CNH Industrial NV (CNHI) 2009 Q4 法說會逐字稿

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

For your information today's conference is being recorded.

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

Gerry Spahn.

Please go ahead, sir.

Thank you very much, operator.

I want to welcome everybody to the CNH 2009 financial results conference call.

My name is Gerry Spahn.

I'm the Head of Investor Relations.

I want to thank many of you for helping me get up to speed over the past couple of weeks, and I look forward to working with you in the future.

We are lucky to have with us today Mr.

Harold Boyanovsky, our President and CEO; Steve Bierman, our Chief Financial Officer; Marco Casalino, our Treasurer.

Today we want to be able to walk you through the results and take your questions, but before we start I have to review some legal disclosure items.

In recognition of Reg FD, we provide public guidance to this morning's press release, which we will elaborate in today's call, and after this call the guidance will not be updated until CNH issues a press release on the subject.

During today's presentation and answering questions, we will be making some forward-looking statements concerning the Company's plans, projections and objectives for the futures, and these are subject to risks and uncertainties.

We issued a press release this morning and on our form 2008 annual report filed in the Form 20-K for the year ended December 31, 2008 on file and contains additional information on the important risk factors and uncertainties in the Company's business.

These 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 are filed with the SEC on a Form 6-K.

We have noted on the slides that you can find reconciliations to generally accepted accounting principles of the US or US GAAP.

Various non-GAAP financial measures will be used in analyzing our performance that is in the appendix.

Finally, this conference call is live and webcast over the Internet.

It is being recorded for future transmission and used by CNH, Thomson Reuters and other third parties.

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

and are not to be rerecorded or rebroadcast without our expressed written consent.

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

And now that we have gotten through that I would like to turn the call over to Steve Bierman.

Steve is going to take you through the financial review for 2009 and in Q4 and is going to give you a quick business review before he wraps up with our outlook.

Steve?

Thank you.

I know you have already had a chance to take a quick look through the presentation package.

Let's go right to slide five where we sum up the key points for the year.

On the second-quarter call, you remember we shared with you our target to reduce working capital by $1 billion.

We had expected a slightly stronger second half of the year, yet despite some softening we managed to reduce inventory and accounts receivable and, in fact, beat the target with a $1.2 billion working capital reduction.

The organization had a clear directive to reduce accounts receivable and inventories.

We've focused on this, we established plans, we monitored our progress, and collectively we exceeded this target.

We improved our cash position in the year by $953 million, and we start 2010 in a net cash position of $530 million, and we intend to bid on this during the upcoming year.

Notwithstanding the drop in industry volumes, we delivered a positive operating profit with $101 million in Q4 and $373 million for the full year.

In the fourth quarter, we delivered a $0.20 EPS before restructuring and after tax.

In addition to working capital management, our operating cost was another area that we could control in the difficult environment of 2009.

Year-over-year we reduced our SG&A by 18%.

I certainly don't need to tell anyone on this call that the credit markets were difficult in the early part of 2009, but we are encouraged by the way the year ended with respect to the capital markets.

CNH Capital closed to obtain transactions in the fourth quarter.

These transactions totaled approximately $4.5 billion but more importantly generated $1.1 billion of incremental cash.

So, in summary, we are generating cash, we are managing working capital, we had positive operating profit and EPS in the fourth quarter, we are controlling our costs, and we see dramatic improvement in the capital markets from where we began 2009.

Now if we look at slide seven, I will give you a quick summary of the highlight of the P&L for the year.

Net sales of $12.8 billion down 26% year-over-year.

Operating profit of $373 million for the year, down 75%.

Financial services turned in net income of $174 million, down 28%.

The net loss attributable to CNH, excluding restructuring, after tax was $115 million or a $0.48 loss per share.

We improved from a net debt position of $423 million to a net cash position of $530 million.

This is the $953 million improvement that I mentioned previously.

Let's move to slide eight for a closer look at our net sales and operating profit.

Net sales were down 26%, though we did see this trend moderate in Q4.

The drop in ag sales for the year was 17%, while the construction equipment sales decline was much more dramatic at 53%.

You see the recap of our operating profit.

The collapse of the Construction Equipment market was the biggest negative for our operating results in 2009.

