CNH Industrial NV (CNHI) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's Fiat Industrial 2011 Second Quarter & First Half Year Results Conference Call. For your information, today's call is being recorded. At this time, I'd like to turn the call over to Manfred Markevitch, Head of Fiat Industrial Investor Relations. Mr. Markevitch, please go ahead, sir.

Thank you, Sarah. Good morning or good afternoon, everyone. We would like to welcome you to the Fiat Industrial second quarter and first half 2011 results webcast conference call. Fiat Industrial Chairman Sergio Marchionne, Alfredo Altavilla, CEO of Iveco, Giovanni Bartoli, CEO of FPT Industrial, Camillo Rossotto, Group Treasurer, and Rich Tobin, CFO of CNH, will host today's call.

They will use the material you should have downloaded from our website, www.fiatindustrial.com. After introductory remarks, we will be available to answer the questions you may have. Before moving ahead, let me just remind you that any forward-looking statements we might be making during today's call are subject to the risks and uncertainties mentioned in the Safe Harbor statement included in the presentation material. I will now turn the call over to Mr. Sergio Marchionne.

Good morning. I have got some very brief remarks to make. When we went back and looked at the presentation that we made back in April of 2010 and we pitched and outlined the future for Fiat Industrial, we were relatively clear that from a forecast standpoint, we thought that the plan that we had laid out, of all the numbers that we showed the market at that time were probably the ones that we felt most comfortable with than the ones that we thought were more easily achievable, given the market dynamics and the trading conditions of these businesses we are in.

I think that what we've seen in the second quarter of 2011 is a confirmation of what we told you over a year ago. And it is the basis on which I think we have reached a level of comfortable upgrading guidance as early as the second quarter of this year, which is something that we would normally do as we approach the last quarter of 2011.

So what you're going to hear today from my colleagues here at Fiat Industrial is a series of what I consider to be fundamentally good news about the state of the business. We have really nothing negative to report. Trading conditions are healthy across the majority of our significant trading regions. Alfredo will speak in detail about Iveco's experience in Europe on the truck side and especially in the southern part of Europe and what he's seeing.

But absent the structural weakness in what I call the club net countries in Europe, particularly the rest of the global businesses of Fiat Industrial are doing well. We have had a good quarter revenues were up nearly 11% in 2010. More significantly, the trading profit margin is now at about 8.4%. We're still significantly lagging our competitors, as we all know. But I think it's a huge move forward from where we were and I think we are slowly approaching, and hopefully putting ourselves in a position to exceed the double-digit target that have set for ourselves for 2014.

Net results given at EUR239 million, again, to go back to something which I have reiterated now for a number of quarters, the significant story -- the significant element of the story of Fiat Industrial is cash generation capability. We're going to spend about EUR1 billion in capital. We're going to generate a significant amount of cash. And as evidenced for the cash flow generation in the second quarter, it is a consistent phenomenon that I think we'll see as the Fiat Industrial story develops going forward.

We're sitting on a significant amount of liquidity, nearly EUR4 billion. It's a number that we also confirm for the year end. So we expect no cash drain from the system. And I think that we will be in a position to paying, on a regular basis, dividends out of Fiat Industrial, which was one of the reasons why we thought it was important to cover that from the old Fiat structure.

We move onto page three, which deals with the highlights. [You're not get draw any back] vis a vis with the Euro VI story in detail in terms of the technology involved and the -- what I consider to be a significant technological breakthrough that we've made with SCR technology. One of the things that we are down in Brazil, the board met this morning. We had both the CNH and the Fiat Industrial board meeting here yesterday and today.

The objective here was to show the strength of the CNH and the rest of the Fiat Industrial activities here in Latin America. And consistent with our strength, we had decided in the early part of this year to consider -- to seriously consider expanding the operating capability of CNH in Argentina. We are, as a result of a variety of discussions that we've had with the Argentinean government and in view of the market needs to have local production for large combines in Argentina to serve local market needs, we have decided to expand our operation in Argentina up in Cordoba.

We were finalizing now the manner in which that expansion will take place, but it is an investment that will cost us over EUR100 million, but will effectively allow us to produce large capacity combines in Argentina to serve the Latin American market. This was a significant step forward.

We continue -- this is going to be the fourth combine plant that we now will have worldwide. We have two in Europe. We have one in the US and this -- we have just opened another one a couple of years ago up in Sorocaba. This will be the fifth, I guess, when you add them up all together at Zedelgem [block], Grand Island, we have Sorocaba, and now this one in Cordoba. So it's fifth.

And I'm looking at my friend, Tobin, who is reminding me that Curitiba is making combines. That's definitely true, but hopefully not for a long period of time but as we clean up that portfolio. A significant move forward, it reinforces our commitment to the region and is a significant profit generator for both Fiat and Fiat Industrial, I think it's something that we need to continue to nurture as we go forward. All indications from our review of the business, having been down here for nearly a week now, is just that the market continues to perform strongly and it will continue to do so both in 2011 and 2012.

In terms of guidance, we've moved trading profit up to a minimum of EUR1.5 billion. We'll revisit that number at the end of Q3. I think it's a safe number for now. I think that given the fact that we've re-dimensioned CapEx expenditures for the year, nothing is a capital restriction, but just an ability to invest the funds at the rate it was originally forecast, we're going to have debt level at about EUR1.6 billion as a maximum, now have about EUR4 billion worth of liquidity on our balance sheet. And on that note, I'll pass it onto Camillo, who is going to try and deal with some of the financial aggregate numbers before we pass it onto the sectors.

