CNH Industrial NV (CNHI) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's CNH 2013 second-quarter conference call.

For your information, today's conference is being recorded.

At this time, I would like to turn the conference over to Manfred Markevitch, Head of CNH Investor Relations.

Mr. Markevitch, please go ahead, sir.

Thank you, Caroline.

Good morning and good afternoon, everyone.

I would like to welcome you to the CNH 2013 second quarter conference call.

Let me make a brief introduction.

I would like to remind everybody, they can refer to page two of our presentation, which was distributed earlier today and posted on the Internet regarding certain forward-looking statements.

Also, all the information that will be used in the conference call today is available on our website at www.CNH.com.

Today we will have the presentation, followed by a short Q&A session.

We are pleased to have our President and CEO, Richard Tobin; our CFO, Pablo Di Si; and our Treasurer, Andrea Paulis with us on the call today.

We would like to begin with a brief presentation.

With that, I will hand over the call to Rich.

Thank you, Manfred.

I guess, I'll make some opening comments and we'll cover slide three.

And then I'll hand it over to Pablo Di Si, who'll take you through some of the financial numbers.

And then we'll come back to market conditions and then move briefly into Q&A.

Overall, it was a good quarter.

I think that what you see in the financials in terms of positive mix and price realizations were driven -- which drove profitability quarter over quarter.

The market continues to hold up on the Agricultural side, which is driving the vast majority of performance quarter to quarter.

Construction Equipment still is a challenged marketplace.

But in turn right now, it looks to have stabilized somewhat, we can talk about in terms of what we expect over the balance of the year.

So with net sales increase of 9% to $5.5b, and an operating profit of $659m in the quarter, we're quite pleased with the performance -- the operating performance of the Group.

A net cash position at $3.6b with available liquidity to the Group operations being robust.

And then you can see at the bottom of the slide, in terms of EPS accretion on the back of good performance of earnings.

So, as I mentioned, I'll hand it over to Pablo to go through some of the more detailed slides on the financials.

And then we'll wrap it up with some other commentary on the market conditions and then take Q&A.

So, Pablo.

Thank you, Rich.

So on slide number four, you can see that CNH posted strong net sales growth of 10% at constant currency on a worldwide basis.

When you look on the geographic basis, Latin America in its sales grew by 55%.

And this increase was primarily due to price realization, a strong combine industry growth of 74%, a strong combine industry -- a tractor industry growth of 29%, combined with share gains in both businesses.

In Europe and Africa and Middle East, we have flat sales versus last quarter.

And in North America we have an increase of 8% versus last quarter.

This -- in North America, the gain was primarily due to price realization, better mix and strong industry growth in combines, tractors and in light construction equipment.

In the Asia-Pacific region, the net sales declined by 4%, primarily due to the industry softening in both segments in the markets in which we participate.

When you look at page five, you can see that the organic growth of 10% was partially offset by the impact of the foreign exchange on our net sales, primarily due to the weakening of the Brazilian real.

If you turn over to page six, you can see that Equipment Operations operating profit increased by $135m or 26%, primarily due to the increased volume, better mix and pricing in the Agricultural sector and Ag and CE purchasing efficiencies.

All of these were partially offset by the lower volume in the Construction sector, higher R&D spending and SG&A to support our business growth.

On the stable purchasing economics of $13m, we are both -- leveraging on both commercial negotiations and technical cost reductions with contributions from the mechanical and chemical commodities.

When you flip over page number seven, you can see, as Rich alluded earlier, that our net cash reached $3.6b at the end of June which is an increase of $789m versus last year, primarily due to the higher operating profit from operations and lower cash utilization for working capital.

Our capital spending reached $192m, which is an increase of $12m versus last year as we have invested in additional projects in China, India and Argentina.

I will make some additional comments on the next pages on project spending.

Turning over to page eight, you can see that under Agricultural Equipment, the second quarter overproduction versus retail was up by 7%, in anticipation of our scheduled maintenance and repair downtime which is scheduled for the third quarter, primarily in NAFTA, Europe, Africa and Middle East.

In terms of the Construction Equipment, you can see that the underproduction versus retail was 1% which was the result of overproduction in Brazil due to the infrastructure projects launched in the country, offset by underproduction in Europe, Africa and Middle East due to softer demand in market.

