CNH Industrial NV (CNHI) 2014 Q4 法說會逐字稿

Thank you, Alex.

Good afternoon, everyone.

We would like to welcome you to the CNH Industrial fourth quarter and full year 2014 results webcast conference call.

CNH Industrial Group's 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 question you may have.

Before moving ahead, let me just remind you that any forward-looking statement 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 afternoon.

I'll begin the presentation with some opening remarks, and then I'll hand it over to Max.

We'll begin going through the slides.

So, overall, we had a satisfactory performance for the quarter and the year.

Consolidated revenues were down 2%, excluding adverse currency movements.

We held operating margin in industrial activities at 6.4% and an EPS of $0.52 per share.

We were able to increase earnings per share before restructuring and other exceptional items by almost 10% to $0.69 a share.

Cash flow's been positive in Q4, but not enough to bring us back in line with our net industrial debt year-end target.

As demand contraction exacerbated further in the Ag space with an unforecasted decline in EMEA retail activity did not allow us to liquidate our finished goods inventory position as much as we'd have preferred, despite the good performances in construction equipment and commercial vehicles.

This we will take action on in Q1 of 2015.

I'll deal with the 2015 outlook further in the presentation.

Let me spend a few words to summarize this year in terms of business environment, highlighting the positives and negatives we'd have to deal with during 2014.

On the positive side, in the Ag segment, we've demonstrated operating margin resilience despite a more severe industry drop in Q4 by maintaining price discipline, industrial efficiency and flexibility, and tight cost controls in SG&A, allowing the segment to minimize decremental operating margin.

In construction equipment, solid profit recovery as a result of repositioning initiatives, disciplined pricing, and product costs as a result of improved industrial efficiency.

In commercial vehicles, the EMEA recovery in trucks continued, confirming margin recovery despite the tough comp due to Euro pre-buy activity in 2013.

Also here we should start to see the benefit of the efficiency program, particularly on SG&A expenses, which we expect to realize the full year benefit of in 2015 as we approach the completion of the manufacturing product specialization program.

In powertrain, increased penetration of non-captive sales, coupled with industrial efficiencies, contributed to improved margin, notwithstanding the drop in agricultural equipment captive volume.

Powertrain has also benefited during the year from some stockpiling in preparation for Tier 4 final.

But we've also been exposed to some difficult trading conditions and operational issues, such as continued demand, uncertainty in LatAm across all businesses, particularly in the commercial vehicle segment, unstable agricultural equipment demand conditions in the Ukraine and Russia, and second-semester weakness in China, headwinds from negative FX exchange, and launch costs for the new daily launch at mid-year of 2014 and Euro VI launch costs in the bus segment.

Our focus now is getting in the industrial machine ready to deal with the negative demand cycle for cash crop machinery in Ag.

We're preparing for a tough year and implementing additional efficiency actions and cost containment programs.

We are experiencing significantly lower agricultural segment profitability in the first half of 2015 as we keep production at low levels to assist the inventory clearing process, with a resulting decremental margin of low to mid 30%s in Q1.

In summary, our financial performance is as follows: net sales of industrial activities of $31 billion, down 2.8% on a constant currency basis, operating profit of industrial activities at $2 billion, margin at 6.4%, in line with last year, and net income before restructuring and exceptional items of $940 million.

The Board of Directors has recommended to the Company shareholders a dividend of EUR0.20 per common share for approximately payout of EUR271 million.

At this time, I'll turn it over to Max, who will give you an overview of the financial performance for the quarter, and I'll come back with the segmental performance overview.

Thank you, Rich.

I'm on slide five now.

In summary, consolidated revenues at $8.4 billion, down 5% for the quarter in constant currency, and at $32.6 billion for the year, down 2% in constant currency versus prior year.

Consolidated net income stood at $87 million for the quarter, and $708 million for the full year 2014.

Net income before restructuring and other exceptional items was $167 million for the quarter, $50 million above Q4 of 2013, and was $940 million for the full year, in line with the prior year.

EPS before restructuring and exceptional item for the quarter was $0.12 a share and $0.69 a share for the full year.

Available liquidity at December-end, $8.9 billion, inclusive of $2.7 billion in undrawn committed facilities.