Thank you, Sergio. We're now on slide four. As you can see the breakdown of the revenues between the businesses that make up Fiat Industrial there about cooperate on the revenue side. CNH in dollar terms will be a 22% increase and translate to a 9.5% in euro terms.

Iveco and FPT, very significant decreases there. In the Q2, the trading profit breakdown, [refinitary] million which equates to a [230] basis point improvement versus the same quarter of 2010, are made up of, again, of a very significant contribution from CNH and Iveco. Where the operating leverage is kicking in at above businesses and they represent an incremental margin of 37% on the incremental sales of CNH and 25% for Iveco.

The FPT industrial comparisons with last year, which is pretty much the same amount in absolute value -- FPT industrial closed the quarter with EUR24 million trading profit. It was EUR23 million last year. It's somewhat biased by the fact that last year there were EUR9 million of nonrecurring income, which have now repeated this year. So the real comparison should be including those in the base.

Moving to the following slide, slide five, we're just capturing graphically the dynamics that have impacted the purchasing activities on the direct materials. Clearly, there's still headwind there. The good news is that all sectors here are capable of recovering, have actually already taken pricing action to recover. [Food] pricing, part of these increases and we're expecting that that's going to be true for the full year, while in Q2 that has already happened.

With that, I will move to slide six. Slide six is the reconciliation, the move from trading profit to net income. And when I'm looking at Q2, the largest reconciling items, obviously, are unusual items, financial charges, and investment income. On the unusual items line there is a combination of factors that have impacted this line item as we have reported at the bottom of the slide.

Iveco has started actioning some actions on the industrial footprint that Alfredo will provide some color around in his section of the presentation. And that has cost include the P&L EUR43 million. On the other side, we have had EUR16 million of nonrecurring income that has reduced the P&L impact.

Financial charges, I would invite you to take a look at slide 30 in the Appendix, which is where we, as usual, provide the breakdown of the EUR129 million for the quarter. The comparison on the apple-to-apples basis with Q2 of 2010 shows the deterioration of EUR29 million, as we had EUR17 million one-off in terms of a bond repurchase last year in CNH. And EUR129 million split, according to the table reported on slide 30, EUR36 million are essentially driven by the cost of the debt -- on the net debt amount -- in the comparison with the second quarter of 2010, is obviously showing a significant increase of debt as we have reported to you when we showed the impact of the de-merger.

We have allocated a couple of billion euro of debt at the beginning of 2011, which reflects, obviously, in this chart. The cost of carried is now recurring item in our sort of reconciliation on the financial expenses. Clearly, as interest rates in Europe move up, this should become a smaller number. But it's a significant amount of cash that we're keeping on balance -- on balance sheets and that is sufficient to pay all our cash maturities through the end of 2014. And you have the cost of the other -- in [post] -- the retirement benefit obligation through the P&L according to [act 19] and the others which are such of effects -- cost of hedging and discounting, obviously, the loss. That compares with last year.

We move to the following slide, slide seven. We take a look at the cash flow. As Sergio mentioned in his opening remarks, we have had a good cash flow generation in the quarter, which both therefore the rest of the year. And as you can see in terms of the quality of the cash flow, it's really been driven by operating performance, net income, D&A. The D&A is substantially in line with the CapEx in the period and that explains the change in the net debt move from EUR2.1 billion to EUR1.7 billion at the end of the quarter.

Are you done?

I'm done.

Great. If we can move onto slide number nine. Mr. Tobin who is standing in for Harold Boyanovsky, who has unavoidable family commitments and could not be here today, he told me that he had made these arrangements a year ago. So Tobin is going to -- Rich is going to try and do this in his place. Rich, you're quite knowledgeable, so go ahead.

Thank you, Sergio. I won't spend a lot of time on slide nine, which is the opening slide for CNH. Camillo has covered some of the high points. But revenues are EUR3.6 billion. The best part of that, if you take a look at the second line, the distribution of those revenues across the market presence of CNH -- all of the regions that have contributed to that revenue growth on a quarter-to-quarter basis. AG, EUR2.7 billion, pretty much solid trading conditions in both the tractor and harvesting equipment segments. Construction equipment up 17% on general market improvements and a particular robust performance in Latin America.

Trading profit of EUR381 million, up EUR118 million in higher revenues, improved pricing, and more favorable product mix. I call your attention to the graph. The trading profit variance walk -- so starting at EUR263 million, Q2 2010, EUR131 million due to volume and mix. As Camillo mentioned in terms of pricing action is EUR59 million positive pricing on a q-to-q basis. A little bit of a different story there on the AG side. It is absolute pricing taken to the market in preparation for both higher commodity costs and the introduction of Tier 4 compliant equipment.

And on the CE side, it is a normalization from reduced pricings coming out of the liquidation period of whole goods, there was that, the Group has experienced for 2009 and 2010, giving an aggregate EUR59 million of positive pricing on a q-to-q basis. We had a negative EUR23 million in production costs which is largely the result of launch expenses with new products from industrial inefficiency as a result of component constraints and some ramp-up costs associated with the European production base, which has largely contributed to the absorption on the positive margin on the AG and construction equipment side. SG&A flat, R&D up on the back of product launches in Tier 4 compliance programs and other just a net of translation FX related translation and transaction in FX.

Moving to slide ten, I will call your attention to Q2 2011 industry, by region, by segment, and then CNH's performance relative to that industry. You can see on the tractor side a good performance overall. You see down on APAC, it's a little bit of a messy number in terms of determining the total volume as far as the APAC regions and CNH's performance in there. So it's not an overly worrisome figure. The good news, both in the recovery of the European African Middle East and CIS markets is very good news vis-a-vis quarter-over-quarter performance. And as a result of that increased volume in those regions, the industrial leverage that we're getting out of our European clients on the AG side is positively contributing to the operating margin.

