CNH Industrial NV (CNHI) 2013 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's CNH Industrial 2013 third-quarter and September year-to-date conference call.

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

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

Mr. Markevitch, please go ahead, sir.

Thank you, Holly.

Good afternoon, everyone.

We would like to welcome you to the CNH industrial third-quarter and September year-to-date 2013 results webcast conference call.

CNH Industrial Chairman, Mr. Sergio Marchione, with Rich Tobin, Group CEO, and Max Chiara, Group CFO, will host today's call.

They will use the material you should have downloaded from our website, www.CNHindustrial.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 Marchione.

Thanks very much, Manfred.

I am going to keep my remarks incredibly brief.

I make reference to page 2, which -- of the presentation, which deals with what has been accomplished so far.

This is a pretty significant quarter for us.

It is the first time that we report earnings as a fully integrated now organization called CNH Industrial.

As you well know, the merger was completed on September 29th and we started trading on the New York Stock Exchange on the 30th of September.

And we now have one class of shares, and it has made everybody's life phenomenally easier.

And I think we have had a chance to review the shareholder composition this morning, just to see what has happened in terms of the share flows, and we are beginning to build a significant shareholding base in the United States, and that is exactly what we wanted to accomplish as part of the merger, to effectively place this organization in the right capital markets to be properly evaluated against its peer class.

Moving on to page 3, there are changes that we have made -- that Rich and I have made to the organizational team.

I think we feel comfortable now that we have strengthened the bench considerably by appointing some pretty senior leaders to some key role areas that required special attention, like the commercial vehicle side, which is now headed up by Franco Fusignani, who has been an integral part of CNH now for a number of years.

But a couple of his people have been able to come up.

We have moved now Mr. Pampalone to run Asia-Pacific.

We have taken a very senior leader, such as Vilmar Fistarol, who was a Brazilian that was assigned to the Fiat Chrysler world as the Head of Group Purchasing, to now run Latin America, which we consider to be a significant area of growth potential for the group.

We have moved Annalisa Stupenengo back into her purchasing role now, heading up the whole of CNH Industrial.

Max Chiara, who you will listen to in a few minutes, has had a pretty varied career inside Fiat Chrysler.

And we recently pulled him from his assignment in Latin America to become the CFO of this house.

So I think we have made some good changes.

Lambro is now in charge of New Holland on a global scale.

He had been working for Franco Fusignani for a number of years.

So it has been as expected.

I think we have been able to execute on proper succession plans and bring in some younger people onto the management team, and I feel relatively comfortable that we now have a pretty good structure to try and manage the business forward.

I am going to pass it on to Max, who will take you through the financial presentation, and then Rich will explain everything else.

Thanks.

Thank you, Mr. Marchione.

I am on slide 4, financial highlights for Q3.

Revenues closed at EUR6.2 billion, was slightly down, 1.5% versus last year.

On a constant currency basis, they were up 5.4%, as growth for ag, trucks & CV and powertrain was partially offset by more challenging trading conditions affecting construction equipment.

Trading profit at EUR508 million was down EUR62 million, or 10.9%.

On a constant currency basis, trading profit decreased 4.9%, mainly due to Euro VI transitional costs and less favorable product mix and pricing environment in trucks and commercial vehicles, lower global demand for CE, and unfavorable exchange rate impacts, mainly due to Latin America currencies across the businesses.

These adverse factors were partially offset by positive net price realization in agricultural equipment and higher revenues and better capacity utilization in powertrain.

Trading margin of 8.2%, down 0.8% versus the same period last year, with improved profitability, as discussed, on ag and powertrain.

Net profit at EUR248 million was down EUR43 million versus last year, with EPS in the quarter at EUR0.169.

Net industrial debt at September 30, 2013 of EUR2.5 billion was EUR228 million higher than at June 30, with operating performance more than offset by a seasonal increase in working capital and sustained capital expenditures.

Available liquidity of EUR4.9 billion, inclusive of approximately EUR1.6 billion in undrawn committed facilities, was down EUR383 million after repayment of a $1 billion bond that matured in September, partially offset by new financing related to the portfolio growth in financial services.

Moving on to slide 5, revenues and profit contribution by operating segment.

Revenues from agricultural and construction equipment were down 4.9% to EUR3.9 billion.

On a constant currency basis, revenue increased by [EUR190] million due to sustained demand in ag, partially offset by lower global demand for CE products.

Trucks and CV revenues increased 1.9% to EUR2.1 billion from low demand levels in Q3 last years.

Powertrain revenues increased 18% to EUR762 million, driven by higher sales volume to both internal and external customers.

Trading profit in ag and CE increased to EUR470 million for the quarter, up EUR26 million from Q3 2012, with a trading margin of 12.1%.

Trucks and CV closed the quarter with a trading profit of EUR15 million compared to EUR110 million for last year, margin down to 0.7%.

Powertrain closed the quarter with a trading profit of EUR35 million, up EUR10 million from the same period in 2012, with a trading margin of 4.6.

Slide 6 slide 6 deals with revenue growth composition.