The Construction Equipment operation lost $339 million for the year.

The decline in the profitability of the Construction Equipment business comes mainly from the decrease in global volumes.

While there is no question that we have seen a drop both in operating revenues and profit, we are also comparing our results in 2009 against 2008, which was a record year for Agricultural Equipment.

Turning to page nine in the presentation, we will walk you through the main factors which impacted our 2009 operating profit when we compare to the operating profit for 2008.

Lower volumes were the main cause of this drop.

Volume and mix accounts for a $1.2 billion decrease.

We achieved $500 million in net pricing.

We have been able to hold our pricing at levels above increases in cost.

Our production costs were up $371 million year over year.

As a practical matter, we achieved operating efficiencies and cost reductions, and this negative impact is mainly made up of our FIFO inventory adjustment.

As we worked our inventories down during the year, the impact of using FIFO as our valuation method flowed negatively through to our 2009 P&L.

We had a significant savings in SG&A, $168 million for the full year in equipment operations.

Controlling SG&A is a clear target for every leader in this Company.

We reduced our salaried workforce by 13%, but we did not stop there.

We implemented and continue with tight controls on items such as travel expenses.

These reductions in 2009 were significant.

Our R&D expense was down slightly, $8 million from last year.

We continued to invest heavily in our products.

We did not have any significant change in scope of R&D projects this year, and we continue to benefit from our work with Fiat Powertrain in developing engines.

The negative impact of currency on translation for the year was $89 million.

Within the other line, the biggest factor was the negative impact of currency hedging and exchange impact on transactions during the year.

These two items totaled $150 million.

Let's move to slide 10 and take a look at the evolution of our net debt position over the year.

We finished 2008 in a $423 million net debt position for equipment operations and finished 2009 in a $530 million net cash position.

Let's look at how we move from a net debt position to a net cash position.

We reduced accounts receivable by $794 million over the year.

But our reduction of inventory was even more dramatic, almost $1.4 billion.

An offset to this was a reduction to Accounts Payable of $920 million, driven by the slowdown in our production.

I would like to repeat what Harold stated in our press release.

We set clear targets on improving working capital and put in place action plans and the Company executed them.

Moving on, net investment for the year was $217 million, down compared to 2008.

We saw higher CapEx in [2A] to meet peak demand.

After $112 million in other changes, we ended the year with $530 million in net cash on hand for equipment operations.

I consider this to be a very good outcome.

Slide 11 compares our change in net debt for 2009 to the result for 2008.

I have already taken you through the changes for 2009.

Here you can easily compare our cash flow generation and working capital movements and the dramatic improvement of 2009 when compared to 2008.

On slide 12 we show the impact of destocking for both company and dealer inventories.

This is a slide we have shown you before.

2009 was clearly a year of destocking -- destocking not only for us but for the entire industry.

We cut back production over the year, under-producing retail sales for Agricultural Equipment by 12% and for Construction Equipment by 51%.

We have cut company and dealer inventories.

We reduced our Agricultural Equipment inventories by a third and our Construction Equipment inventories by slightly more than half when looking at inventory levels on a four-month supply basis.

Management of both dealer and company inventories will continue as a key area of focus for 2010.

In addition to reducing working capital, we accessed the capital markets in 2009.

The net result of these two activities is the improvement of our liquidity position.

We see this result as we turn to slide 13.

This graph compares our cash plus our deposits with Fiat to our existing debt maturities.

This analysis again focuses solely on equipment operations.

This picture continues to improve.

On the topic of capital market access, we will now turn to slide 14 to give you an update on activities for financial services.

From a funding perspective, we saw improvements over the year.

The improvement in spreads and other terms and conditions that began in Q3 continued into Q4.

In the fourth quarter alone, financial services closed 15 transactions, which totaled $4.5 billion.

These transactions generated $1.1 billion in incremental cash.

For the full year, financial services closed over $10 billion of transactions globally.

This includes new transactions of $6 billion and renewals of $4 billion.

We closed private transactions with banks and financial institutions, but the significant event for financial services was the resurgence of the ABS market in North America in 2009.

