CNH Industrial NV (CNHI) 2014 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's CNH Industrial third quarter and September year-to-date 2014 results conference call.

For your information, today's call is being recorded. At this time I'd like to turn the call over to your host today, Federico Donati, head of Investor Relations. Please go ahead, sir.

Thank you, Sarah. Good afternoon, everyone. We would like to welcome you to the CNH Industrial third quarter and September year-to-date 2014 results webcast conference call.

CNH Industrial Group CEO, 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 risks 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, everybody.

Overall, we've had a satisfactory performance for the quarter, notwithstanding the challenging trading conditions in the agricultural row crop segment, particularly NAFTA's result, with commodity price declines negatively affecting projected farm income levels, tax incentives uncertainty, and installed fleet age; and in LATAM, as a result of commodity prices and negative regional sentiment in Brazil and Argentina, which impacted both agricultural and commercial vehicle revenues and profits.

Operating profit improved in commercial vehicles, construction equipment and powertrain segments as a result of increased demand in construction and powertrain, and the beginning of the cost control actions as part of the Group's announced efficiency plan, for which we'll give you an update in the presentation.

In summary, we achieved net sales of industrial activities at $7.4 billion for the quarter (technical difficulty) activities at 7.1%.

Under these conditions, we are confirming our full-year 2014 guidance, as you've seen from the press release, and we've taken the opportunity to provide an early view of our expectations for 2015 industry volumes by segment and our expectation for industrial operating performance under forecasted demand conditions, which we'll cover at the end of the presentation.

At this point I'll turn it over to Max to give you an overview of the financial performance for the quarter, then I'll come back with the performance of the businesses and the overview for 2015.

Thank you, Rich. Good morning or afternoon. I'm on slide 5.

In summary, for the quarter, consolidated revenues at $7.7 billion. Consolidated net income of $162 million for the third quarter. Net income before restructuring and other exceptional items was $240 million for the quarter, and $773 million at September year-to-date.

EPS before restructuring and other exceptional items was $0.16 per share for the quarter, and $0.57 share for the September year-to-date period, up roughly 4% versus prior year.

Available liquidity at September end was $7.9 billion, inclusive of $2.5 billion in undrawn committed facilities, compared to $7.7 billion at June end.

The Company posted net sales of industrial activities of $7.4 billion for the quarter, and of $23.2 billion for the first 9 months.

In the quarter, net sales increases in construction equipment and powertrain were more than offset by declines in agricultural equipment and commercial vehicles. Operating profit of industrial activities was $522 million in Q3 2014, with an operating margin of 7.1%.

The first 9 months, operating profit stood at $1.6 billion with margin of 7%.

Net industrial debt at September 30, 2014 of $3.9 billion was $0.2 billion higher than at June end, with net industrial cash flow negative $700 million, affected by lower payables in the quarter due to seasonal slowdown of activity.

On slide 6 we have the reconciliation from consolidated operating profit to net income for the quarter. Consolidated operating profit stood at $562 million, down $69 million to prior year.

Restructuring expenses totaled $56 million compared to $3 million for Q3 2013, as part of the efficiency program announced in July 2014. I will talk about it in more detail on the next slide.

Interest expense net totaled $150 million for the quarter, $22 million higher than Q3 of last year, primarily due to an increase in average net industrial debt, partially offset by more favorable interest rates.

Other net was a charge of $97 million for the quarter. The increase of $32 million versus prior year was mainly due to higher foreign exchange losses, which included an $8 million pretax charge for the remeasurement of Venezuelan asset denominated in local currency.

Income taxes totaled $107 million, representing an effective tax rate of 41% for the quarter, substantially in line with Q3 of prior year.

The Company's effective tax rate for the year is still expected to be in the range of 40% to 44% due to the inability to recognize the tax benefit of losses in certain jurisdictions.

Net income attributable to CNH Industrial N.V. was $173 million for the quarter, and was positively impacted by losses attributed to minority interest holder related to the closure of the joint venture in China.