Net of currency impact, revenue growth was 5.4% in the quarter.

Currency impact reduced revenues of EUR434 million for the quarter, mainly due to US dollar and Brazilian real fluctuations.

As of September year to date, revenues in US dollar and real were approximately half of the total, 49%, as highlighted in the pie chart at the bottom left of the slide.

Slide 7 shows you the walk from trading profit to net result.

Unusual items in the quarter were EUR10 million.

Financial charges, EUR114 million, EUR2 million worse than last year.

Effective tax rate was 38%, in line with group expectations for the full year.

As a result, net profit for the quarter was EUR248 million.

Year to date, net profit was EUR747 million, in line with the comparable period in the prior year.

Slide 8 provides greater detail of financial charges in the quarter of EUR114 million, with a slight increase versus prior year, mostly due to higher average net investor debt.

Moving on to slide 9, the cash flow chart shows you the quarterly change in net industrial debt.

Positive operating performance was more than offset by a seasonal increase in working capital and sustained capital expenditure levels primarily related to new product initiatives.

Working capital increase was in line with the same period of the previous year, in preparation for the year-end retail season.

Slide 10 provides greater detail regarding tangible and intangible CapEx, net of vehicle buyback obligations by standing category and segment.

At September year to date, CapEx was EUR844 million, EUR46 million above prior-year spending, as the investment for new products and engine technology compliance efforts are ramping up.

In terms of composition, new products represent 60%, maintenance and running capacity 23%, while capacity expansion represents 17%, mainly on ag, with new plants coming in Harbin, China and Pune, India, as previously disclosed.

Thanks and I will pass over to Rich for the business segment review.

Thank you, Max.

You can skip to slide [14], I believe.

I am not going to read you all the data on these slides.

I think that Max took you through the ForEx issues in terms of the translation.

So I think you have to be a little bit careful when you read through these slides at constant currency, and then when it makes reference to decline year over year, NAFTA specifically.

That is on a reported basis; on a US dollar basis, NAFTA is up in agricultural equipment.

So with the exception of Asia-Pacific, which is due to timing on large, big contracts, all of the regions are up in ag across the board.

And as you can see from the bottom, we have more than translated that increased revenue in terms of a margin performance which is now in excess of 13%.

So overall, a very good quarter for ag.

I think that as we had talked on the last -- at the half-year, we have continued to do a lot of work in terms of used equipment at the dealer level.

We have put that money to work, we think, that we have positioned ourselves that will allow us to retail heavily in Q4, generating cash while not increasing a preponderance of used at the dealer level.

So I think that we have managed that well.

And in terms of the performance, there is really no change in terms of market share.

Overall, I think we have given up a little bit on the combines in North America year to date, largely as a result of we have launched in the midrange combines the Tier 4 final product.

So we launched that in Q3.

We will be making up a lot of those units in Q4.

And the balance of the portfolio, we are doing reasonably well.

We are keeping up with the significant unit growth in Latin America.

But not only that; we are quite pleased with the configuration of that growth.

I think that we have retooled the facilities for the future in terms of high-horsepower equipment.

So in terms of our performance on market share, on combines, we are doing quite well.

On the tractors, while market share is reasonably flat, our market share in the high-horsepower segment continues to improve, and we believe that is a fundamental driver to the future growth of the business and its profitability.

And construction equipment business, it a completely different story.

The market continues to be extremely tough in terms of unit demand.

Or more important, just a lot of equipment trying to find a home, so pricing pressure in the market remains severe.

I think that was the way I would describe it right now.

We are holding market share across all the categories.

It is costing us money to do so in terms of pricing, but we are trying to remain disciplined in terms of our production levels and our dealer levels because at this point there really isn't a lot of good to be had by chasing whatever volume is out there in the market.

So we are remaining disciplined.

Moving to the next slide, please.

If you take a look at slide 13, the volume and mix negativity of EUR52 million is all construction equipment.

We are actually positive year over year in net pricing in construction equipment.

So we are doing our best, I think, in certain categories to not chase down some pretty prohibitive pricing levels.

But on the ag side, as we had talked about earlier in the year in preparation for Tier 4 final, we are trying to remain as disciplined as we can in terms of pricing.

We have left a little bit of market share on the table in certain instances during the year it an attempt to remain to keep that discipline on the pricing side.

I mean, we know we have a lot of work to do in terms of what we think 2014 demand is going to be.

We can deal with that in the Q&A.

But more importantly, as I've said, this year is all about improving the mix, which you can see in terms of the improvement in the profitability which we've accomplished and working on inventory levels and setting the table for 2014.

So overall, on ag and construction equipment, entirely different performance in the sectors, but I think that overall, especially in European ag, I think that it has been a good quarter.

Next slide, please.

Same slide.

I won't comment on the quarters.

You see that we have overproduced retail on the ag side.

As we do every fourth quarter, we will cut production to level load inventory and drive for cash in the fourth quarter.

So we are in pretty good shape there.

We think that we have all the product standing, whether at dealer or Company levels, to meet our retail objectives for the full year.

