CNH Industrial NV (CNHI) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to today's Fiat Industrial Third Quarter 2012 Conference Call. For your information, today's conference is being recorded. At this time, I will turn the call over to your host today, Mr. Manfred Markevitch, head of Fiat Investor Relations. Mr. Markevitch, please go ahead, sir.

Thank you, [George]. Good afternoon, everyone. We would like to welcome you to the Fiat Industrial third 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 at www.fiatindustrial.com. After introductory remarks, we will 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.

Thank you, Mr. Chairman. I will start on slide two. This is Camillo. Good evening, everybody. I'm starting with the highlights for the quarter that you've had a chance to review after my release.

So, revenues came in at EUR6.3 billion, including EUR200 million of positive FX impact. Trading profit of EUR575 million, for a margin of 9.1% in the quarter, compared to 8.3% in Q3 2011. Net results up EUR93 million to EUR297 million. And the slight increase in net industrial debt that was probably anticipated in terms of seasonal absorption and capital expenditure, continuation of our programs has generated a reduction liquidity of EUR800 million in the quarter, as a combination, again, of the industrial absorption and the increase in the portfolio financial services.

We have already, so to speak, remediated this reduction in liquidity in the early part of October by having issued a bond out to CNH Capital EUR750 million, approaching EUR600 million that brings back the liquidity substantially to where it was at the end of June.

On slide three, we have the highlights for the quarter. And what I would like to think -- jump to is really fine tuning we had in terms of the full year guidance, where revenues are now forecasted to be about EUR25 billion and the trading profit to be in excess of EUR2 billion. I remind you that we had previous guidance between EUR1.92 billion to EUR2.1 billion. The net profit of approximately EUR900 million is consistent with the previous guidance.

The net industrial debt, we've been seeing some of the commentaries that have been written on the subject earlier today. I'll try to deal with that on the slide where we talk about the cash flow for the quarter, and give you some insights about Q4 of 2012.

Slide four gives you the breakdown of the revenues and the trading profit by sector. As you can see from the slide, we have CNH that now has delivered an 11% trading profit margin on the back of 18.5% incremental margins in the quarter. And Iveco equity industrial and FPT industrial substantially confirmed the same type of margin performance of last year. So, the reduction in revenues has corresponded to a reduction in percentage terms of the absolute profit.

The slide five gives an additional insight into the behavior of cost, the industrial costs, in the quarter. It's a favorable impact, and it's assumed to continue into Q4 of 2012. So, we are starting to see some benefits in terms of the trends in the cost of raw materials flowing through the P&L for the group.

Slide six is the usual walk from trading profits to net results. I would just point out that in the quarters -- in the quarter, sorry financial charges were EUR110 million. That's EUR24 million better than last year. I'll comment move on the next slide. And the year-to-date number for financial charges is now EUR330 million for the nine months.

Slide seven really provides some more breakdown of what has driven financial charges in the quarter. As I just explained, EUR24 million better. That's mostly due to better rate on the higher net industrial debt, which drives the cost down. The EUR330 million year-to-date we are now anticipating an additional EUR100 million in Q4 so that would put us in the higher part of the range that we provided in terms of full year guidance of EUR400 million, plus or minus 10%.

Now to the cash flow. Slide number eight. In the quarter, as you can observe, we had a favorable generation of cash from our operating activities before changing working capital that was substantially absorbed by the change in working capital itself.

And I think, back in February, when we provided you with some guidance in terms of the quarterly trends in net debt and changing working capital, we had anticipated that Q3 would have been an absorption type of quarter. And we also anticipated that Q4 would most likely replicate the performance that we observed in Q4 of 2011. Where, I remind you, we have generated around EUR900 million in terms of positive change from working capital.

The relationship between D&A and CapEx shows the important commitment they were making in terms of new product introduction and new product launches. And tier four, or Euro VI adoption across the range of our products. And we're now looking at a full year guidance in terms of CapEx at the high end of the range that we provided of EUR1.4 billion, approximately.

So, when you look at Q4, based on the couple of things, the dynamics in terms of retail exceeding wholesale production for CNH across the AG and the CE space. And the fact that we will benefit from the typical fourth quarter -- the fact that we have lower payables to settle in the quarter. We're now looking at an industrial net debt, going from the EUR2.2 billion to somewhere between EUR1.2 billion and EUR1.5 billion.

So, really, it's not a change in the guidance on the CapEx because at this point in the year it doesn't really make a difference on the cash flow. It's more an issue where we're going to end up in terms of the actual cash flow from operations and change in working capital in Q4. With that comment, I will move it onto Rich for CNH.

