CNH Industrial NV (CNHI) 2015 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's CNH Industrial first-quarter 2015 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, Ann.

Good afternoon, everyone.

We would like to welcome you to the CNH Industrial fourth-quarter 2015 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 question 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 recent uncertainties mentioned in the Safe Harbor statements including in the presentation materials.

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

Thank you, Federico.

I understand that there is a bit of static on the line, so I will try to speak slowly and clearly.

We're coming to you from Brazil this morning.

Overall, we have had operating performance in line with our expectations in the quarter, where our projected improvements in commercial vehicles and construction equipment businesses were forecasted to moderate the decline in the agricultural equipment sector.

It has proven more difficult in trading conditions with LatAm, particularly with Brazil, and the continued strengthening of the US dollar relative to the Group's trading currencies.

We deal with the Latin American environment right away before we start a discussion of the quarter.

LatAm, the Company has implemented a series of actions to counterbalance the business contraction across all of the Group's business segments, especially in commercial vehicles and construction equipment, as a result of persistent macroeconomic uncertainties and less attractive government-sponsored funding programs.

The resulting negative profit impact has been partially mitigated by measures implemented in our industrial and commercial areas, including general reduction in SG&A expense and production curtailments to adjust inventory levels to prevailing market conditions.

Despite the challenging environment, our view is the long-term demand fundamentals in the region remain intact and we have positioned ourselves to respond to any upturn in the demand cycle in the second half of the year.

As far as the ag environment is concerned, we are well into the projected demand cycle in unit volumes across all the geographies in which we operate.

In particular, negative bias in the row crop machinery sector.

We will continue to update our market demand projections as we move through the year.

In our results, you will see the full-year impact of the year-over-year decline in row crop industry coupled with actions we have taken to readjust inventory during the year for market demand.

On average row crop production has been reduced 40% to NAFTA and LatAm, primarily in the high horsepower tractor segment, combine harvesters, and crop production-related segments.

In commercial vehicles segment we are starting to see some traction from the year-over-year results, despite the difficult market conditions prevailing in the LatAm market.

With benefits coming from our efficiency program, the market acceptance of our new vehicles, as well as positive demand conditions in Europe, which is reflected in our forward-looking order book, increase, which is up 15% in EMEA and are heavy Europe at 43%.

Powertrain, notwithstanding the reduction in intercompany volume due to the low cycle in ag, is showing [resilience with these] numbers and as a result of industrial efficiency, as well as SG&A cost reductions, and is improving its margin by 1.2 percentage points to 4%.

In summary, from a consolidated point of view in our industrial activities, financial performance in the first quarter as follows.

Net sales and industrial activities were $5.6 billion, down 12% on a constant currency basis.

Operating profit of industrial activities was $223 million at a margin of 4%.

SG&A expenses were $567 million for the quarter, down $185 million as compared to Q1 of 2014.

Net industrial debt at $3.1 billion, up $0.4 billion from December 31, 2014, with the expected negative industrial cash flow in the quarter halved as a comparable period last year.

Full-year guidance is confirmed reflecting the current currency exchange rates as follows.

Net sale of industrial activities in the of $26 billion to $27 billion, with an operating margin of industrial activities held at 6.1% to 6.4% and net industrial debt expected between $2.1 billion to $2.3 billion at the year-end.

I will turn it over to Max at this point and he will give you an overview of the financial performance and I will come back with the segmental overview and the 2015 outlook.

Max?

Thank you, Rich.

Let me -- I am on slide 5 now.

Let me walk you through the key financial highlights for the quarter.

In summary, consolidated revenues at 2016, down 11.1% in constant currency versus prior year.

Consolidated net income was $23 million for the quarter.

Net income before restructuring and other exceptional items was $33 million.

Diluted EPS and EPS before restructuring and other exceptional items was $0.02 a share for the quarter.

Available liquidity at March end was $7.2 billion, inclusive of $2.7 billion in undrawn committed facilities.

This compares to a liquidity of $8.9 billion at the end of December.

Company posted net sales of industrial activities of $5.6 billion in the quarter with negative impact from currency translation accounting for roughly 46% of the reduction.

Operating profit of industrial activities $223 million, down 39.4% on a constant currency basis in the quarter with an operating margin of 4%.

Net industrial debt of $3.1 billion at March 31, 2015, was $0.4 billion higher than in December.

Compared to Q1 2014 net industrial cash flow, although seasonally negative $1 billion, has improved $0.8 billion versus Q1 2014, due to lower seasonal increase in net working capital and a 38% reduction in capital expenditures.

Moving on on slide 6, we have the reconciliation from consolidated operating profit to net income for the quarter.