Slide number 7 shows the quarterly update on efficiency program, highlighting the main efficiency actions with relative charges in the quarter.

Of the $56 million total charges for the quarter, $28 million were in the agricultural equipment segment, primarily due to the wind-down of a 60%-owned JV in China, consolidated line by line in our accounts. The 40% benefit from this charge will be recognized, as I said before, in the year-over-year comparative performance of minority income.

Of the remaining amount, $22 million was related to the commercial vehicle segment, mainly due to actions to reduce SG&A expenses and business support cost, as a result of the transition to CNH Industrial regional structure; and remaining $6 million was related to the construction equipment, mainly due to the repositioning of the Case and New Holland brand offerings, and the consequent alignment of their dealer networks. More of these areas are beginning to recognize these benefits in their respective segmental performance in Q3.

On a year-to-date basis, charges make up to $98 million, which are expected to generate savings of approximately $50 million on an annualized basis in 2015.

Next slide, number 8, shows the overview of the industrial activities net sales performance for the quarter. Agricultural equipment net sales were $3.7 billion for the quarter, down 11.6% from Q3 of prior year, driven by lower volume and less favorable product mix, partially offset by positive net pricing.

Construction equipment net sales were up 15% to $841 million with increases in all regions, especially NAFTA.

Commercial vehicles net sales were down 6% to $2.5 billion. Increased net sales in EMEA, driven by light and heavy vehicles despite lower deliveries in the bus business due to the transition to Euro VI applications, were more than offset by a significant decline in LATAM, negative 29%, as a result of continued overall weak economic conditions and the need to adjust the dealer inventory metrics.

Powertrain net sales were up 1.8% to $1 billion, primarily attributable to higher volume. Sales to external customers accounted for 39% of total net sales, up 6 percentage points versus the same period in 2013.

Similarly to the second quarter, net FX translation differences on net sales are immaterial in the quarter.

Slide number 9 shows the overview of the industrial activities operating profit performance for the quarter, which Rich will discuss in detail at the end of my presentation.

In agricultural equipment, operating profit stood at $433 million with a margin at almost 12%, down $149 million.

Our reduced unit volume, with a negative product mix in the row crop sector, and increased manufacturing costs as a result of cuts in production line rates, were partially offset by positive net price realization in excess of increase in product content cost.

Operating profit improved in the construction equipment to $39 million at an operating margin of 4.6%, from last year operating loss of $31 million.

In powertrain, operating profit was up 18%, mainly due to the increase in volume and related industrial efficiencies.

And in -- the commercial vehicle segment was marginally up on positive performance in EMEA, partially offset by the negative effect of the challenging trading conditions in LATAM.

Slide 10 shows the change in net industrial debt, moving from $3.7 billion as of June 30 to $3.9 billion at the end of Q3, representing an increase in net debt of $0.2 billion.

A seasonal slowdown of activity due to summer shutdown and actions to reduce production in agricultural equipment, resulted in a $0.6 billion reduction in payables at the end of the quarter. Currency translation differences on euro-denominated debt positively affected net industrial debt by $0.4 billion.

On -- slide 11 now provide greater detail regarding industrial activities CapEx by spending category and segment. At September end, CapEx was $246 million, flat versus last year. Spending composition was in line with the prior quarter.

Looking at the composition of the CapEx by segment, around 80% relates to ag and CV, mainly related to the new product launches and regulatory capital on Tier 4B. Industrial capacity expansion continued to reduce, and in Q3 it was 20 percentage points lower than prior year, at 16% of total.

Moving on to slide 12, our financial services business performance. Net income for the quarter was up 15% to $75 million, mainly as a result of higher activity. Retail loan origination in the quarter were $2.8 billion, flat compared to Q3 of 2013.

Managed portfolio, including JV, of $28.1 billion was down $1 billion compared to June 30, or flat excluding currency impact.

