CNH Industrial NV (CNHI) 2009 Q3 法說會逐字稿

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

For your information, this conference is being recorded.

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

Al Trefts.

Please go ahead, sir.

Thank you.

Welcome, everyone.

We're pleased to have with us today Mr.

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

Steve Bierman, 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 may be making some 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 to 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.

Slides used in this presentation will be available on our website, www.cnh.com, and filed with the US SEC on a Form 6-K.

As noted on the slides, the appendix contains reconciliations to generally accepted accounting principles 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 use by CNH, Thomson Reuters and third parties.

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

and are not to be re-recorded or re-broadcast without our express written permission.

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

Now, I'd like to turn the call over to Steve to make a few remarks on the quarter.

Steve.

Thank you, Al.

Let me start with the highlights for the quarter on page four.

First, we earned $72m in operating profit in the quarter, despite the significant industry-wide decline we saw in unit sales.

It was a solid performance for cash flow generation in the quarter.

We reduced receivables by $281m and inventories by $440m.

This contributed to a $155m reduction in Equipment Operations' net debt.

We continue to focus on cash flow and expect further working capital reductions in the fourth quarter.

In total, we are still targeting for the full year a working capital reduction of $1b.

We see our liquidity and funding situation as much improved compared with the beginning of the year, as evidenced by the $1b of Senior Notes in the wholesale ABS transaction we closed in August.

We look to further improve our liquidity in a capital market scenario we now view as much more favorable than the one we entered the year with.

Finally, we achieved significant milestones in our restructuring plan, and we will focus on this later in the discussion.

Turning to slide five, let's review our net sales and operating profit for the quarter.

In total, our net sales were down 32%, including a three percentage point reduction for changes in exchange rates.

Worldwide Agricultural Tractor and Combine Industry Retail unit sales were down 18% in the quarter, dragging our Agricultural Equipment net sales down 19% in the quarter on a constant currency basis.

Worldwide Construction Equipment Industry Retail unit sales dropped 42% in the quarter, pushing our Construction Equipment net sales down 54% in the quarter on a constant currency basis.

And we continued de-stocking our dealers here as well, accounting for 5% of the sales decline.

Our operating profit for the quarter was $72m.

Now, turning to slide six, we will review our operating profit evolution.

For the quarter, operating profit decreased by $267m when compared with the quarter last year.

Volume and Mix were the most significant factors in the quarter, totaling $354m.

AG accounted for about 60% of this decline, and Construction Equipment accounted for the balance.

Net Pricing was positive by $96m and was positive for both AG and CE.

Production Costs increased by $86m (sic - see presentation).

The impact of FIFO alone was $120m, which was partially offset by good news from purchasing economics and favorable labor and overhead cost variances.

Our cost control actions continue to produce results year over year.

SG&A expenses were reduced by $74m.

Important to note we continue to invest heavily in our products.

R&D was $98m in the quarter, essentially flat from the level we saw in the third quarter of 2008.

The category titled Other, factors includes, primarily, currency hedging and currency transaction cost.

On slide seven we see the trend of third quarter Industry Retail unit sales and the market share changes detailed for both Tractors and Combines.

Industry Retail unit sales declined in all regions and for all products except Combines in North America, although some individual markets were up slightly.

As examples, China was up 1% for Tractors and Brazil was up 4% for Tractors.

Our Tractor market share was up in North America, and stable in Western Europe and Latin America.

Our Combine market share was up in Latin America and stable in Western Europe.

Of note, here, is our four months' supply of Tractor and Combine company and dealer inventories, which is down by half a month from the end of the second quarter as Tractor production was 16% below Retail unit sales for the quarter.

On slide eight we see the picture for Construction Equipment.

The industry declines, which started in the third quarter last year, continued.

Total Worldwide Industry Retail unit sales were down 42%.

The Light Equipment industry unit sales, where CNH has a stronger presence, were down 45%, compared with the 37% decline from the Heavy Equipment sector.

Our worldwide total market share declined in the quarter as improvements in Latin America were offset by declines in other parts of the world.

On a four months supply basis our Construction Equipment inventories also declined in the quarter by one and a half months as further evidence of our de-stocking actions.

Production in the quarter was 58% less than our Retail unit sales.

Turning to slide now -- slide nine, excuse me, we have our first nine months' net sales and operating profit results.

The trend is much the same as we have reviewed for the quarter.

Net sales of equipment were down 30%, including a 6% decline for currency.

Agricultural Equipment net sales declined 12% at constant currency, tracking the Global Industry Retail unit sales decline for the nine months.