On construction equipment, we are going to take down production in Q4 some, just to modulate the inventory, just because we don't see any increase in demand for the balance of this year or the demand function for the balance of this year.

Next slide.

I won't go through this.

I mean, this is just a placeholder in terms of the overall conditions of the two markets.

I think we can deal with this in Q&A.

Next slide.

And then there is really not a significant amount of change overall in terms of industry dynamics.

I mean, we have called the market -- with the exception of EMEA combines at the beginning of the year, I think we have called it relatively accurately.

We've called the market to be up in demand in Latin America, and we are running production full out and will continue to do so for the balance of the year.

Which is costing us some money just in terms of trying to run at that kind of capacity level position.

But for future preservation of market shares and to seize as much as we can of the change in the dynamics of high-horsepower trend, we are pushing hard in Latin America on the back of a growth rate of 35%.

Construction equipment, we are not the first reporter nor are we the most material one.

So I don't think there is any news in the numbers that we are giving here in terms of the dynamics in the construction equipment side.

Next slide.

I won't go over these in detail.

If anybody wants to deal with it in Q&A.

But as you know, the big project that is going on right now is the preparation for Tier 4 final.

We can talk about it in terms of strategy, not by product line.

But we are prepared with the technical solution, as you know, and then we will be tiering Tier 4 final production in over 2014, depending on different strategies with credits and banking of engines.

Next slide.

Moving on to trucks and commercial vehicles, a more difficult quarter.

Again, pricing pressure remains high.

We have seen some light in terms of demand.

So revenues were up 2%, or 8% at a constant currency, which is -- virtually 100% of that is the Brazilian reais back to the euro.

We see the demand trending up.

We can talk about Euro V trends as part of the Q&A.

We have managed to turn to a trading profit of EUR15 million for the quarter.

That is not acceptable, but that is a function of both mix and pricing pressure leading into the demand function change in Euro V. We are sold out right now and not taking orders for Euro V in either medium or heavy trucks, so we are transitioning now to Euro VI orders.

Next slide, please.

This slide reflects the difficult market conditions.

I mean, we are going to see some information in terms of market share.

We are preserving market share largely in the regions that we participate in.

It is costing us some money to do it, both in volume and mix.

That negative EUR46 million year over year, EUR30 million of that is mix, which is a comparative reduction in specialty vehicles versus over-the-road trucks.

And the balance of that is just the heavy pricing pressure that we see.

Production costs, I mean we are still dealing with some of the transition costs going to Euro VI and some launch-related costs and production issues in Latin America that we talked about earlier in the year.

We are getting those on track.

There is a long way to go, but we are resolving it.

Other is largely cost of quality, some residual value write-downs and foreign exchange.

Next slide, please.

In terms of overall units sold, 32,000, up 8.6%.

You can see by geography more importantly overall order intake at 38,000 units is up 28% versus last year.

You can see the geography and you can see the influence of the pre-buy of Euro V for Euro VI.

As I mentioned, we are not taking orders in medium or heavy for Euro V any longer and transitioning our orders now to Euro VI.

LatAm is up quite a bit.

We expect -- there is a little bit of news flow in terms of PSI funding and commercial vehicles in Brazil right now.

We expect Brazil to weaken somewhat going forward from here.

And APAC down is largely -- is just a result of timing of contracts.

In Russia and Australia, the overall market is weak and it is not only for trucks; it is for all industrial vehicles.

Next slide, please.

This gives you a look in terms of inventory production units.

We would expect going forward from here for production to ramp up significantly, to make or produce the Euro V orders that you saw in the book to bill.

The big challenge for us is going to be to transfer those wholesales into retails as much as we can, because we are going to have somewhat of an overhang in terms of receivables as a result of backloading production going into 2014.

Next slide, please.

This is -- the next couple of slides are just going to break down industry volumes and share performance.

I think a lot of this news is out in the market in terms of industry volumes in the segments, with heavy being the best-performing sector overall.

In terms of market share performance, we are largely holding our own at some cost or at least some cost through the first 3 quarters of the year with the pricing pressure.

We are reasonably positive about that the pricing pressure, at least on the Euro V vehicles, will begin to come down as the industry sells out of that position in Europe, and we are largely holding our position overall.

I think we are down somewhat in heavy, but those are launch-related issues that we had talked about previously.

Next slide.

Same thing on LatAm.

Overall, the industry is up quite a bit.

We are chasing it across all sectors, performing well in medium, holding our own in the light segment and down in heavy.

The heavy segment, the down portion of the heavy is largely as a result of our position in Venezuela.

I gave you some color in terms of what we see going forward from there.

But we are -- despite having the production issues that we had at the beginning of the year, we are beginning to catch up and keep and hold market share through the third quarter.

Next slide, please.

China overall, China up 13%.

We are giving up a little bit of market share.

We are working strenuously on improving the quality, rather than chasing the share to a certain extent.

So overall, we are happy, and you can see -- you will see that in the profitability and in income and equity or equity and income.

So overall, happy with the performance.