Thank you, Camillo.

Moving to slide 10. CNH revenues are EUR4.1 billion for the quarter, up 17%, with a healthy geographic distribution you can see from the percentages. AG really drove the story at EUR3.2 billion, up 27% q-on-q, with continued high [commodity] prices driving demand in agricultural sector. The CE side at EUR667 million down 10%. CNH is not immune to the slowdown to the industry that we've seen from a variety of -- of our different competitors release Q3 earlier than us.

Trading profit is up 33%, to EUR448 million. That is the result of volume mix and positive pricing on both the AG and the CE side, which has allowed us to finance the increased costs of SG&A to accommodate the higher revenue line.

Moving to slide 11, please. (Technical difficulty) in agriculture equipment, in terms of industry, growth rate and CNH relative performance (technical difficulty), both in tractors and in combines, we've made positive -- we've outperformed the industry. In terms of the full year expectation of both tractors and combines, they remain largely the same as that we had disclosed at the end of Q3, in terms of the market growth for the full year. And this is on a unit basis, not a revenue basis.

Moving to slide 12. Despite a significant slowdown in the quarter, we were able to hold market share of both light and heavy segments, despite the fact that it's been down, as I mentioned earlier in one of the previous slides, we have positive year-over-year pricing as we attempt to remain disciplined in terms of pricing and to a slowing market conditions.

Moving to slide 13. This is inventory, retailed production. As you can see, well balanced move on the AG side in Q3 where they're evenly matched. Our expectation is to under-produce retail by approximately 20% on the AG side in Q4, with the resulting liquidation of Company and dealer inventory, which will positive for cash flow.

Same story on the construction equipment side, as you can see, that we've already started the reduction. Because of the weakening market conditions in Q3, we'd expect to do a further 20% reduction relative to retail sales in Q4, with the positive impact to cash flow that we expect on a full year basis.

Slide 14 is just main product launches. We've covered this significantly through the first couple of quarters of the year. This is all part of the 130 product integrations that we have slated between now and the end of 2015 on the back of new product launches in tier four compliance. These are some of the early entries that we see in both the agricultural and the construction equipment side, of which a significant amount of the launches on the AG side were released at Farm Progress Show in Boone, Iowa, earlier in the year.

That's the end for CNH. I'll hand it over to Alfred for Iveco.

Thanks, Rich. Good afternoon, everybody.

Iveco Q3 revenues down 7% to EUR2.1 billion, primarily due to the market downturn in both Europe and Latin America, partially offset by a more favorable product mix coming, primarily, from special vehicle business, bus and heavy trucks.

Volumes down 18% to 29,000 units, which is pretty much the same level of Q3 2010, with southern Europe still driving the negative trend. Trading profit came at EUR110 million with margin at 5.4%, pretty much in line with last year, and we able to offset through product and manufacturing efficiencies, the reduction in terms of volume and pricing effect.

Moving to slide 17, the outlook for the remainder of the year. Western Europe, we are now at minus 8%. The expectation is for Q4 to be pretty much in line with this trend. And so, probably, the year will close around minus 9%, minus 10%, compared with last year.

Latin America is on a recovery path, thanks to the new [Finame] package that was introduced in September. And, therefore, the expectation is for the year to close around minus 15%.

Our expectation is that, probably, the market, especially the heavy truck market, will -- thanks to a pre-buy next year in the second half of next year will probably go up and recover some of the downturn experienced this year. And, probably, Latin America will keep on benefiting from this Finame program to the extent it gets renewed, also, for 2013.

In terms of order intake, we were down 6%, and pretty much inline -- slightly higher than the Q3 2010. And it's pretty much stabilized versus Q2 of this year, which we hope is an indication that we bottom the market. The good thing on the order intake is that Africa-Middle East we achieved an 85% increase on Q3 2011. So, the trend is continuing. And also the order board for the Q4 is pretty strong in that region.

Turning to page 18, which deals with company and dealer inventories. We keep on streamlining our inventory. We are at 13% down, versus Q3 of last year in terms of dealer inventory and 11% down in terms of company inventory. This resizing is moving ahead. And we are now down to less than three months of average sales in our dealer inventories, which divided by the number of dealers we have, is pretty much 55 units per dealer.

Page 19. Market share by region, the good news in Western Europe is the uplift in our market share on heavy duty trucks, which is the first time after six years of consecutive negative trend in heavy trucks that we post a positive gain. Same market mix of 2011. The gain, slightly lower than 1 percentage point. This is thanks to the introduction of the new Stratus, of course.

On the light duty segment, our market share went down 2.1%, primarily due to the fierce price competition coming from cab derived -- car derived vans, which, as you all know, is very competitive environment this year.

