction equipment business, taking advantage of the strength of our two brands, Case and New Holland, streamlining the business, optimizing the use of our technology -- product technology across our platforms, and revisiting some of our industrial and commercial alliances and partnerships.

While we do this, our customers and dealers are foremost in our minds.

We are not prepared today to announce all of the outcomes of those analyses.

We do anticipate giving you an update as we come out with the second quarter earnings release.

What are we doing with the current financial environment -- or about the current financial environment, on page 14?

A couple of actions worthy of note.

We have reduced our CE company inventory.

We've reduced our dealer inventory.

We've reduced our production of construction equipment to be 55% (sic - see presentation) below expected retail.

Our AG inventory build was $340m, which we feel positions us well for the second quarter sales of AG equipment.

Our payables are declining, as I mentioned earlier, reflecting the lower levels of production.

And we've cut our capital spending to about two-thirds of the 2008 level of approximately $500m.

On the Financial Services side, we have completed $1.2b of new funding transactions in the quarter, including a $500m ABS transaction.

We have renewed a $1.2b warehouse facility for our dealer inventory financing.

And we are working with both the US government and Canadian government as they work on programs that are intended to improve liquidity in the ABS markets.

Certainly, in the US we now have assets on both the retail and wholesale side that are eligible for the TALF programs.

During the quarter, we did increase our risk reserves relative to performance in some key portfolios.

And we have created and are continuing to expand alternative funding for ourselves, and are working with our dealers to provide ongoing avenues and access to financing.

We have seen ample sources of funds in both the AG and CE markets to support retail of our dealers.

Commenting briefly on the portfolio, certainly the CNH Capital retail portfolio today has delinquency rates that are up versus a year ago, but are still below the levels of the 2002 period, when the prior peak in the CE delinquencies was hit.

Total receivables delinquencies over 100 -- over 30 days is about 4.2%, up from about 3% a year ago.

Turning to page 15, looking at our full year industry outlook.

You can see that on the agricultural equipment tractors worldwide we now expect unit volumes to be down 15% to 20%.

This is compared to a down 10% to 15%, as we began the year.

If you look at construction equipment, we now expect light construction equipment to be down 40% to 45%.

This compares to roughly a 20% down expectation at the start of the year.

And on heavy equipment, we now expect declines of 30% to 35% compared to 10% to 15% declines in our expectations at the beginning of the year.

We do believe that AG fundamentals remain strong.

We do also believe that the challenging financial and credit conditions will have an impact on the business, particularly in the second quarter.

We do also, as I mentioned earlier, see bright spots in the near term on some higher horsepower equipment, on some equipment that I mentioned earlier, in North America.

And we believe that these declines, if you turn to page two, you'll see -- or page 16, you'll see that in quarter two the declines are deeper than we show for the full year and they are not as deep as we showed in the first quarter, which means we expect an improving trend as we go through the year and we'll see smaller declines in the second half.

This is a function of the industry.

It is also a function of the destocking efforts at our dealers and our own Company inventory.

During the first half, which we should consider somewhat of a transition period, we are going to reduce volumes sufficiently to get our inventories in line, so that we are producing closer to retail as we go through the second half.

This is true in both agricultural and construction equipment.

We will also be implementing the cost reduction activities that I mentioned earlier, particularly as we talked about the structural organization and reduction in the salaried workforce.

We will be talking about the reduction in the -- we'll be talking to you in the next earnings release about the -- an update and next actions on construction equipment, and we will tell you where we are on finalizing our construction equipment plan.

As we look at the year, I mentioned already the tax rate.

It will be volatile as we go through the year but normalizing, or stabilizing, I should say, as we exit the year.

And we will see results -- or market comparisons become more favorable as we go through the year.

With that, I am going to end my comments and turn it back over to Al.

Thank you, Rubin.

We are now ready to begin the Q&A session.

We ask that everyone please limit themselves to one question and one follow-up at a time.

Operator, could you please retrieve the first question?

Certainly.

Thank you, sir.

(Operator Instructions).

We'll now move to our first question from Henry Kirn of UBS.

Please go ahead.

Good morning, guys.

Could you talk a little about market pricing and how rational it is at this point in the cycle, maybe compare AG versus construction and then regional guidance would be helpful?

First, I'll just take you back to page five in the presentation.

As we look at the pricing between AG and CE, I mentioned that we had about -- let's it call it $185m, or between $180m/$200m of pricing.

That was split about $125m -- well, actually, let me be correct, correct myself here.