This compares to a $7.9 billion of available liquidity at the end of September.

The Company posted net sales of industrial activities of $8 billion for the quarter, which is down 6% versus last year in constant currency, and $31.2 billion for the year, down 2.8% versus last year in constant currency again for the full year, with negative impact from currency translation approximating $600 million, and this primarily relating to the Brazilian real.

Operating profit of industrial activities was $376 million in Q4, with an operating margin of 4.7%.

The full-year operating profit stood at $2 billion, with margin at 6.4%, in line with prior year.

Net industrial debt of $2.7 billion at December-end was $1.2 billion lower than September, with net industrial cash flow positive of $1.2 billion for the quarter, and negative $0.7 billion for the year.

On slide six, we have reconciliation from consolidated operating profit and net income for the quarter and full year.

Consolidated operating profit was $435 million for the quarter, up $21 million versus Q4 2013.

Restructuring expenses total $86 million in the quarter and $184 million for the year as part of the efficiency program announced in July 2014.

This compares to $39 million and $71 million respectively for last year.

The $86 million restructuring expenses total in the quarter are mainly due to actions to reduce SG&A expenses and business support costs, as well as costs related to the completion of manufacturing product specialization program for commercial vehicles, and the two cost reduction activities as a result of negative demand conditions within agricultural equipment.

For Q4 2013, restructuring expenses were mainly related to commercial vehicles.

Interest expense net totaled $164 million for the quarter, flat versus prior year, and $631 million for the full year, up $65 million versus last year.

The increase in interest expenses in the full year was primarily due to an increase in average net industrial debt during the year, partially offset by more favorable interest rates primarily related to the new notes issued during the year.

Other net was a charge of $313 million for full year of 2014.

It was $284 million last year.

The increase of $29 million was mainly due to higher foreign exchange losses.

The 2014 number also includes a $71 million pretax charge for re-measurement of the Venezuelan assets denominated in bolivars.

Income taxes for the year totaled $467 million, representing an effective tax rate of almost 43%.

The comparable tax rate last year was 49%.

The rate was in line with Company expectations for the year but was well above our expected long-term target.

For 2015, Company expects the tax rate to be in the range of 40% to 43%, with rates still impacted by no tax effect in book losses in certain jurisdiction.

On slide seven, we showed the change in net industrial debt for the quarter, representing a decrease in net debt of $1.2 billion.

Notwithstanding the challenging conditions in Ag, change in working capital for the quarter was positive for $1.5 billion, slightly below last year as a result of inventory reduction in the quarter.

CapEx in the quarter was $159 million lower than last year due to the expected reduction of capacity expansion investments.

Net industrial cash flow was in line with Q4 2013.

It was positive for $1.2 billion.

On slide eight, we show the change in net industrial debt now for the full year.

As you can see, net industrial debt at December-end was roughly $0.5 billion higher than prior year, and also our full year target of $2.2 billion.

Cash generation in the operations before changes in working capital contributed for $1.3 billion.

Changes in working capital negatively impacted by $1 billion, mainly due to lower payables as a result of the relevant production curtailments in agricultural equipment in the fourth quarter, and of commercial vehicles in EMEA returning to normalized level of production as compared to prior year's Euro V pre-buy activity, as well as due to constraint in LatAm operations.

Capital expenditure activity for the year totaled $1 billion, and dividend payments were $400 million.

Currency translation differences on euro-denominated debt positively affected net industrial debt by $600 million.

The under-achievement to our full year target is primarily attributable to the further slowdown in Ag affecting inventory and payables.

Slide nine provides greater detail regarding industrial CapEx activity by spending category and segment.

CapEx decelerated to $470 million, and for the quarter and for the full year closed almost 20% below prior year to $1 billion.

Spending composition for the quarter was remaining flat, with long-term investment, industrial capacity expansion reducing, thus profiting from the tail end of the engine emission CapEx and demonstrating our ability to flex the capital expenditure in the cycle.

Moving on to slide 10, our financial services business performance, net income for the quarter was down 20% to $98 million as the positive impact of the higher average portfolio and lower provisions for credit losses was more than offset by higher income taxes.

For the full year, net income of $364 million was up 6.4% year-over-year.