Consolidated operating profit, including financial services and eliminations, at $284 million, down $182 million versus comparable quarter last year.

Restructuring expenses flat at $12 million in the quarter and mainly related to actions in ag and CV as per the Company efficiency program that we launched last year in July.

Interest expense net totaled $106 million for the quarter, a decrease of $35 million compared to Q1 2014, primarily to lower cost of funding.

Other net was a charge of $75 million for the quarter and may include foreign exchange losses.

$90 million favorable versus the comparable quarter last year.

Income taxes totaled $77 million, representing an effective tax rate of approximately 85% for Q1 2015.

The tax rate for the quarter is mainly due to not recording deferred tax assets and losses in certain jurisdictions.

For the full year 2015, the Company continues to expect an effective tax rate would be in the 40% to 43% range.

Basic EPS and before restructuring and other exceptional items was $0.02 a share for the quarter, down $0.05 and $0.11, respectively, versus Q1 2014.

Slide 7 shows the detail of the change in net industrial debt for the quarter, moving from the $2.7 billion as of December to the $3.1 billion at the end of March.

Industrial cash flow was negative $1 billion as per the expected seasonality with the said improvement year-over-year of $0.8 billion.

And was mainly due to lower seasonal increase in inventory as we are starting to see the impact of the inventory balancing measures implemented in ag and by lower payments to suppliers due to the lower activity in ag.

Our next slide, number 8, provides greater detail regarding industrial activities CapEx by spend category and segment.

CapEx decelerated to $88 million, down 40% versus last year.

Spending composition for the quarter shows long-term investments in industrial capacity expansion, down 18% versus Q1 last year.

New product and technology were 60% of total, with maintenance and other for the remaining 29%.

Spending by segment is in line with long-term company guidance in terms of capital allocation, weighted towards the highest return on capital business.

Moving on to slide 9, our financial services business performance.

Net income for the quarter was $85 million, in line with Q1 of 2014 whereby the negative impact of currency translation and the reduction in net interest margin were offset by reduced SG&A costs and lower provision for credit losses.

Retail loan originations in the quarter were $2.1 million, down $0.2 billion compared to Q1 of 2014.

The managed portfolio, which includes also the unconsolidated JV at $25.2 billion at the end of March, was down 8% compared to December but was down $0.3 billion excluding the currency impact.

Quality of the portfolio continues to improve with delinquencies on book over 30 days at 3.6%, down 1.4 percentage points versus the comparable quarter last year.

Next slide, number 10, shows the Company debt maturity schedule and the available liquidity at March 31, 2015.

Our available liquidity was $7.2 billion compared to $8.9 billion at December 31, 2014.

The number includes $2.7 billion of undrawn under our medium-term committed unsecured facility.

The decrease in the quarter on the liquidity is mainly attributable to the seasonal cash absorption from the [formatting] activities net of investing.

The repayment of a EUR1 billion bond in March as we start to roll off higher coupon debts from our balance sheet and the negative currency translational difference is partially offset by a slight bad debt increase and financial services portfolio reductions.

Going forward, we continue to reiterate our strategy of moving towards capital market unsecured funding as fixed income market conditions continue to remain favorable.

Slide 11 deals with the breakdown of our industrial debt in order to provide greater details on the balance sheet management assumptions and the progress made by the Company so far in reducing financial services reliance on funding from industrial activities.

Consistent with our SBC targets, intersegment funding to financial services has decreased 44% since Q4 2012 and is now at $2.5 billion as a result of funding segregation and cash management recalibration actions between the two business activities.

This concludes this part of the presentation.

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

Thank you.

Moving forward to slide 13, industrial activities net sales and operating profit composition for the quarter.

You can see roughly 50% of the change in net sales for the quarter is related to FX impacts.

Foreign exchange impact on operating profit was instead only $27 million as we continued to maintain a well-balanced exposure on transactional costs and hedging programs.

The next slide is the segmental overview of net sales and operating profit and performance by industrial activities.

I will deal with all of the segments on the following slide, so let's move forward to slide 15 on agricultural equipment performance for the quarter.

Net sales for the quarter were down 24% on a constant currency basis as a result of industry volume and mix in all regions, primarily in the row crop sector.

The geographic distribution of net sales for the period was 45% NAFTA, 32% EMEA, 12% LatAm, and 11% APac.

Operating profit for the quarter was $204 million at a margin of 7.9%, driven by negative volume in mix including negative industrial absorption with production outlets declining nearly 40% in NAFTA, LatAm, partially offset by net positive price realization, purchasing efficiencies, and a positive contribution from structural cost reduction.