We move onto combines and harvesting equipment. Good performance overall. Good performance in North America. Europe again with some market share gains in Europe. Latin America down, largely the result of some quality problems experienced at the end of 2010, which has been largely resolved and sugarcane harvesters will expect to improve their position going forward. So overall, a good performance relative to the markets on the AG side in the geographical regions and the particular product segments that CNH competes in.

Moving to slide 11, a little bit of a mixed picture. We talked -- or Harold talked about quite a bit in Q1 in the light segment. In some of the delayed launches we had in the light segment, so we are recovering share. We are quite pleased with the product acceptance in both the tractor backhoe loader and the skid steer. June performance in terms of market share has been quite good, so that's a good sign in terms of product acceptance of new launches and the positioning of those particular products in the recovery in the North American market.

Latin America, although absolute performance very good, down in terms of shares, largely the result of this market is attracting a significant amount of imported materials. CNH as in Q1 is running very close to production capacity across the board on the construction equipment segment, so keeping up largely with the result on the 500-bit miss. On the heavy side, we talked quite a bit about constraints on the heavy side, both on the excavator product line, which is largely dependent on supply out of the Japanese supply base, both for component parts and whole goods.

But overall, a flat performance year over year on share, which is a very good performance considering the constraints that we had on North American performance, especially through the Latin American performance I think I commented on, on the light side. So overall, the construction equipment posted in the Q2 profits is a good sign. We think that with resolve on the light side, some of the launch issues that we had in Q2, so we expect that to perform better over the balance of the year and we'll be ramping up production on a European production base in the second half.

Moving to slide 12, it's a particular CNH chart, which shows company and dealer inventory and then matching retail sales to production. So we see a direct match on the AG side. So a slight reduction on company inventory. Company and dealer inventory on a q-to-q basis of Q1 to Q2 and a direct match in terms of retail sales and production. So largely we're selling right now everything that we can make from an industrial base. We don't expect this to change over the balance of the year until we get to the end of Q3 when we're ready to make a call on what we believe market demand is going to be for 2012.

If we move over to the right-hand of the side of the slide, the same thing for construction equipment so we can see the sequential liquidation of inventory from Q1 2009 and then an uptick in 2012. That's been the release of light equipment segments now that the launch issues are behind us in Q2. So we're bringing products and restocking our dealers and making the new products available into the marketplace. So nothing really worrying there, to the extent that production is in excess of retail for the second quarter.

Moving to slide 13, Sergio talked quite a bit of what the strategic intent and what our industrial aspirations are in terms of the Argentinean market and in harvesting equipment, particularly in the larger class combine segment. Our expectation here in the midst of finalizing our industrial plans right now in terms of where we stand, we expect to begin to do CKD units at the tail end of Q4 of 2011 and progressively ramp up production -- install production through 2012 and having an operating plant for large capacity combines at the end of 2012. That's all I have and I'll pass it onto Alfredo with Iveco.

Good afternoon, everybody. Revenues for Q2 at Iveco were up 16% to EUR2.4 billion, as we've said, primarily thanks to the recovery in the demand in most of the European markets and the continued strength in Latin America. Overall volumes were up 18.2% to 40,600 units, where we had Western Europe contributing with almost 13% increase. Italy finally is showing some signs of recovery in the heavy duty segment while the light duty still is weak and below 2010. The other market which is suffering a lot is Spain, which is the other domestic market that we have, given our industrial presence there. The market in Q2 2011 was down 30% compared with 2010 and I don't have any better indication for the rest of the year.

Eastern Europe is coming back with a 36% increase. Latin America, as I said, it's still growing pretty significantly. The increase in volumes were shared across all the different segments. The light duties were up [18%]. The medium 30%, although, as you know, the market for medium duty truck is virtually small. And the heavys were up 14%. When it comes to trading profit, as you can see from the work that is in the bottom of the chart, we continue to benefit from the planting actions that we're doing in order to strengthen the brand equity of Iveco.

The improvement in production costs, as Camillo said, is partially explained by the operating leverage and from the ramp up of all the world class manufacturing actions that have been introduced. And those of you who were in Morocco with us a couple of weeks ago might remember that we talked about this extensively.

SG&A deterioration of EUR8 million in SG&A is almost entirely due to the labor inflation cost, which is higher than it was in Q2 2010 and EUR14 million negative in others made up of a lot of different things, among which provision that we took for the deterioration of the quality of our portfolio is in Europe. On the negative side and on the positive side the release of funding for warranty, thanks to very good actual that we are seeing as a result of an improvement in the quality of our products.

If we move to slide number 15, it deals with the industry outlook. Q2 was still showing 20% increase in Western Europe, which would soften a bit in the second half of the year. On one side, this is because of the macroeconomic uncertainty is still there. And on the other side because when compared with the second half of 2010, that was already a pretty strong semester.

Latin America has been doing quite well on the industry side in Q2 2011. The forecast for the remainder of the year, assuming an increase between 5% and 10% compared with the -- on a full year basis. Although, as you all know, there is this question mark around introduction -- around the pre-buying of Euro III vehicles ahead of the introduction of Euro V and Brazil, which is due January 1st 2012.

It's worthwhile noting that the Argentinean market, where we have a strong presence, is growing pretty fast. It was up 65% in the last quarter. When it comes to the order intake, in the Q2 we had an increase of 28% over the second quarter of 2010. And was pretty much in line with the Q2 of 2008, which was the last quarter before the crisis hit in the industry.