If you flip over to page nine, total CapEx for June year to date was $192m.

We continue to invest heavily in new product upgrades on both the tractors and combines and Tier 4 in the amount of $60m.

Additionally, we spent over $98m in core industrial capacity expansions and strategic long-term investment projects in China, Argentina, India, North America, Russia and Brazil.

With that, I will turn it over to Rich.

Okay.

Thank you, Pablo.

Moving to slide 10, I'm not going to cover this in detail.

This is information that's available in the marketplace.

We have seen some weakness in commodity prices relative to the quarter -- second quarter of last year, keeping in mind that commodity prices were running up quite heavily this time last year in anticipation of drought conditions, primarily in North America and now you see the comparison now where the expectation of significant increase of production, primarily out of North America on a year-over-year basis, on the GDP side which is more tied to Construction Equipment, I thin.

, All the red there on that slide will give you an indication of the prevailing conditions in the Construction Equipment market.

Turning to slide 11, in terms of industry units, volume, second quarter and full-year outlook, you see the numbers by product segment, both on the Ag and the CE side and our expectations for the full year which are largely unchanged to those that we reported at the end of Q1.

On slide 12, Pablo alluded to the capital spending in terms of R&D and new products.

A lot of this is on the back of preparation for Tier 4 final compliance in 2014.

But we continue to invest heavily across the product portfolio.

At present, the Agricultural business is consuming approximately 85% to 90% of capital spend for the Group on an ongoing basis.

Moving to slide 13, this is the final slide.

In terms of execution priorities for the balance of 2013, as always, it's new product launches in preparation for Tier 4 final or Tier 4B compliance programs, with continuation of the strategic investments in Harbin in China and in India for the expansion of capacity in growing markets and to maintain the maintenance and industrial flexibility to meet geographical market demand changes.

We've transacted two ABS transactions, one in the US and one in Australia, during the period.

CNH Financial Services has been able -- has continued to be able to tap the capital markets at favorable pricing.

The update in terms of the strategic combination between Fiat Industrial and CNH Global is on track with both shareholder meetings and approvals taking place over the past several weeks.

And in terms of the guidance looking forward, it's unchanged from the end of Q1, which I'm sure will be part of the discussion when we get to the Q&A.

And all of the mathematicians out there that want to do fourth-quarter squeezes and the like.

Look, at the end of the day, we're happy with the performance year to date.

There's still a lot of hard work to do in the second half of the year.

Those of you that spend some time following the Company know that in Q4 is where we maintain industrial flexibility as we drive for cash in -- at the end of the year.

So depending on when we have a clear outlook for market demand in 2014 we'll really see where we are in terms of flexing production capacity in the fourth quarter.

But, overall, I think it's fair to say that, from an operating margin basis, I think the high end of the margin window is becoming increasingly likely.

With that, I'll hand it to you, Manfred, and we can go to Q&A.

Thank you, Rich.

Caroline, please take the first question.

Certainly.

(Operator Instructions).

We'll now take our first question from David Raso from ISI Group.

Please go ahead.

Your line is open.

Thank you.

As you mentioned, obviously, everybody is wondering about 2014 and the Ag cycle.

And you mentioned, obviously, this time last year the commodity prices were going up and, obviously, lately they've been down.

So is there any indication you're seeing yet on the order rates, adoption of any new products, order windows for new combines, anything that suggests some of the angst that's out there is somewhat filtering into your order book?

Or have you not seen any impact yet?

And the reason I bring it up too is you raised the retail outlook for the industry but didn't raise your own revenues.

So is that partially an understandable desire to manage your inventory a little bit lower in the second half of the year?

Okay, David.

Let me do the second one first to a certain extent.

And we've got to be careful a little bit, and that's our own fault, because we keep putting these charts in here, about industry growth in terms of units.

Because there are particular segments that contribute a lot of units that the CNH portfolio doesn't really participate in.

So I think we've got to be very careful if the lower end of the horsepower spectrum is growing heavily that's not something that's really going to translate into performance on the CNH side.

So I think you need to -- those are overall unit global demand.

And it goes all the way from very low horsepower products all the way up to 1,000 horsepower tractors.

So there's a huge difference in terms of mix, volume and profitability.