Operating decremental margin in the quarter was 23%, which was a good performance.

We had guided at 30% for the full year on the row crop side, so we have done a pretty good job in terms of moderating our costs.

Moving to the next slide is the inventory dynamics in the quarter with industry performance of the quarter and full-year outlook.

As anticipated during the last quarter conference call, production level was sequentially down and I will deal with that in the following slide.

Global production in units versus retail units was up 4%, mainly is reflecting the season volume demand projected from the dairy and livestock segment.

Worldwide agricultural equipment industry unit sales were down 14% for tractors and down 26% for combines.

Our industry outlooks shows a slowdown in high horsepower tractor demand in NAFTA, now expected to be down 20% to 25%; partially counterbalanced by a better outlook in the 40 to 140 horsepower tractor, now expected to be flat to up 5% versus flat to down 5% previously as we continue to see positive demand in the varying livestock and mixed farming sectors.

Following slide gives you a deep dive into the actions we have implemented during the quarter to counterbalance the challenging trading conditions in the row crop sector, as we have talked about at the close of 2014.

As I have already anticipated in my opening remarks, we have lowered the production across the row crop product families by nearly 40% on a worldwide basis in order to adjust dealer and company inventory lines.

We also implemented actions to reduce our SG&A spending, resulting in improvement of 25% year-over-year.

And headcount reduction was also targeted primarily among hourly employees as a result of production levels rightsizing.

So we have taken a lot of the actions and we don't see -- as we had discussed at the end of Q1, the production has been curtailed significantly.

We have managed to offset a significant portion of that absorption loss, where you can see in our margin close to 8%, so we have done a reasonably good job there.

In terms of working capital liquidation, our expectation is slowing into Q2.

As we going to the selling season primarily in NAFTA and EMEA that we will have a significant gap between retail sales and production equivalent units, which would be reflected in the cash flow of the group.

In construction equipment net sales were $602 million for the quarter, down 17% on a constant currency basis due to negative volume and mix almost exclusively in LatAm, as well as negative impact on currency translation.

The geographic distribution of net sales for the period was 53% NAFTA, 21% EMEA, 17% LatAm, and 9% APac.

Construction equipment reported breakeven operating profit for the quarter as improved profits in NAFTA and EMEA regions and a reduction of structural costs were substantially offset by the negative effects of challenging trading conditions of LatAm due to the significant decline in the municipality-driven demand and challenging conditions in the construction sector.

So overall we have dealt with a significant decline.

You can see $27 million in the chart at the top right; that is almost exclusively LatAm.

We've been able to offset the majority of that decline by intervening on our cost base.

Last year in Q1 we were delivering a significant amount of volume to so-called MDA bids in Brazil.

Those were frontloaded in the first half of the year so we don't expect, from a comparison point of view, despite the difficult conditions in LatAm in terms of the demand cycle, for this variance to remain for the balance of the year.

Thus, we will confirm construction equipment to improve profits year-over-year for the full year.

Moving to slide 19, CE inventory management and industry performance and outlook.

Construction equipment worldwide production levels were 36% above retail sales in support of seasonal increase in NAFTA and EMEA.

As far as industry trends worldwide, heavy and light sales were down 19% and 4%, respectively, for the quarter.

Industry heavy and light equipment sales were up in NAFTA and EMEA, but down in LatAm and APac.

Moving forward to commercial vehicles, net sales of $2 billion, up 5.6% with constant currency basis as a result of favorable volume and mix in EMEA.

Excluding negative currency translation, net sales increased in EMEA driven by higher volumes for trucks and buses.

In LatAm, net sales were down due to lower volume in trucks, partially offset by the favorable performance in bus and specialty vehicle segments, and positive pricing.

In the quarter total deliveries were 27,500 vehicles, representing a 1% decrease compared to Q1 2014.

Volumes were higher in the light segment, up 5%, while in the medium and heavy segments volumes were down 8% and 10%, respectively.

Commercial vehicles deliveries increased 9% in EMEA while LatAm and APac were down 28% and 35%, respectively.

Total orders worldwide were up 9% versus Q1 2014 with EMEA up 18% and APac up 12%.

Operating profit of $1 million compared with a loss of $70 million for the quarter of 2014 -- first quarter of 2014 is a result of improved volume and mix, industrial productivity, and reductions in SG&A expenses as the benefit of our efficiency program continues to gain traction in the segment.

In EMEA, the increase in operating profit was mainly attributable to trucks as a result of favorable volume and mix operating efficiencies, disciplined pricing, and SG&A cost reductions.

This performance was able to offset the difficult trading conditions in the LatAm region.

On slide 21, the first-quarter overproduction versus retail is 11%, in line with market seasonality.