More pleased with the progress in terms of the quality of the output of the facilities in all three segments, but particularly on the heavy side.

Next slide, please.

And the main product launches, with the exception of the new Stralis Hi-Way at LatAm, I think we had addressed the majority of these, including the rebranding of the Magirus brand for the specialty vehicle segment during the first half.

Next slide.

Moving on to powertrain, good performance overall in powertrain.

Revenues up 18% -- you can see it by sector -- predominantly on increase of engines.

We have translated that to a trading profit of EUR35 million at a margin of 4.6%, so good semester to semester performance.

That is largely on the back of the increase in demand and preparation -- the transition of Euro V to Euro VI, and the beginnings of some of the volume that we will see coming through, predominantly in Q4, for the engine banking between Tier 4 interim and Tier 4 final.

So expect this type of performance to go on for the balance of the year.

Next slide.

And here is some of the news flow in terms of the third-party business.

But overall, the story with the powertrain segment is all hands on deck in the preparation for both Tier 4 final and Euro VI, as we have discussed previously.

We believe that we have the right technical solution now; it is purely a question of executing during the transition.

Next slide.

I won't go over these.

This is just some events during the year.

We have continued to diversify the funding of the US-based finance company as part of our goal to reaching investment-grade.

And then we have been confirmed once again as a sector leader in the Dow Jones Sustainability World Index for the third consecutive year.

Next slide.

Industry outlook for the full year, no big changes from where we were at the first half.

I mean, some minor changes overall, but there is really nothing of note to take out of this slide based on what we have covered in the first half.

So overall, relatively good, stable markets in ag and a difficult market in construction equipment, and a market that seems to be turning in the second half of the year in terms of commercial vehicles.

Next slide.

And overall, as you saw from the press release this morning, we are confirming full-year guidance for the year.

I mean, I think out of all of these, it is going to be the translation.

But because of the fact that Iveco should perform quite well, which is Euro-dominated, I think that we can confirm everything across the board.

I think that is the final slide.

With that, Manfred -- sorry, I will do this one, Max.

This is going to be -- and let me step back for a moment.

I mean what -- you have seen the reporting here in IFRS in euro.

Just to be clear in terms of how we are going to deal with the transition with the newly-merged company.

Segment reporting is consistent with Fiat Industrial, will remain so for the balance of the year.

We will make the transition to dollar US GAAP with Q1 results of 2014.

In preparation for that, we will have an Investor Day meeting where we will give retrospective results for comparability.

We will be announcing that date for the investor meeting within the next 30 to 45 days.

So you will be able to bridge historical results into US GAAP.

But in terms of the Q&A today, I mean, I think that we are just going to have to largely avoid going back and forth between US GAAP and IFRS.

I think you are going to have to use the historical results under IFRS euro for the balance of this year, and then we will give you a comprehensive bridge in the change to US GAAP at the special meeting.

Yes, and just to add to what Rich has said, we will continue to be an IFRS reporter under US dollars starting in 2014.

So the standard will be both international accounting principles and US GAAP, everything in US dollars, starting Q1 2014.

Thank you, Rich.

Now we are ready to start the Q&A session.

Holly, please take the first question.

(Operator Instructions).

Ann Duignan, JPMorgan.

Yes, hi.

Good morning, everybody.

My first question is around the Brazilian Development Bank's announcement that it was suspending its conventional FINAME interest rate incentives.

Can you talk about the impact of that?

You mentioned it on your Iveco business.

But also, if they have done it on trucks and machinery, why would we not expect them to do something similar on the agricultural side?

If you could just address your insights on that, I would appreciated.

Thank you.

Okay, Ann.

I mean, yesterday morning there was an announcement of PSI on the truck side.

There is other available financing avenues, but specifically on the PSI being stopped on commercial vehicles.

That was rescinded later in the day.

And so those incentives under the PSI program, as far as we know, are going to continue.

We have absolutely no news so far on the off-road, so the construction equipment or ag, I mean, we would be waiting for some announcement or some view in the fourth quarter about what those programs will be for 2014.

But right now, as far as we know, that that announcement about the suspension of PSI for commercial vehicles yesterday morning was rescinded later in the day.

So we are just going to have to work our way through that.

I mean, just in terms of if it was to be rescinded, it is a 400 basis point headwind in terms of the subsidy that is embedded in that particular program.

Right.

Well, our analysts down there spoke with BNDES this morning, and their position is that the conventional application for FINAME interest rate incentives have been suspended temporarily, but the simplified ones are available still.

So there will be obviously some impact.

And I guess what you are saying is no news yet on the agricultural equipment side.

Is that what I should take away from that?

That is correct.

Okay.

And then just a follow-up on Q4 guidance, maintaining the full-year guidance, I think you said Iveco will support Q4.

Can you just walk us through the bridge into Q4?

Because it does look like a stretch at this point, given the first 3 quarters' actual performance, particularly on the trading profit side.

Can you just walk us through each of the segments and as much color as you can give us in terms of what we should be looking at maybe sequentially or year over year for each of the segments?