TALF was a positive factor in the rebound of the US ABS market; however, our most recent retail securitization although TALF eligible was sewed entirely to non-TALF investors in the US.

We were also pleased to see the restart of the ABS market in Canada.

On the retail side, we have excess funding capacity and clearer visibility on our funding costs.

Last quarter I mentioned to you that we closed the wholesale transaction in the US, and in the fourth quarter we were able to close the wholesale transaction under the Canadian version of TALF.

Let me just say that, although the ABS markets in general were hit hard, the impact on the wholesale financing side was more dramatic.

After closing, these two transactions and as we continued to renew other wholesale transactions we are also encouraged by the improving conditions in the wholesale financing segment.

This is positive not only for CNH but also for our dealers.

Let's move to slide 15 and review the highlights of the fourth quarter.

Net sales of $3.2 billion down 12%, but we do see some moderation from the 26% decline for the full year.

An operating profit of $101 million, down 66%.

Further evidence of the improvement in the ABS markets and our funding conditions was Financial Services net income, which was $96 million which includes significant gains from ABS transactions.

Net income attributable to CNH before restructuring after-tax of $47 million, this is just $0.20 a share.

This again from improvement in margins and also from the contribution in the quarter from CNH Capital.

We generated $713 million of cash in Q4 from operations.

Let's take a look at slide 16.

The drop in net sales was primarily from lower volume with currency and pricing slightly positive.

Net sales for ag were down 12%, and Construction Equipment fell 16%.

Ag operations posted a $167 million operating profit in Construction Equipment, a $66 million loss.

We did not see a significant change in ag operating margins, but Construction Equipment improved from a negative 17.4% year-to-date margin to the end of Q3 to a negative 11.2% margin for Q4.

Still not a good answer obviously, but an improvement and hopefully an indicator that we are near the bottom of this steep market decline for Construction Equipment.

On slide 17 we can go through the variance analysis of Q4's operating profit.

Volume and mix was negative for $257 million, but we saw stronger net pricing with the positive $226 million impact.

Production costs were negative by $77 million.

Here again, you see the benefit of our focus on SG&A reduction as SG&A was $61 million lower in the fourth quarter year over year.

R&D was up $3 million.

Translation had a negative $50 million impact.

Other totaled a $98 million negative impact of this currency transaction alone had a negative $46 million impact.

On slide 18 you have a snapshot of our change in net debt in Q4.

Again, Q4 was a very strong quarter for cash flow generation and working capital reduction as we decreased net debt by $713 million.

We brought down accounts receivable by $171 million, reduced inventory $432 million, and saw an increase in Accounts Payable of $336 million.

The net impact and changes in Accounts Receivable, inventory and Accounts Payable was a $939 million working capital reduction in the quarter.

If you will look at slides 20 and 21 together, you get a view of the ag market for the full year and how it ended in Q4.

For the full year, industry sales were down 7%.

This is compared to an exceptionally strong 2008 where we saw commodity prices drive record farm incomes and demand for our products.

Both the tractor and combine markets were down for the full year and in the fourth quarter.

In the combine segment, we saw growth in 2009 in North America all year, including Q4 and in Latin America just in Q4.

We also see that the tractor market grew in rest of the world throughout the year, but this was largely driven by China where we do not have a significant presence.

If we look at CNH's market share, on the tractor side, we were generally flat.

One item I would point to is the gain in share in the profitable North American over 40 horsepower tractor market throughout the year.

Combine share was down for the year in North America, but we recovered some of this in Q4.

Slides 22 and 23 when taken together give you a look at how the Construction Equipment's markets unfolded for the full year and in Q4.

Across the board, Construction Equipment was down for the year, except for an uptick in the rest of the world region in Q4.

Looking at the industry data, our market share was down both for both full year and Q4 with the exception of Latin America where we gained in both periods.

The answer to your obvious question is we are not pleased with this performance, and we need to improve on it in 2010.

Now let's turn to our outlook for 2010.

You can move to slide 25 where we see the latest global insight data on key indicators.

We see a slightly more conservative outlook for crops going forward since last quarter, mostly as a result of better than expected corn and wheat yields in 2009.

Strong demand for soybeans is expected to continue.