Construction Equipment net sales decline 56% at constant currency, driven by a 47% reduction in Worldwide Industry Retail unit sales.

Our de-stocking actions accounted for eight percentage points of the decline.

For the nine months, our AG production was 10% less than our Retail's, while our Construction Equipment was 53% less than our Retail's.

On page 10 we see the factors which impacted our third quarter operating profit results also impact the year-to-date results.

Lower volumes were the principal driver of our year-over-year decline in operating profit.

Net pricing was up, again for both AG and Construction Equipment.

Production costs were up.

Substantially all of this variance is accounted for by the FIFO impact.

We had significant savings and SG&A expense.

Here, it was $110m.

We continue to invest in R&D, just as I highlighted for the quarter.

We have spent $286m for the nine-month period and this, again, is essentially in line with the levels of 2008.

And the negative impacts of currency transaction as well as hedging cost more than account for the variance in the other category.

On slide 11 we see the nine-month of Agricultural Equipment Industry Retail unit sales.

In the third quarter the principal areas of strength were the higher horsepower Tractors and Combines in North America and Tractor sales in the Rest of World markets.

For this period our Tractor market share was stable in Western Europe and up in Latin America, and in the North American Over 40 Horsepower segment.

Our Combine market share was down.

Slide 12 shows the first nine months' picture for Construction Equipment and the by-region detail for the overall 47% industry decline.

Again, you see the decline was in all markets.

The Light Equipment sector decline for the nine-month period is more dramatic than the decline for the Heavy Equipment sector.

Our worldwide market share was down.

We have gains in Latin America, yet these do not offset the declines in Western Europe and Rest of the World markets.

Our North America share was stable in both sectors.

Now, turning to slide 13.

In the introduction this morning we highlighted, briefly, the cash flow performance in the quarter.

The impact of working capital reductions is evident on this slide.

Receivables were reduced by $281m.

Inventories were reduced by $440m.

In total, this is a $721m dollar reduction.

The impact of the reduced production was a reduction in accounts payable, which used 46 -- $466m of cash in the quarter.

In total, a $255m reduction in working capital for the quarter was achieved.

Net cash from investing in Other, which is primarily exchange-related, was another source of $23m.

In summary, we reduced net debt in the quarter by $155m.

Our cash flow performance for the nine-month period is shown on slide 14.

Receivables and inventories have been reduced in the nine months by almost $1.6b.

Payables also have declined by $1.3b.

Net cash generated by operating activities, of $362m, was $340m higher than last year, despite the decline in net income.

For the nine-month period, we have reduced net debt by $240m.

We are on track with our plan to reduce full-year working capital by $1m.

I would also like to note we have reduced our Equipment Operations and Financial Services net debt position with Fiat by $751m since the beginning of the year.

On slide 15, we show the impact of de-stocking on inventories, both for our dealers and for us.

The bars show dealer and company inventories in units.

The black line represents our production, while the red line represents units that we produced in Retail.

As I have already said, in the third quarter our production levels for both AG and Construction Equipment were below Retail sales levels.

For the fourth quarter we expect this trend to continue.

We expect AG production to be less than Retail's by approximately 25%, and for our Construction Equipment we expect unit production to be less than Retail's by almost 50%.

This disciplined approach is the key to our $1b reduction in working capital for the full year.

On slide 16 we first compare Equipment Operations' cash and cash equivalents at September 30 to our debt maturing in the next 15 months.

To the right-hand of the slide we also show Equipment Operations' debt maturity schedule.

Back to the left-hand side of the slide, we have $1.2b of cash and cash equivalents, which is more than enough to cover the $1.1b of debt maturing in the next 15 months.

We see our liquidity picture as being much better than that, because it is our expectation that a portion of the debt will be refinanced and some will be extinguished by the liquidation of underlying assets associated with the debt.

We also expect that further reduction of working capital will continue to generate additional cash.

In addition to our cash and deposits with Fiat affiliates, we also have $3.9b of availability on our consolidated credit lines.

Our recent $1b Note issuance was used to replenish cash used in tune to pay off a $500m maturing Bond and to repay maturing short-term obligations, thereby, lengthening the debt of our maturity -- lengthening our debt maturity profile.

In summary, liquidity and funding continue to improve.

We have $1.2b of cash on hand.

We are generating cash.

We have demonstrated access to the capital markets for Equipment Operations.

If I turn to slide 17, we will provide an update on the funding situation for Financial Services.