So I think overall, despite the fact that the numbers move a little bit as we continue to get upgraded TIVs on a global scale, our view in terms of our own demand is largely unchanged at the end of Q1.

In terms of your other question about 2014, the demand is a little less than we've seen in last year primarily in North America on both combines and tractors.

But in terms of order coverage, it hasn't really translated to a lot of headwind in terms of how much orders we've got covered on the industrial base.

But it is slowing a little bit.

Now, why is it slowing?

Well, a lot of it is probably a little bit of negative market sentiment about commodity prices are going down.

Some of which is the impact of the reduction on the tax credits for capital investment.

And then some of it is we're going through, which seems like every year, the other transition now between Tier 4 and Tier 4 final and everybody getting an understanding of what the price point's going to be.

I think that if you take a look back on the slide that Pablo had, where it showed the profitability walk, I think we've been trying to maintain adequate discipline in terms of pricing and market share.

I think that we've, in certain regions, given up a little bit of market share in attempt to protect pricing.

We're trying to protect pricing because we know the Tier 4 final's coming.

So we've got another headwind there.

So we'd like to manage that step up as we move into 2014.

But overall, as you can see to the numbers, it's not as if we see a cliff in the third and fourth quarter what would be bringing down the industry.

But I think that at the end of Q3, as order books continue to fill up, we'll have a clearer idea of what we have to say in Q4.

I think the other thing to keep in mind is when we were at Farm Progress last year, the world was ending because despite the fact that commodity prices were going through the roof, the drought was going to have a disproportionate impact on farmer net income and then we had the whole discussion about insurance and everything else.

So I think you need to take it with a little grain of salt.

If the harvest is as large as everybody thinks it's going to be, the individual farmer's going to make it up in terms of total profitability on volume.

So we don't expect to forecast a significant decline in net farming income on a global scale because if you look what's going on in Brazil, what's going on in Europe and North America, it seems to -- I don't think there's a profitability crunch for our clients.

I appreciate all the puts and takes, especially with the Tier 4. But can you help us quantify it a little bit, the orders currently versus this time last year or maybe, as you said, the coverage, the backlog versus the time lag -- just to put some quantification around it?

It's maybe a half of a month of production.

When we get into units it's a much messier number.

But maybe a half month.

(multiple speakers) growth rate year over year?

The orders, is it down 5%, 10%, flat?

It's all over the map.

You want to talk about Brazil?

It's up significantly.

We don't see that turning down.

North America is a little bit down.

We're talking about single digits.

Europe is acting a little bit strangely where tractors are slightly down but combines are way up which is a bit counterintuitive if you want to just deal with this on a macro basis.

So for me to quantify it for you there's just no one global answer.

No.

That's helpful.

I appreciate it.

Thank you.

We'll now take our next question from Steven Fisher from UBS.

Please go ahead.

Hi.

Thanks.

I'm wondering, in terms of Construction, it sounds like Brazil was keeping your production in line relative to demand but that was driven by infrastructure spending programs.

Can you just talk about is that a sustaining trend do you think or we're going to start to see that generally under=produce relative to demand?

Yes.

I've seen the comments from other market participants in Brazil.

I think that we don't have an exposure to the mining sector, so the mining sector in Brazil, as everybody knows, is down quite a bit.

On the general Construction product lines, we've got very favorable financing packages that are in place right now.

We don't expect those to change within this calendar year.

We'll be waiting just like everybody else what's going to happen in 2014.

But our expectation is there will be a package.

What the amount of the incentive is, we're just going to have to wait until FINAME comes down and puts in the packages for 2014.

It was running very heavy during the first of the year.

We were running at capacity.

So in terms of our market share performance it actually declined in Brazil in the first half but we were running full out.

And, as you know, if you don't make the product in Brazil itself, your ability to participate in that market is challenged from a profitability point of view.

So that's the way we see the Brazilian market right now.

Okay.

Great.

And then on the US Ag side.

I know you mentioned globally you're not expecting a farmer income crunch, but do you have any sense of to what extent farmers have locked in better corn pricing, say, in the $5, $6 range over the last few months to mitigate the current pricing or where we're headed?

We've got internal estimates that say somewhere around 60% of the corn production has been sold forward.