Retail loan originations in the quarter were $3 billion, down $0.5 billion compared to the same quarter of last year.

The managed portfolio, including JV of $27.3 billion, was down 2.8% compared to September 30, 2014.

The quality of the portfolio continues to improve, with delinquencies on book over 30 days at 3.5%, down 1.3 percentage points versus Q4 last year.

On slide 11, this slide shows the Company debt maturity schedule and the available liquidity at December 31st.

Available liquidity was $8.9 billion.

That compares to $7.9 billion at September, and the number includes $2.7 billion of undrawn committed facilities.

The increase in the fourth quarter is mainly attributable to the cash generation from operating activities net of investing, partially offset by bank debt reduction and negative currency translation differences on cash balances.

The amount of available liquidity maintained, coupled with management focus to shift indebtedness to unsecured funding, the extension of debt maturities and the reduction of inter-segment funding to our financial operations, all represent capital allocation actions consistent with management objective to drive towards an investment-grade status of our rating.

In addition, in November 21, Company signed a EUR1.75 billion, five-year committed revolving credit facility at improved terms and duration intended for general corporate purposes, facility replacing an existing three-year, EUR2 billion facility to mature in February 2016.

This concludes this part of the presentation.

Let me now turn back to Rich for the business overview.

I'm on slide 13.

This is the industrial activities net sales growth composition and the full year 2014 regional split.

As you can see, roughly 50% of the reduction in net sales for the quarter is related to foreign exchange impacts and translation.

FX impact for the full year is $550 million.

Net sales split by region was roughly in line with previous year, with LatAm underweight, replaced by a stronger EMEA region.

Agricultural net sales were $3.4 billion for the quarter, down 18% from Q4 2013, or 14% on a constant currency basis due to negative volume and products mix, partially offset by positive pricing.

Construction equipment sales were down 4%, or 0.5% or flat at constant currencies, to $800 million, with weakness in LatAm and APAC being offset by favorable trading conditions in NAFTA.

Commercial net sales were down 1% in constant currencies to $3.3 billion.

Net sales increased in EMEA as a result of favorable mix for trucks, despite lower volumes due to Euro V pre-buy effect in 2013.

In APAC, commercial vehicles registered higher volumes, mainly for buses.

LatAm volumes were down due to protracted unfavorable market conditions and a result of inventory de-stocking actions completed in Q4.

Powertrain sales were down 19% on a constant currency basis to $1 billion due to a different quarterly cadence of engine production year-over-year.

Next slide.

I won't spend a lot of time here, but what this gives you is operating performance by segment for the quarter and for the full year, and the comparable margins of the quarter and the full year.

I'll deal with that in greater detail on the following slides for the quarter.

So, move to slide 16.

Agricultural equipment performance for the quarter and the year, worldwide agriculture equipment units sales were down compared to 2013, with a more severe slowdown in the quarter.

Global demand for tractors was down 7% in the year and 14% for the quarter.

As we previously commented, net sales for the year were down 9.3%.

Unfavorable volume and product mix partially offset by positive pricing.

All of the regions reported decreases in net sales, with the largest percent decline reported in LatAm.

Full year operating margin resilience as a result of Company's actions implemented, favorable pricing, industrial flexibility exceeding negative absorption, and efficiencies on structural costs.

Operating profit was $240 million for the quarter, with a margin of 7.1%.

Decrease was driven by unfavorable volume and mix.

Slide 17, the inventory dynamics for the quarter, together a snapshot on commodity prices.

As anticipated during the last quarter conference call, under-production versus retail was 19% due to continued adverse industry demand, and further production curtailments are now expected in Q1 of 2015 of 30% to the comparable quarter.

Despite the fact the duration of negative cycle of cash crop machinery is not completely clear yet, the structural fundamentals of the Ag business remain strong.

Next slide.

Worldwide heavy and light construction equipment industry sales for the full year were down 9% and up 5% respectively from the prior year.

Worldwide heavy industry sales in the quarter were down 20%, with LatAm down 22% and APAC down 35%, partially offset by NAFTA and EMEA that were up 8% and 5% respectively.

Full year net sales by product was well balanced between heavy and the light segment.

