CNH Industrial NV (CNHI) 2014 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's CNH Industrial second-quarter and first-half 2014 results conference call. For your information, today's conference call is being recorded.

At this time I would like to turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir.

Thank you, Leon. Good afternoon, everyone. We would like to welcome you to the CNH Industrial's second-quarter and first-half 2014 results webcast conference call. CNH Industrial Group's COO, Rich Tobin, 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 risk and uncertainties mentioned in the safe harbor statement included in the presentation material.

I will now turn the call over to Mr. Rich Tobin.

Thank you. Good morning, good afternoon, everyone. Overall, we have had a good performance for the quarter. Despite some challenging market conditions in LATAM in the commercial vehicles and agricultural segments and negative mix in ag, high horsepower and NAFTA, we are able to offset these headwinds with improvements in operating performance in the construction and powertrain segments, commercial pricing actions, improved industrial efficiency, and through the implementation of some substantial cost controls to improve the quarter EPS by 12%.

In summary, we achieved net sales of industrial operations of $8.6 billion, flat to prior year, holding operating margin at 7.9% while EPS ex restructuring improved 12% year-over-year to $0.28 a share.

As we review in the following slides, we expect trading additions in the agricultural sector to be challenging for the balance of the year in most of the Group's operating geographies. We will be taking appropriate actions to align production plans to accommodate this as we have successfully executed in the past, and we will be taking action to align our cost structure for the projected business environment in the second semester.

As you have seen from the press release this morning, we have instituted a group efficiency program with particular emphasis in the commercial vehicles and construction equipment segments of the business, with the aim of improving operational performance which will be outlined later in the presentation.

So overall, good performance despite the headwinds, flat revenue with margins holding at 7.9%, which has given us the ability to confirm full-year guidance for the year.

I will hand over the presentation to Max who will take you through the financial slides, and I will come back to you when we get to the business later in the presentation. Max?

Thank you, Rich. I am on slide 5, financial highlights. In summary, the Company posted consolidated revenues of $8.9 billion, up 1% versus last year in the quarter, while revenues were flat at $16.5 billion for the first half of 2014.

Consolidated net income was $358 million for the second quarter. Net income before restructuring and other exceptional items was $382 million for the second quarter or $0.28 per share.

EPS before restructuring and other exceptional items for the first half was $0.41 per share. Available liquidity at June end was $7.7 billion, inclusive of $2.3 billion in undrawn committed facilities, compared to $8.1 billion at March end. The Company posted net sales of industrial activities of $8.6 billion for the quarter, flat versus last year, and an end of $15.8 billion for the first half.

In the quarter, net sales increased in the powertrain segment, offsetting declines in net sales in agricultural equipment, primarily in LATAM and in NAFTA, and a slight decrease in construction equipment and commercial vehicles compared to second quarter of last year.

Operating profit of industrial activities was $678 million in Q2 2014, a 1% decrease compared to last year, with an operating margin of 7.9, flat to Q2 2013.

Operating profit improvements in construction equipment, powertrain and commercial vehicles in EMEA were offset by the negative effect of poor trading conditions in commercial vehicles in LATAM, due to a significant decline in market demand, and by negative volume and mix for agricultural equipment, primarily NAFTA and LATAM.

First-half operating profit stood at $1.1 billion with margin at 6.9%, in line with full-year guidance.

Net industrial debt of $3.7 billion at June 30, 2014 was $300 million lower than at March 31, 2014. Net industrial cash flow was positive at $600 million plus in the quarter, as cash flow generated from operating activities, including a positive change in working capital of $0.3 billion, more than offset CapEx; and was partially offset by the dividend payment of $0.4 billion pro forma in April, to deliver a net industrial debt reduction in the quarter of $300 million.

On slide 6 we have the usual reconciliation from consolidated operating profit to net income for the second quarter compared to prior year. Consolidated operating profit at $736 million, down $14 million to prior year. Major highlights below there: restructuring expenses totaled $30 million, $10 million higher than Q2 of last year, and related construction equipment as a result of the announced production shutdown of the company Calhoun, Georgia facility in the US, and for the other parts to commercial vehicles.