Even though corn prices started off the year with a drop, the forecasts prices for corn and wheat are still at attractive levels, but we will continue to keep an eye on them as we go forward.

If we move to slide 26, as we have talked about in the past, we continue to anticipate a significant drop in US net farm income in 2009 and 2008, roughly a 30% drop.

We don't expect this drop to be distributed evenly across the board with rogue crop production farmers expecting to decline less than the decline expected in the livestock and dairy segments.

On slide 27 we take a look at the GDP forecast in key markets.

GDP growth above 2.5% historically signals an increase in construction activity in an economy.

For North America, Europe and the rest of the OECD markets, we don't see an impending macro recovery in 2010.

Of the [massive slide] for growth, we want to know Latin America as Brazil is the key economy, and we continued to see favorable market conditions such as the extension of the FIA.MI financing through June 30, 2010, as well as longer-term opportunities driven by the upcoming events of the World Cup and Summer Olympics.

Obviously on the construction side, we need to hit bottom, and before we see a pickup, we anticipate it will take two to three quarters for the industry to work through inventories, both new and used.

That said, after a period of significant destocking, we anticipate an increase of our production levels in 2010.

We continue to keep an eye on a variety of industry surveys, including rental and retail channel surveys for the Construction Equipment sector.

This, along with our own internal data, seems to indicate that sentiment stabilized in Q4 and in some areas seems to be picking up.

That said, we continue to remain cautious but optimistic.

On slide 28 we detail our industry outlook by market for 2010.

On the agricultural side, we see the tractor industry down 5% to 10% globally with Europe likely to decline 10% to 15% and a Latin America improving by 5%.

Globally we see the combine market down 5% to 10% across-the-board, again with Latin America the exception as we look for growth of 5% to 10%.

For Construction Equipment we see global demand being up 5% to 10%.

We see industry demand for both light and heavy equipment flat to down 5% in North America and flat in Western Europe.

Latin America is forecast to be up for both light and heavy equipment due to the factors we have previously discussed.

The 10% growth outlook for rest of the world is again driven largely by China.

And on slide 29 I want to recap main points from today's presentation.

Despite the downturn in 2009, we posted an operating profit, we generated cash, we saw improved funding conditions, not only for equipment operations but also for financial services, and we managed our costs.

In 2010 we expect improvement in profitability.

We will continue our focus on generating cash, not only for working capital reductions but also from improved profitability.

We will continue to manage our costs and to position ourselves for what we hope is the start of a rebound in the global economy.

I know some of you would like specific financial guidance today, but we're going to defer specifics until we get to the opportunity to share our first-quarter results with you.

At that point I would expect to provide more detailed guidance.

That wraps up my comments for today.

I thank you for your attention, and now Harold and I can get to your questions.

Thanks, Steve.

Before we go to Q&A, I would just like to ask that during Q&A when you ask a question you can please ask two questions.

That way we will try to get everybody on the call.

When you ask a question, can you please remember to clearly state your name and what firm you're calling from.

So, operator, we will go to questions at this point.

(Operator Instructions).

Jerry Revich, Goldman Sachs.

I'm wondering if you could first talk about the production versus retail sales plan that you expect for 2010 in that Construction Equipment business, and maybe you could expand that to talk about the ag equipment business as well?

I would be happy to do that.

In 2010, in the Construction Equipment sector, which you asked about first, we would expect our production to be below retail levels in the order of magnitude of 10% to 15% across-the-board.

On the agricultural side, we would expect retails to exceed production by about 3%.

So we are seeing in 2010 again 3% of production below retail for ag, 10% to 15% for Construction Equipment.

Thank you.

And on the CNH Capital side, I'm wondering if you can discuss what were the ABS gains in the fourth quarter and what the 2009 CNH Capital income would look like based on the new variable entity accounting standards roughly just so we set the bars right heading into 2010.

Right.

The fourth-quarter gains were $67 million, which is essentially the gains for the full year, which were $68 million.

What I would say to you for financial services for 2010 obviously these gains don't repeat themselves as you know.

We would expect to see slightly better net interest margins in 2010, probably against lower portfolios, and we would expect our losses to essentially moderate in 2010.

So our expectation would be when you carve out the 2009 gains for a flattish outlook for financial services.

