CNH Industrial NV (CNHI) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's Fiat Industrial 2012 First Quarter Conference Call. For your information, today's conference 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 afternoon, everyone. We would like to welcome you to the Fiat Industrial First Quarter 2012 Results Webcast Conference Call. Fiat Industrial Chairman, Mr. Sergio Marchionne, with Rich Tobin, President and CEO of CNH, Alfredo Altavilla, CEO of Iveco, Giovanni Bartoli, CEO of FPT Industrial, and Camillo Rossotto, Group Treasurer, 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.

Thanks very much. Good morning. It's been -- it's actually good afternoon, even in the US. But as you put on the front of the presentation here for today's call, this has been an exceptionally good quarter. We've had a chance to take a look at your estimates in terms of performance for the business and we have exceeded all of them.

I think that one area of concern, at least in terms of the way in which the market was forecasting cash usage in the first quarter, is going to require some more details, which Camillo will give you in a few minutes. But I think this has been an underestimation of the working capital changes that are required in order to satisfy demand in Q2 going forward. So I'll leave that to Camillo to take you through the intricacies of that process.

But obviously, the top line came in incredibly strong with EUR5.8 billion. More importantly, I think our trading profit performance was up a significant amount, nearly 60%, in 2011. Margins are now beginning to look respectable at 7.5%. We've had the strongest quarter of CNH -- the strongest first quarter of CNH since its inception back in 1999. So this is not -- it's been a record quarter for CNH and it's a performance that I think lays out some interesting possibilities in terms of performance going forward for the remainder of the year.

Net results at EUR207 million, net industrial debt at EUR1.9 billion, which Camillo will explain. I think it's purely due to the working capital shifts. And obviously, we continue to remain highly liquid with about EUR5.5 billion worth of liquidity.

Page three. The credit outlook continues to improve. We've now been raised to a stable outlook from Standard & Poor's. We've gone through a number of shareholders' processes back on April 5, including the approval of a simplification of the classes of shares that exist within FI. I'll deal with this on the next slide, but the important thing for a second to deal with guidance and we'll leave it here and we'll take questions on this guidance. It has been the practice of this house not to revise forecasts or market guidance until the third quarter of the year.

I think that now we're saying the strong performance that we've had in Q1, we're going to hold to that commitment to revisit forecast in the third quarter. There is a chance, depending on performance of CNH in Q2 that we may be forced to revise the guidance upward earlier than that; I think that we need to wait until the second quarter numbers come in. Certainly, the indications are for a strong execution on an incredibly strong order book. I think Rich will give you information on this as we go through.

The important thing is that we finally managed to close this chapter on this multiple classes of shares within Fiat Industrial. As most of you remember, this was something that was mandated as a result of the merger rules in Italy. We would have much preferred to be merged on a single class of shares. We've had to demerge and we inherited the class structure of Fiat on day one.

This is finally going to close the chapter on that, what I call abnormal governance systems in terms of share classes. That will hopefully go away on April the 28th, which is a Saturday, next Saturday, and I think that if the conditions are met on or before May the 14th, we'll be able to execute on the conversion of the press and of the savings shares into common.

It's been a great quarter and a conclusion from a capital structure standpoint of a long saga which is finally bringing us to the creation of a single share. I'm going to make one more comment on something which I raised during the shareholders' -- my remarks at the shareholders' meetings, which had to do with the simplification of the share structure between CNH and Fiat Industrial, and I might as well deal with this up-front because I'm sure it's one of the issues that you have been contemplating.

I reiterate what I said back on April the 5th. I think that it is an issue that we recognize as being a valid issue. It is something that needs to be handled at some point in time. I again confirm the fact that we've been approached by a number of banks who have offered their services in helping us through a process of simplification of structure going forward.

We're analyzing the impact of these things. We have made no decision in connection with the process or the timing that will be required to bring that about, but I think it is important to recognize that the issue is alive and well and it is an issue that we need to bring resolution to in short order. We are still in the evaluation stage. Nothing has been resolved. We'll come back to you as soon as we have a more definitive view on how to get this done.

And on that note, I'll pass it on to Mr. Rossotto, who is going to razzle-dazzle you with an interpretation of the numbers.

Thank you, Chairman. I'm on slide five, that provides the breakdown of the revenues and the trading profit by segment for the quarter. The EUR5.8 billion, how they break between CNH, Iveco, and FPT Industrial; the EUR158 million of incremental trading profit, warrants at 31%, incremental margin in the period, so operating leverage is working pretty well across the sectors.

And in terms of growth rates, you can see how the 9.3%, it's a blend of growth at 25% at CNH and a contraction of 10% at Iveco, which is sort of mirroring the trading profit contraction on the right-hand side of the chart. CNH in the quarter is at 9.8% trading profit margin; Iveco, 3.4%; and FPT Industrial at 2.1% -- all up versus Q1 of 2011.