The quality of the portfolio remains good, with delinquencies on book over 30 days at 3.9% down 1.2 percentage points versus prior year.

Next slide, number 13, shows the Company debt maturity schedule and the available liquidity at September 30. Available liquidity was $7.9 billion, including the said $2.5 billion of undrawn under the medium term committed unsecured credit facility, compared to $7.7 billion at June 30.

The increase is mainly attributable to the proceeds from the EUR700 million bond issued by CNH Industrial Finance Europe S.A., and due on September 2021, with a fixed rate coupon of 2.875%, partially offset by cash utilized in operating activities and by negative currency translation differences on cash balances.

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

Thanks, Max. I'm on slide 15. I think Max covered the operating performance for the quarter. Substantially, all the volume and mix of $176 million is in NAFTA and LATAM, and -- because of the conditions I expressed earlier.

Pricing has continued to hold up, so we're trying to remain disciplined in pricing, and that's been able to offset both Tier 4 content added during the quarter and some costs related to the slowdown in the production activity. And then you see all the other categories are positive year over year.

Slide 16 -- worldwide industry down for the quarter specifically in combines, down 22%. Market share was flat for tractors while decreased for combines in all markets except for LATAM.

I think in terms of the industry and the full year outlook, there's not a lot of changes here with the exception of LATAM from the previous quarter. And we've brought down the combine number, but I think by another 500 basis points. Next slide.

Notwithstanding the anticipated production cuts in Q3, worldwide production of agricultural equipment was 10% above retail sales for the quarter, mainly the result of season stocking actions, primarily in Asia PAC and in LATAM.

Production has decreased 6% versus the period of last year, more specifically in high-horsepower equipment, down 22% in NAFTA, and in combines down 38% in NAFTA, reaching the lowest quarterly production volume since Q3 of 2011. We're expecting the significantly underproduced retail demand in Q4 2014 to realign inventories to the expected market conditions. Next.

This is a slide that we have added just because of -- which really dovetails what I'll show you later in the presentation about the expectations for 2015.

What we're doing right now under the conditions in -- to align the cost structure of the Group with the decrease in demand, especially in the high-horsepower segment of the row crop section of the business -- we've got industrial flexibility -- I think we've addressed it before, which is about 10% of manufacturing cost. This, we believe that we can take out, and we are taking out, with the reduction of overtime and weekend premiums.

Single mission plants for high-horsepower tractors and harvesting machinery have already been brought down in terms of their line rates, and will be brought down significantly more, as I mentioned in Q4.

The reduction of outsourced components capacity protecting fixed cost absorption -- this is the make/buy, I think that we've addressed, in terms of what we've been buying in terms of componentry that we can manufacture in-house. We'll be reabsorbing that into our plant.

And then we're right now at the -- in the process of trying to avoid, the best we can, and I think it's reflected in our margin so far, of a line rate speed adoption to avoid "stop and go." Last thing we want to do is to curtail in totality manufacturing, because of the unwinding and startup cost associated with doing so.

So, right now, we've been in a mode of taking down line rates, decreasing overtime and weekend shift premiums, and -- in order to control costs.

On the functional cost flexibility, we also believe we have savings of 5% to 10%. That's discretionary spending and reduction of SG&A, which you haven't seen in -- a lot of it in ag. I think you'll begin to see that in Q4 with a flow-through into 2015.

Non-labor expense in our SG&A line is approximately 50%. That's where we'll be acting upon first. And then we've got R&D flexibility in terms of R&D expense in the P&L for all of the non-regulatory projects. We'll be revisiting our plans based on the fact of -- under current and projected market conditions.

To clarify -- and I don't think that we've done this before, but I think that there's -- we are -- we're fully cognizant that the market in the row crop machinery segment is under pressure. I don't think we've shown in the past the split in units between cash crop machinery, dairy and livestock machinery, and specialty.