As an overview, access to capital, as well as borrowing cost, have improved as the year has gone along.

We have closed $4.1b in new funding transactions through September, including $1.1b in the third quarter.

In the US, conditions in the ABS market have improved significantly since the beginning of the year driven, in part, by TALF.

We have seen traditional cash investors returning to the markets, in many cases, in force.

Pricing spreads have tightened and, we believe, continue to tighten.

Deal sizes and deal frequency are increasing.

Secondary market trading is healthier, with much better levels for pricing and volumes.

And the market for wholesale funding transactions re-opened in the third quarter of this year.

It has been almost two years since the last wholesale ABS transaction was included in the US.

We expect to continue to participate in these markets and we will also continue developing our alternative funding sources to diversify our funding base.

Turning to slide 18, our current outlook for pre-tax restructuring charges for 2009 is approximately $120m.

Approximately $80m of this will require cash outlay during the year.

Our reorganization of the Construction Equipment management structure is completed.

To date, we have achieved an 11% cumulative reduction in permanent and temporary salaried and agency positions across the Company.

And our goal is to achieve reductions of up to 12% for this category by the end of the year.

We have reached agreement with the trade unions and government authorities to move loader backhoe and compact wheel loader production from Imola to our Lecce, Italy facility.

In essence, our plans are on track.

Now, turning to our Equipment outlook for 2009, which starts on page 19.

Global Insight's October data presents a picture similar to the one we shared with you last quarter.

Global stock levels and stock-to-use ratios for Corn and Wheat are expected to increase slightly in 2009, while this ratio for Soybeans is expected to decline.

Prices of Corn, Wheat and Soybeans are expected to decline from their peaks, but will still remain at attractive levels compared to last year's -- the past year's.

If I turn to slide 20, unfortunately, the situation for the North American dairy farmer also remains unchanged from last quarter, with no prices down significantly from their highs of two years ago.

This situation is similar for ranchers, and these two groups are certainly significant purchasers of mid-size tractors and hay and forage equipment.

The US net farm income outlook has been revised downwards by both Global Insight and by the USDA.

It is now expected to be in the $54b to $56b range, below the last 10 years' average.

Net farm income is still expected to be unevenly distributed across market segments, obviously, better for the real crop production farmers and not as good for the dairy farmers in the ranching segment.

Despite the US farmers' balance -- despite this, the US farmers' balance sheet remains solid, with very modest and healthy debt-to-asset ratios.

Those ratios remain in the 10% range.

Turning to slide 21 for Construction Equipment, here, we rely on GDP as a major indicator of industry activity.

The world GDP outlook and the outlook for OECD countries and Former Soviet Union are all projected to be negative this year.

The GDP growth we may see in some non-OECD countries will probably not result in the robust Equipment sales that one might otherwise imagine in spots where we have tight financial and credit markets.

An exception is China where the market continues to grow, but where CNH does not have a significant presence, or a large presence.

On slide 22 we can see quantification of the economic and market situations that we have discussed on the last few slides in our Industry unit volume outlook for 2009.

On the AG side, our Tractor industry forecast is relatively unchanged from last quarter.

We expect the full year 2009 to be down approximately 10% to 15%, down about 10% for the Over Horsepower segment globally.

For Combines, we see the industry this year slightly stronger than we saw it last quarter, now down approximately 20% to 25%, primarily due to some strengthening in the North American market.

For Construction Equipment, our 2009 outlook is also relatively unchanged from last quarter, at down 40% to 45% for total Heavy and Light Equipment.

And, finally, when we turn to slide 23, I will provide some highlights for our full year 2009 outlook for CNH.

Our expectations for net sales of Equipment remains unchanged, with fourth quarter net sales expected to be down approximately 10%.

As I had indicated earlier, we expect to continue producing below expected Retail sales levels in the fourth quarter.

Our salaried personnel reduction plans are on target to achieve up to a 12% reduction.

We continue to target a working capital reduction of $1b for 2009.

Our Equipment Operations' liquidity and our Financial Services funding positions have improved, and we expect to see even further improvement for, not only liquidity, but also for borrowing cost.

This concludes my comments for today.

We're now ready to begin the Q&A session.

Certainly.

Thank you, sir.

(Operator Instructions).

We'll now move to our first question from Andrew Obin of Banc of America.

Please go ahead.

Good morning.

A couple of questions.

Steve, noting your pretty conservative GDP outlook for the world for next year, still what do you think for the Company production has to catch up to Retail, and so when do you think you're going to be done with inventory reductions?