That's primarily in the Case and in the New Holland agricultural brands.

Those two brands combined accounted for the bulk of that pricing.

And the construction equipment business, as you can see, had a smaller net price but also a smaller absolute price recovery.

If you split it out, in fact, it would probably be about $150m to $35m, something in that range and ratio.

And in CE we did not recover all of the higher cost of materials, including the effects of FX in the quarter.

Now, also, as you look at it regionally, certainly again, and we are talking year-on-year comparisons not price increases during the first quarter, the comparisons are far more favorable.

They are actually favorable all around the world in the AG business.

The CE pricing is most pronouncedly down in Europe, where the market did drop substantially more than any of the other regions.

Pricing in Latin America seems to be okay and Europe -- and North America is more stable.

That's helpful.

Thanks.

One quick follow-up on how should we think about TALF and how your participation in the program impacts the financial services business?

As you think about TALF, again, I mentioned that we qualify -- our CNH assets qualify for investors to buy under the program in both the wholesale and the retail portfolios.

Now, we have been doing transactions during the period when ABS market was down that would use some of the assets we would otherwise use in a TALF transaction.

But you should expect that we will be using the ABS market in the course of the -- certainly, we would think in the second or third quarter.

And you should expect that we will be looking at it not necessarily as a TALF deal, but as a TALF qualified program that may or may not have TALF investors.

As the pricing comes in, we may choose to use other -- or other investors may choose to pay -- to buy the paper and price it below or beneath what TALF assets might sell for.

We have some very attractive assets in the agricultural side.

The performance of those assets is very good.

And the mix of agricultural versus CE assets is very strong, much more pronounced than the past.

So we find it very attractive.

Thanks a lot.

Thank you.

We'll now move to our next question, from Jerry Revich of Goldman Sachs.

Please go ahead.

Good morning and good afternoon.

Can you please discuss what kind of pricing you've seen in private ABS markets since the deals you've done in the quarter?

Have you seen pricing terms improve since the TALF announcement has gone through?

And also, considering you lost money on ABS issuances this quarter, will you further increase the rates you charge to customers going forward?

I won't give a specific margin impact, but your question was the trend.

We have certainly seen that ABS spreads have been declining since the TALF deal started.

In fact, we've seen some deals priced beneath the TALF haircut.

So we are favorably disposed towards the trend in pricing.

Specifically, I think your second question was are we going to pass that pricing on, or what was the second part of your question?

So, if you lost money in ABS issuances this quarter, I'm wondering if you're pushing the rates you're charging customers as a result.

Oh, absolutely.

Remember that this transaction we did in the end of March included some of our older assets, and we have anticipated that as we've added assets subsequent -- in subsequent transactions.

Remember, we haven't done some ABS transactions for a protracted period of time and in this first deal we sold some of our older assets that had older pricing on them.

Okay.

And what are you targeting for ABS issuances for the year, something similar to this quarterly run rate or do you hope to do more than that as the markets improve?

As we look at it, it depends on how it evolves and the size and the performance of the TALF market.

I wouldn't say that it would necessarily be much different than the current run rate.

Okay.

And in your remarks you spoke a couple of times about construction equipment industry needing to become more rational over the long term.

Negative double-digit margins for most players in the trough and high single-digit margins at the peak is obviously not a great industry structure.

Can you talk about some of the changes that you think need to happen and how do you think those changes come to pass?

Yes.

This is Harold.

Good day to you.

As Rubin indicated in his earlier comments, we're exploring all avenues to add value, not only to the shareholders but to our dealers and customers.

And we're looking at every potential opportunity to improve this business.

As we indicated, we'll come back to you with the second quarter earnings and give you more color on the specifics.

And, Harold, I realize that you don't want to comment on CNH specifically quite yet, but I'm wondering if you can make comments related to the broader industry at all, if you're comfortable doing that now.

No, I'll give it a pass.

Thank you.

Okay.

Thank you.

Thank you.

We now move to Mark Koznarek of Cleveland Research.

Please go ahead.

Good day, everybody.

First, a clarification.

Rubin, I think you mentioned that the North American combine market was still strong and you expect it up 20% for the year, but yet the unit forecast for North American combines is down 5% to 10%.

Could you clarify that, please?

If I said that we thought the combine industry would be up 20%, then I misspoke.

What we're talking about, as far as the industry is -- what we show on page 15, we expect combines globally to be down 25% to 30% and we do expect North America will be off slightly, even though it started the year very strong.