Slide six deals with the usual trends that we're observing in terms of the purchasing performance, and that's mostly the raw material impact. You can see that Q1 2012 has been traveling at a slightly higher level than the average for 2011. But the good news there is that the curve is trending down and we're expecting over the remainder of 2012 to see some favorable behaviors. We're still seeing some tensions in terms of rubber and steel pushing up the average in Q1.

Slide seven is the reconciliation from trading profit down to net results. I would just talk about the tax rate on this slide as there's a specific slide coming up next on financial charges. The tax rate at 39%, which is 37% excluding Europe, is consistent with the indication that we provided for the balance of 2012.

The slide eight is the new form that we've introduced with our last call in terms of breaking down the impact on financial charges of gross debt, gross cash, and the other components which are not related to the debt which drive financial charges for Fiat Industrial. You will recognize the format and I think the rationale here is to move the attention away from net debt and talk about more what really drives the financial expenses at the gross level and the cost-of-carry component.

So while the comparison with Q1 of 2011 at the net financial charges, net industrial debt level is on par, the blend of debt is a combination of slightly higher cost of the gross debt and better return on the cash. I think the point that we're making here, we're confirming the full year guidance of EUR300 million in terms of net industrial debt-related charges for full year 2012 and EUR400 million at the total level. And that's predicated on the positive trend that we're seeing in terms of lower cost of debt and the higher yield on the mix of cash and intersegment for the balance of the year.

The following slide deals with the cash flow. And as Sergio mentioned in the opening remarks, I think I'll go straight to the largest single line item on the page, which is the change in working capital, EUR800 million for the quarter. That's a combination mostly attributable to the increase in inventory. For those of you who were in the CNH call, I think we discussed that. Most of that is finished goods inventory.

So not only was CNH able in the quarter to service a higher level of revenues versus Q1 of 2011, but also based on the solid order boards that we're looking at, we've been building with a new inventory of finished goods that will be liquidated in the course of Q2, which is typically a seasonal strong quarter for our ag sales. The balance of the change of the EUR808 million comes from payable reversals at Iveco and FPT and that has to do with the relative level of production of Q1 2012 versus Q4 of 2011 at Iveco and FPT.

The other two line items that I think are worth mentioning here are the relationship between D&A and CapEx. In Q1 of 2011, they were pretty much even. In Q1 of 2012, we are starting to see the trend in terms of our expanding capacity and investing in new products and Tier 4-related type of initiatives, so we spent EUR230 million with the D&A of EUR170 million. And that rise the change in net debt from EUR1.2 billion to EUR1.9 billion.

Well, we didn't like ten to the point of trying to bridge a gap in terms of how to better forecast the seasonality pattern of Fiat Industrial as the combination of the seasonality pattern at CNH, Iveco and FPT, we have taken a look back and you can see that the major driver or the major correlation exists between changes in working capital and changes in net debt.

And then, we have sort of projected a dotted line to look at the remainder of 2012, which is consistent with the full year guidance of between EUR1 billion to EUR1.2 billion in terms of final net debt numbers where were see a Q2 which is going to be cash generative and a Q4 which is also going to be strongly cash generative. And again, the combination of seasonality at CNH but also at Iveco who normally sees a very strong fourth quarter.

What we've done also on the right-hand side box here is sort of move from changes in net debt to changes in cash and liquidity. And you can see that Q1, the absorption in the level of cash, the EUR1.9 billion, is attributable for the change in the net industrial debt plus an additional absorption coming from the change in intersegment, which is a combination of the refinancing of part of the Barclays portfolio that we took on book that we discussed in the Q4 last year call and some increases in the portfolio which are also of a seasonal nature.

We just show it against the backdrop of Q4 where the same factors have been playing in the positive cash generation mode and overall we are confirming for this, for cash and cash equivalents, a full year guidance of EUR4 billion by year-end.

With that, I will pass it to Rich to comment on the CNH performance.

Thank you, Camillo. Starting on slide 12, CNH revenues at EUR3.8 billion, up 25%. As Sergio mentioned, it was a strong quarter for CNH as a whole. The distribution geographically is healthy with North America really leading the way during the quarter. Ag at EUR2.8 billion, up 23%, largely driven by the progression in terms of firm commodity prices, increased planting over the year. There is a bit of a seasonality effect in the comparable Qs due to the warm weather in North American and Europe; the planting season has been brought forward approximately one month.

And we were the beneficiary of building adequate inventory to meet demand during the quarter. We'll see how that plays out in terms of total demand for the full year by this somewhat pull-forward into Q1, which had traditionally been a Q2. CE, up 48%, driven by demand in the Americas.

The Q-to-Q comparison there, again, is heavily influenced by the fact that in Q1 of 2011 we were in the midst of transitioning our two biggest unit volume product lines in both the skid steer and the TLB, leading to a depressed revenue line in earnings in the comparable period of quarter one 2011. So there's some amount of bounce-back in just in terms when you look at the comparison Q-to-Q.