As you can see, all the strategic initiatives outlined in the previous -- outlined previously are proceeding as planned.

Looking at the operating profit walk for the quarter, favorable volume and mix, as well as efficiency program together with other cost savings, allowed the segment to confirm its return to profitability, showing a positive swing year-over-year for $62 million for the quarter, despite running at low production rates to balance inventories going into 2015, resulting in the value of inventory being reduced as compared to 2014.

Operating margin for the full year was 2.4%, a positive swing of $176 million in operating income.

We're on slide 19.

We under-produced -- fourth quarter under-production versus retail was 23%.

As I mentioned in my earlier comments, the value of our total inventory is lower at the end of 2014 than it was in 2013.

So, to the extent that you can see about the positive GDP swing, so to the extent that the market holds up across the world, we go into 2015 balancing production with demand and with dealer level of inventories in control.

Next slide.

Far as industry trends, full year 2014 EMEA market grew by 1% compared to the previous year to approximately 670,000 units, while LatAm new truck registrations were down 16.5% to last year.

The largest decrease was registered in Venezuela and Argentina.

In the quarter, total deliveries were 39,000 units, down 10% versus Q4 of 2013.

Truck volumes were slightly down in light, mainly driven by market conditions in LatAm, while medium and heavy were down 31% and 19% respectively, mainly due to last year's Euro V pre-buy in Europe.

Total orders were slightly down versus Q4 2013, with EMEA up 13% and buses in EMEA up 45%, offset by LatAm down Q4 book-to-bill at 0.9 versus 0.1 versus last year.

Improved operating margin in the quarter as favorable pricing in EMEA is a result of new product launches, and the positive effect of efficiency program more than offset lower volumes and negative fixed cost absorption in EMEA when compared to higher production rate achieved in Q4 as a result of Euro pre-buy.

LatAm, the markets remained weak.

In terms of inventory in the commercial vehicle segment of the business, fourth quarter under-production versus retail was at 18%, with LatAm under-production of 33%.

Both dealer and Company inventory levels are now below Q4 of 2013.

Expectations for Q1 2015 are for our production levels aligned with retail.

European truck market for medium-heavy range maintained again below the 10-year average with market level, with next year expected to remain that level and well below the 2007 peak.

Looking ahead, only 4% of the Euro market has transitioned to Euro VI, while aged trucks are running at a higher operational [PCOX] depreciation.

EU freight indicators for 2015 are a positive support for our restart in demand recovery.

Pent-up demand potential in southern European markets, based on historical trend, remain unexploited, and LatAm over-age fleet, which is more than twice the size of Europe, demanding rejuvenation and replacement in the mid-term, but likely to be held back by macro uncertainties in the short-term.

Our commercial vehicle brand product launches in light and Euro VI medium and heavy trucks have been successively completed.

In powertrain, I think I covered most of this.

Full year third-party net sales at 41%, which I believe is close to the highest ever, versus 34% in 2013.

Really, I think I commented on most of this already, so I'm moving to the next slide.

Slide 24 compares our updated market outlook versus what we preliminary provided in October.

The revised outlook mainly reflects the continuation of challenging trading conditions in the row crop sector of the agricultural industry, highlighted by the worsening expectations for high horsepower tractors and combines in NAFTA.

While for tractors worldwide, the industry remains flat, as previously forecasted, combines worldwide industry outlook is forecasted down 15% to 20%.

LatAm macro environment continues to remain challenging, with uncertainties from the slow ramp-up of FINAME rules.

In construction equipment, worldwide CE industry remain unchanged, with some fine-tuning adjustments from our previous forecast.

And commercial vehicles is now forecast to be slightly better in the EMEA region compared to previous expectation, while LatAm has deteriorated.

Turning now to the full year 2015 US GAAP guidance, for the full year 2015, Company expects improved profitability in commercial vehicles and the construction equipment segments.

Structural cost improvements, improvement measures, and from the full-year benefit of the Company's efficiency program, and the forecasted decline in R&D expense as a result of the completion of the majority of the Euro VI Tier 4 final product transitions will be positive year-over-year contributors.