David Raso, ISI.

On the production versus retail for construction, the down 10% to 15% below retail, I suspect that is very front-half loaded.

Do you expect to see by the third quarter or fourth quarter you are producing back in line with retail?

Because obviously the swing for construction loss to hopefully get the possibility at some point is a major kicker to bringing the whole Company back to profitability.

So if you can touch on that -- production versus retail as the year goes on and maybe a thought on when construction can become profitable.

We had a little trouble hearing you, so I'm just going to recap your question.

Tell me if we got it.

You want to know what the outlook is going to be for 2010 production versus retail, particularly on the CE side.

(multiple speakers)

Maybe speaking up would be better.

But the 10% to 15% production versus retail for construction, I suspect that is very front-half loaded.

Can you give us some indication of when do you think production will be back in line with retail and construction and then ducktail that into when you think construction can return to profitability?

Because that is significant for the whole company to return to profitability.

This is Harold.

You are absolutely right.

The first semester, or first half to the year, we will be under-producing at a lower rate than in the second-half as we continue to work down some of the excess inventory in some of the regions.

But having said that in general, a year ago we underproduced, as Steve indicated, 51%.

So even in the first quarter, the adjustments we will have will be half of what we were doing a year ago.

Would you be able to give some indication of when do you think production will be in line with retail, at least what is the plan?

And that moment that that occurs, is that when you think you can get back to profitability or at least breakeven in construction?

It depends upon the level of the industry, quite honestly.

And although we have seen some moderation, let's just use North American market.

November was a little better on an industry decline than October/December was better than November, but it was still down double-digits.

And, as Steve indicated, we are thinking that is the used and the new inventory, the rental inventories worked through the channel, it will be at least going into the second half, and this is the reason that we said we would give you a better indication of our full-year outlook in concert with the first-quarter earnings release.

And lastly, I walk hop off after the question about price versus cost.

Can you just give us some indication of how you're thinking about price versus costs for the individual businesses, ag and construction?

(inaudible).

We have got a little technical glitch here.

Okay.

There we go.

Sorry about that.

Pushed the wrong button.

Okay.

The question was what is your price versus cost, David, and how is that -- what is the outlook on that going forward?

Okay --

For both ag and construction, if you can break them up between the two divisions.

Okay.

So price versus cost on ag versus construction.

I will start.

This is Steve.

On the ag side, we have a 3.5% increase in our price book for the start of 2010.

On the CE side, we don't yet see any real price improvement from 2009.

We do anticipate that improvement will come from targeted destocking and, quite frankly, re-stocking in selective areas.

So we see this improving as we go through 2010.

Okay.

Does that answer your question there for you?

The comment on costs, so if you could relative to those price comments.

Giving you more specific comment on cost?

What I would say is with respect to our material economic we see costs essentially returning back to 2007 levels around the globe.

Latin America seems to be the continuing exception to that where we are continuing to see prices or costs, economics in the range of 3% to 4% above where they were in 2007.

What I could tell you today, David, is that it is our expectation that we have the ability and that we will keep rising ahead of cost increases throughout 2010.

Ann Duignan, JPMorgan.

My question is around your outlook for profitability improvement in an environment where you are going to be producing significantly less in 2010 and even 2009.

Can you talk about specifically how you are going to achieve that?

And then in conjunction with that, how are you going to achieve market share gains if you are under-producing retail into 2010?

Let me take the last question.

The answer is we are going to lower the inventory levels that we have in the dealer channel or in the company channel from what we have today.

Although we have made significant progress in 2009, as Steve indicated earlier, we are keeping our eye on further working capital reduction in 2010.

To the first part of your question, in 2009 because of our FIFO method of valuing our inventory, the margins were impacted significantly as we worked through a lot of this high-cost inventory, as you may recall of 2008.

And that number was something short of $500 million, $488 million to be exact, that negatively impacted the results.

So as that high-cost material flows out of the production system, we are expecting positive impact on the material costs in 2010.

And that is in the range of 150 to 180 roughly.

Okay.

That is helpful color.

And just a quick follow-up on could you talk a little bit more about the $150 million efforts impact from hedging and transaction, and how we should think about that going into 2010?