I will give you a piece of the first answer, and probably not as much -- I mean of the first question -- and not as much as you would like of the second question, I think.

Let's start with ag first.

As you look back -- and you'd know this historically -- we cut production in Q4 and that it has got a detrimental impact on margin.

We would expect to see the same pattern for ag in Q4 as a result of the reduction in production performance.

But that is really what drives the cash flow and the net debt objectives for the year.

So I mean I think that you could look back historically and take a look at ag and see the changes between Q3 and Q4, and it will be something like that to a certain extent.

We don't expect it to get better in construction equipment in Q4.

We are actually going to cut production in Q4, so we may have a little bit of a headwind there.

We expect Iveco to have a material increase in trading profit in Q4, largely on the back of the Euro V demand and the increase in production that I spoke to earlier in the slide.

And that Q4 performance in Iveco will be given up in Q1 of next year?

Is that the way we should think about it?

And then I will get back in queue.

Yes, I mean, I think that we would expect -- we can expect that Q1 next year is probably going to be a little bit more of a difficult quarter because there is going to be some overhang from a significant amount of deliveries of Euro V. So the real task at hand is to build the backlog at Euro VI and to retail those Euro Vs as quickly as possible in Q1.

Okay, I appreciate it.

I will get back in line.

Thanks.

David Raso, ISI Group.

Hi, my question is related to truck.

It appears the fourth quarter, Iveco is probably going to have to do over 20% growth to hit the numbers.

And I am just trying to think about -- besides the first quarter weakness in Europe, kind of post the pre-buy, if you are having a hard time getting price now on truck, how should we think about your ability to pass on the Euro VI price increases next year?

And maybe wrapped in that question, if you can give us some indication -- Iveco margins in the fourth quarter sound like they need to be, say, at least 5%.

How should we think about profitability for Iveco in 2014?

All right, David, it's the same thing.

I mean, let's deal with the first question in terms of outlook for Q4 for Iveco.

As we mentioned, and you can see from the book to bill, that obviously production performance is going to increase significantly and we are going to be the beneficiary of that.

In terms of margin performance of the business, there is going to be a material change in margins vis-a-vis Q3.

But vis-a-vis Q4 of the previous year, the mix is going to be heavily weighted towards on-the-road trucks, with not as much specialty vehicles, significantly less defense, which is not margin accretive.

So the change in profitability is going to be purely profit-driven.

In terms of pricing, look, we are doing our best in the market.

I mean, I think that what we said before is we are holding share.

We are paying some -- we are paying a price for holding that share.

But we are a market participant with a lot of other people.

So the same issues that we have in terms of the transition of pricing from Euro V to Euro VI, we can't lead the market out of this.

We are all going to come out of it together.

So I think it is a little early to say in terms of pricing realization in Euro VI.

Our objective is to get back as much as we can.

I mean, the fact of the matter was the pricing environment through the first three quarters of the year was unnecessarily difficult, in our mind.

But when those conditions exist, we are going to fight and we are going to keep our share, as we have shown up to this point.

Now that we are sold out of Euro V, there is no more availability on Euro V, so we will see in terms of the building of the backlog on Euro VI.

But right now, on the heavy side, about 20% of our backlog is Euro VI.

So we are going to have to just continue to build that, and we will cooperate with the balance of the market in terms of price realization.

I think people are just trying to figure out the profitability profile of Iveco.

I mean, the revenues this year on Iveco, similar to where they were two years ago, up from last year -- like if you do the fourth quarter that you are saying.

But the profitability of the last two years were 5%, a little more than 5%.

This year has obviously been a struggle.

So can you at least help us a little bit to framework how we should think about 2014 Iveco profitability?

The only thing I will say about that is that part of the (inaudible) is what I mentioned in the call up to this point, and splitting down the issue of mix between specialty vehicle and on-the-road.

When we have a richer mix of specialty vehicle, it is better for margin performance.

But I am not going to break down by segment 2014 for you.

I mean, I think we have been pretty clear up to this point that some of the profitability issues, when you look at 2012 to 2013 at Iveco, were self-induced.

Right?

We haven't performed from an industrial point of view as we would have liked.

So we are going to be working on correcting that.

So I think you got to be very careful of just doing incremental margin calculations at the end of the day.

Our objective, based on what we know today, is that we can improve profitability of Iveco in a flat market.

But I am not in a position right now nor will I break it down by segment going forward.

Last question, the ag order.

Any color on the ag order book, especially North America, into next year?

Into next year?

(multiple speakers)

I mean, the orders right now for especially final Tier 4, but whatever you can provide us on the order book year over year.

I am not going to disclose Tier 4 strategy by segment, because I think that -- but at the end of the day, the order book is exactly the same where it was at the end of the first half.

So whether we are signing -- we were about a month down on combines in North America.

The balance of the business on combines is up in terms of backlog.

We see small weakness in tractors in terms of backlog.

So that is all I can tell you about 2014.

Thank you so much.

I appreciate it.

Monica Bosio, Banca IMI.

Good morning, everyone.

I would have two questions.

The first one is on the truck market in 2014.