These actions are expected to buffer the negative impact from the continuation of challenging trading conditions in the agricultural row crop sector, but will be unable to fully offset the recent significant strengthening of the US dollar and the corresponding negative translation effects on the Group's consolidated accounts.

The Company's guidance for 2015 therefore is as follows: net sales of industrial activity is approximately $28 billion.

Operating margin of industrial activity is between 6.1% and 6.4%.

And net industrial debt at the end of 2015 between $2.2 billion and $2.4 billion.

That concludes the presentation.

I'll hand it back to Federico, and we can move to the Q&A.

Thank you, Mr. Tobin.

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

Please take the first question.

(Operator Instructions) Ann Duignan of JPMorgan.

Well, thank you.

Can you talk a little bit, first off, on the agricultural side?

Where are your early order programs today versus a year ago?

Sure.

We got you first in line this time, Ann, after missing you last quarter.

Yes, thank you.

I appreciate that.

No problem.

They're pretty much a reflection of what we forecasted the decline for the full year, speaking mostly about NAFTA and EMEA.

LatAm is weaker than we would expect.

There's not a lot of pre-order activity in LatAm anyway.

I think that the market is waiting to see how the FINAME rules pan out here in Q1.

So, I think there's going to be a little bit of a -- I think it's going to be a weak Q1 in terms of order backlog in LatAm until that gets resolved.

Okay, thank you.

That's helpful.

And on the financial services side, can you talk a little bit about any stress at your dealer level, any changes that you're making to wholesale financing?

We're hearing about very, very aggressive financing out there, particularly in large agriculture.

Can you talk about how the impact of the downturn in agriculture is weighing on your financial services business?

That will be great.

Thanks.

I don't think that we've changed anything in totality on the financial services.

We're cognizant of the fact that both our dealers and ourselves have to reduce total inventories for the health of the market.

That's why we're cutting production, and we're working on a dealer-to-dealer individual basis in terms of extended floor planning and the like, but extremely aggressive on our part, I don't think that that would be true for us.

But you are expanding floor plans?

Yes.

I think that from -- depending on the balance between new and used, I think that we're being accommodative where we can.

But, on an individual dealer-by-dealer basis, but I don't think that we've done anything overly aggressive.

Okay.

And just finally, real quick, your five-year plan, your EPS target included stable demand for agricultural equipment from last year.

Are you still sticking with your five-year plan?

No, we don't have any reason right now to change it.

I mean, I think that we're obviously going to have some negative FX in 2015, but whenever we do a five-plan, we understand that we're participating in a cyclical industry, or industries, if you will.

So, right now, look, the Ag is weak.

I think that the cycle being down through 2018 is a little bit over-aggressive.

So, right now, I think we're sticking to it.

Okay, thank you.

I appreciate you letting me be on the call.

No problem, Ann.

[Sam Morton] of Credit Suisse.

Good afternoon, good morning.

First question on the balance sheet.

So, in the presentation, you reiterated the commitment towards getting an investment-grade rating.

But, in the light of today's update, I was just hoping that you could provide a little bit more detail on the steps that you think you need to take to get there.

And then secondly, just on your associate holdings, I guess the valuation of those assets has increased substantially over the past couple of years, reflecting the better growth prospects.

And I just wanted to understand how you were thinking about these assets in the medium-term, in the short-term.

How do you think about those assets?

Thanks a lot.

Okay.

I'll go back to the first one.

We'll continue on taking the actions that we've been doing over the past three, four years in terms of the structure of the debt of the Company and been diversifying that.

I don't think that forecasted trading conditions change that in terms of our goal, in terms of improving the balance sheet of the Company.

In terms of the associate holdings, I mean, I think that we're committed to all of them, and we retain optionality on all of them.

I mean, that's really all I can say.

Okay, great.

Thanks a lot.

Martino De Ambroggi of Equita Sim.

Thank you.

Good morning, good afternoon, everybody.

The first question is on the -- changing in the guidance, the operating level for industrial activities.

It was expected flat when you released Q3 results.

Now is a bit lower.

Could you help us in -- try to understand what are the main variables for the bridge?

Is just a matter of currencies, or is there any additional difference from what you expected one quarter ago?

The majority is FX.

The balance of it is some fine-tuning the expectations in terms of row crop equipment demand in Ag.