In Latin America, on the other end, the light duty segment is where we keep on posting good results. This quarter we are at 17.1%, 2.4% higher than the same quarter last year, stable in the medium segment and down 2.2% on heavy duty trucks. Clearly, destocking that the markets experienced in Q3 has been pretty severe. And price competition was pretty tough. And we tried to be very disciplined, giving up shares without compromising on our pricing positioning.

The downturn in the market share in Brazil has been more than offset by the gain in Argentina where we confirm our leadership position at 21.7%, and in Venezuela where we closed the quarter at 11.4%.

Page 20 deals with the product displayed at the Hannover truck show in September. We told you already about the award that the new Stratus got as Truck of the Year, thanks to the very good performance in terms of total cost of ownership, driven by the IECR technology developed by FPT Industrial and introduced on this truck.

Page 21. China. The market keeps on going down. We are now even lower than the levels that we experienced in Q3 2009, at 600,000 units. But, notwithstanding this trend, our sales reached an historical high at 33,000 units for the third quarter, with a 5.4% market share, one point higher than Q3 2011, with all the business contributing positively to the performance. Certainly, the heavy truck segment in China remains the primary issue due to the contraction in the construction business.

Page 22 deals with the latest development, the joint venture that we set up in South Africa with Larimar, which is a South African conglomerate operating in logistic services, but also in bus engineering and manufacturing. Iveco is going own 60% of this joint venture that will assemble bus and trucks in South Africa, [kits] coming both from western Europe as well as from China.

The total investment for the setup of the operation will be EUR36 million in 2013. And the primary target for this joint venture is to serve not only the local market, but all the other countries federated into the south African custom union, which is the fastest growing region currently in the world this year, is posting an almost 18% growth for the truck market in itself. And the start of production is planned for the second half of next year.

And I'll turn it over to Giovanni for FPT Industrial.

Thank you, Alfredo. Good afternoon to everybody.

We look at page 24. In Q3, we have seen a decline in our business in connection with the general decline of the economy. We have a reduction in revenues year-over-year 13% from EUR742 million to EUR646 million. The third party customer turnover is 32%, up three points percentage, compared to last year. Careful management of the capacity and internal efficiency allowed us to reach the same 4% (inaudible) margin over last year, although the trading profit was EUR26 million, down EUR4 million versus last year.

If we look at the volumes, we can see that a better performance in the off-road limited the engine volume reduction to 17%. 40% was sold to third parties. In the same time, the decline in the on-road business has partly influenced the sales of gear boxes and axels, down 30% and 24%.

Page 25. In this chart, we can see some of the action that we realized in Q3 to ensure further growing of our business. For on-road application we presented our first Euro VI engine, CNG version for truck and bus application.

For the marine application we launched our first tier three compliant engine, NEF. The tier three emission constraints will be started in the middle of next year.

Regarding our FPT customer base, in September, we signed an LOI, or a supply agreement with VDL Bus and Coach. It is one of the major bus producers in Europe. We will supply to them a specific version the Cursor 9 Euro VI engine, with higher CR technology. The total cost of ownership and the performance of our arranging convinced the Dutch companies.

Another important step in our future growth is the [signature] the supply contract with Ford Truck Division. Also, in this case, their choices were the FPT engine performance and competitiveness. We will start to supply Cursor 10 Euro V engine to Ford to power their new cargo range in Europe and in Latin America, as a first stage.

Staying in Latin America, we started the production of on-road application for Cursor 9 Euro V and NEF4 Euro V engine.

Page 26. Here, we have summarized the main events in Q3 just to underline that we are working to keep the leadership in the engine technology and reliability. As you have already -- was already told by Alfredo, the Iveco Stratus won the award of Truck of the Year. Thanks, also, to our Hi-eSCR technology. But what is not well known, that Stratus was the winner in a basket of four finalists. And the finalists were Daimler, Iveco, Ford and Fuso. Three of these four were powered by our FPT engine. It's an important target, I believe.

Then, in July, we reached our first million engine produced in our Turin plant. Also, in China, we are trying to grow our Cursor 13 due to the award of Annual Environmental Protection Engine. And we started again to supply engines to the Beijing Public Transportation Company with our Cursor 8 CNG version. And next year, we will see an important [bench] of more than 1,000 engines to them.

At the least, we can see that the efficiency and the reliability of our engine can be seen in the record that one Italian boat got one month ago in the race New York-Bermuda, making a very astonishing record, reducing more than 50% of the previous record.

That's it for our side.