How do you see the pricing, the competition in 2014, excluding the first half of the year?

My question is how much volume should increase in order to limit the pricing competition.

And the second question is still on Iveco trading profit margin over the fourth quarter.

Maybe I am wrong, but I remember during the last conference call that it has been set a target, a guidance, for trading margin of Iveco in the fourth quarter at 5%.

I am just wondering if you are confirming or if you do not confirm anymore this target.

Thank you.

Answering your first question between volume and price dynamics into the future on the truck business is next to impossible, so I can't even go there.

We will have a material increase in trading profit over Q3 and Q4 in Iveco, but I don't think we have -- and I know we haven't ever put numbers on quarterly margin targets for the business.

Okay.

Thank you.

Massimo Vecchio, Mediobanca.

Yes, good afternoon.

First question on Iveco.

In the press release you say that there has been some provision on the financial services.

Can you quantify that so -- it will be helpful?

Second question is on the 2013 outlook for ag.

It looks like you raised the outlook versus the last one.

Can you give a little bit of color on that?

Because there is a lot of doubts on the market about farmers' income going down here, so there's a slowdown in the market already in Q4.

So if you can elaborate a little bit on that, it will be very helpful.

And third point, third question, always on Iveco.

When you talk about mix, you refer to negative mix and you speak about product and market mix.

What do you mean by negative market mix?

Because I believe Brazil is a profitable market for you, so probably you are talking about southern Europe?

Thanks.

Okay, I will start with two.

I think that -- first of all, I think that those are units when we are looking at market outlook on the ag side.

And any changes that we made between the half-year and this quarter are marginal at best.

So I mean, I don't think you should read into anything about upgrading market demand when you look at total units across the world.

I think that our view of the agricultural market has been the same since the beginning of the year.

I think it is purely -- I think that we have produced what we need to produce in order to meet our retail objectives.

So it allows us to modulate production in the second half of the year.

So I don't think we are calling any change, other than at the margin, in terms of ag demand for the balance of this year.

In Iveco, we say market mix and product mix.

The product mix is largely the difference in profitability between specialty vehicles which command a higher profit margin versus the over-the-road truck segment.

I don't think that we have ever talked about margin performance in Iveco on a regional basis, but there is disparity in terms of margins around the world.

And depending on how different geographies perform, there can be both positive and negative mix.

All right.

Thank you very much.

Larry De Maria, William Blair.

Okay, hi.

Good morning.

Thanks.

Obviously, construction remains challenged in several regions, which you went through.

I think Europe is the most challenged in terms of profits.

Can you help us understand really how far from profitability we are and what kind of volume increase we need maybe to get towards breakeven in Europe, if that is even correct that that is really where the (inaudible) problems are.

That is the first question.

Yes, I think I understood.

You are pretty garbled there, Larry.

The construction profitability, I mean, I think the headwind other than what I gave you some color about the pricing environment, is we've got the additional headwind of foreign exchange and the Brazilian reais, where we do make good money in construction equipment.

Translating that back into euros has been somewhat of a headwind quarter over quarter.

What kind of levels do we need to get to profitability in Europe?

Look, we are not looking for 2007, 2008 kinds of volumes.

I think that we are looking at a reasonable demand in terms of units out of Europe.

But I think that if you plot over the last 5 years, since 2009, we have been somewhere on the order of 35% to 40% below kind of historical volumes.

We don't need all of that to come back in terms to get to breakeven, because we have intervened in terms of the fixed cost base.

But at the current levels, I think it is a difficult hurdle.

Okay, thanks.

And sorry it was garbled.

Same question on European ag.

Are you guys seeing some tentative signs of weakness or is there a hesitancy as emissions change and Agritechnia?

Or just some further color on maybe how order books in Europe stand and how we are to think about a preliminary outlook in Europe for next year.

Thanks very much.

Okay.

Well, I guess we will find out at Agritechnica.

I guess somebody has made a big thing about order writing at Agritechnica.

Look, I mean, we will see the environment.

I was with all of the European New Holland dealers earlier this week.

I don't think that anybody is staring into the abyss.

But I mean we are not prepared now to call 2014 in terms of ag demand, but we don't see a significant headwind coming from the transition to Euro VI.

And as you may know, we have more flexibility in terms of banking that we can tier in Euro VI better than we can in certain other jurisdictions, and we will take advantage of that.

Okay, thanks.

Rob Wertheimer, Vertical Research Partners.

Hi, I wanted to start with ag, and apologies for asking the same sort of question.

But it seems as though even if you give Iveco up 30% sequentially in the 4Q, that will only get you less than half of the way there on the sequential revenue improvement.

So is the balance of that either ag pre-buying in Europe, which you sort of touched on and maybe didn't indicate that was it?

I am just struggling to get to the revenue number on the low end of the guide.

I don't have your spreadsheet in front of me.

So look, I mean, like I said -- I keep repeating myself.

In terms of the demand function in Europe, we don't see any pre-buy.

It has been steady performance from the European business, in terms of what we thought we were going to sell and produce into the marketplace.