Okay.

And always in the last -- in your last presentation, you made a lot of examples regarding cost-cutting initiatives and so on.

In your current updated guidance in 2015, how much is cost savings, just to understand how things are progressing in terms of cost savings?

Yes.

I think that we need to separate what we had put in in terms of the restructuring plan.

I believe that the savings in 2015 is $80 million, is what the rollover of that is.

Now, there's still a remaining restructuring charge that needs to be taken in 2015 to finish it.

The balance of the savings, I think you've got to look at the segmental of what we've done on both SG&A and R&D.

A portion of that was part of the restructuring plan largely in Europe.

The balance of it is tight cost control.

So, it's not just the $80 million, but you can take a look at by segment what we've done below industrial activities and roll that forward, depending on the timing of what you've seen.

Okay.

If I may, one more question on the pricing, if you can elaborate a bit on the trend you expect for the three main divisions.

In terms of pricing?

Pricing, yes.

Yes.

Well, we're a market leader in Ag, so it's dependent on us to maintain pricing discipline in the marketplace.

And I think that, despite Q4 in terms of volume, if you go back to the slide, it shows that we're positive in pricing.

So, we're maintaining our commitment for pricing discipline despite the fact that we're heading into some pretty difficult market conditions.

In commercial vehicles, we're positive in pricing also.

I think that that is the industry as a whole trying to recapture Euro VI related costs.

We're not a leader, but we've demonstrated that we're moving pricing up during the year and trying to improve profitability.

And in LatAm it's a little bit different.

That's more inflationary-related pricing because of the environment there.

Okay, thank you.

Ross Gilardi of Bank of America Merrill Lynch.

Yes, good morning, thanks very much.

Rich, I've got some more balance sheet and cash flow questions.

But really on the net debt, to begin with, I mean, at the end of the third quarter, you guys were guiding at $2.1 billion to $2.2 billion of net debt.

You finished with $2.7 billion.

You burned $700 million of industrial cash flow in 2014, and the Ag business has got a pretty uncertain outlook that could last a while.

So, first question is how'd you miss the net debt target by $500 million with only three months left in the year?

And just more fundamentally, why isn't CNH generating any cash?

I mean, the outlook is tough, but we're not seeing negative free cash flow from most of the other companies in this space.

And then, I just had a follow-up to that.

Okay.

I'll deal with the $500 million, and then I think Max, if you want to step in with the balance of it, because I think it's more than just working capital.

So, I'll deal with the working capital piece of it.

It's approximately $350 million of hung inventory that we had expected to retail primarily in Europe that didn't happen.

We had a significant downturn.

If you look at Q4 in Europe in terms of what we had seen in September versus what happened in the fourth quarter, I think that's the majority of the hang there in working capital, and then the fact that we had cut production severely in Q4, so you have a corresponding reduction in payables, which exasperates it.

In terms of cash flow for the Group, we've been going through a significant CapEx cycle.

I think that we've basically shown that we've cut CapEx approximately 20% this year, and we would expect to have that same kind of cut in CapEx next year, which would possibly impact cash flow.

So, we're coming out of a relatively heavy CapEx cycle, and then whatever we can get in terms of inventory liquidation will flow through.

And that's just going to be based on market conditions predominantly in Ag.

Okay.

Just somewhat related to this, and given your longer-term balance sheet goals, I mean, you guys get asked about potential divestitures quite a bit from time to time.

I mean, do you feel like you're in a position where you've got to more seriously consider divestitures to move you further towards your balance sheet objectives over the next three to five years?

Obviously we're in a tough environment, and you've also got a $300 million dividend that the Board is recommending again this year that you obviously want to sustain.

So, thoughts on divestitures, given the balance sheet?

I don't think that we would be considering inorganic options based on balance sheet goals.

I mean, that's really the best way I can say it.

I mean, I think that we've got all the tools we need to continue to improve the financial position of the Company.

I don't think that we would consider divestitures as part of reaching those goals.

I mean, that's a completely different head set.

Okay.

Well, irrespective of just the balance sheet, then, just what is your latest view on -- are Iveco and the construction equipment business, are they still very much core to CNH?

Yes.

Okay.