We've been able to translate that strong top-line growth into trading profit of EUR371 million, an increase of EUR158 million over the period. And you can see on the bottom, left-hand of the chart the split in volume mix and net pricing, which were the largest contributors to the performance, resulting in an operating margin of 9.8%.

Next slide. Slide 13 is the agricultural equipment markets. What you have in the first column, by geography and then split between tractors and the combine segments, is the industry performance Q-to-Q, CNH's performance relative to the industry, and then the full-year industry outlook for 2012.

Let's deal with the industry outlook in total first. That's largely unchanged in totality. There's some changes region-by-region, I think, that we've moved, for example, the Latin American combine down slightly as a result of the drought in Southern Brazil and some of the issues that the industry is dealing with with the ability to move production of product from Brazil into Argentina, which we're rectifying with our investment in our Cordoba facility. The balance of our expectation in terms of total unit demand by region is largely unchanged, that we showed you in January 27th at the end of the full-year results.

Our performance relative to the industry, you can see by the middle column there, with few exceptions in the low horsepower segment where we don't have a large [primary] material participation in that particular market is down. But in the areas that we participate in, you can see a lot of performance at par with the market or over-performance to the market.

I think one has to be a little bit careful this year of taking a look at the industry. The industry is recognized on retail delivery in certain regions and wholesale delivery in certain others. It's going to be a bit choppy this year because of introduction of Tier 4 products for engines compliance.

So when you look, for example, at the North American market down 40% quarter-to-quarter, that is the result of some transition of some of the competitive products in the market place. We don't expect the market overall -- as you can see on the right, we expect the market to be flat relative to 2011. So this is going to be something that's ongoing for the entire industry as the transition takes place from Tier 3 to Tier 4.

Next slide, please. So the same slide, but on the construction equipment, again, really little change in terms of the industry outlook with the exception of APAC, where we were proven wrong. We had some pushback in Q1 in terms of what we had thought was going to happen in Asia-Pacific. I think that we are a little bit more bullish that that market would have had some incentive behind it after a second half of 2011 which was relatively weak.

Well, it's continued -- it's not material for us, but it's continued through the year, so that's the only number we changed. And then overall you can see that we've performed better at par in terms of our market share performance quarter-to-quarter.

Next slide. I won't comment a lot on this because I think Camillo covered it in terms of the net working capital movement, but it shows you retail sales to production, so we feel quite confident that we've built enough product to be available for what has historically been Q2 and Q3, the heaviest consumption months for CNH in total, so we go into those two periods with what we believe to be adequate dealer and Company inventory.

Finally, it's a little bit of a busy slide, which is just the reiteration of a variety of things that we have announced during the quarter, both from an investment point of view with the groundbreaking of our new construction equipment facility in Montes Claros in Brazil, which will take away some of the capacity constraints that we've been living with over the last 24 months and based on the projections of what we expect long-term in the Brazilian market for demand. And then, the confirmation of our investment for the manufacture of high horsepower tractors and combines for the Argentinean market.

On the right side, I won't take you through all of the individual items there, but clearly it's going to be a very busy year in terms of product introduction, largely as a result of the transition -- the final transition to Tier 4A products, both in North America and Europe. So our performance for the year is largely going to be contingent on how we execute on these particular projects.

That's the final comment, and I'll pass it on to Alfredo with Iveco.

Thanks, Rich. Good afternoon, everybody. Q1 for Iveco closed with revenues down 11%, to EUR1.9 billion, compared to last year and volumes down 18% to 28,000 units. Basically, the slowdown was in all the three segments -- light, medium and heavy -- primarily on the light side where the market has been severely affected also by competition of [car to ride] vans.

In terms of trading profit, we came in at EUR64 million with a trading margin of 3.4%, slightly higher than the 3.3% we experienced in Q1 2011. That while, of course, the negative EUR30 million in terms of volume mix is a fraction of the market trend, the good news is that we've been able to hold on our pricing with an improvement, actually, of EUR7 million primarily driven by the call that we made last year in Brazil to manufacture Euro3 vehicles to be sold in Q1 and the rest of the year, and I think that that was a smart idea in the sense that we have been able to hold our pricing on all Euro3 inventory, which has been 80% of total sales in Brazil in Q1.

The efficiencies in product costs are a reflection of the full exploitation of world-class manufacturing that, as we told you in the call of Q4 2011, is now fully introduced in all our plants in Europe and Latin America.

Next chart, 19, deals with the industry outlook. As you can see, Western Europe in Q1 has been down 3.1% and Latin America at 0.6%. Western Europe is really a two-way kind of a market with Southern Europe, meaning the pool of countries that our Chairman made reference to last year in terms of Club Med, meaning Italy, Spain, Portugal, and Greece, down 26% while Northern Europe actually was up 2%.

The good news is that we keep on lowering our exposure to Southern Europe, which in Q1 was 18% of our total revenues. But, of course, we still enjoy 28% market share in these four countries, so the strong decline in the market is affecting our performance, of course.