Page 16 deals with the -- our market share. Notwithstanding the pricing actions that we are doing, the retraction on market share are not as bad -- that bad. In the light segment, we hold 13.2% market share, which is 0.6% lower than it was last year, notwithstanding the weakness of Italy and Spain and the product mix shift from chassis cab to vans where, as I told you already in the last conference call, cab vans are much more cost efficient.

When it comes to medium trucks, we are pretty much in line with the performance we had last year at 23.6%, we're still competing upward with Daimler for the leadership in this segment. On heavy duty trucks, we are at 7.6%, 1.2% below where we were in Q2 2010, when we were doing some aggressive marketing actions to complete the destocking of our vehicles. The good news is that the -- our market share has improved 0.5% versus Q1 of this year.

Brazil, it's a nice story across all the three segments with light at 21.7%, 5% better than Q2 2010, thanks to the strong success of our daily product range. Medium, we had added 5% with an increase of 1.6% versus 2010 and the -- I'm pleased because the introduction of the Chinese-based medium duty truck [vest] is doing very good and it's the reason why we have been able to grab this additional market share in this quarter.

We have also launched an entry-level version of our [aero cargo], named aero cargo [attack]. On the heavy side, market share is improving as well as 11.2%, notwithstanding some kind of price competition that is going on in the market, primarily because of the decreasing in the financing incentives which are now supposed from the Orient.

Slide 17 shows the mid-cycle action that we're going to do on the Iveco Daily, which will be launched on September 19, 2011. This is not just an emission compliance related introduction, but it's also addressing some of the main concerns that our customer had with our product, so we trust the introduction of the new Daily will market a significant breakthrough in the market acceptance of this Iveco.

On one side, the Daily will be the first light commercial Iveco with an engine capable of delivering more than 200 horsepower, which for chassis -- for the body on frame vehicle which is, of course, as a mission, to be overloaded is very important. The efforts that we have made with -- in conjunction with FTP Industrial made possible delivering a fuel consumption benefit, which will range from 5% to 10%, depending on the power train considered.

And on the other side, we have increased the comfort of our cabin as well as the technology on board to make the use of the vehicle as much comfortable on one side, but also we have made it possible for the fleet owners to keep tracking of the performance of the vehicle from total cost of ownership standpoint.

Moving to page 18, China -- and the market in Q2 2011 was 100,000 units below the same period of 2010, mainly due to the credit crunch that Central Bank introduced at the end of March. Now you probably are aware that a couple of weeks ago the central government, in order to react to this decrease of the market has introduced as scrappage campaign for buses and heavy trucks older than ten years, will probably balance the downturn that we experienced in the second quarter of 2011.

When it comes to our performance in this market, we are still increasing our market share in the light vehicle segment at 12.1%, pretty much stable in the medium duty range, waiting for the new cab over to be introduced later this year. And on the heavy side, we are at 4.1%, which shows an improvement of 0.7% versus last year. Total sales were 37,000 units, 4,000 units less than in 2010.

Page 19 deals with the industrial footprint optimization that we had initiated in the bus division at Iveco. We have reached an agreement with the unions in Spain for the shutdown of the plant in Barcelona, which was manufacturing chassis coach for the Spanish market and for export in Africa and Middle East. Given the very low situation of the plant, we have decided to shut it down.

The other one is the plant in Valle Ufita, for which we have signed a preliminary agreement with an Italian automotive group, [Derizio], to divest this operation. We are now in the middle of the negotiations with the unions and the Italian government on the -- to be able to finalize the agreement for this -- to finalize this sale. The reason why we have decided to dispose this offer is primarily because this plant is manufacturing city buses and it has been operating below -- significantly below breakeven for the last seven years and there's no forecast that the market of city buses will take additional volumes over the last -- in the next future. And so that's why we have decided to basically dispose this asset. And this concludes the Iveco package and move on with Giovanni for FTP Industrial.

We can have a look to the page 31. We can see that in line incurrence with the growth of the other sector, revenues of FTP Industrial reached EUR838 million in the second quarter 2011, EUR192 million more than the previous year. 60% of this increase was given by the increase of captive volumes. 40% of this increase was given to the external phase. We have a look to engine volumes. The engine goes up to 146 units, 54 sold to Iveco, 25 to CNH, and the remaining 41 to the external customer. Attracting growth, we had also with the gearbox, 12% more, and the axels, 51% up to about 50,000 units.

About the trading profit, the second quarter 2011 reached EUR24 million, 2.9% margin. We made a comparison. It's the same perimeter of 2010. We can have EUR10 million more than your previous year. Considering also this quarter two, 2011 falls in some way affected by some launch cost for the new models and some increase in 2011 because -- for the new technologies. Our capacity utilization was up 27% versus 2010, reaching almost 60% in the total.

Page 32. If we look at the product, as Alfredo told before, we completed the launch for the new Euro V version of the F1 family. In this area, the light-on-road application, we have two displacement -- 2.3 liters and 3.0 liters. The 2.3 liters will be Multijet II new injection system. This is especially focused on the fuel setting, especially the 3.0 twin-stage is focused on the power and tork to have the best performance for the Daily in the higher hand application.

Very, very important for us was also the completion of all the validation tests for the Euro VI, on the medium and heavy engines with the SCR only technology. This technology is already demonstrated its effectiveness with the application of the CNH agriculture application. CNH is finding 10% of fuel reduction in the field operating cost.