So, we expect combines North America to be down slightly and -- but up in the first quarter.

Okay.

Thank you.

And what we've adjusted into our forecast is the change in commodity prices between mid last year and what we expect to see this year with greater stock-to-use ratios.

And we had, as we all know, a significantly strong fourth quarter with tax buying and also strong cash from our customer base, and we anticipate that this'll be more normalized going into the fourth quarter.

Okay.

Thank you.

And then, with regard to dealer inventory reduction both in AG and CE, could you characterize what remains to occur for the remainder of the year or, put it in another way, what your full year inventory reduction plans are from the channel?

Speaking first to CNH inventory reductions, we expect to take out inventory essentially equivalent to the inventory we put into our inventory in 2008.

We added about a billion two.

We were going to -- we expect to take that out in 2009, as far as inventories.

As we look at the dealer inventory levels, we expect during the full year to under-produce retail by about 8% to 10% in AG and by about 45% in CE.

And so that would -- you could use that to approximate the dealer inventory reductions.

Okay.

Thank you very much.

Thank you.

We'll now move to our next question from Ann Duignan of JP Morgan.

Please go ahead.

Hi, good morning.

It's Ann.

Good morning, Ann.

Morning.

Can you help me?

I'm trying to separate the construction equipment from the agricultural equipment businesses, just a little bit.

Can you tell me what the delinquency rates were for construction equipment versus AG equipment?

If you look at the levels at the end of March, CE business' over 90 days was slightly under 6%, whereas the AG delinquencies, over 90 days, was about 0.75%.

Okay.

That's what I suspected.

And do you get a sense, on the construction equipment side, that delinquencies might have peaked or do you expect them to get worse before they get better?

If you could just give us an outlook on what you see out there in the marketplace in construction equipment (multiple speakers).

Ann, let me jump in here, for Rubin.

The -- what we see right now is a continued high level of used and auction activities.

I know, as close as you follow this business, you know that there's some occurring online in real terms in April/May.

So we have not seen, I think, the used equipment valuation stabilize on rental rates, and are still under pressure and utilization is not stabilized at this point in time.

So, I think we still have some days ahead of us on the used equipment valuation.

Okay.

That's very helpful.

And then, just following up on the financing side, we have heard from several dealers that you have indeed increased your pricing, or your financing costs, to dealers and that you're not financing non-CNH equipment right now.

Given all the structural things you're looking at, how will all of these things affect your relationship with your dealers?

And could this be compounding your market share losses?

First, just -- as we saw a tightening of liquidity in the financial markets, we did give CNH Capital the focus to prioritize CNH product and our rates have been changed to reflect the cost of funds of CNH.

That said, the agricultural customers' balance sheets are in excellent shape.

And as I mentioned during my comments, we see lots of sources of funds for retail financing of both agricultural and CE retail customers.

We are in constant communication with our dealers, and certainly none of them enjoy paying higher rates.

And we -- through our dealer councils, through direct contact, we continue to work with them on a day-to-day basis.

And yes, the dealers would rather have lower rates today.

But, Ann, I would come back to your comment about market share losses.

Market share, globally, in the quarter is flat.

Our tractor business, particularly the over 40 horsepower business and tractors overall, is up and in good shape in North America.

The combine business is flat.

So, if there's a follow-up question on that, please feel free to ask it.

Yes.

No, I just -- the relationship with the dealers is always so symbolic.

I just was curious as to how did they maybe complain about higher cost of funding, but does it really impact the way that they manage their business at the end of the day?

At the end of the day, the dealer network, as well as our brands, have a common objective and that's to retail the iron and take care of customers.

And to this extent, the change in the cost of funds has not impacted the retail sales at all.

Okay.

That's helpful.

Just one quick clarification, again back to construction equipment versus AG equipment.

Can you give us an absolute inventory for both, or should I just divide the total inventory about in proportion to revenues?

We'll leave that calculation to you, Ann.

Okay.

Thank you.

I'll get back in line.

Thanks.

Thank you.

(Operator Instructions).

We'll move to our next question, now, from David Raso of ISI.

Please go ahead.

Yes, hi.

I've two questions.

One first related to the AG tractor production versus retail, and also your outlook.

You provide an above 40 horsepower outlook for North America, but can you specify above 100 horsepower?

What are you looking for your retail -- your production versus retail and what are you looking for retail for the full year?

Hi, David.

For the over 100 horsepower, we're looking at the industry being down about 10%, roughly.