When it comes to Latin America, Brazil has been down 3.6%, but Argentina and Venezuela experienced substantial growth, a 7% and 17% increase across all segments. The forecast for the year is unchanged as it is pretty difficult today to make the final call on the evolution of the markets, especially in Western Europe. And so for the time being, we're still projecting a decline between 5% and 10% in Western Europe and between 10% and 15% in Latin America.

Although the stimulus program for capital goods that has been introduced in Brazil and in Argentina and which we'll display full results starting from June, probably will have a positive impact on the performance in the second half of the year. In terms of order intake in Q1 2012, we experienced a decline of 13% compared with last year, and the slowdown was pretty much balanced across all the three main regions.

The next chart, page 20, deals with inventory. I don't want to repeat what Camillo already said. I think that we are holding to our policy of one month inventory at Company level and two months at dealer level, which is also a reflection of the additional stock that in Europe was due to the transition from Euro4 to Euro5 on the light duty truck.

Next page, 21, our market share by region. The good news in this chart is that for the first time since Q3 2010 we are regaining share on the heavy duty -- in the heavy duty segment up to 7.9. And with the same market mix that we had in 2011, the increase would have been even higher, 1.4%.

When it comes to light duty truck, our market share has been 11.8%, 1% down versus 2011 as a reflection of the growing importance of car to ride vans in the segment, which, of course, is detrimental for our product, which is primarily used as a [taxi] cab. The medium segment keeps on shrinking. Our market share is 22.6%, down 1.3% compared to last year.

Brazil, very good performance in the light duty segment, 23.1, up 2.4% compared with 2011; 5.4% in the medium segment, 1% higher than 2011 thanks to the Vertis, that was introduced at the beginning of last year -- of the Q4 last year. On the heavy side, market share, 11.5%, 1% down versus 2011 as a reflection of the increased competition from Chinese OEMs and the decision of some of our peers of not to pass onto the final customer the cost increase of Euro5 since they had no stock of Euro3, they could still supply.

I would like to make reference to Latin America as the old region because the market share of Iveco increased all across the three different segments in Latin America -- light, medium and heavy -- with a significant increase on the heavy side to 14.9%, up 1% compared to Q1 last year, but same result has been experienced in light and medium.

Next page, 22, deals with China. Market down 13.4% with pretty stable market, down just 2% in light bus where we play with our Daily, down 6% on the light and medium truck where we play with the [Uagen] product lineup. And the most significant decline has been experienced in the heavy segment to down 30%, which unfortunately for us has also an even more severe impact on the deeper segment where our SIH products are into play.

Our two joint ventures' sales are down 14% compared to last year at 14,400 units with a market share of 5.4%, unchanged versus Q1 2011 as a reflection of an improvement experienced in Iveco both with Daily and Uagen products and the decline in the market share of SIH and Daily segment of 2% compared with Q1 2011.

And next, I will turn to Giovanni for FPT Industrial. Thanks.

Good afternoon to everybody. If we look to page 24, we can see that in terms of revenues the Q1 2012 had a light decrease in revenues from EUR729 million to EUR674 million, 7% less, mainly due to the volumes reduction following the decrease in the demand of trucks and bus and light commercial vehicles. The 140,000 engines that we produced in Q1 was mainly 28% sold to Iveco, 29% to CNH, and the remaining 43% to a standard customer, including LDJV or Fiat and Iveco outside Europe.

In terms of trading profit, we have increased and also in terms of margin we have increased mainly due to the additional synergies and savings that we made versus the Q1 2011 and also with the expiration of the extra cost we had last year owing to the start of production of new engine in China and Europe.

Go to page 25. In this page, we can see what we are doing now about the new product for our customer. The most important program that we have in the Q1 was the launch of the new family engines compliant with Euro5 and Euro-fifth level of emission in Latin America, starting from the F1 family, 2.3 and 3.0 liter engines, up to the Cursor 13 for Iveco and CNH obligation.

Other important point is the extension of Tier 4 interim version of F5C [Naf] and Cursor engine for CNH and the other external customers. And finally, we have a completed the refurbishment and the machine installation in the new plant in Cordoba, Argentina just to follow the new project of CNH, and the first engine went out over the (inaudible) last week, the 18th of April.

Thank you, Giovanni. Just to reiterate our commitment to the outlook that we gave you at the beginning of 2012, I think for today we're confirming the numbers that you see on slide 26 with a trading profit between EUR1.9 billion and EUR 2.1 billion and a net number of about EUR900 million.

As I mentioned in my opening remarks, I think we need to see the development of Q2, especially at CNH, to make a better call for the remainder of the year. But in the absence of any significant shift in performance in Q2 by CNH, we'll reserve the right to revisit forecast and guidance at the end of the third quarter.

So, that's the presentation. We'll be more than glad to take questions.

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

Certainly. Thank you. (Operator Instructions). We'll now move to our first question from Nico Dil from JP Morgan. Please, go ahead.