So we're saying we let in the on-road application almost the same. But we need to underline that Iveco, using our SCR only technology, could all to have the installation that Euro VI engine without any main modification in the total cooling system with the vehicle, without the application, without the dimension of the system around the power train. So we have no base to change the architecture of the vehicles.

In China, we have presented the Cursor 13 without the Euro V. That one is the must update technological product in that area with the Common Rail system. And on this base, we will develop also the Euro VI version for the Europe application. Finally, we have completed the start of production for the Cursor family for the Stage IIIB, Tier 4A, for agricultural structural version, for CNH for Europe application and USA application.

That sort of concludes the presentation, but the fact is if I can just take you to slide 22 before we take questions. I already indicated in my opening remarks that we are quite optimistic about the performance of our businesses within the trading regions that my colleagues have outlined. I think that the remainder of the year promises to be a good semester.

Notwithstanding some issues that were raised here, I think that the underlyings of the business are certainly in line with the guidance that we have provided here. We're going to revisit these numbers at the end of the Q3 to see whether there's any potential upgrade from where we are. But the EUR1.5 billion today in trading profit looks more than attainable. I think that we need to work through the next three months to find out exactly how much more the system will give.

The financial soundness of the capital structure is beyond doubt now. The cash generation capability of the house has been proven. And I think other things that Camillo has been saying that we've repeated as we met with investors on a regular basis confirmed the fact that we're on track to becoming investment grade is short order. I think that this whole notion of being able to extinguish our net industrial debt position remains the key objective. I think the question -- the only question is how long will it take us to get it done. On that note, I'll take it open -- I'll leave it open to questions. Mr. Markevitch?

Thank you, Mr. Marchionne. Now we're ready to start the Q&A session. Sarah, please retrieve the first question.

Thank you, sir. (Operator Instructions). We'll now move to our first question from Monica Bosio from Banca IMI. Please go ahead.

Good afternoon, everyone. I would have a couple of questions. The first one is on Iveco. Could you please give us an indication of the capacity utilization rate for Iveco in the second quarter and if you have some guidance for the full year? And the second quarter is on the net debt, the target. In my previous estimate, I had a CapEx estimate of EUR1.8 billion.

Now I see that the CapEx is in the region of EUR1 billion. And the new net debt guidance is EUR1.6 billion. With this CapEx guidance, I would have expected an even lower net debt. So maybe I'm wrong about it. Could you please give us some more details on this? Is it because of the working capital absorption or is it because you prefer to be conservative and further renounce the guidance -- the net debt target at the end of the third quarter?

Ms. Bosio, just to answer your second question and I'll pass it onto Alfredo. I cautioned when I give you the guidance for the full year that we were being sufficiently conservative in terms of establishing these numbers. I think that obviously to the extent that working capital performance follows historical trends and you would expect to better the number that we've shown, but I -- the last thing we want to do is disappoint the market. So at the end of the day, I think you should take this as a minimum condition in terms of the objectives, we're trying obviously be better. But I actually -- the arithmetic is not wrong.

Okay. Thanks.

We'll take the first question on Alfredo.

Yes. The capacity utilization for the year is supposed to reach 59% and the second quarter was at 55%.

Thank you very much.

Thank you. And then we move to our next question from Max Warburton from Bernstein. Please go ahead.

Yes, hi. Good afternoon. Two quick questions, please. A number of the other truck companies have been making more cautious noises on Brazil that you've suggested today. Since you're in the field and obviously have been talking about the region this week, could you just flesh out in more detail your enthusiasm for Brazil and also talk just a little bit about 2012. And if we do see a big contraction in 2012, can you just remind us of the sensitivity of that to earnings of Iveco? I think it's less than a lot of your peers, but if you can just clarify that, that would be very helpful.

And then the second thing, on Fiat power train, any advice to us analysts on how to forecast it? Mr. Marchionne, you used to give, I think, an idiots' guide to operating leverage for the car company. Could you give us an idiots' guide to operating leverage in Fiat power train because it is quite difficult as outsiders to figure out how revenues are going to turn into earnings going forward. Thanks.

Max, I promise not to let go of my wisdom and be an idiot over the next quarter and I'll give it to you in the next call, on the Q3 call. And the reason why I'm hesitating to give you an answer is because it is a portfolio issue that has to do with what portion of the sales are truly third party as opposed to internal sales. We will narrow that for you and we'll show you. But give us the quarter and we'll come back to you on that question and I'll give it to Alfredo to answer the result question.

There is a very, Max -- the real issue on Brazil is that so far nobody has announced a price increase for Euro V vehicles. And so there has been no reaction in the market in terms of pre-buying. Of course, if there's going to be a pre-buy in the last quarter of this year, it is pretty natural to expect a slowdown in the market in the first half of 2012, which is what we are all forecasting.

However, there is no indication in the market today that this is going to happen. From our standpoint, we have made all the agreements that we were needing with our suppliers to be in a position to cope with the potential increase of demand in the last quarter. If it materializes, we're ready. Otherwise, we're going to stick with our projections. As I said, we cannot expect the Brazilian market to keep on rolling at this straight year over year. But in the absence of a pre-buying activity, we are expecting 2012 to be pretty much aligned with 2011.

Okay. And just, I mean, a follow-on for that, really. Most of your rivals have made it pretty clear that Brazil is disproportionately very profitable compared to other regions. I mean, even though it's smaller for you, does that hold true on a unit basis for Iveco?

It is true that it's much more profitable across -- to other lines because we are benefitting from a pretty high price kind of a market in Brazil, primarily on the heavy side, as far as Iveco is concerned.