So, you can see the cash crop on a global basis represents 55% of the unit volume. So, that's going to be the part, from -- both from an industrial side of the business and on an inventory side of the business, where all the heavy lifting's going to have to be done between now and the end of the year, and we'll be repositioning that portion of the business in terms of its structural and functional cost.

On the dairy and livestock segment of the business, and the specialty, we believe that those businesses have been -- have performed -- they have performed well, and expect them to perform well throughout this year, and to not show the declines that we've seen on the row crop segment.

Overall, we're going to maintain our presence in mature markets, focusing on farmer productivity improvement, because structurally that is the driver that will lead to industry demand. I mean, despite the fact the commodity prices are down, productivity is one of the ways that farming income can be protected by increasing productivity, which will drive machine demand, and then we will continue to increase our international expansion to first demand areas -- China India, and to certain sections of Brazil.

So, we believe that we've got a healthy and well-diversified business model in ag. We think that the exposure we have to the row crop section, while material, is not all of our business. It's -- let's just call it 50%.

We believe that the 50% that's more dairy and livestock machinery, implements -- those types of things -- we expect that part of the business to hold up well, because of the fact that commodity price declines have increased profitability in that portion of the business. And then we're just going to have to manage our costs on the other side. Next slide.

Moving on to construction equipment, it's good performance overall. They're all green here. So, we've been able to extract the profits out of the increase in volume. We've been covering Tier 4 pricing. And actually, the pricing environment in construction equipment on the return to demand in certain regions, has not been under the pressure that we have seen in previous years.

Production cost is a reflection of us working on our efficiency program, in both production costs on the SG&A side; and then R&D is just a decline as we complete Tier 4 transition.

So, overall, continue to contain actions in SG&A and R&D expenses as a result of the realization of the Company's brand realignment initiatives and global excavator strategies that seem to be performing well so far this year. Next slide.

Overall, I don't think there's any changes to this slide in terms of what we believe market conditions will be for -- what they've been for the quarter, and what we think they're going to be for the full year. Next slide.

Inventory -- really no issue here. Third quarter overproduction at 9%. As we've done every year, projections for Q4 will realign in Q4. So, we'll underproduce retail for Q4, so you'll see some liquidation of dealer and Company inventory projected for the full year. Next slide.

In commercial vehicles, the segment continues to be affected by weak economic conditions in LATAM. As you can see in the footnote for the volume and mix variance, LATAM is all of the negative $30 million -- it's actually negative $35 million quarter to quarter.

Notwithstanding the challenging LATAM environment, operating profit improved year over year to $20 million with a margin of 1%, mainly in positive pricing in EMEA and APAC, mostly related to new product introductions, exceeding the impact of new product cost and the structural cost savings and R&D and SG&A expenses as a result of the Group's efficiency plan.

Our European truck market was up 4.3% over Q3 2013, and 158,000 units. Light vehicles increased 11%, while medium heavy vehicle market and the heavy vehicle market decreased 15.2% and 1.8% respectively.

The Company's third quarter market share of European trucks was estimated at 10%, decline of 0.5%, which is largely on light, which is the result of the transition to the new Daily that was launched at the end of the third quarter. We expect to make that up progressively over the next 15 months. Next slide.

Commercial vehicles delivered a total of 29,000 vehicles including buses and specialty, representing an 8.2% decrease over Q3 2013.

Volumes were higher in the light segment as a result of the launch of the Daily, while decline in both medium and heavy, driven by weak trading conditions in LATAM; and, as we've been guiding all year, the pre-buy effect that we had last year on Euro V demand prior to the introduction of Euro VI. Commercial vehicles deliveries increased 7.7% in EMEA while APAC was down 14% and LATAM down 45%, as basically the entire industry is rebalancing inventories.

As we've guided throughout the year, total orders were 28,000 units, down 27%; EMEA down 21,000 down -- at 21,000 units, was down 18%. Truck orders have been flat year over year excluding Euro VI pre-buy impact on 2013 in medium and heavy.

LATAM at 4.3 was down significantly, attributable to medium and heavy segments as the region balances inventory.