What the basis of that -- what the number is there, you can pick anywhere on the curve and your guess would be as good as ours.

But from what we understand about 60% of the crop has been sold forward to date.

Okay.

Very helpful.

Thank you.

We'll now take our next question from Ann Duignan from JPMorgan.

Please go ahead.

Hi.

Good morning, guys.

Good morning.

Good morning.

Can you talk a little bit more about the fundamentals in Brazil on the Agricultural side, both on the crop side as well as the sugarcane side?

Would you anticipate, given where the real is, that we continue to see expansion of acres on the crop side, going forward?

And how is the sugarcane sector holding up, given sugar prices?

Yes.

In terms of the weather, it's not really cooperating with the sugar crop right now so you're seeing some reflection of that in the pricing.

I think that from a competitive point of view, the real selling in a crop in dollars is a good thing.

But against that you've got some inflationary pressures in Brazil itself in terms of input costs, including equipment that run against that to a certain extent.

But right now, the market seems quite healthy.

The clients that we speak to down there are not signaling us of future capital investment being constrained based on the current market conditions.

And on the crop side, do you have any sense for equipment being sold for expansion of acres versus replacement?

Can you give us any sense or is that just too difficult to get your hands around?

It's too difficult for us to get our hands around.

I think at the end of the day, as we've talked about, I guess, for the last couple of years, there is an industrialization trend by the Brazilian farmer.

Now there is, in Mato Grosso, a continuous expansion in terms of acreage that's going on there.

But how much of the unit demand is acreage expansion and how much is productivity based?

I think that we would argue it's more productivity based than acreage expansion.

Okay.

Maybe we'll all have to get down there again soon and figure it out.

I go there all the time, Ann.

So you can (multiple speakers).

Okay.

Good.

Good to know.

Just a quick follow up on the lower input costs.

If I look at Fiat Powertrain's margins versus, in particular, your Agricultural Equipment margins, should we be concerned at all that the Fiat Powertrain business is subsidizing the margins of the machinery business?

If I compare Fiat Powertrain's margins versus somebody like Cummins, maybe not a fair comparison but the gap in profitability is significant.

It's an absolutely unfair comparison to compare somebody that's got between 70% and 80% of their unit volume that's intercompany versus a company that has 100% of the unit volume third party.

So clearly there's always going to be a gap between the two.

Okay.

I'll leave it there and get back in line.

Thanks.

We'll now take our next question from Alexander Virgo from Berenberg Bank.

Please go ahead.

Thanks very much.

Good morning.

I was just after a little bit of clarification around the overproduction in the quarter going into -- on the Ag side.

I appreciate your point with respect to preparing for shutdowns and maintenance.

But I was just wondering if you could comment on how you feel about the inventory levels, notwithstanding your guidance for the full -- your reiteration of guidance for the full year?

Where do you think they are in terms of your own versus the dealers?

And then just secondly on the health of the Financing business, it looks like your delinquencies have improved quite materially actually, probably a bit more than I would have expected.

I'm wondering if you could talk a bit perhaps the profile of provisioning you thought you had to take, because clearly that's been of benefit to the profitability in your Financial Services business?

Thank you.

In terms of the inventory, look, if you look back at that chart that we showed you and then you looked back over the past few quarters and take a look closely at the fourth quarter, the fourth quarter is really where we intervene on our production to manage total inventories both our own and both the dealers'.

So we have that operational flexibility.

And we'll make that call relatively soon, probably in about another 30 days, about the level of -- and capacity utilization on the Ag side.

So we've got short-term demand right now in Q3.

We had to make some of the products in Q2 to accommodate the fact that we're going to take the industrial system in the Middle East at least in the west, for the lack of a better word, down for scheduled maintenance repair in the month of August.

And then we'll balance it from there.

In terms of dealer inventories, we recognize as a major market participant that we have to manage that figure, inclusive of dealer trade-in inventories.

So we've managed the amount of wholesales that we're putting into the marketplace to ensure that we don't get an imbalance between trade-in [units] and new units sitting at the distribution level.

Okay.

And are you happy with where pricing is?

Sorry, just a small follow up on the used side?

Am I happy with it?

Well, not happy, sorry.

Is pricing okay?

Sorry.

You'll never be happy, right?

Right.

No.

We're never in a state of happiness.