Interest expense net totaled $158 million for the quarter, $16 million higher than prior year, primarily due to an increase in average net industrial debt, partially offset by more favorable interest rates. Other net of $63 million for the quarter, basically flat to prior year.

Income taxes totaled $158 million, representing an effective tax rate of approximately 33% for the quarter. The decrease from the 42% in Q2 of last year's effective tax rate is mainly due to favorable resolution of tax audits for which specific provisions have been made, and lower losses in jurisdictions where such losses cannot be book benefited.

The Company's 2014 forecast effective tax rate is still expected to be in the range of 40% to 44% due to not book benefiting losses in certain jurisdictions.

Equity in income of unconsolidated subsidiaries and affiliates totaled $31 million for the quarter. The decrease versus prior year of $10 million is due to lower results from the APAC JVs, but primarily as a result of lower industry volume in China.

Consolidated net income was, therefore, $358 million for the quarter. Net income available to common shareholders improved $71 million to $354 million and was favorably impacted by the effect of the merger consummated last year, returning basic and diluted EPS of $0.26 per share, up 13% to prior year.

On slide 7, we show the overview of the industrial activities net sales for the quarter. Total industrial activities net sales at $8.6 million. The performance by segment was as follows: Agricultural equipment net sales were $4.4 billion for the quarter, down 2% from prior year, driven by lower volume, primarily in LATAM and NAFTA, as well as less favorable product mix specifically on large horsepower tractors and combines in NAFTA, plus partially offset by net pricing.

The geographic distribution of net sales for the period was 43% NAFTA, 37% EMEA, 10% each for LATAM and APAC. Construction equipment net sales were $931 million, down 1%, as increased demand in NAFTA was offset by a decrease in volume in LATAM.

Commercial vehicles net sales were $2.7 billion, flat to prior year. Increased deliveries in EMEA driven by light and heavy range vehicles were partially offset by a significant decrease in LATAM and a decrease in buses, due to the transition to Euro VI applications.

APAC net sales benefited from better mix, due to increased heavy vehicles sales. LATAM net sales significantly decreased due to sharp market declines across the region, as a result of overall weak economic conditions and a deterioration in the terms of subsidized financing. Production has been reduced to allow for their inventories to be aligned to market demand.

Powertrain net sales were $1.3 billion, an increase of almost 14% over the prior year, primarily attributable to higher volume. Sales to external customers accounted for 41% of total net sales versus 33% in the same period of last year.

During the second quarter, the net impact of the currency movement has been minimal, whereby the organic change in net sales of negative 0.3% has been offset by a positive impact from currency movements of 0.6%.

In detail, the negative FX impact year-over-year for the quarter continues to come from the weakening in the Brazilian real, being offset by changes in other currencies, mainly euro.

On slide 9, we show the overview of the industrial activities operating profit performance for the quarter. Total industrial activities operating profit was $678 million, down 1% versus prior year, with operating margin at 7.9%, flat.

Agricultural equipment operating profit was $632 million for the quarter, down $14 million versus last year. Operating margin was flat to last year at 14.2%.

Construction equipment operating profit at $28 million, up $15 million to last year, with operating margin at 3%.

Commercial vehicles reported an operating loss of $21 million versus $11 million last year.

Powertrain operating profit of $64 million was up $10 million from the same period in 2013, with an operating margin of 5.1%. In the business overview section which will provide further insights to the operating profit change year-over-year.

On slide 10, we show here the change in net industrial debt moving from $4 billion as of March 31, 2014 to $3.7 billion at the end of Q2. This represents a reduction in net debt of $300 million.

Cash flow generated from operating activities contributed approximately $800 million plus, including a positive change in working capital for $300 million. This was partially offset by a $374 million dividend payment and continued capital expenditure activity of $200 million.

On slide 11, we provide some details regarding the industrial activities CapEx, which is net of vehicle buyback obligations by spending category and segment. At June end, CapEx for the quarter was $200 million, basically 7.4% than prior year.