I'm sorry --

Hello.

-- we had a little bit of an echo in here.

I think you asked when are we going to be done on our inventory reductions, is that it?

When will production start matching your Retail sales, yes, for the Company?

I think, as we highlighted, our production levels are expected to be approximately 50% below for Construction Equipment and approximately 10% below for Agricultural Equipment for the full year.

We will continue to under-produce in the next quarter as we work towards our inventory reduction units -- our targets, excuse me.

We are still working on preparing our 2010 budgets and cash flow forecast and, so, I think we would prefer to comment on this more specifically in our call in January.

But we clearly are making significant progress towards the goals that we have set for ourselves internally with respect to reduction of dealer and company inventories for 2009.

Let me ask you the question another way.

If you continue on the same take as you are right now, will you hit your targets by the end of the year for inventory reduction?

I would say, in most parts of the world, the answer to that question would be yes.

(Multiple speakers).

Great.

A second question just on the AG side.

Can you comment just how much visibility, given the existing order book that you guys have, could you just describe the trend you're seeing in the order book going to the (inaudible) season?

And if realistically this fall you would have any visibility in terms of (inaudible) of 2010?

Thank you.

Yes.

Here, I think that I can provide some more color.

Our North American High Horsepower Tractor and Combine order boards are down versus last year.

They're actually down by about 50% as to where they were last year, so are our projected production levels.

We have to recall, though, that 2008 was probably an anomaly, certainly the highest period, I think, not only for production but also for Retail orders.

What I would say to you, if I look at the average for the three years prior to 2008, our Retail order coverage is twice what we would typically see in those three -- or what we saw in those three years prior to 2008.

And so the production -- just to make sure what you said.

So are those order boards down quite a bit versus last year, still quite a good relevant historical average, and production for the fall (inaudible) is down 50%.

Is that a fair summary?

I'm going to say I'm sorry but we're struggling to hear a little bit with the echo here.

Again, if you would repeat your question.

I apologize.

I just was trying to rephrase what you said.

So what you said is that the order book is down 50% versus last year and yet still twice the level where it was over the past three years because of --

Yes.

-- 2008, and --

Yes.

That's right, right?

Yes, it's [multiple speakers].

And then production for the full --

Yes, it's correct.

The order book is approximately 50% down for Combines and High Horsepower Tractors from where it was in 2008, but two times what it was for the three years prior to 2008.

And the production for the (inaudible) season say was to be down 50%, does it say anything about production level going to the spring [celery] season or it's just to (inaudible) this number down 50%?

That's, I guess, what I'm hearing [here].

I think it's -- that is too early to tell at this point.

I think we will want to see how we come out of the fall season and, obviously, the conclusion of the harvest.

Thank you very much.

You're welcome.

Thank you.

Thank you.

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

Please go ahead.

Hi, good morning, guys.

Can you hear me?

Yes, we can, Ann.

Thank you.

How are you this morning?

Doing good, thanks.

I just wanted to ask you about what you're seeing in Europe?

I know you're probably not willing to give 2010 outlooks or anything like that.

But just directionally are you seeing the same kind of recent slowdown in both Western Europe and Eastern Europe that some of your competitors are seeing?

And, then, what is your hunch in terms of what the European market might look like going into 2010?

Ann, good morning to you.

This is Harold.

Hi, Harold.

Let me take that question because I've just been visiting -- I'm in Europe as we speak and, clearly, the farmers in Europe are dealing with the same issues as the farmers in the US market relative to commodity, dairy, livestock pricing.

For the full year, this year, our Tractor forecast for Europe is down 10% to 15%, but we have seen a softening in the third quarter and we anticipate that it'll get a little softer at the fourth quarter, maybe into the first half of next year before some recovery.

But it is showing some signs of weakness.

And you're (multiple speakers) sector?

Sorry.

Ann, if I can direct your attention to slide 27, you can see the details of some of the major countries in Europe in terms of what happened to the industries in the third quarter for both Tractors and Combines and also for Light and Heavy Construction.

And I'm sorry, I stepped over your question, so we didn't hear it.

If you could repeat it, that would be great.

That's okay.

That's okay, no problem.

I was just going to ask on the Construction side also, now that we're looking at this data, but just directionally or anecdotally, are you seeing any kind of a bottom in any of your regional markets in Construction Equipment?

Ann, although we've -- let's say, outside of Brazil where we have some stronger construction activity, in general, as you see the same numbers in the industry volumes, we haven't seen the units turn the corner year over year.