I think the good news about Europe for us is the market share performance, especially on combines.

So I can't speak for the entire market.

We don't see a significant pull-forward because of a pre-buy.

Because I think that you will find that -- I think that we will see that Tier 4 final will come in later in 2014 in Europe than it will in North America.

Okay, that's helpful.

Can I ask you a little bit about the Iveco rollout on Euro VI.

When did you put that Euro VI engine on?

I know you have had some fleets.

I don't know if it has been fully on sale or not.

And do you expect your share to improve throughout the year if you were on sale later than some others?

Just curious about how that rollout has gone with customer acceptance of it.

We have had the medium Euro VI from September, heavy since February, but that was kind of a staggered launch.

I mean, I think we covered that earlier in the year.

I think that we could've performed better in terms of the heavy launch, so we are a little bit behind.

But as I mentioned before, we now have approximately 20% of the backlog is in Euro VI on the heavy segment.

So we are a little late, but we are catching up.

And that 20% is for next year or some of it is this year?

It will be blended in.

Great, thank you.

Alexander Virgo, Berenberg.

Yes, hi, good afternoon.

A couple, please.

One, just wondering whether you could comment on whether you see any likelihood of a pull-forward in the US affecting Q4 with the expiry of the tax breaks, which I think is still expected to fall away at the end of this year for ag.

And then the second one -- and forgive me if this sounds a little antagonistic -- but you've sort of talked about holding share, and most of the slides showed declines, I suppose -- not much, I agree -- but a little bit.

So I am just wondering do you see that as holding and therefore not something to worry overly about and you will catch that back up as we move through the balance of this year and into next year?

Or is that something that you feel you need to respond to a little bit more proactively?

And the last one, just on construction.

The significant overproduction in Q3, I guess you made a point of doing something meaningful in response to that.

But I am just wondering to what extent you think margins were sort of overly benefited, if you like, from overproduction in both ag and construction in Q3.

Thank you.

Okay, in terms of the pull-forward in North America and the expiration of the tax breaks, I can only give you the general comment as I made before.

I think that from what we have ready in terms of inventory that we showed you on one of the slides, it allows us -- both Company and dealer inventory that allows us to cut production in Q4 and meet what we believe the demand is in Q4 for retail activity.

Now, whether that is pull-forward or not, it's just we look at it in terms of units and we think that we are appropriately positioned.

In terms of share performance at Iveco, you are right.

There is small differences.

(technical difficulty)

Hello?

Yes, do you hear me now?

Yes.

Okay, sorry.

In terms of --.

All right.

So the share performance with Iveco, I mean, we do have some catching up to do in heavy, due to the delay in the Euro VI launch of the Stralis.

The balance of it is playing -- trying to balance pricing versus volume.

And we are not just going to chase share at all costs in certain instances.

On CE, I mean I think the question of whether Q3 benefited from overproduction, I mean, we are not talking about significant volumes either in Q3 or what we are going to cut Q4.

So I mean it has some impact, but it is not overly material.

Okay, great.

Thank you.

Steven Fisher, UBS.

Great, thanks.

Following up on an earlier question on ag orders, can you give us a sense of the year-over-year trend in orders in ag by region in the quarter?

You want it broken down within Europe?

No, globally.

No, no, I am not going to break it down.

I mean, I am going to give you a general view, because these things are moving targets.

We look at them once a quarter, we give you some general information.

But if I start breaking them down region by region, quarter by quarter, we are going to be all over the place here.

Because orders, in terms of order book, when you talk to one industrial participant, if I am going through a Tier 4 to Tier 4 change, my backlog is going to go up.

So no, I think I gave you enough color in terms of backlog.

It is largely where it was in terms of at the first half of the year.

Okay.

And then this may be a difficult question.

But on the Brazilian ag, do you have any sense of how big an increase in FINAME rates it would take to have a material impact on demand going forward?

And to monetize it either to reais or units, no, I cannot.

I mean, it depends -- we believe that there will be something -- a program there for 2014.

What the rate will be and when it is launched relies on the Brazilian government.

So I mean -- but we have been living with that forever in Brazil.

So I mean over the long haul, we think that structurally something will be there.

It is just a question of the timing.

Okay, thank you.

Michael Tyndall, Barclays.

Yes, hi there.

It's Mike Tyndall from Barclays.

Thanks for taking my question.

Two, if I may.

Just one on net pricing around Euro VI.

And I guess what I am curious to know is do you have an ace up your sleeve in terms of having an SCR-only solution?

So everyone else is looking at maybe a 10% increase in cost.

Your increase in cost is lower.

Am I right in thinking that?

And will you use that at all on pricing or will you just use that in terms of improving profitability?

And then the second question is really around refinancing.

You have issued, I think, at least one bond since the merger has occurred.

A wonder if you could give us a feel for what sort of saving we are talking about going into next year, given that was, I guess, one of the key reasons for going ahead with the merger.

Thanks.

In terms of the question on net pricing, we are interested in improving the profitability.

That is our major interest.