Thank you, Giovanni. We're now on slide 27. Just a reminder that we have been confirmed in the Dow Jones Sustainability Index as the sector leader in the Industrial Engineering space. And that's the second consecutive year where we have achieved the leadership in the specific recognition of the efforts across the economic, environmental and social areas at the group level.

And slide 28, just a recap. So, we're firming up our guidance, revenues above EUR25 billion. Trading profit in excess of EUR2 billion. And net industrial debt between EUR1.2 billion and EUR1.5 billion on the basis of the cash flows of Q4, at this point. Cash and cash equivalents in excess of EUR4 billion, and capital expenditures between EUR1.2 billion and EUR1.4 billion. And we're anticipating to be at high side of the range.

So, with these remarks, I will pass it back to Manfred.

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

Thank you, Mr. Markevitch. (Operator Instructions). Today's first question is coming from Laura Lembke of Morgan Stanley. Please go ahead, ma'am.

Yes. Good afternoon, gentlemen. I actually have three questions. The first one is on Iveco. Obviously, you've had a very strong performance here, thanks to the military business. And I'm just wondering if you could give us a little bit of a feel on how the underlying performance of the Iveco unit looks if you exclude the effect from the military business?

And, also, could you tell us what kind of visibility do you have on the military revenues going forward in the next couple of quarters?

The second question is also on Iveco. Can you tell us how order momentum has developed in the various regions in October? And also what pricing has done, and if we should expect any noteworthy production cuts in Q4 to come?

And then the last one is just on AG. Can you explain to us what kind of impact the lower equipment utilization due to the drought effect has on the equipment trade-in cycles in North America? Thank you very much.

Okay. I'll start with the military business. The weight of the military business in Q3 was 11% of our revenues. And this is supposed to grow in the last quarter of the year, which is traditionally the one where we have the highest seasonality. And, as I told you already in the conference call last quarter, the order board looks very interesting. This year is going to be a record high for our defense legal business.

The order intake for 2013 is also pretty good. And we will also display full effect of our operation in Brazil where we started delivering the new amphibious to the Brazilian government.

I'm not sure I understood the second question. If you can please repeat it?

Yes, sure. It was about the order momentum in the various regions for truck in October. I'm just wondering if you have seen any significant change relative to what we saw in Q3. And also, if we should expect any noteworthy production cuts in Q4 to come for Iveco?

No. No major changes. Brazil -- Latin America is doing very well because, of course, we are on the back of the rebound, thanks to the new Finame incentive package. So, the last quarter of this year will be slightly below the last quarter of 2011. So, pretty good across all businesses. Likewise, in Western Europe, I think we're going to see pretty much what we are already experiencing in Q3.

The only question mark in Western Europe is the German market, which went down 6% in this quarter. So, given the relevance of the German market on the total European market, I think that we need to watch carefully what goes on there. And, as I said before, Africa is still on a very good pace. And we expect to close the year with 100% growth compared to last year.

Rich?

The final question was the low equipment utilization due to the drought. That's really, narrowly, going to be in combines because of the fact that there was the planting that was done. And there was the take-down of -- when it comes to corn of the failed crops. So, tractor utilization is similar to what it would have been in a normalized year.

So, it's restricted to combines. And what we are doing right now, we are cutting year-over-year combine production in North America by 18%, this is Q4-over-Q4, to level load inventories and help clear out whatever amount of used inventory is in the system or to be proactive on that subject.

Okay. That's very helpful. Maybe one quick follow-up. Are you generally concerned about the level of used inventory in the US AG market, or would you say it's still at relatively healthy levels?

On a metric basis, it doesn't seem egregiously high. But coming off of three years of pretty robust demand in North America, and that why I think we're taking larger actions this year to deal with it than we have taken over the last two years.

Okay. That's great. Thank you very much.

Thank you for your questions. We'll now go to Alberto Villa of Intermonte. Please go ahead.

Hi. Good afternoon. Just two questions. The first one is if you can comment on what you have written in the press release that you are still discussing the terms of the merger with Fiat Industrials? If you ca add anything now the ratio today is around 4.2 [measure ratio] between the two companies? Would you be -- discussing to -- for a measure ratio that is in this region or even higher, something that you can add on this? And also on the timing of the deal?

And, secondly, you advised yesterday your targets on 2013 and 2014, for Fiat [Alta]. I was wondering if the target for turning profit 2013, 2014 for Fiat Industrial are still feasible given what happened in Europe on the truck market, et cetera, pointing to EUR2.7 billion of trading profit next year? And that [EUR3 billion], or something like that, at the end of next year is still something that is achievement, in your view? Thank you.