It has declined a little bit but nothing out of the ordinary.

It's the one thing that we keep an eye on because it's a leading indicator of future market demand, clearly.

Yes.

And then part of the reason that in Q2 we generally don't touch our guidance is we preserve the right to intervene on used at the end of the year.

And there's ways that we can do that in helping our dealers to manage that issue.

Okay.

On the Fin Co side, I think that's just a reflection of the size of the portfolio has increased which is the penetration of our Fin Co within our dealer retails.

And then it's just the overall profitability of the farming sector.

It doesn't -- it's just not an area where you see a lot of defaults right now.

Yes.

And then if you look at the total portfolio with Construction Equipment, over the last several years being smaller in terms of the total portfolio then the credit risk of the entire portfolio declines.

Okay.

All right.

Thanks very much.

Our next question is from Ross Gilardi from Bank of America.

Please go ahead.

Good morning.

Thank you.

Rich, I'm just wondering, is there any way you could quantify how some of the strengths you're seeing now in North American Ag to be a prebuy in front of final Tier 4?

No.

We tried to do it between Tier 3 and Tier 4 and never really got there.

It's hard to say.

It's not as if clients come in and say I'm here because I heard Tier 4 final's coming.

I think that everybody got a little bit overexcited during the transition between Tier 3 and Tier 4. There are a lot of different strategies that were taken by the market participants in terms of credits available and engine banking and when the conversion would take place.

And we're not going to disclose our own day.

So it's not as if it's a January 1 across the entire product line goes into Tier 4 final compliance.

So it's -- but we cannot measure prebuy.

And really we would argue that if we see any prebuy it would happen in the fourth quarter.

It wouldn't be happening now.

Okay.

Thank you.

And then I just noticed you bumped up your industry forecast a little bit for North American low horsepower.

And I'm wondering -- what's behind that?

Are you seeing any general pickup in livestock as a result of improving meat prices and could that be a support to small Ag demand in the next year?

Any thoughts there?

Well, we bump it up just based on reported numbers.

North America is the easiest one because the numbers were most accurate and you can all access those as they come out from -- at the end of the period.

In terms of tractors and the low-horsepower segment, what we can say is after having a pretty dreadful year in hay and forage during the drought last year that the conditions have improved markedly.

And for our particular portfolio, small tractors do move, not necessarily absolutely in line with hay and forage products but there is a link there.

Okay.

Thank you.

And then any latest thoughts on what's happening with Russia and combine import duties and how that's impacting CNH?

And any movement there since -- I think there was a July 5 deadline, but presumably this is still ongoing.

But any thoughts there?

Yes.

Market conditions are difficult in Russia.

They were last year and they haven't gotten materially better.

And any news on what's happening with the import duties?

Again, I'm not going to prognosticate.

We've -- we're positioned adequately.

We think that there's a latent market demand there.

But we don't see any signs of a step change in ability for imports or even local manufacturing right now.

It's not the greatest environment.

Okay.

All right.

Thanks very much.

We'll now take our question from Larry De Maria from William Blair.

Please go ahead.

Okay, thanks, good morning.

Rich, on the Construction side, I think you said you overproduced in Brazil, but obviously underproduced overall.

Can you quantify, maybe specifically in North America, how much you are underproducing now, how long this inventory adjustment might still last before the market gets normalized, and whether we should expect Construction to stay positive from here on out?

Thanks.

Our expectation is to underproduce retail for the full year in Construction Equipment.

I think that we've done some work on the industrial side and the cost side.

We are actually positive in net pricing, quarter over quarter, in Construction, so we are trying to remain disciplined of chasing a falling knife, because pricing is pretty prohibitive out there, especially on larger deals.

So we are just managing it the best way we can, and I think that the positive pricing that we see has really been the material change.

And the fact that the Brazilian market has gone up quite a bit, where we have probably our best market position overall globally.

So -- the only negative to say about all that comment is if the Brazilian real had been a little bit stronger it would have been nice, but I guess that's life sometimes.

But specifically North America, are you underproducing much more -- we sense that it is obviously an issue with industry inventory, from the dealers all the way up to the OEs.

And I'm just wondering how long North America specifically will take to normalize.

And I assume, I don't know, maybe net pricing was positive only in Brazil, but not in North America.