Good afternoon, gentlemen. I'd like to ask three questions, please. First of all, just sort of a minor question on the Brazilian truck outlook. It improved somewhat, as far as I can see, versus the last presentation that you gave. Is this a full reflection of the Brazilian stimulus coming through or could this actually pan out a bit more positive than this?

The second question is around the inventory increase that you saw during the quarter. On the balance sheet, I see about EUR600 million contribution here or an outflow into working capital. Wondering what the EBIT margin impact was due to the inventory increase in Q1 2012.

And the third question, Mr. Marchionne, you alluded to this already, around the structure of CNH, Fiat Industrial. Could you perhaps highlight what you are currently concerned about or what sort of your interest is in going forward so that we can understand a little bit what the pathway forward is?

Yes. I'll get Alfredo to answer the first question, the Brazilian stuff, but I think it's the revision of the stimulus package. You should add on whatever views you have.

We have tried to embed in our forecast the effect of the stimulus package, although we need to wait until June to see exactly how it deploys in the market. That's it.

I don't want to get involved in accounting discussions about a profit impact of the EUR600 million inventory build, but the simplest answer is that if it's on our book it's only the absorption of fixed cost that's really relevant. There's no margin recognition, so there's no EBIT impact other than arguably the fixed cost absorption of production.

That is almost a useless question. Don't be offended by the note on my response here, the tone, because it assumes that we would not have reacted -- we would not have reacted to the lack of volume in terms of fixed cost structure, which is not realistic. So the answer is between zero and a negligible number; I wouldn't worry about it. Right?

The real question is that if it -- the bigger issue is that if it stays on book in Q2 you should worry. All right. These orders were produced in order to satisfy Q2 order books, and so it's going to blow out in 90 days. And if you still see it, then you should worry. You should worry about a variety of things, including the fact that Camillo's forecast about cash generation in Q2 is suspect.

Camillo, you want to add anything to this?

No, I don't disagree. If there is -- if it doesn't liquidate in Q2 substantially, that means that the second half of the year is going to be better than we're forecasting.

Or the alternative is that there's been a substantial shift in the market conditions, which we don't forecast at all. We're at the end of April, and the indications are that the quarter is solid.

Look, in another way, this has been an anomalous quarter for us because we've actually anticipated market moves, which has historically not been our practice. And so we have positioned the business then to reap the benefits of what we consider to be a market opportunity, and so far the indication is that we called it right.

This is something that I think we need to get into the habit of doing. I think we need to be a lot more careful in forecasting a market demand, but we also need to be able to take the opportunity of the market when it's there. We have historically chased volumes, and that's caused a whole pot of negative repercussions on industrial utilization, not to mention negative margin variances as a result of industrial inefficiencies. That's something that cannot happen.

But we need to stable the house; that's something that Rich and I have agreed to do on a pretty consistent basis going forward and hopefully you'll --. The good thing about this is that it's technically reversible in the period of six to nine months, so this has got no lasting impacts other than the fact that it positions the brands properly in the marketplace.

And so as a result of some, what we consider to be, strange aberrations in terms of market introductions from some of our key competitors -- and I won't get involved in details as to what those are. I think you should probably contact the others to try and find out what's preventing them from launching, but I think we should -- we're going to benefit from this going forward and we'll continue to watch this. But I don't have -- I have zero concerns over the fact that this was the right thing to do. It was in pure satisfaction of an order book and it will unwind clearly at the end of Q2.

The other question that you asked about, what are the things I'm going through it, the fundamental issues, to the extent that we're trying to remove this duplicity of governance systems now that were pure capital goods tasks, we need to make sure that we position the business in the right environment for it to continue to grow.

There are things -- there are benefits associated with the listing of CNH in the United States, including access to deep and wide capital markets, which, as a result of a variety of historical conditions, do not match the sort of offerings of the European side. The bulk of our competitor class is sitting elsewhere in the world than in Europe, and so we need to take a very, very hard look at that choice and be sure that we understand why we do what we do here in terms of our next move and the implications of that shift on a permanent basis on the organization.

I'm as convinced as I've always been that these businesses are required to be connected. Giovanni was humble, I think, in his description of FPT activities, and it's reflective of his style, but I think as we progress through this development of the engine portfolio in satisfaction of Tier 4A and Tier 4B, I think you will see that the choices that we have made strategically and technically on how to comply with those emissions standards will pay off very large dividends in the marketplace because of the improvement in the operating cost structure of the vehicles that we're selling.

And if there was any doubt before, I think that that issue has been put to bed. This is something that would have been technically unavailable, at least prohibitively expensive to the stand-alone business of the truck and the construction and ag sides, so the combination of that know-how in one entity, which is in support of both the capital goods sides and the marketplace, is important.

But having said all of this, you need to give us some time to sort of meander through the options. I can give you a back-of-the-envelope answer as to what it would be, but it would be unfair given the lack of maturity of my thinking process. Let me work on it. I'll come back to you as quickly as we can, but we recognize it as an issue and we recognize it as an actionable issue in the short-term.