In terms of bonds, that was a bond that came out of the capital side of the business and what we have talked about before in terms of diversification of the funding of the capital business, which is more -- I mean, which is more behind changing the structure to allow us one of the steps to getting to investment-grade.

In terms of future financing and its impact on interest costs, I think that when we come back out at the end of the year and we give the outlook going forward from 2014, I think that we can address that.

Because you can't look at that quarter by quarter; you have to look at that over a longer time series.

Okay, thanks very much.

Brian Sponheimer, Gabelli.

Hi, good morning.

Can you hear me?

I hear you, Brian.

All right, great.

Thanks, Rich.

So with the balance sheet hopefully at around $2 billion in US dollars at the end of the year, and without having really gotten the spike in valuation -- or the lift in valuation that you may have planned, any plan to potentially think about reallocation of capital towards a share buyback as we're looking into 2014?

Brian, as you well know, when we had the meeting in New York, I never excluded share buybacks from one of the policies of the corporate finance of CNH Industrial.

It remains an option.

The Board will and has in the past authorized those transactions.

I would not be -- the thing that concerns me more about your question is the fact that you expected an instantaneous response to the placement of CNH Industrial in the US market.

And especially somebody -- both you and the house that you represent having as much experience as you do in the capital markets, you should know that this takes a lot longer than the time that we have been given here.

We have been in the US market now for 30 days.

And before I sort of call it a crisis in terms of a re-rating of CNH Industrial, I would probably wait until the end of the year came around and we release the numbers.

So have patience, my dear man.

I think things will happen in the proper timeframe.

I just -- I would say to that that both myself and the other side of the house here have come to expect -- have learned to expect nothing and just anticipate certain things.

And I appreciate the encouragement, and I am sure that we will deliver on to your expectations.

Thank you.

Ross Gilardi, Bank of America Merrill Lynch.

Yes, thank you.

Just a couple of questions.

Just on construction equipment, what is your latest view on this business as a core business of CNH Industrial?

I mean it seems that the market, if anything, needs a lot of consolidation right now.

Would you agree with that?

And kind of any thoughts on that topic right now on trying to continue to turn it around or pursuing other options?

It is a core business of the Group.

I mean, it is a full liner.

I mean, I think that we are doing a lot of work in terms of positioning both brands appropriately.

But for all intents and purposes, it is a core part of the business.

In terms of consolidation in construction equipment, that is an issue for somebody else.

At the end of the day, what we would like to see is an amount of discipline in the construction equipment business in terms of the amount of inventory that is built and then the liquidation of that inventory.

I think this is going to unwind at some point.

I think we are going through the second stage of now the crisis in terms of the demand function in China and the spillback of the fact that the pressure that mining is putting on it.

But there is really no rationale for some of the pricing we see out there for the time being.

But structurally, the business is in the portfolio and we are keeping it.

Okay, thanks for that.

And then you mentioned some actions you have taken with your dealers on used equipment.

You sounded pleased with the results of those actions.

Could you just give a little more detail there, and your thoughts on sort of where your used inventories, at least at the dealer level, might be relative to where they were, say, 6 to 12 months ago?

Yes, I mean, I am not going to monetize it for you, but we have taken action on used, especially in combines and especially in North America.

We needed to do that for a variety of reasons, one of which is that we had to get that work done before Q4, because our objectives in terms of retail performance in the combine sector is for some pretty good volumes, which is reflected in terms of what our expectations are for cash flow for the year.

So I think that we have done the work in terms of a metric point of view.

They are lower than they were last year, but I am not going to give you the hard figures.

Okay, thanks, Rich.

And then just lastly, you mentioned an increase in bad debt provisioning for Iveco.

Can you quantify that at all?

You mentioned that in the press release, at least.

I didn't hear that question.

In the press release, there was an increase in bad debt provisions mentioned for Iveco.

Could you quantify that at all?

Yes, I am not going to quantify it for you, but I think that there is -- it is just some of the spillover due to the -- it's a function of a very competitive pricing environment in Europe that has existed since the second half of last year.

But I am not going to give you the number itself.

Thanks a lot.

Alberto Villa, Intermonte.

Good afternoon.

Two quick ones from my side.

One is on the CapEx outlook going into 2014.

Is that fair to assume that your CapEx expenditure would be lower going forward compared to the last couple of years because the expenditure cycle would be a little bit lower going forward?

And secondly, on the occasion of the analyst meeting you are planning, would you be giving a target for 2014.

And there would be any target as it was in the past in terms of having (inaudible) and previously (inaudible) industrial debt-free in the timeframe in the future?

Thank you.

Yes, the answer to the second question is yes.

The first one, I think it is a little early to call the absolute amount of CapEx.

But I wouldn't expect to see a significant reduction in 2014 because we will be finalizing the transition to both Euro VI and Tier 4 final.

So that is further out in terms of that benefit from the redemption of environmental spending.

Okay, thank you.

That will conclude today's question-and-answer session.

I would now like to turn the call back to Manfred Markevitch for any additional or closing remarks.

Thank you, Holly.

We would like to thank everyone for attending today's call with us.

Have a good evening.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.