Alfredo, if I can help you with that question. Before we think that we're gouging those other customers, which is not really quite the case. I think it's fair to say that the main function is support the good pricing in the marketplace. The thing that we benefit from is that we don't have the inheritance of the structural industrial footprint here, which would effectively, on the European side, would block us from achieving the right level of operational efficiency that we would expect.

We just started -- we started this business back in 2006. It had been neglected for a number of years. We gotten new vehicle in place and we've done a great job of reestablishing the brand in Latin America. I think that, as relevant on a per unit basis as the margin may be, to the overall Iveco numbers, even a slowdown of the Brazilian market will not have a material impact on -- certainly on the numbers that we've given you in total and certainly for the forecast for 2011, which is embedded in the 2012 guidance.

The fundamental difference of the Brazilian market compared with Western Europe is the rate of the retail business compared to the fleets. This is the primary difference in terms of pricing structure.

Okay. Very clear. Thank you.

Thank you. We now move to our next question from Martino De Ambroggi from Equita. Please go ahead.

Yes. Good afternoon. Good morning, everybody. I was wondering if you could elaborate a bit more on the truck side in Western Europe because I understand the second half of this year has a very good visibility. But taking into account the recent financial market turmoil, I expect some inevitable negative impact on the investment cycle in Europe. Could you give us an additional comment on this issue? Thank you.

And the second question is on the tax rate. In one of your slide I saw that you are giving the guidance of 41% for the full year, so in line with the first half. Actually, I had quite a lower estimate for the full year. So if it's right, could you summarize what are the reasons and if there is any change for the long-term expected reduction in tax rate. Thank you.

Martino, I'll be with the first question and then Camillo will answer the second. On the Western European market, as I said during my remarks, this is an entirely duty-free related industry. So the recovery in the economy is not there across all markets in Western Europe. And that's the reason why we have assumed a pretty conservative guidance for the second half of this year.

There are some markets like Germany and the UK, which are still doing well. And, when I look at the order board of a vehicle, I'm comfortable with what I see. The clear weaknesses are in Spain and in the light segment in Italy. We'll see how the macroeconomic conditions develop, but certainly we're going to see a slowdown in the growth in the second part of the year. Let's always keep in mind that the second half of 2010 was already a pretty good market for the truck industry.

And Martino for the tax rate, we should anticipate a 40% effective tax rate for the full year, which yields at 38%, excluding Europe.

Okay. Any change in the long-term expected reduction?

Long-term, sorry?

In the long run you expected, I would say, roughly one percentage lower tax rate every year. Is it still a reasonable rule of thumb before the tax rate improvement?

It's certainly reasonable.

Okay. Thank you.

Thank you. We now move to our next question from Michael Tyndall from Barclays Capital. Please go ahead.

Hi there. Thanks for taking my question. Just two real topics for me. One is Fiat power train. You've now got a Euro VI engine and an EPA 10 engine. You're already dealing with Mitsubishi Fuso. I'm just wondering if you can talk a little bit about the opportunities for selling product outside of the Fiat Group, particularly given your capacity utilization is at 60%. Is that increasing over time? Yes, just a bit more color around that, if you could.

And then the second question is pretty straight forward. Just on Iveco, the plant closure and the disposal. Do you have any views on what the savings will be as a result of that? And could you give us a feel for whether or not there is more to come in terms of, I guess, an adjustment of your industrial footprint? Thanks.

Just to -- before Alfredo gives you the answer on the lines that he made reference to, I -- we continue to look at the manufacturing print at all times. I think one of the challenges that Alfredo has now and one of the opportunities that he has as the new guy on the block is to take a look at this situation with fresh eyes. It is my expectation that as he works through the issue, we will see additional opportunities for the improvement or optimization of the industrial footprint. But I think it's too early to tell.

Okay.

Sorry there are things that are sitting on his desk that he and I need to discuss in terms of moving forward. But for now the one that is going to be action is the one that he made reference to. [Miguel], if you want to make a reference to these savings.

Yes, the savings in terms of this cost on a state-to-state between the two plans will be around EUR35 million.

Okay. Thanks very much.

What was the other question?

Yes. To answer about the Euro VI (inaudible) time for the engine. We already got the approval for the F1 (inaudible) obligation and we are supplying this engine to Daimler for their Fuso brand and in the sales in USA. With the Euro VI, we are ready to produce, but now we are not introduction. We have some trusting discussion with some other customer than [Deyco] to sell our engines also to them. And the same technology we are applying on T4B and we have already installed discussion with some type producers to sell this engine to this -- out of the group.

Okay. Thanks very much.

Thank you. We'll now move to our next question today. Please go ahead from the question from Yann Benhamou from Exane. Please go ahead.

Good afternoon. Yann Benhamou from Exane. We have seen quite slow [planting] leverage for FPT and concession equipment at CNH for different reasons. My question is, beyond the specific one-offs that you had, when do you expect those divisions to reach quite normalized level of leverage?

Second question, in terms of CapEx guidance, could you clarify a bit why you have got this guidance and whether this is something that we could extrapolate for the coming years, especially in light of the guidance you gave with your business plans? And finally, at Iveco, what do you do there in Southern Europe in terms of demand? What's your outlook in your view? Thank you.

I'm sorry to be [presented], but could you repeat the second question that you asked about guidance?

Yes. The CapEx guidance has been cut to EUR1 billion. What was the main reason behind this and do we have to extrapolate that for the coming years?

Oh, I see. Well, look. I think there are two comments. One, we laid out the plan and we gave guidance of 2014 -- we made it incredibly clear. And we repeated this on a number of occasions. The number that we had picked was the upper limit of what we considered as being possibly capable of being spent by the sectors within those years. We've always defined them to be upper limits and they've always -- we always have known historically that we will probably understand that number over the cycle.