We anticipate that we will see some improvement beginning in the fourth quarter and moving into 2010.

We are getting additional enquiries from the distribution for select shortages of equipment, where they've sold down the rental fleet and they have Retail activity.

So I wouldn't say it's time to be bullish, but I think that we're close to the bottom and moving forward.

And so, by that, I think what I would read into that is that when we do start to see demand pick back up it's probably going to be the contact equipment, the rental equipment first which will be pretty traditional.

Is that what you would interpret it to be?

Yes, that's exactly correct, Ann.

As you say, first you'll see the used pricing improve, you'll see the rental fleets stabilize and start to be refreshed.

Those will be the first signs that you'll see normally.

Perfect.

And one real quick follow-up.

(Inaudible) off Andrew's question.

While you did a very good job of taking down your absolute inventory dollars, your days on hand are trending upwards just because of the lack of revenues.

Do you have a goal for what your days on hand or are you going to set your goals based on absolute dollars, and where you think it should be from a dollar standpoint?

I should let Steve answer this but, since I'm on, let me go ahead.

As we went into this year, clearly, we set our targets on cash and what we wanted to generate, regardless of how the industries were moving, because it was critical to funding the business and moving forward.

You're right on days outstanding and, as we move into the future that's an area that we're focused on improving in addition just to the absolute cash.

Great.

That's helpful.

I'll pass it on to somebody else.

Thank you.

Thank you.

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

Please go ahead.

Good morning.

Good morning.

Harold, you mentioned you're starting to see some signs of improved enquiries in Construction Equipment.

I'm wondering if you can rank order for us the regions where you're seeing the most promising signs of, I guess, bottoming a recovery here.

Well, for sure, in Brazil and, secondly, in parts of Canada and some in the US.

Thank you.

None in the CIS regions or Eastern Europe at this time.

And Western Europe seems to be pretty stabilized at levels similar to North America.

And Asia, Harold?

Asia, China is moving forward.

Japan is still weak, but China is showing some reasonable growth, particularly in the Heavy side and the excavators.

Thank you.

And, Harold, just the broader strategy question.

Can you talk you about Tier 4 emissions and your product plan, whether you're going to go with the [SER] iteration, as most of us expect?

And just give us your thoughts on which direction you see the industry going on that emissions standard.

Yes.

For sure, as you know, we're working forward to 2011 with the Tier 4 requirements being in place.

And we're well in line with our joint work with Fiat Powertrain to provide the engines that, not only meet the emission requirements, but also some further fuel efficiency for the customers.

So we're looking as we transition to Tier 4 for about a 10% improvement in fuel efficiency.

And, Harold, particularly in Europe, do you see potential for share gains as some of your smaller competitors might have trouble with the transition?

Well, one of the things that we ask of our brands is to always be looking for ways to capture new customers.

Thanks, Harold.

And, Steve, can you talk about the extent of restructuring charges that you expect in 2010?

It looks like you have one major project still left.

Am I right about that?

And how should we think about restructuring charges in 2010 relative to '09?

At this point we're not prepared to provide an outlook.

I'm sorry, I needed to turn the microphone on.

Unfortunately,, at this point we're not prepared to provide an outlook towards 2010.

I think what we did comment on this morning is that we will expect restructuring charges up to $120m in 2009.

I talked about the cash outlays.

In addition to that, we would see probably somewhere in the neighborhood of $25m to $30m in charges in 2009 that could be related to, or would be related to some of our restructuring actions but are not included for technical accounting reasons in the restructuring expense item.

Got it.

Thank you very much.

You're welcome.

Thank you.

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

Please go ahead.

Hi, good morning.

A quick question on pricing.

Can you give us some idea how you think about pricing going into '10 for both AG and Construction?

But even in Construction in particular we have heard some rumblings in the channel that you're actually looking to raise price November 1 on some compact Construction Equipment, and really equipment broadly for Construction.

I'm just trying to get a feel of how you're viewing price -- pricing going to '10.

Well, as Steve indicated, we're just in the process of taking a look at '10, and we'll give you the details of that at the fourth quarter call.

But as we have committed and been able to execute, we've been able to price to recover cost.

In each region we monitor very closely the competitive situation and if we have the opportunity on pricing, we will take pricing.

Anything you can be a little more specific on now regarding even AG versus Construction, product size, any help at all?

Not for 2010.

I would anticipate --

Okay, well --

I just anticipate in general that CE competitive situation and market environment would remain to be difficult, particularly in the first semester.

And AG would be a little stronger than CE just in this year.