Thank you.

Michael Raab of Kepler Cheuvreux.

Yes, hi, Mike Raab from Kepler Cheuvreux.

Hey, gentlemen.

I have basically two questions.

I mean, looking at your guidance for industrial sales this year and the apparent roundabout 8% drop you seem to be expecting, I presume this is chiefly a combination of the negative outlook for Ag and ForEx.

But, in light of that, do you think you're going to be able to basically reach again a double-digit margin in Ag this year?

And then, secondly, looking at the weak spot, which apparently is cash generation ability, at what point of this year should we expect your countermeasures to basically take over and, hence, finally prevent the cash drain, and then to see starting cash basically coming in positively again?

Okay.

I don't think that we gave a margin target for 2015 by segment, so we just gave Group.

So, I'm not going to comment on what our expectation is in terms of Ag margins for 2015.

I can only give you what we think that the range is for the consolidated industrial ops.

In terms of cash flow, like I said, I mean, I think that we're looking to liquidate inventory on the Ag side, because I think it's pretty clear that the cycle is going down.

I think that we have to preserve some optionality on construction equipment and the commercial vehicle segment, depending on how those markets perform over the balance of the year.

That coupled with the fact, as I mentioned before, that we can expect to be cutting CapEx in 2015 relative to 2014, which is positive to cash flow, so that would come over the 12-month cycle.

But, just for my understanding, if you still have excess inventory, how could pricing be positive in this year?

How can pricing be positive this year?

Yes, if you still have excess inventory that you need to get rid of.

Yes.

And you're not the only one out there, so if I got you right, you mentioned earlier that you expect pricing to be positive, or was it a misperception of mine?

No, it's not a misperception.

We expect to maintain pricing discipline in the marketplace in 2014.

Part of that pricing, year-over-year, is Tier 4 final related, depending on when those products were brought into the system.

We need to raise prices in conjunction with that.

All right, thanks.

Alessandro Foletti of Bank Bellevue.

Yes, good afternoon, gentlemen.

I have a question on financial services.

You quote in your press release that the sales there basically went up because of valuation of the portfolio.

Does it mean the portfolio has been revaluated, that there were, like, book gains in it?

And as a consequence of that, could this trend also change, going forward, in a negative way?

No, is volume of the portfolio going up.

I read value.

I read value of the portfolio in your press release.

So, there's no revaluations?

Oh, no, there's been no revaluation of the portfolio.

It's volume.

All right, thank you.

Larry De Maria of William Blair.

Hi, good morning.

Thank you.

Couple questions.

I think, Rich, you said that you're going to under-produce retail in Ag by 30% versus year-ago levels.

Year-ago we were up 27% over retail demand and production.

So, I'm just curious why do we think that's enough.

It seems like there could be downward pressure as we go through the year.

And then, along with price, if you're going to maintain price at the corporate level, does that imply that the dealers would, if there is price concession, that the dealers would feel the bigger impact than CNH corporate?

Yes.

I can't -- I won't comment on dealer profitability.

I think that -- I know that there's a fear out there in terms of pricing.

All I can do is demonstrate that we've been positive pricing through a downturn this year, and our expectation is to maintain that discipline, going forward.

What was the other question, Larry?

Well, yes -- well, it sounds like obviously the price concessions may come from the distribution, but the production you said was going to be down 30% versus year-ago levels.

Oh, okay, yes.

No, I understand, yes.

It's 30% down to Q1 of 2013 -- or 2014, excuse me.

And that was over-produced by --?

Yes.

I mean, in a perfect world, Larry, if you really wanted to clear, you'd go to zero, but you've got to balance the economic impact of doing that over the year.

So, we're always balancing getting the inventory right and matching demand, inventory, and production.

The most economic way is to run it at a reduced level for a period of time.

You can't swing the industrial machine zero to 50 overnight.

There's a significant amount of cost associated with doing that.

Okay.

No, I understand.

That makes sense.

And then, just finally, with dairy and livestock prices are lower, how comfortable with you are your flat forecast, or do you think there's risk to that, given that some of the prices in that segment are lower now?

We're as comfortable as we are making the forecasts going into the year.