And our production will be slightly less than retail, probably in the 5% to 10% range, to try and keep control of dealer inventories.

And let me -- this is Rubin.

Let me add, David, that particularly in the high horsepower tractor segment, we ended the year in pretty good inventory levels.

So, under-producing at this level, we're in good shape.

The order book where we stand right now, versus this time last year, clearly it's going to be lighter, but any order of magnitude, the order book you're sitting on today for big tractors in North America versus this time last year?

I think, in general, on the agricultural side, David, is -- the order book and the quality of order book to the schedule is as strong as it was last year.

We have not seen any cancellations to speak of at all.

Particularly strong in North America on self-propelled combines, where the model year is sold out and so now we're -- our brands are looking to what they do for the 2010 model year.

Large four-wheel drive tractors, as Rubin indicated, is still quite strong.

Having said that, I think everyone is aware of the former CIS and how the market is dropped significantly in the quarter, 70%/80% in some of these countries.

So we're moving equipment, adjusting schedules, to make sure we feed the areas that have the demand for the products that typically in the first and second quarter would have went into these international markets.

Is it fair to say -- what we're hearing from dealers in North America is tractors that were destined for Russia's CIS, the larger tractors, with those being cancelled, you're saying customers get their large tractors earlier than they originally planned because the production slot opened up (multiple speakers)?

Absolutely.

Last year, this time, we were talking about late shipments into the North American market, and today our customers have a more normal supply pattern because of the availability of these additional units.

[Or if I ask more directly], orders that you have on the book for the large tractors right now, do they extend much beyond the third quarter?

No.

The -- as I say, four-wheel drive, the order board is strong and also magnum-size tractors, so your 140-plus going into the third quarter, which is normal at this point in time.

Okay.

The second question, real quick.

I know you don't want to go into a lot of detail, but just big picture, Harold, when you think of the construction business model and some of the changes you're contemplating, is it more of a product focus?

Is it a manufacturing focus?

More vertically integrated, less vertically integrated, some private label relationships, the way (inaudible) do teles with JLG?

Is it a distribution focus?

Can you just give us some idea, when you go through that basic framework of a business model, what are you looking at the top products that need to change to make the business more profitable?

Well, you're a pretty good straight man.

We are looking at the construction business on a full 360 basis.

So, we're looking, as Rubin indicated, how can we further leverage the technologies in our platform.

We're looking at the operations side of the business on how we can operate within the regions and with the globe back office and also in the field more efficiently, effectively, and also looking at the industrial side of the business and also our supply side.

So we're (multiple speakers).

I guess, to ask more directly, obviously, 10 years ago, when the Case and New Holland came together, it was the -- we weren't going to touch the downstream, the upstream we'd consolidate and get the cost efficiencies and so forth.

Can you see a business model that separates construction and AG?

We'll come back to you at the end of the second quarter and you'll have a better idea.

I'm not at liberty to discuss because the plans have not been finalized, as you can appreciate.

Okay, I appreciate that.

Thank you very much.

Thank you.

As we have no further questions, I would like to hand the call back over to you, Mr.

Trefts, for any additional or closing remarks.

Thank you, everyone, for attending the call with us.

Before we leave, however, Harold has a few more words.

Yes.

I just wanted to -- as we all have looked at the environment we're operating in, this is a pretty tough time in particularly the construction equipment business.

But as we spoke in January, we said we were going to take a very hard line on controlling production to retail, and we did that in the first quarter.

We will continue and we will have the majority of these issues that we're dealing with out of the way.

And the second half, from a destocking standpoint, will be a lot more favorable than what you can expect in the second quarter.

Second quarter will be more like the first, I would say.

And as the industries move, if some of the stimulation plans start to gain traction around the world, then we're hopeful that we'll see an increase in the retail side of the business.

We are, as Rubin indicated, going to continue to go strongly after cost and control of working capital, and so you can count on similar results that you saw in the first quarter in that area, in the second quarter.

On the procurement side, clearly, as we went through 2008, as you'll recall, the raw material costs continued to escalate month by month, peaking in the latter part of the year.

So, you'll see some significant improvement from us on the quarter-over-quarter comparisons in the second half.

So, I'm optimistic about the future, but today we need to deal with the realities of size in the business and controlling the costs, to get through the next quarter.

Thank you.

Thank you, Harold.

And thank you, everyone.

And if you have any further questions after the call, please don't hesitate to give us a call and we'll get back to you as soon as we can.

Good day, everyone.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.