Thank you for your answer.

Thank you. And we'll move to our next question from Michael Tyndall from Barclays. Please, go ahead.

Hi, there. Thanks for taking my question. Two questions, one relating to Iveco. Quite impressive to see that your margin has actually gone up despite the fall in sales, and it looks like production costs have been the bonus there. I wonder if you could just give us a feel for what exactly is going on on the production cost side and where are we in terms of is there -- are there more opportunities that we should be thinking about when we're looking forward to your margin in that business?

And then the second is around China in your joint ventures. I might be wrong here, but just looking at the profit contribution last year, it was around about EUR13 million from your joint ventures. I just wondered if you could talk a little bit about the profitability outlook in China and what might be going on there to limit the profitability and what you might be doing to improve that going forward. Thanks.

Okay. On the manufacturing costs, as I said during my presentation, the most important driver of the performance is the world-class manufacturing efficiencies that are now on target with the 8% target that we gave you last year in the call of the Q4.

On the other side, we have been extremely flexible and adjust our production to the slowdown of the demand. We had 200 days of production shutdown in Q1 in all the regions. And I think that this is one proof of the ability of the old Fiat Industrial group to adjust production as a reflection of market trend.

As we go forward, I think we keep on looking all possible ways to optimize our manufacturing footprint. We acknowledge the fact that especially in some of our businesses there are further thoughts to be given and we will -- this is an endless process.

When it comes to China, the Naveco joint venture has been profitable and, as you know, it's not consolidated in terms of equity pick-up. It has been profitable EUR5.5 million in terms of our share of the profit in Q1 2012, while SIH was negative EUR2 million as a reflection of the unabsorption of fixed costs.

I must say that probably we should have been better and cut production in Q1 at SIH. In Q2, this problem has been handled more properly. As we go forward, the issue in China is clearly all volume-related. So I have no concern when it comes to Naveco because the production -- the capacity utilization in Naveco is pretty large and the market is doing well in that segment, so I think that Naveco will be, notwithstanding the decline of the market, Naveco will keep on being profitable throughout 2012.

Thank you very much.

Thank you. And we'll move to our next question from Monica Bosio from Banca IMI. Please, go ahead.

Good afternoon, everyone. I would have two questions on Naveco. The first one is on the pricing scenario. Are you expecting a further deterioration of the pricing scenario, especially in the light segment? And could you confirm that you are going to alter the prices?

The second question is related to the trading profit margin of Iveco. Iveco was pretty resilient despite the drop in volumes. Just to check, can you remind me if you had a restructuring cost in the first quarter of 2011? And if yes, if you can tell me the amount?

No, there were no restructuring costs in 2011.

Okay. And now, in the first quarter of 2012, so it is a -- it is a clean comparison?

Yes.

Okay.

When it comes to pricing, the market is what it is. Frankly speaking, we have been able to hold pricing, thanks to the fact that we introduced the new Daily just in September. And as we speak, we are not planning any [significant gain] on pricing going forward.

Okay, thanks.

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

Thank you. Good morning, good afternoon, everybody. Two questions on Iveco, one more on the strategies -- strategic options for the group structure. On Iveco, you already talked about production cost savings in Q1. Could you quantify what the total amount that you had in your plan of savings for the current year just to understand what's the buffer of the long list of cost savings initiatives that you presented in the previous conference call?

And the second question on Iveco refers to the provisions, I remember last year, EUR150 million of non-recurring provisions for the financial activity. This year in Q1 were only EUR6 million. Based on your current visibility, what's the potential negative amount, if any, that you expect for the rest of the year?

And a strategic question. I understand you already talked about it, but let's say once you have settled the issue of CNH minorities, will you be satisfied with the group structure, meaning in the past I remember you mentioned that construction equipment could have been subject for eventual M&A deal and maybe now that the market -- the referenced market is recovering it's easier to achieve it or what else? Thank you.

Okay. When it comes to efficiencies, two-thirds of the EUR15 million savings of Q1 are the contribution of world-class manufacturing and other production efficiencies, and the remaining one-third comes from a product cost reduction. The trend is going to be pretty stable in the sense that we do have a portfolio of initiatives to continue cutting cost of our products for the rest of the year.

In terms of financial services, the EUR6 million losses that we experienced in Q1 2012 are a reflection of market conditions. We are expecting a zero for the full year 2012.

Just to complete Alfredo's answer on the financial side of Iveco, I think there was a one-time adjustment that I think was crystallized in '11. And whatever happens from now on is purely of an operating nature and it should not be sizeable.

The answer to your other question that you asked, about whether we will be satisfied once we create a much simpler capital structure, is that we consider that to be a requirement for anything else that will go on.

One of the benefits, I think, of a simplification of the dual governance system is to effectively provide the surviving entity with certainly strategic freedom to execute, including projects like the one that you mentioned, which is the reinforcement of our construction equipment side, in which we continue to explore possibilities in view of strengthening that business and therefore rendering it much more value accretive to the combined entity.