Q3 book to bill was at 0.95 versus 1.2, primarily due to the pre-buy impact and to LATAM heavy.

Commercial vehicle inventory management production levels were 2% above retail. LATAM underproduction versus retail was 20%, confirming a one-month reduction of inventories in the region. In EMEA, dealer inventories of new vehicles remained stable to prior year despite the launch of the new Daily, representing a coverage of 3 months' expected retail activity.

In powertrain, third party volumes were up across all business segments. Engines were up 3% to 133,000 units. Third party sales were 45% of revenue. I think that's the highest since CNH -- in CNHI's history. So, that bodes well for next year, as we expect to see a decline in engine demand from the ag sector.

I won't go over 27. I think we've done press releases on all of these with the exception of the new New Holland Class 10 combine that just set a record in terms of productivity in wheat, which is in launch presently.

And CNH Industrial's been selected for inclusion to the A List of Climate Performance Leadership Index of 2014. So, the Company continues to improve its results. Out of the eligible 100 companies, only 10% were admitted into this select group. And so, we're quite proud of that performance. And we expect to continue to comply and to maintain our leadership position in this particular portion of the business.

Guidance, I think that you saw from the press release, is confirmed for the year. Next slide.

Okay. We thought, because of the negative sentiment about -- around the ag cycle, that we would come out earlier -- this is something we usually do in January. We're going to come out earlier and give you our view on the end markets that we serve for 2015. These are our views today.

And then we're going to get into what we think that we can do from an earnings perspective, based on this. So, in a nutshell, we're -- the expectation is for the row crop portion of the business to remain under pressure.

Just to put these numbers in perspective, if we add the projected decline for 2014, with this decline, which is off a full year 2014 basis, you're looking at a 40% decline in combines from the peak of 2013. So, a significant decline.

I think that we're going to manage the business based on the numbers right here. You can call them conservative; not conservative. I think that they're our view right now, in terms of what we see in the marketplace.

I think that if you look at the tractor side, tractors are overall flat, but the mix is going to change quite dramatically from the high-horsepower segment to the low-horsepower segment, as I mentioned before -- what we believe to be continued strength in the dairy and livestock segments of the business and construction equipment overall.

Generally, every region up flat to single digits, with the exception of LATAM, which we're projecting to be down in heavy for 2015, largely as a result of the lack of municipal bids projected for next year; but that may change now that we've gone beyond the election cycle, so that's some possible upside.

And in commercial vehicles, I think that we're calling the bottom in LATAM. So, flat in 2015 from a pretty depressed level in 2014, and then flat in the other regions.

So, taking that volume at a constant currency basis -- so, using average currencies, taking that volume and projecting it into 2015, full-year 2014 operating profit is to be held in 2015. Improved profitability in commercial vehicles and construction equipment, coupled with productivity actions and structural cost improvement measures from the Company's efficiency program, are expected to offset the challenging conditions in the row crop sector of the agricultural business.

So, as you can see, the positives and negatives from the different business -- we've begun to take actions in 2014 to align cost structure and inventory positions to protect segmental margins in ag.

Reduced input costs will continue to benefit livestock and dairy segments. And, as I mentioned before, trading conditions are expected to remain challenging through 2015, largely concentrated in the harvesting and high horsepower row crop segments in NAFTA and LATAM.

In commercial vehicles, as you saw on the previous page, we're calling volumes flat to 2014 overall. So, actions taken in cost structure, improved manufacturing productivity, and reduced Euro VI-related launch costs are going to be what provides the impetus for profit -- or, the expected profit improvement in 2015 over 2014 in commercial vehicles.

In powertrain, increased third party sales and manufacturing productivity improvements will offset the headwind in terms of ag and construction. I think I mentioned before the trajectory. I think it's more or less a roll-forward from what -- the performance that you've seen in 2014.

I think ag's the most important one. I think that our goal is to limit the impact in ag to the gross margin of the adjusted for mix of the unit volume decrease that we showed you in the previous slide.