As far as composition, new products and technology 47%, maintenance and running capacity 39%, while capacity expansion represents 14%. It was [13%] last year. As recent new capacity expansion projects are starting to come to fruition, as the inauguration of the Harbin plant in China just completed this week is a testimony to it.

Looking at the composition of the CapEx by segment, around 50% relates to commercial vehicles and is mainly related to the new product launches, i.e., the new Daily and the Euro VI family in the bus business, 33% to ag, 10% to powertrain, and the remaining 5% to C.

Moving on to slide 12, financial services business performance. Net income for the quarter in financial services was up 9% to $105 million, mainly due to higher activity and lower income taxes.

Retail loan originations in the quarter was $2.7 billion, flat compared to Q2 last year. The managed portfolio including JV of $29.1 billion, of which retail was 65% and wholesale 35%, was up $1.4 billion compared to March 31, 2014. The quality of the portfolio remains good with delinquencies on book over 30 days at 4.5%.

Next slide shows the Company's debt maturity schedule and the available liquidity at June 30, 2014. Available liquidity at June 30 was $7.7 billion, including $2.3 billion of undrawn facilities under the medium-term committed credit lines. This is more than enough to cover debt maturities for 2014 and 2015 that you can see in the chart.

The decrease of the liquidity is mainly attributable to the dividend payment as well as the cash utilized to support increased activity for financial services, which was partially offset by the proceeds from the $500 million bond issued in June by our industrial capital vehicle.

The bond is due in July 2019, and has a fixed rate coupon of 3.375% which is the second lowest coupon ever, and a record tightest spread in the sub investment grade space for a 5-year bond. This issuance, together with the other successful transaction of EUR1 billion 5-year note issued in Q1 in Europe, demonstrate once again our ability in accessing the capital market, and represents another milestone in our funding diversification strategy and maturity extension of our debt profile.

Going forward, we will maintain these opportunistic approach in order to keep what we believe is the appropriate profile of liquidity for our Group, consistently with our target of reaching investment grade.

This concludes the first part of the presentation. Let me now turn to Rich for the business overview section. Thank you.

Agricultural equipment operating performance variance for the quarter, operating profits of $632 million. Operating margin stood at 14.2% with negative volume in LATAM and NAFTA, and negative mix in NAFTA being offset by pricing improvements, improvements in industrial performance, cost control actions to cover Tier 4B content, inflation and adverse exchange movements.

Next slide. Industry volumes for ag worldwide agricultural equipment industry unit sales were down during the second quarter of 2014, with global demand for tractors and combines down approximately 12%. Industry volume weaknesses experienced across all of the regions with the exception of low horsepower tractors in NAFTA. The 12% reduction in tractors equates to a reduction of 60,000 tractors, the majority of which were in APAC which are not a material to CNH.

Worldwide equipment market share performance was mainly flat for tractors with the exception of LATAM. Combines was down with the exception of NAFTA, but we expect to fully recover that in the second half of the year. In combines, the outlook for the year is not expected to improve from the quarter 2 trend, with further deterioration expected in APAC for the balance of the year, offset by some improvement in LATAM from very low levels in Q2 where the industry was down 30%.

With the announcement of the recent [Motorfrota] program in Brazil, we do not expect to have a disruption between PSI 2014 and the start of PSI 2015, as we experienced in the fourth quarter of 2013.

Next slide. Worldwide production of agricultural equipment was 6% above retail sales for the quarter to support normal seasonality and in anticipation of summer facility shutdown schedules. The Company now expects to under-produce retail in the second half of the year, particularly in NAFTA in light of the outward trend as discussed.

Just to put some numbers on it, I mean in combine manufacturing, H1 to H2 we will be down on average approximately 40% semester to semester. So we are going to be taking action to align inventory with the trend that we see in demand going forward. I think that is something that we have managed in the past.

We have been doing a lot of work on this in terms of managing both the dealer inventory positions, working on as we've discussed in previous calls about moderating line rates at the industrial level. So I think that we have a solid plan to meet both the working capital objectives and net debt objectives that we have for the Group, and to finish the year with appropriate levels of both company and dealer inventory to satisfy projected demand in 2015.