The reason why we have understand the 2011 number is not because of the capital rationing exercise. It's simply due to the fact that the investment projects that we've got -- and that we enlisted at the beginning of this process were so numerous that the capability of the house to execute those was fundamentally not there.

We have not restricted any growth opportunities that are available out of the CNH or to Iveco or to FPT. I think it was a list of incredibly optimistic ambitions about where the money could be allocated. As we go forward, I think we're going to get much better at sort of understanding exactly what is spendable by the factors over the forecast period and it maybe that at the end of this year we'll give you a more realistic view as to what that capital expenditure profile will look like until 2014. My expectation, based on what I know today, is that you're going to see a drawing down of those numbers.

Thank you.

The question you asked about our outlook in Southern Europe on the truck market. In our forecast, the -- we have built up a minus 30% post-paying over the last -- in the future six months. And Italy flat was 2010 in light duty segment and up 10% in the heavy duty segment.

And do you see any signs of pick up currently?

I'm sorry?

Do you see any signs of pick up in those countries?

Sorry, we don't understand your question. Figures of --?

Do you see any signs of pick-up of demands in those regions?

As I said, the pickup in demand will be very small in the light duty segment and that's the reason why, from a minus 2% that we experienced in the first half of the year, we see a market going back to be flat over 2010 in the second half of the year. And on the light duty segment. The heavy will stay stable between around 10% plus compared with last year.

Okay. Thank you.

And the question that you've asked on the FPT industrial margins, I -- we'll postpone answering this question until we get to Q3 and we give you those idiots' proof of profitability and margin expansion based on [longing]. I think a lot of it depends on, as I said earlier, I think it depends on the mix of third party sales to internal consumption. We'll give you alternative curves based on what the mix will be. But wait for the announcement until then. We might be able to provide better clarity then.

Thank you.

Thank you. We'll now move to our next question, which comes from Nico Dil from JPMorgan. Please go ahead.

In Europe, you highlighted a somewhat more uncertain outlook in Europe. I'm just wondering what your customers have particularly highlighted in terms of what they see coming through in terms of freight and what their expectations are for the second half of this year. Second question is really for Mr. Marchionne. You highlighted an operating profit for 2011 in excess of EUR1.5 billion. Perhaps you could give us a little bit of a flavor on what you see as the upside potential here.

I'm now getting -- I'm getting told what -- if I asked if I could give you the other boundaries of the upside, I would have given it to you. It's not as if I'm trying to withhold information. I think I feel relatively comfortable with the EUR1.5 billion is doable. I think this organization has -- it has historically done, over the last 7.5 years, it will continue to outperform its objectives. And I think we need to wait until we get to Q3 until I can give you a better read.

Could you perhaps give us a bit of a -- sorry.

I can't help you with providing embedded granularity than this, I think we're done. EUR1.5 billion is where it gets to today and it's going to be in excess of that number.

Okay. Since we're not so familiar with the historical trading of Iveco and FPT, could you give us a bit of flavor around the seasonality of those two businesses?

Sure. I think Alfredo will be more than glad to do that.

Yes. Iveco is playing in a number of different segments including also bus and the special vehicles which includes firefighting equipment and the defense and military Iveco. These two segments are at a very strong seasonality in the second part of the year and especially in the last quarter. So Q4 is traditionally the best quarter for Iveco in terms of both sales and margins. The first question you asked about the increase and freight costs. This is probably highest concern of all our customers.

And that's the reason why improvement in fuel consumption are becoming more and more important to be able to sell a better operating cost to our customers. And that's the reason why we are pushing so hard with introduction of the new Daily that would be presented in September. And this is the reason behind the improvement in our market share, Q2 versus Q1, thanks to the introduction of the Ecostralis, which is already delivering with interesting fuel consumption performance.

Okay. Thank you.

Thank you. We'll now move to our next question from Jochen Gehrke from Deutsche Bank. Please go ahead.

Yes. Good afternoon. Just two quick questions. First of all, on the construction equipment side, obviously, second quarter you improved quite substantially. But nevertheless both in a relative as well as on an absolute level, this remains an underperforming business within the Group. I just wonder whether you could give us an update on some of the strategic thoughts that you've played within the past. Where they are on the management agenda, how high and how urgent you see a need for construction equipment to find a strategic partner and if at all, throughout this cycle.

And then secondly, there was some press commentary throughout the quarter and correct me if I'm wrong. But I think the press suggested that you might be thinking about appointing Mr. Altavilla as the Group CEO for Fiat Industrial somewhere in the second half. I guess that's a question for Mr. Marchionne. Is that a thought that you, as chairman of the board, are thinking about to change the management structure here? And if so, in your view, would it have any major impact on how this group with the three main assets is actually working together? Thank you.

Just to deal with the second issue with Mr. Altavilla staring me across the table here. I have no idea where the press rumor came from. And it lacks complete substance. We have no intention of changing the management structure of Fiat Industrial, certainly in the short term. I've been clear on the fact that ultimately, as a result of at least the simplification of the structure in Fiat Industrial, including its relationship with CNH, that we need to get to a point where there is a -- that we may end up having a Fiat Industrial CEO that will manage this business, but it is not an immediate issue to be dealt with for now.

I think that the business continues to perform well. The structure as it is has been designed and will continue to function in this manner as long as we maintain corporate governance obligations for separate listings of CNH and for Fiat Industrial. So I -- to be honest, with the number of things that we're dealing with, this is not a high priority item. I think that we feel comfortable that we've got the right leadership in place to drive the business and to achieve the targets that we've laid out, as you have seen from the improved guidance that we gave.