So, all of the underabsorption and other inefficiencies is going to have to be made up with the reduction of structural cost in the ag segment. Or, a significant portion of that, to close that gap, and so it's -- only remains at the gross margin of the units.

And then commercial vehicles, powertrain and construction equipment, I think, is a -- is largely a flow-through on actions that we've already begun and you can see already reflected in the Q3 P&Ls of at least the commercial vehicles and construction equipment business, and the powertrain is really the trajectory you've seen in terms of third party sales, which command higher margins than inter-company, replacing the negative -- or the headwind that we have in the projected unit decline of agricultural engines.

I think that wraps up the presentation, and I'll hand it back and you -- we can open it up for Q&A.

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

(Operator Instructions). Ross Gilardi, Bank of America.

I was just wondering if you can talk a little bit more about the drivers of the sequential margin improvement for Iveco in construction. And certainly in the past few years, you've seen these businesses bounce around between sort of a modest margin and modest loss position from quarter to quarter.

So, just wondering, how sustainable is the profitability in these two segments? Clearly, you're expecting some improvement into 2015 to offset the agricultural weakness. But, any more thoughts you can give there, on the drivers of savings and improved earnings?

Yes. I mean, I think that if you look on at least the quarterly chart in commercial vehicles, I think that what you see in terms of structural savings are really the beginning of the actions that we took at the end of Q2. So, our expectation is that those savings hold and then flow through to an annualized basis in terms of next year.

We're calling the bottom in LATAM. And LATAM significantly or -- it offset all of the improvement that we'd made in Europe. I think that we've actually begun to improve our performance in Europe. Unfortunately, I think -- and I -- it was not forecasted when we started out the year. I don't think that anybody thought that the commercial vehicle market of LATAM was going to be what it is.

So, without getting into the granularity of the numbers, significant -- year over year, we've had a material change between Q3 -- or, between 2013 and 2014, in commercial vehicle profitability on the swing of LATAM.

Now, we've taken actions to reduce our costs in LATAM for that new reality. But -- so, we're not going to have the downward trend where we're bleeding costs as we made those cuts into production.

It's very early to tell, in terms of what's going to happen overall. I think that we've taken a pretty conservative view. I think, overall in terms of calling the market flat, I mean, EMEA -- the EMEA markets wasn't exactly the most buoyant market in 2013, and we're calling that flat for 2014.

LATAM has been down significantly, and we're calling it the bottom. I mean, I would assume, or -- that there is some improvement there in terms of market demand, because it's been pretty grim, and you can see in terms of the order books and everything else.

Now that we're on the other side of the election cycle, hopefully sentiment will improve, which will allow us to improve performance.

But right now, what we're forecasting for 2015 is self-help in terms of structural cost and the reduction of launch cost that we've had on Euro VI and the new Daily launch that we incurred this year, and the Euro VI conversion that we're still going through on the bus portion of the business. That alone is going to allow us, even in a flattened market, to improve performance for 2015.

Got you. Thanks, Rich. And then, could you comment maybe a bit about ag equipment dealer inventories, and maybe through the key regions, do you feel like your dealers are getting things under control, or has the dealer inventory situation gotten worse through the last quarter, particularly with the additional dip in commodity prices?

Look, it's higher than we would like in NAFTA, for sure. And that's why you've got some pretty significant cuts in production that I mentioned before in the row crop segment.

So, I mean, I think that we're working with the dealers. There's -- I wouldn't describe it as too much inventory. It's the total inventory, I think, that's more of a problem between new and used. I don't -- that's going to take some time to unwind. I think it's going to take through the first half of the year before we can get those positions stabilized, I guess, is the best way we can say it, in terms of an FMS point of view.

And at the end of the day, we're working with all the dealers. It's not a matter of, let's maximize 2014 and then fall off a cliff in 2015. So, I think we're working with them in terms of making the new product that has been presold, available for the balance of the year.