Next slide. Operating for construction equipment, you can see volume and mix being down 10, which is predominantly LATAM. You can see positive pricing despite, in terms of scale, not being the largest market participant.

I think that we have been very disciplined in pricing. The vast majority of that pricing benefit quarter to quarter is in NAFTA, which is the market that has been showing some signs of strength overall.

As we have discussed during the 5-year plan, we are beginning to take appropriate actions in terms of production costs and overhead costs. The SG&A reduction quarter to quarter is the beginning steps of the realignment of the distribution of both the New Holland and Case brands.

We are beginning to realize the synergies associated with intervening it with the cost structure. So overall, a satisfactory performance in terms of operating profit variance.

And we can see on the next slide in terms of market share performance and industry, as I mentioned earlier 7% EMEA, up 8% to the signs of strength. You can see be difference between light and heavy, LATAM being down which is the general trend on top of what we have seen in the agricultural sector.

We don't expect a significant improvement in LATAM in the construction equipment sector, while we do see some improvement on the agricultural side in the second semester of the year. But overall, we don't expect the trajectory that we see here in the quarter to be demonstrably different on a full-year basis.

So NAFTA improving, EMEA improving, LATAM projected to be weak but not as weak as some of the trajectory we have seen in a very light Q2.

Next slide. In terms of dealer inventory, you see a relatively close match between retail sales and production. That will correct itself. We are 12% in Q2, but we are going into the shutdown schedule in August. So we would expect on a full-year basis to match retail and production for the full year in the CE segment.

Unless we see a turnaround in some of the particular markets, then we may see some inventory build, but that is purely a question. I think we can move the industrial machine appropriately to catch up if we see some turn-up in some of the jurisdictions in which we operate in.

Slide 21 and commercial vehicles. The segment continued to be affected by weak economic conditions in LATAM and post an operating loss for $21 million for the quarter, but represented improved performance of the $70 million loss in Q1 of 2014.

We are now starting to see some improving conditions in EMEA, with positive volume and mix and pricing in both light and heavy vehicles, and favorable product mix in APAC. The segment has reported $20 million and lower in SG&A expenses as a result of cost containment actions.

To put it in perspective, we improved performance in EMEA significantly quarter to quarter. Unfortunately, we have given that up in some very weak conditions in Latin America. It is not just a Brazil story for us. We have been down -- you can see from the slide -- Brazil being down 34%, Argentina down 57%.

The curtailment that we took in Venezuela in Q1, that is just going to be a full-year effect. So I think we will stop reporting 100% going forward, but I think we are just going to have to work our way through this. Right now, we are going to continue to take appropriate action on the costs of the business itself.

You saw that we have announced an efficiency program. A significant amount of that program will be focused on the commercial vehicle segment that I will cover later in the presentation, but it is not -- despite the headwinds in LATAM, I think that we have seen some improved performance in the EMEA region which is important as it is the bulk of our volume.

Next slide, please. In terms of industry volumes, we see that EMEA up 3%. We are forecasting flat to 5% for the full year, LATAM down 23%. We will see a slight moderation, but without an intervention in terms of (inaudible) rates, we expect that to remain weak for the balance of the year.

Market share in EMEA 11% is in line with last year. LATAM is down 1.3 percentage points, largely as a result of the weight of the Argentinean business to the total LATAM volume.

In terms of some color, I think it comes up on the next slide; next slide, please. In terms of color, we have given up a little bit of market share in EMEA in light, as a result of the transition to the new Daily which we launched in June. Backlog for the Daily is approximately 15,000 units. So we are relatively hopeful in the second half of the year and expect to run at a decent level of capacity utilization.

Medium has been down and troublesome, down to 25% as a result of the Euro V pre-buy effect. This is an area where we have material market share at approximately 30%, so any upside that we can get out of the medium sector will be positive to earnings through the second half of the year.

Heavy was down 3%, largely as a result of the TIV drop in LATAM. Total units at 30,000 is down 23% to last year, which is largely as a result of the pre-buy which is very much weighted towards the medium segment. LATAM is down as a result of the poor conditions that we are finding in the market.