The issue -- there are other -- and I think that you need to be careful because by limiting yourself to the construction side of CNH, I think you're probably precluding at least consideration of other strategic moves that will be available to the combined entity, and certainly we'd have the currency to try and get that done. And subject to sort of anti-trust limitations and the expansion of ag and CNH, there are very few other areas in the portfolio of businesses that will prevent it from growing by acquisition.

And I think we need to remain absolutely -- I think we need to be focused and disciplined in getting this done in an intelligent and expedient way so we can start engaging in the next phase of development of the combined entity.

Okay, thank you.

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

Yes, good afternoon. Three questions, if I may. First of all, on the Brazilian truck market, you mentioned that during the quarter Euro5 trucks -- the Euro5, Euro3 truck issue; we're now one month into the Euro5 application. Could you talk about the market environment there is? Do you see it easier to pass through incremental costs as competitors have to move up as well or has it remained as tough for Euro5 trucks on the price side?

Secondly, more medium-term for Iveco, Mr. Marchionne, I think in the past you always presented Iveco as a truck manufacturer that you thought could do, in the best of all worlds, about a double-digit EBIT margin, around 10%, and you projected that for the end of your planning period. With all the events that are going on in Europe, I know that you reserve the right to recalibrate the business [guess] for Fiat SpA and the other side. Is there a plan also to do that for Iveco given the challenges we are facing in some of your key end markets?

And then finally on CNH, a question on the comparability to John Deere. I think in the past you always alluded to John Deere as a peer, where you thought that CNH could match the performance. Just a question to Richard. When you screen CNH and you benchmark it, where are really the pockets, from your perspective now after having been CEO of that division, that need to close? Is it where it particular on the ag side? Thank you.

Let me try and answer the questions backwards. I just want to remind everybody that my poor friend Rich here has been on the job for four months and he'll be celebrating his anniversary on Monday, I think. It's April 30th. So with that caveat, I think that the -- and although he knows the business because he's been the CFO of the business now for a while, but I think that we continue to -- I'll give you some broad answers and then Rich can fill it in.

But I think we're beginning to understand the value of linkage on the production processes of ag infrastructure in a much better way than we've done. I think some of the performance that you see reflected in Q1 is also a reflection of the fact that we've been closing some of those gaps. We still have a long way to go.

I think that the unplayed card here going forward is, again, the value of the powertrain solutions that we're offering through the range of products that both ag and construction offer. But let me deal with my question on the issue about whether I think that the 10% margin for Iveco is doable or not.

There's not a single doubt that the impact of the European truck market on Iveco needs to be considered. I think that the 10% number was viewed as sort of a portfolio answer to the performance of a variety of businesses within Iveco, including the relatively profitable business that we have in special vehicles and the performance of Latin America.

I don't think we're in a position today to take the forecast down. I'm still relatively hopeful and confident that we can find ways to try and bridge that gap to a 10% target through other means, and I think Alfredo and I are going to be doing some dancing here over the next two or three months to make sure that we understand exactly where that potential shortfall caused by European dislocation in the market, how that could be filled.

I'll leave it to my friend here, Rich, to answer the question on the John Deere [closer].

I don't have much to add from Sergio's comments. I think that one has to take a look at the geographical mix of revenues, and that's the way you should really compare it rather than in consolidation. So if you split the ag and feed business, clearly we're underperforming in the CE side relative to John Deere, but we've got actions in place to deal with that over time, which largely are concentrated and improving our position in profitability in Europe.

On the ag side, I think that from a North American point of view we have narrowed the gap in terms of profitability largely. So now it just becomes a question of the relative weighting of North America in the distribution of revenue. So we're not there, but I think from a product point of view that we're confident that we have a product line-up that's able to compete with anybody in the marketplace.

So then it just becomes a question now of executing commercially and industrially on the back of that product. And then clearly, as we're looking more medium-term on executing some of the Greenfield expansion projects that we've got going underway, whether that be Argentina, Brazil, Russia, or China.

Alfredo?

When it comes to Brazil, one of the most important benefits of the stimulus package that has been introduced will probably the fact that all OEMs could be in a position to pass through the increase in cost for a Euro5 to the final customer, which would have been a question mark in the absence of that package, as you know, because of some pricing decisions that some of our peers made in the absence of stock available of Euro3 vehicles.

Sorry, Alfredo, I didn't really understand the point on Brazil. Are you indicating that prices have now stabilized compared to Q1?

As I said in my introductory remarks, we need to wait until June to see exactly the full deployment of the stimulus package. The expectation is that pricing is going to stabilize for the remainder of the year.

Okay, thank you.

Thank you. We'll now move to our next question from Ashish Gupta from CLSA. Please, go ahead.