Dealer and company inventory levels were below Q1 2014 on a global basis.

Q2 2015 increased production expected in EMEA while under production planned in Brazil due to weak market demand environment.

As far as the industry trends for the quarter, the European truck market was up 12.5% compared with Q1 of 2014 at approximately 176,000 units.

Light vehicles increased 13.5% and heavy up by 14%, while the medium vehicle segment posted a decline of 10%.

Latin America [mid-truck] registrations were up -- were approximately 30,000 units, a decline of 32% compared to Q1 of 2014 and market drop affected all ranges with significant declines in Brazil and Argentina.

Moving to the next slide, we had issued a press release around April 10 where we announced that as part of our efficiency program we plan to complete our product specialization manufacturing footprint in Europe.

Under the plan, Madrid will be fully dedicated to the assembly of Stralis and Trakker heavy commercial vehicles and Valladolid will be transformed into a center of excellence for commercial vehicle cab production.

The transfer of cab operations from Madrid to Valladolid will be executed in two steps beginning in mid-2015 and concluding at the end of 2016.

In addition, the production of extra heavy special vehicles and chassis cab versions of the Iveco Daily light-duty commercial vehicle currently carried out in Madrid and Valladolid will be transferred to existing facilities in Italy.

The Iveco Astra plant located in Piacenza will assume production of extra heavy vehicles from Madrid in the second half of 2015 and the CNH industrial facility in Suzzara will become the center of production hub for the Daily by the end of 2016.

With this plan we expect to maximize production out of these four plants and improve site structure utilization and improve total productivity for the year.

In powertrain, net sales for the quarter were $901 million, down 10% on a constant currency basis as compared to Q1 2014 on lower volumes, mainly in the captive portion of the business, as a result of the decreased agricultural equivalent demand and the 2014 buildup of Q4 interim transition engine inventory.

Sales to external customers accounted for 47% of total net sales versus 37% in Q1 of 2014.

Despite the decline in engine volumes, powertrain closed the first quarter with an operating profit of $36 million, up $12 million on a constant currency basis, mainly due to positive product mix, industrial efficiencies, and SG&A expense reduction.

Operating margin for the quarter was 4% versus 2.8% in the previous period.

During the quarter, powertrain sold 130,000 engines, a decrease of 18% as compared to Q1 of 2014.

By major customer, 11% of the engines were supplied to agricultural equipment, 30% to commercial vehicles, and 5% to construction equipment, with the remaining 54% to external customers.

Decreases in volumes were mainly due to ag -- on ag demand and additionally powertrain delivered 16,000 transmissions and 42,000 axels during the period.

That concludes the operational review and the outlook for the individual segments.

As I mentioned in my earlier comments, we will turn now to the full-year 2015 US GAAP guidance where full-year guidance is confirmed, reflecting current currency exchange rates as follows.

Net sales of industrial activities in the range of $26 billion to $27 billion with an operating margin and industrial activities between 6.1% and 6.4%.

Net industrial debt targeted to be between $2.1 billion to $2.3 billion.

So we are confirming guidance for the year at current exchange rates.

That concludes the presentation.

Federico, we're going to move it over to Q&A.

Thank you, Mr. Tobin.

Now we are ready to start the Q&A session and please take the first question.

(Operator Instructions) Rob Wertheimer, Vertical Partners.

Hello, everybody.

So the question is I guess on margin.

You have started to cut production below retail and wonder whether the Q2 margin is going to be more challenged than 1Q or whether 1Q already had some of the lower production efficiencies in them.

And I guess I assume it is in the future.

And I will just ask my second with it.

Your inventories in North America are what they are year over year.

Industry inventories are quite high.

I guess that implies that it's not just you and the industry, as some have said, but that the whole industry is still trying to work it down.

I will stop there.

We have put a detailed slide on the production cuts for the quarter.

We would expect not to have any margin degredation in ag in Q2 because of the fact that we don't have any further production cuts.

We are down 40% in the row crop segment now.

We're going into the selling season; in terms of expectations of retail to production, we are looking at somewhere in the order of 14% to 16% gap between retail sales to production going in the quarter.

So we will depleting inventory during there.

Overall, I think that the margin performance for the agricultural segment was good.

We had been guiding at a 30% decremental just based on the forecasted mix.

We were able to offset some of that, so we saw the decremental margins in Q1 were lower than 30% but we didn't expect a degradation of margins in Q2 versus Q1.

And industry inventories I guess; is it your expectation to kind of get -- North America I'm thinking of particularly -- get cleaned up at this rate by year-end?

Or is this sort of a production plan that you have worked, assume a recovery in the market to get inventories where they should be?