Q4 book to bill at 0.9 versus 1.2 was largely as a result of Euro V pre-buy. Book to bill in the bus business is 1.7 versus 1.4 last year. We are essentially going to be running at capacity for the balance of the year. In the bus business, we expect to get some positive mix effect from the specialty business where we will be running it at significantly improved production levels in both the firefighting business and the military side.

Next slide. In terms of commercial vehicles, we have pretty much matched retail to production, and we would expect to see that trend over the balance of the year.

In powertrain we had an excellent quarter, engines up 18% to 160,000 units. I think the best part is that the volumes were up across all business segments, both gearboxes, axles and engines. A third party is up -- at 74,000 units is up 35% of last year, and you can see that the mix between what we call the intercompany segment -- so commercial vehicle, agricultural and construction equipment -- third-party revenues at 46% of total volumes is the highest it has been since we have split FPT at the creation of Fiat Industrial. So a good trend overall in terms of the performance of the powertrain segment.

Won't go into a lot of detail here. I think you can read through it. I think that the most recent announcement that we made on top of Diesel of the Year was the launch, as you can see in the top right-hand, of the new Tier 4B CR combine, which is the largest capacity combine available in the marketplace.

Next slide. As I mentioned, as we wrote at the beginning that we are holding guidance for the year. I think that as you have seen from the previous slides, we have been able to offset some of the headwinds that we have had with pricing and cost controls. We are going to have to do a lot of work in the second half of the year as we begin to moderate production on the ag side, but we think that we've got the plans in place in order to do that.

I have seen some estimates about decremental margins of in excess of 30% on agriculture. I think that is a bit aggressive. I think that at least we have proven through Q2 that we have been able to manage the process. We have done it in the past, and I think that we are confident in terms of our plans to prepare ourselves for the 2015, and to meet our working capital objectives and as a result the net debt for the full year.

Next slide. We have announced today an efficiency program which is a comprehensive program to enhance productivity and competitiveness of the industrial activities. The total cumulative charge is approximately $280 million over the next three years, the majority of which will be taken in 2014 and 2015.

Among the efficiency actions by segment will be closing a joint venture facility in Asia, which is no longer viable with the opening of our Harbin facility that we inaugurated on Monday. In construction equipment, I think that we went over that extensively when we did the 5-year plan.

You saw that we've closed an assembly operation last month in Calhoun, Georgia, which is in connection with the recently-announced enlargement of the Sumitomo Machinery agreement that we signed earlier in the year. We will be taking some related charges as we go through the balance of the repositioning of the Case and New Holland brands, in terms of their distribution, primarily in Europe.

I think that you have begun to see some of the improvements in both the cost base and the support costs for this business. These are further actions to continue the improvement that we expect to realize the goals of our 5-year plan.

On the commercial vehicle side, it will be largely actions taken to realize the synergies benefits of combining the commercial vehicles business into the CNHI global network. So as a result, a lot of that will be transitional costs for overhead and support, and then the completion of our manufacturing product specialization programs. The vast majority of the charges will be taken in 2014 and 2015. We will begin to realize the benefits in the second half of this year.

I think that is the last slide, so we can open it up to Q&A.

Thank you, Mr. Tobin. Now we are ready to start the Q&A session. Leon, please take the first question.

(Operator Instructions) Rob Wertheimer, Vertical Research Partners.

Good morning, everybody. First question, I guess, Rich, you did go into this in really helpful detail on the inventory side. I am just curious if you can add to it what you think about used channel inventory, particularly in North American ag? We have written it; it looked like you were managing it pretty well, but I think it is going to be tough to stay ahead of.

Maybe you can give a little context around what a normal seasonal first half to second half combine production decline would be. That was great that you gave a data point. I just don't know if there is normally a second-half slide anyway. And are you starting to see tractors come off in a similar magnitude? Thank you.

Yes. Look, part of the drag that we see in terms of other than the forecasted decline in farmer net income, which is I think forecasted to be down by 30% as a result of the commodity price declines, that is putting a drag on new, which is always going to have a subsequent drag in terms of used.

So we are trying to balance with our dealer network to make sure that we are not exasperating the problem. So as I mentioned in terms of what our actions are, we have got some significant reductions in terms of production performance now.