Just to clarify, once again, just want to make sure we are clear.

You wanted to know a little bit more information on the $150 million impact from hedging and other transactions that were referred to in the other column?

Yes.

I will let Marco Casalino, our Treasurer, provide you some color on that.

(inaudible) number for the full year.

Of course, we operate on different markets.

In a fund volatile year, especially on some currencies, I think I may quote them, especially the Australian and Australian dollar.

In the equity we had some losses.

If you look at the same number for the fourth quarter, you may see an improvement.

I think we will be in a better situation for 2010.

So you can extrapolate our 2009 number.

Okay.

So it was primarily the Australian dollar.

Is that how I interpret it?

I mentioned that as an example, but of course, I mean we work on different markets.

Okay.

So it is difficult to forecast the impact of that in 2010?

No, we don't forecast on currencies.

Henry Kirn, UBS.

A quick question on restructuring.

Could you talk a little bit about how much more runway there is in your restructuring programs, maybe a little bit about the costs you expect to incur as we go through 2010 and if applicable the benefits you expect to be able to see?

Okay?

Let me just repeat that again for you, Henry.

What is the expected -- the continued running cost on restructuring in 2010, and what else do we expect to see?

Does that sum it up?

Yes, exactly.

Benefits and cost of restructuring in 2010.

I will start by telling you in 2010 we would expect the cash outlay for restructuring activities to be between $20 million and $30 million.

In 2009 the gross benefit from restructuring actions that we have already concluded was approximately $30 million.

In 2010 we would expect to see savings well in excess of that from the actions that we did take in 2009 and actions that are already completed.

By 2011, when all of our actions are complete, we would expect the SG&A savings or the cost savings run-rate to be approximately $100 million.

Is that something that is clear for you?

That is helpful.

Thanks.

As far as your cash now that you are in a better cash position, could you talk a little bit about your plans for cash in 2010?

Okay.

Okay.

Just so I caught that.

What are the plans for cash in 2010?

Right.

In terms of capital --?

Right.

How do you intend to use cash to deploy it in 2010?

This is Steve Bierman.

I will take that.

It is we would look to generate cash flow from operations as at this point we're not going to give specifics with respect to the range that we are looking for.

We will share that with you in April.

But we are looking to generate cash from operations, which would include profits, as well as further working capital reductions.

Obviously we don't anticipate the order of magnitude of working capital reductions that we had in 2009 to repeat themselves in 2010.

We will continue to pay down debt as we see the opportunity to do that.

We will continue to invest in our product.

We have a significant capital expenditure budget in 2010.

I think you will see us continue to generate cash, pay down debt, hopefully improve upon our net cash position, and fund our investment in plant and product.

Joel Tiss, Buckingham Research.

I wonder if you guys could break down the finished goods inventory between your Agricultural business and your Construction business?

So just to (technical difficulty)-- so I can repeat, the breakdown of inventory between Ag and Construction, was that your question (multiple speakers) for the end of 2009?

(multiple speakers) just a percentage to get us into the ballpark.

Give us a second here.

We will pull up the exact --

Yes.

I would say the Construction Equipment finished goods -- well, this is old inventory, I am sorry, inventory would be about 30% in that range of the total.

And can you spend just a couple of minutes on Brazilian or Latin American Agricultural Equipment and just give us a sense, it looks like the fourth quarter was up in the 20% range, and for the full year, you're only looking for up 5% to 10%.

So I just wondered if you could give us a little color on what you're seeing there for the next 12 months?

Yeah, I think from Brazil, as well as other key markets such as Argentina that the customers request with more than adequate rainfall.

Secondly, the current government has extended the social and the incentive programs not only for large tractors and combines through FIA.MI at 4.5% interest, but also the modernization of the small farm and under 100 horsepower tractor program has been extended through June 30.

So we think that the incentives are there.

The crops, particularly soybeans, yields look quite good.

Sugar is, as we all know, is extremely favorable at the moment, and so we are looking for a good year in Latin America totally and then in particular in Brazil.

The first quarter we think it will be up the tractor industry maybe in the 20%, mid-20% range.

Steve Volkmann, Jefferies.

Just a question back on the CE business.