I mean, I think that the relative -- the prices have slipped some, but in terms of profitability, it's still in the black.

So, it's just an area that we've got a brand -- the New Holland brand that's been living in that space a long time.

We think that we have a competitive advantage against some of our competitors that go in and out of dairy livestock.

We've got a dedicated brand, that that's their reason to exist, to a certain extent.

So, we're just going to have to get our fair share.

Okay, thanks.

Good luck, Rich.

Monica Bosio of Banca Imi.

Good afternoon, everyone.

I would have two questions.

The first is just a check.

Maybe I lost a part of the Q&A, is it on CapEx.

Is it correct that the CapEx will be more or less in line with the 2014 level as for current year, just to be sure I have understood well?

And the second question is regarding your oil price assumptions.

What kind of oil price assumptions have you factored in in your outlook?

And could you please comment a little bit more on potential impact of a further decrease in oil price on the demand in Europe as for commercial vehicles?

Thank you.

Okay.

The first one is we did not say it would be flat to year-over-year.

We said CapEx would be down 2015 to 2014.

In terms of oil price, look, I mean we think that oil price is positive to both -- the reduction in oil price is both positive to both the commercial vehicle and the Ag segment because of the fact that operating costs decline, so there's more available profitability to move towards equipment purchasing.

So, overall, we think it's fine, but we don't model it in any particular way and try to extrapolate something into unit volume demand.

We just think that it's constructive for both large fleet operators on the commercial vehicle side and for farming in general.

Okay, thank you very much.

Michael Tyndall of Barclays.

Yes, hi there, it's Mike Tyndall from Barclays.

Just two questions, if I may.

The first one, just thinking about your outlook for North American markets, you've got tractor down roughly 5%.

You've got combines down 25% to 30%.

I mean, you probably know that one of your main competitors is significantly more bearish.

Is that just a function of their mix, or are you seeing something different to what they're seeing?

I know you probably don't want to comment about them, but I'm just trying to reconcile those two fairly diverse outlooks on the North American market.

And then, the second question, on a more positive note, looking at your market share in Europe, you seem to be taking share on the Iveco side in both the medium and the heavy truck side.

Is that a geographic mix reflection, obviously you being strong in Club Med, where we're seeing demand recover, or are you actually winning on a face-to-face basis against some of the other players there?

Thanks.

Let me deal with the truck one.

It's not geographic, because the traditional stronghold of southern Europe ex-Spain -- Spain actually was up quite a bit, if my memory serves me correctly, for the year, so that's a -- we consider to be a home market for us, so that's proactive to us gaining share in both those segment.

The balance of southern Europe is down overall.

So, I don't think that it's overly as a result of geographic mix on the truck side.

The first question about -- I think that we're pretty much in line now.

I mean, we came out first.

We tried to be helpful and set our forecasts, which everybody came and adjusted off of, and I think that's not a surprise that everybody came down off of our first-line forecasts back in October.

I think we're pretty much in line right now between the two.

I mean, they're a little bit messy numbers because we break tractors into segments.

I think we're the only ones that do that.

And then, we have combines, and then there's other classifications, which are harvesting equipment, which may have sprayers in it.

So, there's never a completely directly correlation between the two bigger guys in the market, but I think that now we're mostly aligned between the two of us.

In terms of combine share, I think that was the third question that you had, I mean, I think that overall we did reasonably well.

Can I just have one very quick follow-on, just in terms of flex in the machine, you've already talked about the fact, and it's in the EBIT walk in terms of you actually having flex.

How much flex is left?

Because we're going further down in production, by the sounds of it, in Q1.

Yes.

I mean, we did the significant amount of work.

I think we offset $100 million of comparable absorption, that none of it fell to the bottom line from the industrial side.

So, I think that we demonstrated that we can flex, but we gave guidance on negative, or decremental margin, for at least Q1 of being in the 30%s.

That's double what it was for the full year.

So, I mean, we're going to have to take production down quite a bit now to level the inventories, and there's no amount of flex that you can have to account for that.

Got it.

Thank you very much.

Thanks.

That will conclude the question and answer session.

I would now like to turn the call back over to Mr. Federico Donati for any additional or closing remarks.

Thank you, Alex.

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

Have a good evening.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.