But in terms of what we see in terms of dealer inventory overall, I think that we're going to have the new reality -- if we're calling the market correctly, if you look just at the NAFTA numbers, then those dealer inventories are going to have to correct by that quantum overall.

In Europe -- we're actually up for the year versus previous year in Europe, in terms of revenues and profits. So, right now, based on what we can see, there's -- European dealer inventories are okay. And LATAM, we've been adjusting all year. That tends to be a more volatile market, so dealer inventory tends to swing a little bit more violently than we see in NAFTA or the European inventories. We've been bringing them down.

It's the buying season in LATAM now. So, we're going to be bringing -- we've actually -- what you can see in terms of production for retail in Q3 -- part of that is us bringing up LATAM in preparation for the buying season. But -- so, we did a lot of the heavy lifting in LATAM at mid-year, I guess, is the best way to put it.

But clearly, NAFTA is the challenge, and based on what we can see here, you're going to have to see total inventories drop by the same percentage points that I showed you for expectation for 2015.

And could you just elaborate a little bit on what you just said about European ag, and being up in terms of revenue and profit? Do you feel like that could be the next shoe to drop for ag, or does that -- is it -- just feel like a more resilient market, maybe just because you didn't have the same degree of up cycle over the last few years? And I'm talk specifically about ag.

Yes. I think the latter. I think the latter. I think that we never saw the big, tremendous upswing. I think that it's not as if there's no pressure in Europe. I think that it's a more disparate market than NAFTA is. So, it's not as heavily weighted on row crop as the -- you see in NAFTA. So, significantly less so.

So, I just -- and I think that we performed very well. I mean, I think that overall, if we were to take at least a year-to-date performance for the Group in ag, the best performance that we've had, just in terms of how we performed for the year so far, in terms of market share performance, in terms of increases in profitability year over year, it's been in the European business. And I think that we expect that to continue through 2015.

Got you. Okay. Thanks very much.

Rob Wertheimer, Vertical Research Partners.

So, construction margins were good. Pricing was good. I'm wondering if you're able to address whether that was a little bit idiosyncratic, and that you were able to, whether through product quality or otherwise, take pricing up? Or, the industry data also had slightly better pricing today -- whether you see industry pricing getting a little bit more healthy there?

Well, we're by no means the price leader. We're a follower in construction equipment. So, I would categorize it as overall market conditions for pricing improving.

Excellent. Thank you. And then -- I mean, I guess you just kind of did this in detail, Rich, but it seems to me as though you'll end the year with dealer inventory on the ag side and NAFTA up in an absolute sense, in a down market.

Am I incorrect in that, and therefore you'll have a few more quarters trying to work the dealer inventory down unless the market recovers?

Well, Rob, I mean, the -- if -- I think everybody looks at those charts in terms of ag inventory, and I'm -- and writes NAFTA over the top of it. It's -- first of all, it's in units, and it's global. So, I think that our expectation is to lower dealer and company inventory at a minimum in NAFTA by the end of the year.

Okay. That's helpful. If I can sneak in one more -- I don't know if you'll answer this, but is your implied -- there's a lot of ways to back into it. Is your implied 4Q ag margin up year over year?

You -- I'm not going to give you a segmental Q4. Right? I've given you a full-year outlook confirmation, and I've actually given you a projected 2015. I think that's enough.

Yes. Okay. Thanks, Rich.

Kwame Webb, Morningstar.

Thank you for taking my question today. If I could just touch on the commercial vehicle segment -- if I look at commercial vehicle sales in Europe pre-2008 versus today, it just seems like the run rates are dramatically lower.

So, in terms of restructuring the business, could you help us think about, secularly, how many units you think the European market can support? And then also, any comments on what you're doing to structure the business -- the deal with the business cycle there?

Okay. I don't think going back to 2008 would be entirely helpful. I think that we're just dealing with where we are today, and what our expectation is for next year. Because I -- we get into a long conversation about geographic and product mix. We're aligning our structural costs the best we can for 2015 future demand.