Hi. Just two quick questions. I just wanted to come back to the simplification of minority . Mr. Marchionne, can you just comment on the timing again? I know that you say you want to take your time for thinking about all the aspects of a transaction, but I think at the AGM you said you're thinking about something within weeks.

And then the second question I had was just I think you talked a little bit about potential strategic opportunities and not to think only about construction or whatever. What are you most excited about when you kind of think about the three businesses and having all that free cash flow consolidated to one entity and a much more stable capital structure?

I think we've been relatively clear about the fact that notwithstanding the reach of Iveco, which is not inconsequential, that it is not the most complete geographical coverage of any of the large truck makers. So I think we need to spend some time understanding exactly what the options are.

And to be perfectly honest, some of these things may even involve utilization of the Chrysler network in terms of the introduction of some of the Iveco products through NAFTA. So one has to be careful that one doesn't start thinking that we're going to go out there and cut tracks to try and buy people, but I think there are opportunities in the greater whole of Fiat and Fiat Industrial that will give opportunities for Iveco to continue to expand.

It remains the least exploited asset that we have within the group today. And if you connect it back to the comments that I made earlier about all we consider to be wise choices made on engine development going forward in view of the regulatory requirements becoming more and more onerous, I think that we need to find a way in which we can leverage the combination of our technical know-how in making trucks with the powertrain capabilities that are offered by FPT.

And that's something that we continue to work on. I think that now in this environment the development internationally with Iveco is a much more -- is a much easier venture to tackle as a discreet project than it was ever in the past.

The issue about construction continues to be an issue for us in terms of making sure that we strengthen everywhere we can. The fact that we have been able to finally stop the bleeding in the sector in the first quarter of 2012 is an indication of the progress that has been made, not just on the basis of volumes, but also in the -- our ability to manage the industrial infrastructure efficiently.

But the issues about the completeness of the product range and its geographical reach, not to mention the issue of the resolution of our excavator future given our dual relationship with Sumitomo and with Kobelco is an issue -- are issues that are going to keep us busy for a while. But I think that once they get resolved, they're going to clear the way for a much stronger CE business going forward.

In terms of the general question that you've asked about, what are we going to do with all of this wonderful cash flow that's generated, I have no intention of running a financial institution, so you'll be a happy shareholder in time. Trust me; just hang on. That's the reason why the separation happened was to provide significant liquidity out of the system to shareholders who believe in the capital goods story. So that's where we are.

Are you still thinking that you'll be making a decision within weeks, or is it a longer-term --?

No, I think the decision is not a multi-year decision-making process; it's discreetly found within a monthly overview. So give us some time. But we're moving on -- we are moving on those quickly. We'll come back to you as soon as we finish.

Our thinking ability is relatively well developed, so I've learned if we get a rest in-between I just think that we need to deal with -- we want to make sure that we do this thoroughly because the implications are permanent. I don't want to do something which has consequences that we don't fully understand or ramifications that cannot be handled.

I mentioned earlier that if I were to give you a back-of-the-envelope answer, I have one; I don't think I'm ready to share the immaturity of my thought process today, but give us a few days.

Thank you very much.

Thank you. Now we'll move to our final question from Larry DeMaria from William Blair. Please, go ahead.

Hi. Thanks for taking the call. A couple of questions. You mentioned, obviously, you're waiting on a pending guidance change to happen, with CNH in particular. But can you just explain, is it more in terms of waiting to see how the Company executes on the new products, which are numerous, or is it really more about just the impact from your early selling season?

And then secondly, also as it relates to CNH in Europe, obviously the Company has done very well in Europe. It has a very good presence. The competitors, as you've already mentioned, has about 100 new products out this year. And CNH's share declined a little bit in combines but gained in tractors. Is that normal fluctuation or have you seen any impact from the big issues that your main competitors are putting forward to actually gain share? I'm just curious if it's normal fluctuations or if there's anything to worry about. Thank you.

I'll let Rich deal with the issue of the European market, but the general question, there's no execution risk on the product launches. I think what we're dealing with is really we just want to be able to see how strong the market really is and how well we execute commercially. It's not an industrial issue, it's not a development issue on products.

I just want to see how long that order book is after Q2. We have indications there are parts of the Q3 order book which are already filled; I just want to see more before we move.

Okay, that's fair enough. Thank you.

And then in Europe, I think that we commented on this morning, the way we're reported to Europe and CIS, and so you have to take into account what we discussed about the localization provisions of really seizing or expanding into the Russian market. So in Europe right now, we're holding our own. The variance that you see on the combines is more related to CIS than it is to old continental Europe, let's say.

Okay. So obviously you take any threat from serious competitors pretty serious when you're putting together your plans, but (inaudible).

We know who you're talking about. We worry every day about all of our competitors, but that's our job is to compete with them daily. So that's life.

But nothing worse in Europe's happened so far, or it looks like to be happening that's overly concerning, I should guess?

Correct.

Okay. Thanks, Rich.

Thank you. As we have no further questions, I'd like to turn the call back over to you, sir, for any addition 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, sir. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.