Is there more that can be done in terms of restructuring there to lower that breakeven point, or at this point are we kind of fairly happy -- maybe that is not the right word -- with the cost structure and we just need the volumes to kind of come back?

And sort of a follow-on to that, is you mentioned that you were not happy with your market shares there.

What can you do about that?

Yes, part of the market share issue, Steve, is dealing with the structure of the current industry decline, particularly in the housing market around the world.

The New Holland and Case brands, as you are aware, were very strong on the light equipment, the tractor loader, backhoes, skid-steer, and these units predominantly are sold into residential construction, some pipeline and landscaping both on construction on the Agricultural side.

So, as the housing market residential construction starts up, we are going to be back into a mix that is favorable to CNH.

So we really have a mix issue at the moment that we are dealing with.

And on the cost side, no, we are not happy.

We are always looking for opportunities to further lower the costs, and this is the reason that we have announced the restructuring in Europe of our [Emilia] facility to further take fixed costs, which we talked to you all about in a previous conference call.

But that plan is underway and on schedule.

Okay.

Great.

Thanks.

And, Harold, you gave some color on the tone of the quarter month by month in the Construction Equipment business.

I'm wondering if you maybe could do that for the Ag business as well?

I was noticing on slide 12 it looked like the ag production ticked up nicely in the fourth quarter versus the third.

I am just curious if there is a trend there within the quarter that we should be aware of?

Yes, let me I think use our order board and give you some comments relative to our order board.

Because I think it is consistent with our forecast for the year that Steve mentioned in his presentation.

If you take a snapshot globally, the tractor order board year over year is down about 5% and combines down 14%.

North America is up.

Latin America is up.

The other regions are down.

We have not seen any significant recovery in the CIS at the moment.

As a matter of fact, if we just looked at combines, which are high margin, high dollars for us, the order boards are stronger in North America at this time than they were a year ago, which is quite positive for the brands and shows you that our customers are maintaining positive outlook.

On the CE side of the business, globally our order boards are up 60%.

They are up in all regions with the exception of international, which is flat.

But we have to recall that is from a very low base.

But it is a very positive sign.

Matt Vittorioso, Barclays Capital.

Just a quick follow-up to the cash deployment strategy in 2010.

What is your current appetite for acquisitions, and as a follow-up, is it your goal currently to get to investment grade credit ratings, and have you had any conversations with the agencies that would indicate what you need to do to get there?

I think from an acquisition side our first priority is fixing our core business, which we have been working on diligently.

If there is an opportunity that comes along in this environment that fits with our core business and makes sense, we would not preclude taking a look at it.

On the other side, I will let Steve answer the question.

Obviously we would like to get to investment grade.

That goes I think without saying.

We have met with the rating agencies, and what I would say is we obviously would need to improve our profitability, particularly in the construction equipment sector.

That is not a surprise.

I think one of the overriding concerns has been the question as to the ability of particularly the capital company or financial services or CNH Capital to finance itself.

And I would say to you based on the information I have shared with you today I think as we revisit with the agencies, which is something we do periodically, we would expect to have a better and improved story to tell them vis-a-vis the ability of CNH Capital, particularly in North America to finance itself.

I think at this point those would be the two major concerns or issues or areas for us to address in the rating agency review.

Jochen Gehrke, Deutsche Bank.

Most of my questions have been answered but just a quick follow-up.

Fiat in its group outlook have stated that they expect CapEx to rise about 30%, 35% across all industrial divisions.

Is that also true for CNH?

Just to recap, you wanted to know what the outlook was for CNH CapEx?

Yes, that is correct.

I have not calculated the percent here, but I would say that would be in line for us as well, the range that you have given.

We do expect an increase in our CapEx and product development costs and cash outlays in 2009 -- I mean 2010 compared to 2009.

Alright.

Thank you.

Larry De Maria, Sterne, Agee.

I am just curious as it relates to the order board, I believe you said it was down 5% for tractors and down 14% for combines.

Yet you finished the year pretty strong.

I'm just curious how things may or may not have changed in the last couple of weeks given the obviously changing dynamic outlook for commodity prices on the ag side?

Have things changed?

Did you have to move the guidance around a little bit?