So can you give us some more color on North America specifically?

Yes, we're underproducing North America specifically, for the full year, based on us sitting here today and in North America we've managed to hold pricing, despite the fact that the market has become increasingly difficult.

Okay, fine.

Then moving on maybe, you mentioned intervening on used, and I know your competitor principally uses a pooled funding mechanism and that seems to help.

Can you talk very specifically what you guys do to help your dealers remarket used equipment, especially when inventory gets too high, which in some cases it may be?

Well, we've got a variety of tools that we can help them with -- I don't think we are going to get into the actual mechanics of it.

But just like we've got tools from the wholesale side, we've got tools on the used side also.

As I mentioned earlier, I think that we've maintained the pricing discipline in the marketplace, and that has cost us arguably some share.

But it's share that we are willing to give up to maintain that discipline.

Okay, thanks.

Good luck, Rich.

Thanks.

We'll now take our next question from Massimo Vecchio from Mediobanca.

Please go ahead.

Good afternoon.

I have a question on the Construction Equipment in Asia.

I was wondering, after your -- you changed the business model and dismantled the JV, how it's going; how are you managing the new business model; if you are happy with that?

And also if you can expand on your strategy on the excavators, what do you think you are going to do in the medium long term?

If you try to go by yourself, or if you -- well, what's the strategy on that because I guess that the Construction Equipment is a huge upside in terms of profit, so I'd be very interested?

Thanks.

It's got upside if the market cooperates, and we've been in a pretty downward trend with the exception of a few quarterly blips since 2009, arguably.

So we've never really seen the benefit of the restructuring that we took in 2009, by cutting our industrial cost basis, because of the fact that unit volume is remained depressed since we took that action.

So I think industrially we are positioned appropriately.

In terms of Asia, our participation -- let's just talk about China, from lack of a better word.

Our participation in China is very, very limited because of historical arrangements that we had with our partnerships.

We have not completed the project that we have with getting out of one of the relationships that we had.

We've retained the other relationship that we have on the case side, so our ability to access excavator product is still in place, for the foreseeable future.

We are working on a longer-term strategy to solidify that position, but I'm in no position right now to say this is exactly how we are going to do it, whether it's going to be internally based or an external initiative.

With the current shape of your CE business and the current footprint, what do you think is the, let's say bottom and peak margins that you can achieve, depending of course on, let's say an average market?

Trying to compare it with the Caterpillar margins, it's going to be much worse than that, or comparable?

I think what you can do is you can look back historically, pre-crisis margins in the Construction Equipment segment.

You could arguably tone down the 2007 number and just say that was a historical anomaly that was driven by the North American construction market.

And then on the other side, kind of as a put and as a take as I've mentioned before, that we've lowered the total cost of our industrial base, so our ability to capture leverage, as the market improves, is in place.

It's just purely a question now of when and if the market improves, in both the European and North American markets.

I can tell you in terms of our profitability in a market that is performing well, where we have a material position, such as Brazil -- I'm not going to tell you what the margin is, we would consider that to be at the midpoint of the Industry, if you will, in terms of margin performance.

Thank you very much, very helpful.

We will now take our last question today from Ashish Gupta from CLSA.

Please go ahead.

Hi, good morning.

I'm wondering if you can give us a perspective on where we are in R&D and CapEx investment for Tier 4 in capacity.

I'm just trying to figure out how to think about when the elevator level spending might come down and could act as a tailwind for earnings and free cash flow.

Yes.

One of the reasons that we gave you the pie chart that shows you R&D, CapEx and then split up CapEx between maintenance, capacity expansion and greenfield, is to try to give a signal about what you would consider to be over the long-haul or on-the-run CapEx.

I think in terms of greenfield capacity, once we have completed the expansion in India, that our industrial footprint is adequate to supply a variety of different scenarios, on a worldwide basis.

So there's really -- there's no latent demand right now that we would have for greenfield capacity expansion, outside of the investments that we have announced previously.

On Tier 4, it's a little bit more of a difficult issue, because I'm not in the position to say what happens after Tier 4B.

Is there Tier 5A?

If we take a look at the over-the-road market with the introduction of Euro 6, it almost seems like a continuing saga of regulation change as it relates to environmental issues.