Touching here to the Combine outlook, which notably improved for the year in North America, how much of that was better than expected third quarter activity?

Or anything when it comes to a change in your fourth quarter outlook?

Some orders that usually are on additional Combines obviously have a long lead time typically in the order book.

Did anything change?

A recent up-tick in orders for year end, maybe year tax buying?

What were some of the things that changed that outlook?

I think in general most of the industry performance improvement has occurred through the third quarter.

Particularly in North America, we're talking about we were able to divert a lot of production that was scheduled earlier in the year, for CIS as an example, to fill customer orders ahead of what we did last year.

And going into the fourth quarter the economics are simple, in the fact that the net farm income is not as robust as it was a year ago.

So whether we're talking about cash receipts which will still be at record levels, but off a year ago will be less than the fourth quarter of 2008, based on the commodity and lifestyle prices.

And to that point, just to clarify because I didn't pick it up before.

The comment about '08 was a bit of an aberration with the demand activity saw, and then you tried to compare it versus prior year.

Can you just repeat so I get exactly what you were referring to regarding the level of demand pre '08 versus how you're viewing the industry over the next year or two?

Hi, David.

What Steve said was that the -- what we see in our Retail order books now is a lot stronger than the average of what we saw in the Retail order books in the 2005 through 2007 period.

So it's down from what we saw last year.

And last year was an abnormally high year.

But if we try and look at a more normal period which, for ease of getting the data we call 2005 through 2007 right now, we're ahead of that pace.

Okay.

Just to understand, in '07, I'm talking globally, your AG revs were about $10b.

They went up to $13b in '08.

This year they're getting close to around [tripling].

Was that trying to insinuate '10 is similar to '09?

Because if you go down much from '09 you're actually below the '07 level, so I'm just trying to characterize [the level].

It's not insinuating anything.

I know you're giving '10 guidance.

We're not insinuating anything at all about 2010, David.

We'll give you that outlook in January.

Okay.

I appreciate it, thank you.

Thank you.

We'll now move to our next question from Mark Koznarek of Cleveland Research.

Please go ahead.

Hi, hello, everyone.

A question about the production costs.

It was roughly $100m higher in the third quarter versus the second quarter, despite the fact that revenues were lower.

What's going on there?

Al, can you have him repeat the question here?

I think we're going to try the volume up here, or have you speak a little louder if you don't mind, please?

Yes.

The question is regarding production costs in the waterfall chart.

Third quarter costs were roughly $100m higher than the second quarter, despite the fact that revenues are lower in the third quarter versus the second.

Could you explain that, please?

Yes.

This is explained by the impact of FIFO on our production cost which, again the FIFO impact was $122m in the third quarter.

So it was a significant impact on our cost of goods sold and, consequently, our margins.

We would anticipate that this would carry over somewhat into the fourth quarter but at much reduced levels, or much reduced impact from what we have seen year to date.

Steve, what was FIFO in the second quarter?

Let me get that for you.

Yes, I'd say what I can do here, I can, right off the top of my notes here, we have -- we had $122 for the quarter and year to date we have an --.

If we could back to you.

I don't have the second quarter information here with me handy.

I apologize, but we will get back to you and give you that information.

Okay.

I have a follow up on your recent announcement for the Russia investment for equipment manufacture.

And if you look at that slide, I think it was 27 that you pointed to regarding regional activity.

That certainly doesn't seem like anything particularly promising going on right now in the CIS.

So what is this that you guys foresee to warrant this investment right now?

Yes.

For sure, the markets in Russia will recover.

We're going through the same kind of economic situation that we are in other places in the world.

And the investments are going to be time phased so that we're there with local assembly production to take advantage of the rules and regulations of the country as the market does recovery, so for large tractors, combines and seeding equipment.

And, again, you may recall the press announcement.

We assigned a letter of intent, if you may.

And we're working on all the details of that plan and target to have that completed in the first quarter of 2010.

The plan completed or manufacturing ready to go by first quarter?

The Joint Venture.

Joint Venture in place?

Yes.

Okay.

So at that point, then, you have to install capital, etc., so production won't occur until later in 2010?

Yes.

We will have assembly, if you may, in 2010.

This is based on the integration plan.

Okay.

But most of it will be coming, I would say, for sure, after the first quarter and into the second semester.

Okay.

I'll just ask basically my original question.

What is going on in Russia to provoke this investment right now?

Is there something tangible that you are seeing in 2010 that you think the market is going to be moving significantly?

Yes.

The big issue is the entry barriers that have been put in place, be it import duties, be it access to finance.