Just some further color about the sentiment you guys are seeing in light of the recent (inaudible) data would be very helpful, thanks.

The numbers I was giving you, Larry, are as of 19 January, and they have not changed at all.

I think the key point is, when we look at the commodity prices, yes, they have trended down over the last several weeks.

But they tend to trend down at this time of the year anyway.

And if you look at where we are, they are significantly above where we were when corn dropped below $2.

So depending upon what the crop to use ratios are and the inventories, which we will see I think in the March reports, there could be a normal run-up just as we saw in 2009.

So I'm not particularly panicked about the commodity prices at the moment.

As Steve indicated, we have our eye on them, but I don't think it is as bad as what some people are saying, at least when you take it to our customers.

That is very helpful.

Thank you.

When will you guys update your engine technology outlook for interim Tier 4?

For Tier 4 emissions, as you know, the first requirement is 2011.

We will be using SCR and CEGR type technologies for the Tier 4A.

But then as we move into 2012 and beyond, we will be gravitating to SCR because we believe that it gives the customers better fuel economy and an opportunity to improve their production costs versus the other solutions.

And, in general, if you look at above 100 horsepower in the Tier 4A, you will see from SCR technology, and in the lower horsepower, you will see other solutions until we move to the second phase of the emissions requirements.

Steve Volkmann, Jefferies.

Just a quick follow-up.

I'm wondering if on the SG&A cost side, there are some temporary cost cuts that we had in 2009 that might actually start to come back in 2010 like I don't know travel or incentive compensation or anything like that?

Let me answer that one.

I think I can speak for all of our operators and our management team that we have worked very hard to take out any cost that was not absolutely necessary to support the level of business with the industries that we have today either in the Ag or the CE side.

In fact, we have been able to bring the SG&A levels, employment levels, down to 2007 levels.

And we are holding the line on that.

We are not changing our policy or our practice until we see what the market yields.

And so but right now we are managing the business just as we did in the fourth quarter of 2009.

Ann Duignan, JPMorgan.

I had just a point of clarification.

I just wanted to make sure I heard you correctly.

Did you say your Construction Equipment order board is up 60%, 6-0?

Yes, but again, that's from a very low base, but it is positive.

But then I don't understand why you have to underproduce significantly then.

What am I missing?

Because we ended the year with a four-month supply greater than what we need -- what we feel is sufficient to support the retail.

So, as we indicated in the first half of the year, we are making further adjustments to the order board -- or to the production schedule.

Okay.

And you said that you will reduce dealer inventories.

How do you accomplish that other than using pricing?

I'm surprised that pricing has planned to even --

Just to repeat again, how are we going to reduce dealer inventory while protecting pricing?

Is that correct?

Right, yes.

By not pushing wholesale.

So just allowing the dealers to file what they have in inventory?

That is exactly right.

(multiple speakers) and then work down (multiple speakers) and work down their rental inventory.

Okay.

We have seen some very aggressive financing out in the marketplace.

Are you using financing to help accomplish that?

Absolutely.

I will let Steve wear his capital company hat on that, but yes, we are.

The capital company is working with our construction brands as we always do to utilize retail financing as a tool to help move retail and good markets and in the down markets.

So no question here in 2009 we have continued those efforts more so with the construction side in terms of how we have approached that.

But we continue to find it to be an effective tool.

The use of financing, is that included when you tell us that pricing is flat, do you include the cost of doing these aggressive financing programs in pricing?

Is your pricing net pricing or gross?

Yes, we do.

Any special buydown from the standard commercial rate from financial services of the capital company is reflected in the brand's sales allowance costs.

Okay.

So 0% pricing includes any financing costs?

Yes.

Steve gave you a net figure.

Thanks a lot, Ann.

That is our last question.

We are running now two minutes past the hour.

We know you all have a very busy earnings day today.

We are going to wrap the call up here.

I just want to thank the participants.

Thank you for taking the past hour to join with us.

As I mentioned before, all of the materials are available on our website at www.cnh.com.

We look forward to talking to you.

Both Federico Catasta and myself will be available over the coming weeks to help answer your questions, and we look forward to talking to you all on our April follow-up for the Q1 conference call.

Have a great day.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.