If we were to say that Tier 4 final would be a -- okay, stop, if you will, then arguably about 40% of our R&D cost is Tier 4 compliance related.

And that would go away and the rest of that spending would just be in terms of enhancing the product portfolio.

But it is fair to say, at least on the capacity side, it will turn into a tailwind.

So you are going to feel pretty good about where you are.

Yes, I think that we've got the installed capacity.

We've seen some pretty big numbers over the years in terms of the combine and tractor demand.

I think that we've done a lot to refit our existing footprint to accommodate the change as to realize the mix of higher horsepower equipment.

So a lot of the industrial investment is in the existing footprint to accommodate the change there.

And we can continue to make that change, so it's not as if we look at -- when we look at our capacity utilization and our footprint.

I think the actions that we have taken in developing markets, and if you look our CapEx versus our regional distribution in sales, I think that we are trying to signal everybody that we are investing in those areas where we have disproportionate, low contribution to our revenues.

And that our area of expected growth over the next five years is going to be in emerging markets, because we believe, from a capital point of view, that we've got an installed base to accommodate a variety of scenarios in developed markets.

Great.

Just one more follow up on North America Ag.

I'm just trying to look at it a different way.

I think in 2009 your business in North America Ag was down about 2%, versus the entire Ag business down 17%.

I'm just wondering, if we do have a down year at some point in the future, how you think about the resilience we saw back then as a way to think going forward.

And if you have any commentary about other markets, that would be helpful too.

It's hard to predict market participant action in a down market, but assuming that that price discipline remains intact, which it largely did during the downturn of 2009, we do not capacitize ourselves industrially for 100% of demand, meaning that we have some capacity that's always on the outside -- flat industrial capacity.

So we don't run into an issue if the market was to decline 10% or 15%, that we'd have that industrial headwind.

We can collapse upon ourselves to a certain extent to accommodate that.

So it's hard to say how the market will react.

I just think that we have a stance that we take that hopefully we position ourselves to capture upside and protect ourselves from downside.

I appreciate it, Richard.

Thanks very much.

Yes, thanks.

We now have a question from Martino De Ambroggi from Equita.

Please go ahead.

Yes, good morning, good afternoon, everybody.

Two questions, one on the potential improvement in terms of production costs and SG&A, referring to your EBIT bridge; what could be exploited going forward on these costs?

And the second is a strategic question concerning the Construction Equipment, because in previous conference calls you mentioned the possibility of an M&A deal, or M&A solution in order to fix the low profitability.

Is there anything new, because I presume over the past 18 months everything was frozen because of the merger between Fiat Industrial and CNH, or at least I suppose it?

Is there anything that you are looking at it?

Let me go to the first one.

I think that, from a production cost point of view and an SG&A point of view, while we never like to see either one of them go up in any period, I think that the relative increase versus the increase in terms of total profits is not bad.

But we'll continue to focus on SG&A and we'll continue to focus on improving productivity on the industrial side.

As Pablo mentioned during the call, we've had some benefit in terms of purchasing.

We'll see.

I think that if you take a look at the steel market, if you look at what's been going on with base commodity prices that feed into the steel market, we've been a beneficiary of that.

How long that remains in place, I think is just going to be a reflection of what happens with GDP going forward.

So we'll try to manage that the best we can.

In terms of external M&A, or thinking about M&A, no, it's not correct that we put everything on hold for the last year and a half, as we've been preparing for the execution of the merger.

Life goes on.

We've been working the business as hard as we ever have, and so it's not as if -- and I think our earnings show it that we haven't tried to take our eye off the ball.

Because that's -- we've been running as what was Fiat Industrial, what will be CNH Industrial, for almost three years now.

So this is a technical merger in the background that's got some benefits to it but, operationally, we've been running as one company for some time.

We always look at both internal and external options and we'll execute based on whether we can create value or not.

Okay, that -- is there anything on the table?

Do you really think that I'd answer you if there was something on the table?

Well, just -- if there is something.

Okay, I know you had to ask.

Okay, thank you.

Thanks.

That will conclude today's question and answer session.

I would now like to turn the conference back to Manfred Markevitch for closing remarks.

Please go ahead.

Thank you, Caroline.

I would like to thank you for joining today's call and, as always, the information is available as well on our website.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.