In terms of the 2013-2014 numbers, we'll give an update on the forecast in January when we release the results for the full year of 2012. I think we certainly have a better read of sectoral behavior in 2013 than we have now, especially in view of some of the questions you've asked.

The other question - the only thing I can tell you about the work of the special committee is that it is undoubtedly going to be more expensive than the offer we made in our letter of May 30. We're in discussions now with the special committee. I think that there is a good level of conversation going on. I think you need to allow us to proceed. It's still my hope that Staten Island by the end of this year, will have this issue resolved one way or the other.

But I think the intentions of both parties to try and find a constructive solution to the quandary that we have to put to bed. I remain as convinced as I was at the time that Fiat Industrial made the offer to CNH of the value of bringing all these businesses together. Simply because of the ability of the power train business to provide sort of unique and incredibly competitive solutions to all the sectors in which we participate.

So, I'm hoping to get it done. I cannot tell you any more than I know today, other than the fact that, obviously, for Fiat Industrial it's going to be a more expensive deal than originally envisioned by the offer.

But the structure with other likely remain the same you offered originally?

I think the broad lines of the offer, to the best of my knowledge, are unchanged. And I think I reiterated that in the letter that -- in the communication that was issued a while ago. So, there's no fundamental change --

Thanks.

In the approach.

Thank you very much Mr. Villa. Our next question is coming from Mr. Martino De Ambroggi of Equita Brokers. Please go ahead, sir.

Yes. Thank you for taking my questions. It's clear the worse net debt is a networking capital issue. So, for the overall group, without the implication on the net debt target, if I remember correctly, was to go down to the Euro by next year, first.

And, second, on the financial costs, if there is due to the higher net debt projected, is there any chance to see the lower financial costs already in 2013? And, the second question is on the Iveco slide 10, I was wondering what is the minus EUR39 million referring to the other item. And if it's possible to have an update on the cost saving initiatives with the amount still not reflected in the P&L, obviously, not taking into account what you announced in the last conference call. So, I was referring to the old cost saving initiatives.

Martino, hi. Let me start from the first point you raised. The financial charges implication, I think I've given some color around the impact as far as 2012 is concerned. We started with that EUR400 million target. Now, we are at EUR330 million at the end of Q3. And we're assuming that we're going to add another EUR100 million in Q4. So, that gives you the answer to the implication of the slightly higher net levels in the quarter.

As far as the ending point is concerned, that's just what it is. I mean, we just revised the final 2012 -- that number to reflect or anticipate being now at the end of September sitting on a EUR2.2 billion net debt figure.

Yes, Camillo, I was referring on the possibility to see -- if not significant, in any case a reduction next year on the financial costs.

I think -- this is Sergio Marchionne. I think you should see a reduction on the interest line in 2013. And, in terms of your question about whether we expect to be at a zero debt level by the end of next year, this is going to be part of the update that we'll give you at the beginning of the year, after we release '12.

It's part of the revised plan that I'll take into account the activity in Europe and how we see the markets going forward for the next two years. Not just for Fiat, but for Iveco, but also for the activities of CNH as they're impacted.

Yes.

Don't expect any draconian bad news coming. I mean, it's not the end of the world. Right? We'll manage our way through.

The other question was reference to Iveco, but reference to page 10. So, page 10, CNH. Is it [39] at CNH? Or is it --?

Yes. Actually there is a negative other, 39 for CNH. But there is a plus of a similar amount in the other line, also for Iveco. And you are right. It's a slide 16. So, if I can have some information on both. Thank you.

Okay. And CNH, it's largely the effect of FX and warranty costs.

Okay.

And on the Iveco side, it's primarily the effect of the provision that we booked last year for the financial services, which were worth EUR39 million.

When it comes to cost saving on Iveco, 50% of the efficiencies that we booked in Q3 are coming from world class manufacturing, 50% from the efficiencies originated by the manufacturing footprint optimization that we did this year.

In terms of purchasing efficiencies, in the next quarter we will start experiencing some positive affects coming from the reduction in raw material that, so far, we have not experienced because we are carrying forward the long term contracts that were signed last year.

And in terms of SG&A, we posted a positive EUR5 million this quarter, which were offset with higher commercial costs, primarily coming from the launch of the new Stratus. So, on a run rate, I think that we will be still positive in terms of SG&A gains going forward.

Okay. Thank you.

Thank you, Mr. De Ambroggi. Ladies and gentlemen, that will conclude the question and answer session. At this stage, I turn the call back over to Mr. Manfred Markevitch for additional closing remarks

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

Ladies and gentlemen, that will conclude today's conference. We thank you very much for your participation. You may now disconnect.