With this partnership we will be able to participate just as any local in-country manufacturer, thus, eliminating the entry barriers that are in front of anyone importing product into the market today.

Okay.

Great, thank you.

This is Steve.

Let me follow up.

The FIFO impact year to date is $288m.

It was $122m for the quarter.

So what I can tell you immediately today, or in response to your question, is year to date through June the impact was $166m.

Okay, thanks.

Thank you.

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

Please go ahead.

Good morning, guys.

Good morning.

I wonder if you can chat a little bit about what you're doing to help get the suppliers able to ramp back up whenever demand begins to take off the bottom?

Well, at this point in time, other than some spot areas we have not seen, enough to speak to the agricultural side, any significant issues with the supply base being able to ramp up to support our demands.

And this would be in any of the regions.

So, at the end of the day, we have been and we continue to work with our supply base on quality, delivery, etc.

So at this point we don't anticipate a large issue of the suppliers being able to follow us when the market recovers.

And in terms of the global AG Fleet, could you talk a little bit about the age and in which region do you think that the maybe product category is more appropriate, where they -- where your customers could still age the fleet and where do you think maybe we'd have shot at an earlier rebound just from the fleet being a little old?

Yes.

Well, you're mainly talking about the Construction side of the business?

I was actually thinking on the AG Fleet side of the business.

Well, when we look at the indicators, clearly, a lot depends upon the planting and harvest season next year.

But everyone is anticipating a further recovery in the AG market going into 2011.

Even in the US the net farm income has projected to increase.

So I think a lot will depend upon the commodity prices and what this spring yields.

Do you look at anything in terms of age of the fleet that might spur a replacement demand, even if commodity prices or underlying economic conditions didn't get better?

The fleet aging on the AG side is not as much of a factor as it might be in the Construction Equipment rental activity.

A lot depends upon the, one, technology, i.e., regulations for emissions which require changes on behalf of the manufacturers and, two, the cash receipts in the net farm income of the customers.

Okay.

Thanks a lot.

Thank you.

We'll now move to our next question from John Buckland of MF Global.

Please go ahead.

Hi, good afternoon.

Thank you very much.

Something here strikes me as quite strange is that it's very rare that any companies talk about the valuation of inventories having an effect on their profitability.

And this was something that [Kafco repeated] yesterday using LIFO, they got a benefit, and you talk about FIFO and got a negative effect.

What is it in the inventory valuation that's causing such an important factor on your profitability?

That's my first question.

Steve.

Yes.

Well, Steve should probably be taking this question, but let me try to be simple in my answer.

We all know, as we went through 2008, material prices went through the roof.

And let's just use the CE's business as an example.

So we have the material WIP, raw material work in progress, at our plants, the market drops 40% and, so, as we enter and build units in 2009 with the FIFO method, which is first in, first out, the cost of the material that we're putting into our products is the high cost that we incurred in price increase in 2008.

And so, as Steve said, throughout the year, as we burn that inventory down to a more normalized level, then the impact of this adjustment will become less.

But it's simply the fact that when our brands sell a piece of equipment the material that we put into the equipment is at the high cost of the material we purchased in 2008.

Now I'll turn it back to Steve for a more technical answer.

Okay.

Okay, on I understand that.

So, basically, you've just had this whole pile of material which you had stockpiled when prices were going up and demand fell, and you've ended up with this need to have this major inventory valuation affecting profitability.

That's it in a nutshell, is it?

Yes, very simple and eloquently put.

Okay.

Right, just so that I can understand that because it is --

No, you've got it.

-- it's very rare that companies do talk about the inventory valuation as an effect on profit.

Yes.

Pardon me for interrupting you.

What I would say to you, though, is, it such a unique period of spike in demand and a record year for production, as well as a period where, along with that, we saw increases in material costs.

So I would say to you in many cases you would expect not to have significant variations between FIFO, LIFO and whatever inventory valuation method you were using.

But, here, obviously because of the market conditions and the material costs it's exacerbated.

Okay.

So just going back on -- just to ask some questions on the business and the outlook and everything else.

Can you contrast Brazil with the other markets?

And maybe I got the impression, and from the statistics, that perhaps Brazil is doing a little bit better in some business areas than other markets which are important to you.

And maybe contrast that with what's happening in 2010 as well?

Is there going to be a very regional bias towards where your, if you like, sales are going to increase or decrease and profits are going to increase or decrease?

Let me just take the first part of your question.

We do clearly see a better picture for Brazil than we see in some of our markets.