As far as your first question is concerned, on the strategic issues impacting construction, I think that we have done a lot of work in the last -- certainly post-2008 to clean up our portfolio and to clean up the duplicity that was involved in having to put together construction equipment brands in the marketplace without having a very clear differentiation and DNA of the brand. This is something we have successfully done on the [act] side between New Holland and Case International Harvester. We have done it less successfully in the case of Case New Holland. But I think we have done a lot of work in this area.

The current launches that Rich made reference to in the first half of this year, the success and the traction that we're getting with these products is an indication of a renewed sense of focus of the organization and construction, not only in terms of its -- or how it produces what it produces, but what it produces. I think that we have -- we know that we can make money in this business if we remain absolutely focused onto a product range and not -- and stop trying to be all things to all people.

I am not as concerned today about the complete lack of coverage of construction equipment as an offering into the marketplace. I think we have equivalent examples from our competitors of people who have successfully run this business without having the product breadth of somebody like Caterpillar. We don't mind being -- we don't mind not being a full liner in the traditional sense of the word in construction.

I think the question is whether we do have product excellence in the areas that we currently are engaged in. And that's become the single largest focus of this organization. We have devoted a lot of human resources to this task and I feel more and more comfortable as we see these product launches and as we see a rectification of a normally inefficient industrial framework on the construction equipment side.

Certainly on the European side of the equation, although NAFTA has not been -- has not been what it needs to be. It certainly has been in a much better shape than European assets. The remaining line question that sits within construction is the resolution of our dual commitments to excavated technology. And that's something that needs to be sorted out. We have been working on this issue pretty intensely for the last two years.

We're making significant progress. I am not in a position today to announce a resolution of that dual commitment. I think we need to provide clarity and simplicity in the way in which we handle excavators. That remains the only true strategic objective that we have going forward. That is not to say that in the medium to long term that we will not look at opportunities to strengthen this business in a variety of ways. But for the immediate future, these remain the key objectives.

Okay. Thank you.

Thank you. We now move to our next question from Mario Gabelli from Gabelli & Company. Please go ahead.

Sergio, thanks. I've been, unfortunately, grazing on some conference calls today and you took over the Company in July of 2004.

Is it painful?

Grazing with you is a delight. I'd rather listen to you than Warren Buffet sometimes. You took over the Company on June 1st, 2004 and you split off industrial on January 1st, 2011. If you look out, I don't care about the next year or so, but looking out three years from now you've got your financial condition in order. You've got Iveco doing what you want it to do. You've got Case New Holland doing. What's the -- where do I see you buying other businesses down the road? You've got the organic growth and what are you thinking about? Because you're always thinking way down the road.

Well, the only thing that I can tell you that I cannot buy is another big AG player because I'm going to run into --

You mean [ACO] is not available? We won't get ACO on a conference call.

I don't want to speak on behalf of [Rick Anaga], but I think he's available for most things, as he publicly states from time to time. I -- yes, ACO is off the radar screen. It was off the radar screen the minute that I met Rick Anaga. But I suppose beyond the question of concentration. But the real issue is that we're severely limited in AG because of the dominance of business on a geographic scale. What we continue to look at is, fundamentally -- the FPT Industrial side is an incredibly solid business. I think we have proprietary technology and certainly a very thorough knowledge of this business. I don't think we need much to make it better than it is.

The Iveco side is the one that continues to offer opportunities for expansion of geographic coverage. That's not to minimize the amount of operational endeavor that needs to go on here to improve the business, but Iveco is the one that may be looking for additional accretive opportunities in terms of top-line growth. And the construction equipment side remains an area where I think we can safely add on businesses to effectively strengthen the business. But these are very broad lines of interest. We know what we cannot do. The opportunity is to do more in the others is relatively clear. I think we need to be -- we need to pace ourselves and not fall in love with the other, as you well know.

Well, it's nice to have a new currency and I'm delighted to keep track of your success. So thank you.

Thank you very much.

Thank you. We now take our next question from Lawrence De Maria from William Blair. Please go ahead.

Okay. Good morning. Thank you. Just wanted to think about a little bit into 2012. Obviously, the results so far have been really good. But at CNH we seem to have turned the corner also. How confident are you that the AG business can continue to grow in North America into next year as well as construction? Construction benefiting from a replacement cycle. Can that continue to grow into next year without the market improvement in actual construction activity in North America?

The answer is yes and it's a short answer to both of your questions. You and I can sit over here and devise an incredibly grooming scenario about commodity prices will be in AG. In which case, it's all back [sell off]. If we're dealing with a $1.50 a bushel on most of the commodities, we're going to go home. It's going to restrict the invest cycle the farmers are undertaking.

But I see absolutely no indication of the fact that we're going to see a significant deterioration in pricing to change the economics of operating firms in the US. And so I feel relatively comfortable that this move up into heavier equipment and to really a heavy phase of industrialization of funding in the US will continue unabated going forward.

The construction side, you understand that we've had levels that we haven't seen here. When we went back and looked at volumes, I have not seen them off the historical chart. You have to go back to the 90s to see anything that is that bad as a result of the decline in 2009. So I -- we feel comfortable that the recovery that we're seeing is structural and that it cannot be moved.

Okay. Very good. Thanks a lot.

Thank you. That will conclude the question-and-answer session. I would now like to turn the call back over to Manfred Markevitch for any additional or closing remarks. Thank you.

Thank you, Sarah. We would like to thank everyone for attending today's call with us. Have a good evening. Thank you.

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