Okay. And maybe just slip over to the powertrain business before we go. You guys have made some nice gains with external customer sales. If you could maybe talk about which product categories those gains have been in, and why you think you're winning that business.

I can't talk about the products themselves, nor the individual customers. I think that the gains are just a lot reflected by the acceptance of the SCR technology out of FPT.

Okay. Thank you.

[Sam Martin], Credit Suisse.

It's a couple of questions on the balance sheet, please. So, at the Investor Day, in the financial presentation, you outlined an intention to move towards investment grade ratings, and I was wondering whether this had changed at all in light of the more challenging market conditions you're currently experiencing.

And then secondly, I was trying to look at, really, Q4 cash flow, and in particular on the working capital, and whether we should expect a normal seasonal swing in Q4, or whether you thought that there could be anything unusual, given the more challenging market conditions that you're currently experiencing. Thank you.

Yes, Sam. This is Max speaking. Let me pick -- start from the second -- to answer the second question. So, we expect Q4 to be positive in cash generation, and basically most of the positive improvement will come from the liquidation of the inventory across the board on each segment, including also the manufacturing inventory associated, obviously, with the production cuts that we have already announced.

Thanks.

Mike Shlisky, Global Hunter.

A quick question for you on conditions in ag in Brazil. Could you maybe contrast for us the row crop business versus sugarcane business, both currently and in 2015?

I'm not going to give you the revenue split in Brazil between sugarcane and row crop. They're both under pressure this year, both because of sugarcane mill profitability and then row crop on just general commodities. So, I mean, right now the decline is relatively equal between the two.

Okay. And then, secondly, I just wanted to get a little more clarity on your tax rate in 2015. I know that [a big portion] of your long-term goals is to get that tax rate down. [Can you maybe give] some kind of color as to how that might be, versus 2014?

I'll pick up the question here. So, we will continue on the trajectory to gear towards our natural rate, which is, as we said, in the mid-30%s. So, moving off the 40% to 44% guidance this year. We expect to improve the rate slightly towards our goal.

Okay. Thanks so much.

Ashik Kurian, Goldman Sachs.

Just a quick question on ag. Could you just help us try to get some comfort on your guidance for ag next year, especially when we look at the used equipment values declining. When you say you're going to try to limit the impact of the decline on the gross margin level, why do you think that -- or, why would the pricing not come under pressure next year?

The used equipment values may come under pressure, but in terms -- as that inventory is liquidated. But in terms of our own earnings for 2015, if we take used aside for a moment, you see we've basically given you, by a [granular portion] of the businesses by category between tractors, combines and horsepower segments of the tractors.

If I take that volume decline that we're forecasting for 2015, and limit that decline just to the gross margin -- we'll have to make up the best -- the rest of it with structural cost reduction -- that's what we're expecting for 2015. So, profits will be down in ag in 2015, but we're trying to limit that to just the average gross margin based -- adjusted for mix.

Okay. Thank you.

Michael Tyndall, Barclays.

Two quick ones if I may. And apologies if you've already said this, but have you given any figures in terms of what you think production will be down in Q4? I know one of your competitors is talking kind of 15% to 20% decline in production. And when I look at the inventory and your objective, it feels like you're going to have to make a pretty sizeable cut in Q4.

And then the second question -- back to 2015, I guess the implication is that things in CV and C will improve considerably. Can you give us, I guess, any order of magnitude in terms of what you're thinking? It feels like it's going to be something like $0.5 billion.

I'm not going to quantify it at this juncture. It's going -- they're both going to improve. In terms of production cuts, let's limit it to NAFTA. Combine productions are going to be cut 42% in the fourth quarter, and high-horsepower tractors 27%.

Brilliant. Thank you very much.

Thank you. That will conclude the Q&A session. I would now like to turn the call back over to Federico Donati for any additional or closing remarks.

Thank you, Sarah. 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.