We have done that, if you go back and look at our results on a quarter-by- quarter basis, in the past. So we have scheduled shutdowns every year in the month of August. So by and large, that is always going to be somewhat of a reduction.

We are going to be taking further actions this year because we are trying to manage the entire chain. The good news about the used is -- despite the fact that it is taking longer for it to be liquidated, so the aging of the used is stringing out somewhat which is putting a drag on new wholesales -- the pricing has held up reasonably well. And that is largely as a result of a significant portion of the used being pre-Tier 4 products. So there is still quite the gap or the value in used equipment.

So we are watching it closely. I think that we are trying to set ourselves up for 2015. I will deal with the question about outlook of 2015, since I'm sure that somebody is going to ask it. I mean, we really -- we don't have a view, a concrete view, to call the market of 2015 yet.

I mean we will open up order writing for 2015 shortly in the late August, beginning September timeframe. At that point, I think by the end of Q3, we will have a much better idea. But I think right now when you have got reductions that I said before in terms of reduction, in terms of combine performance, it is that same quantum of reduction, maybe a little bit less so in four-wheel-drive tractors, semester to semester.

So we are taking action where we need to take it. I think that we have been planning appropriately so that we are not running into a hard stop where we not only lose the gross margin on the mix, that we go in terms of -- that we get the negative in terms of fixed cost absorption. So we are taking appropriate action to align our production system.

It is going to be some heavy lifting, but I think we have got the plan in place, and what we have right now is reflected in the full-year guidance.

Okay, that is helpful. Can you -- the production cuts you are taking in combines and, as you mentioned, four-wheel-drive, would that typically flow through the P&L this year or would it be you are cutting a lot in 4Q and so you will see it more next year? I will stop there. Thank you.

Yes, I think it is more of a this year issue than anything else. Our expectation in order to meet our working capital objectives of the year is to have -- we don't expect to go in with large levels of Company inventory at the end of the year and take the volume leverage or the absorption benefit this year, and then only get the gross margin on the wholesale next year.

I think as I was trying to articulate, we are trying to manage the issue of not losing it on mix in terms on the wholesale basis and then losing it at the industrial level. I think that as we have shown in the past, if there is one thing that we can do, we can manage the industrial machines. So unless we see a further deterioration from where we are right now, and we have given you an idea of what we expect for the full year, I think that we have the plans in place to execute.

Thanks.

David Raso, ISI Group.

At the analyst meeting, you gave guidance for revenues by segment. And I was just curious is the confirmation of the guidance also incorporating maintaining the business segment guidance. Like, for example, agricultural sales for the year at $15.8 billion?

David, the guidance is what the guidance is. I don't think we have to get that granular. In total, I mean we are going to maximize the portfolio in its entirety. So if we make it up -- and understand that there is somewhat of a difference in terms of the margin in totality.

But what you have in terms of the guidance is the aggregation of the top line of the different segments at the margins that those businesses are able to deliver. In terms of giving segment guidance on a full-year basis, I think it is a little bit -- I think that is cutting the quick too close.

Yes, I am just trying to big picture think about the puts and takes since the analyst meeting. Because again, just taking that sales guidance for ag, if we maintain it, it implies the second half of the year sales in ag are only down 6% sequentially. And even last year we had a 3% decline.

So I just would have figured with the combine commentary you just gave that there was probably a little more sequential decline, I would expect, in ag. And if that is the case, where is the offset? What do you think is above what we were thinking at the investor day on the revenues?

I think that right now what has changed since the investor day, but we are talking two months ago, is I think that the mix in terms of the backlog on the commercial vehicles segment has improved.

Okay, obviously that would also portend that the revenue guide for commercial, if you were giving it, that is a little bit of a bump-up, maybe a little bump-down in ag. And how are you viewing construction equipment from previous thoughts for the revenues?

On the construction equipment business, our expectation is that the trajectory of EMEA and NAFTA will follow a similar pattern that it is on right now. I think the one that we are going to have to watch is we have had relatively difficult market conditions in LATAM in construction equipment.