And, quite frankly, we see a better picture for Brazil than we see for Latin America overall.

In essence for the year, Tractors in Brazil are expected to be flat with prior year.

The current year sales have clearly been aided by social programs which have boosted the Under Horsepower market.

The availability of [Fonami] financing at a rate of 4.5% which, at this point carries throughout the year as a significant factor.

And another thing that clearly is favorable for us is the improvement in the spike that we have seen in sugar prices recently.

So I would say to you, in Brazil we currently see that on the AG side and we continue to see some improvement I think on the Construction Equipment market there as well.

I would say to you I do think, as we start to look forward at what world events bring, I would say that there will likely, or be, the possibility of variability between regions as we look towards an economic recovery.

And what I see, quite frankly, is where are we with respect to credit and capital markets?

Many parts of the world where we sell and have sold equipment are continuing to struggle from continuing crisis and strain on banking systems; the Ukraine, Russia, other parts of the world.

So I think in addition to just the economic situation, another factor that will clearly play a role in the pace of recovery could well be the impact of the capital markets.

But this availability of credit, is that really constraining North America or Europe?

Is that a factor, or is it just, if you like, the economic situation in the farming confederation?

No, it is not impacting North America or Europe in any significant way.

Okay.

[Today].

When you talked about your order backlog being similar to the average or twice the average of two -- of the three years prior to 2008, what can you say about the profitability expectations going forward based on that order backlog, compared to the years prior to 2008?

Because, obviously, with a big rise in sales you had a big rise in margins.

Yes.

I would say, clearly, with what we see in the horizon, that we expect our performance in the fourth quarter to be better than the first quarter.

And in January we'll talk to you about 2010.

But are there any reasons why we should expect profitability to be better than the average of the years prior to 2008, given all that you're doing?

No, John.

I don't think you can make an extrapolation like that just based on looking at the order book data, because that is just a small piece of the puzzle.

We really only are talking about the highest horsepower sales in North America when we make that Retail order book comment.

So extrapolating an overall fourth quarter profitability from it is kind of difficult.

No, I was just wondering whether, given the fact that you're making lots of cost cutting, etc., etc., that your margin going forward should be higher than it was in the three years prior to 2008, despite the fact that -- that's what I was just trying to gauge really from you.

Going forward, we have no intentions of giving up the gains that we've made in efficiency in 2009, if that's helpful.

Right.

And, just lastly, when demand does pick up again what is going to happen to inventories?

Are you going to be able to hold them back to -- and really benefit from this working capital reduction you've had?

Or are we going to see an expansion of working capital in the cycle?

Well, certainly working capital and, as Steve indicated earlier today, days sales outstanding are our continuing focus as we go on.

But there certainly maybe a little bit of expansion, but we're going to try and do everything we can to minimize it.

So I think we have time for one more question.

Okay, thanks.

Thank you.

We'll now move to our next question from Tom Klamka of Credit Suisse.

Please go ahead.

Good morning.

Hi, Tom.

Can you talk about on the working -- on the working capital you've gotten some cash out of receivables and inventory, but a lot of it has been offset by payables reductions.

When do the payables hit your base line, given your production declines, so that'll stop being an offset and you'll see a bit more cash coming to the balance sheet?

Yes, this is Steve.

I'll take this one.

In the Q4 we're certainly expecting further reductions in receivables and inventory, as we've highlighted here in our working capital projection year-end target.

And we'll see much less of a negative impact from payables in the fourth quarter is our expectation.

Okay.

And then the last question.

On the Construction Equipment side you comment on the status of the management restructuring, but if you could comment on what's been done on the operational restructuring side?

And, given that the losses have been -- on operating income base (technical difficulty) losses have been flat the last three quarters, is it possible to get that business, in your view, to a break even status, assuming no improvement in revenue?

So if market stays where it is, can that be brought to break even over the near term?

Clearly, if you go back and you look at the previous cycles and downturns that impacted the Construction Equipment business, if near term is 2011, most certainly I see returning to at least a break-even business.

A lot depends upon the size or the rate of the recovery in 2010.

But there's no reason that this should not be a strong profit contribution to CNH.

Is a lot of the FIFO impact, is that disproportionately hitting CE versus AG?

It's a much more -- it's impacting much more by Agricultural Equipment.

More by AG.

Yes.

Okay.

Okay, thank you.

Thank you.

Great.

Well, unfortunately, that's all the time we have for today.

I want to thank you all for joining with us and participating in the call.

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

Thank you and good day.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.