There is a difference in terms of the PSI rates between the two. If we get any help there, we could see some kind of bounceback in LATAM that we have seen up and to this point, but I think it is a little bit too early to tell. So our expectations on the construction equipment segment is improved performance, largely driven by NAFTA and EMEA.

Yes, but (inaudible), I'm just trying to figure out how much upside are you thinking through on commercial vehicle? Because again, the ag sequential decline looks maybe a little optimistic, again down 6% if it was down 3% in the back half even last year. And construction equipment, if you keep the old segment guidance, is implying the second half has to grow 22% after the first half was barely up at all.

So I'm just trying to think if you look at those numbers and say maybe they are a little optimistic from the investor day on the revenues, how much can I model in -- well, commercial is feeling better. In fact, the commercial loss this quarter was a little better than I thought, but I am talking strictly revenues.

Is there that much momentum versus what you saw in commercial vehicle to take my concerns on ag and construction revenues and say, hey, that's what it is; it is moving pieces? You feel better about truck; you feel a little worse about the revs on the other two from the investor day.

Yes, I think if you are talking about sequential performance semester to semester, I think that the upside is on the commercial.

I am talking full year, the full-year guidance, what has changed?

No, I understand what your question is, but we are taking the position where we are right now versus what we had in terms of the investor day. So if there is any headwind, it would be in NAFTA ag, as I mentioned before during the call. I think our expectation in LATAM ag is improve performance in the second half of the year vis-a-vis the first half. So offsetting some of that headwind on the NAFTA piece.

And last question on commercial vehicle. Again, the loss was a little less than I was looking for, so that was encouraging. When we think about the profitability in the back half of commercial, or even just want to talk full year, I think folks are trying to figure out what kind of run rate can we be leaving the year on truck; and then starting to think through next year where maybe have Brazil back up on an easy comp, North America hopefully still growing a bit, and then Europe.

Would you care to talk a little bit about your truck margins kind of exiting the year and how to think about next year?

Sure. I think that there's two different drivers. I think that we are intervening in terms of the cost structure, which is largely in Europe. Right now, we are running at a 3% growth year to date in European commercial vehicles, and I think we are forecasting flat to 5%. So really midrange at the end of the day.

So the pickup in commercial vehicles from a European point of view is as a result of higher revs in the second half of the year at a much improved mix. As I said before, we have a variety of things that are going to be improved in terms of the cost structure.

We are going to get the follow-on effect of the full year of us intervening in terms of the cost structure. You have to improve mix by not having launch costs that we have had in each one, largely as a result of Euro VI transition on the bus segment and the launch of the new Daily.

So those are largely behind us. I think we have got some runway left on buses to complete that in Q3. And then you have got improved mix for the balance here. So right now, we have been matching revenue and production through -- if you look at the Q2, we are saying that we are going to move up in revs in the second half of the year. So we will be moving production up, so we will get improved production performance and the richness of the mix is there.

Our forecast for the full year in terms of profitability, commercial vehicles is I think around where we were at the investor day. So we are not coming off that, and we are forecasting a profit for the full year. I think going forward and what we are expecting for the follow-on year, I would ask that let's deliver the next couple quarters. Let's realize the benefits of the actions that we are taking. And then I would not expect LATAM to perform again in 2015 like it is performing right now.

I mean all of the improvement, which wasn't immaterial, that we made in EMEA quarter to quarter unfortunately was offset by LATAM. LATAM will take action there in terms of the cost base, but -- and we are destocking in LATAM right now -- one would expect that those conditions will improve.

All right, I appreciate the detail. Thank you, Rich.

Thanks.

Alexander Virgo, Berenberg.

Hi, good afternoon, good morning. Just wondering if you could make a comment, please, on the fact that you -- on ag, I guess you overproduced in Q1 by close to 30%, and again in Q1. And then you are seeing this -- you have talked about this sequential adjustment in production to the tune of 40% in the second half. I mean that seems like a fairly volatile approach.

I am wondering why you didn't under-produce in Q2, given as we have established the signs from even the capital markets day were that the retail sales were falling away, particularly in NAFTA but obviously in LATAM, too.

And then second question, I guess as a follow-on to that, you mentioned incremental margins in your prepared notes. Should we be thinking of a 25%, 30% dropthrough on that production adjustment in the second half?

And then last one just as an observation, is there any chance we can have the results a little bit earlier next time? Thank you.

Yes. On the last question, yes, and I know I said that last quarter, but this time I mean it. So we will correct that the next time around.

On the question about why we didn't moderate production in Q2 and then backend load it, you have to go back and look at the performance of ag quarter by quarter for the past several years. I mean, we have historically produced less in the second half for a couple of reasons.

Number one, we have scheduled shutdowns in August at the industrial level that just by in nature is going to drop it. Number two is there is purely a question of you make a call in terms of how much product that you need available, you need to have it available. The leadtimes associated with ramping up production of some of the bigger more sophisticated products when you were talking about drive lines transmissions is not short-chain.

So it is not as if let's cut production in Q2 and then if we need to, we can catch up in Q4. It just doesn't work like that because we are trying to maximize our profitability at the industrial level. So for us, it is much better to have the product available for what the projected market demand is and then to adjust in the second half when, A, we can manage it from an industrial point of view, and we can manage the decrementals as it relates to the absorption loss, and we have the product available to the extent that the demand is there.

It is not as if we can just turn the machine back on if we get it wrong in Q4.

Right, but I guess the issue is whether you got it wrong in Q2, right? Because if I look back over the last, what, four years, you under-produced in Q2 of 2012, I'm sorry, 2011. You were only a couple percent ahead in 2010. I guess those were more positive environments from and ag perspective, where I think we are probably in a more negative environment now.

I am just wondering why you didn't take actions earlier rather than going to 27.6% and then minus 40%. So it seems quite aggressive, that's all.

I think what I explained to you before, I don't think that we got it wrong. At the end of the day, market conditions haven't been improving through the year for sure. But there is a cost associated with turning on and off production. That is a big ticket number that we try to avoid.

So to the extent that we overproduced in Q2 by 6%, to moderate that cost if I was to try to take action on that in a quarter, there is a cost associated with that. It is far more efficient for me to take it out of the back half.

Okay. And then if I might just follow up in terms of what gives you the confidence that you are going to retake that market share in the second half? Thanks.

I think that if you break down those market share declines and units, we are talking about -- if I can do it off the top of my head -- I think it is 99 units in combines in all of Europe, is the market share decline. So we are not talking -- it is not like the commercial vehicles segment where you have to make up thousands of units. We are talking about discrete volumes here.

Okay, all right. Thank you very much.

Ann Duignan, JPMorgan.

Thank you. This is actually Tom [Simonich] on for Ann. Just one question. Do you still believe agriculture fundamentals in North America will be flat through 2018?

Yes. Without any additional knowledge, the answer would be yes.

Thank you.

Is there anybody else on the queue?

Ashik Kurian, Goldman Sachs.

Just one follow-up question on the truck side. There has been some talk around the efficiency of the different truck makers on the new Euro VI technology. So could you just give us an update on how the new Euro VI is working for you and where you rank in terms of total cost of ownership and also in terms of the efficiency compared to your peers?

I think that we are confident in terms of the powertrain solution that we have across the commercial vehicles segment. I mean without getting into detail segment by segment, I think that what we have in terms of what we have delivered of the core technology that comes out of FPT, I think that that is as competitive as anything that is available in the marketplace.

Has your pricing improved on the back of this, or is there still more pricing actions to be taken over the due course of the year?

We are clearly not the price leader in the commercial vehicles segment. We have begun to claw back on the Euro VI side, but any help the market can give us -- and I think that applies to everybody in European commercial vehicles -- we are more than happy to take price where we can get it.

I think that if you look at some of the segmental information that we have there, I think that we have demonstrated in a variety of different market conditions and a variety of different market positions across the segment that we have been disciplined in terms of pricing.

So it is up to the market to a certain extent, but we are more than happy to get to the point of full recapture on Euro VI costs.

Thank you.

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

Thank you, Leon. 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. Thank you for your participation. You may now disconnect.