Rob, I think it's too early to tell because ending inventories for the industry are going to be more or less predicated upon what the expectations are for 2016.

If you allow me, I would rather start prognosticating on 2016 later in the year.

Right now we're targeting to get an SMS level by the end of the year that is consistent with inventory carrying levels versus what the expected volume demand is.

So right now inventory levels are higher.

Production is being cut across the industry.

Depending on the success rate of retail demand versus what we've got in the forecast, the expectation is the total industry inventories would come down over the full year.

But where we end and what decisions we make on Q4 production will be predicated upon what we expect for 2016 and I think it's a little bit too early to tell for that.

Thanks, Rich.

I will stop.

Thank you.

Ross Gilardi, Bank of America.

Thanks, good morning.

My first question is on the balance sheet.

You took your net debt outlook down by $100 million.

It looks like you had a $600 million currency tailwind to your net debt balance in the first quarter, so I'm trying to understand have you essentially taken $500 million of core free cash flow out of your outlook?

Is that a fair way to look at it?

And can you help us bridge the gap in your current net debt to the $2.1 billion to the $2.3 billion by the end of 2015?

This is Max speaking.

Hi, Ross.

Basically, the $630 million compared to year-end you've got two impacts.

You've got the increased volume in the debt, which has a component on the FX impact, and you have also the full devaluation of the euro versus the dollar below [1.10].

Now we are projecting, obviously, a lower indebtedness at the end of the year as well as the currency to remain stable according to the new guidance.

So a piece of that favorability will probably go away by the end of the year on the transmissional positive.

But I mean if you didn't have that tailwind, though, in the first quarter, would you be raising your net debt outlook by $500 million today is basically what I'm asking.

No, no.

We are still projecting a [fewer] industrial operating cash flow performance in line with the previous guidance.

So what should be the cadence of your net debt balances as the year unfolds?

Like, if we go from the $3.1 billion that you finished the year to the $2.1 billion, should we see that come down by $200 million, $300 million a quarter or is that just all a step down in Q4?

As you know, historically our business has generated the largest amount of cash in the last quarter, so you are not going to see a big degradation or dilution of the FX impact until the last quarter, when the volume of the debt comes down.

Okay, all right.

And then can you just give us a sense as to what you're expecting from margins for construction in Iveco in 2015 for the rest of the year?

You are around breakeven for the quarter.

The industry leader in construction is pretty clear that the margins are going to go down, not up, as 2015 unfolds.

So trying to understand why your margins are going to get better, particularly in construction, as we progress through 2015.

It's two issues.

It's the mix from a regional point of view.

So our expectation is the unit volume from NAFTA to be up for the full year and then the balance of it is self-help.

So it's geographic mix and -- I'd say 50% geographic mix and 50% self-help in terms of the reduction of structural costs.

Okay, Rich.

How much self-help, just in dollar terms, is actually in there?

And where do you expect margins to --?

What is the exit rate on 2015?

All I can tell you, Ross, is we don't give out segmental margin targets.

I can tell you that our expectation in terms of margin performance for construction equipment is to increase margins year Over Year.

For the full year 2015?

For the full year.

Yes, for the full year.

All right.

Thanks, guys.

Ann Duignan, JPMorgan.

A few points of clarification.

Did you say that you do not expect your decremental margins in agricultural to worsen in Q2 and, therefore, we should look for 23% -- plus or minus a little bit 23% decrementals in Q2?

Did I hear that correctly, Rich?

Yes, I think what I said was we had guided because of the mix in the row crop of decremental margins of 30%.

We delivered what we delivered in Q1.

We don't expect it to be worse in Q2, but I believe we can give you a little bit of margin of error.

But we don't expect that we overperformed Q2 and now we are going to snap back and underperform -- we overperformed in Q1, we're going to snap back and underperform in Q2.

We have taken out the costs.

You can see what we have done in terms of production performance.

That is a significant decline in terms of what we have taken out of the system.

So we don't expect for it to degrade, but whether it's going to be exactly 23% or somewhere in the range of 22% to 25%, I think you need to give us a little bit of room there.

Okay, and then -- (multiple speakers).

At the end of the day we have been making a lot of progress in terms of input costs.

As you can see in the chart on the ag side, pricing is holding up, so some of what could have been construed as negative events with the decline, right now those factors are keeping up.

We are getting some help in terms of purchasing costs so it's offsetting some of that projected decline.

Okay, that's helpful.

Then under commentary on Q4 production levels that those will be based on what you are seeing in the marketplace for 2015, given the lack of visibility, what are the catalysts that you will be looking at in order to help you determine what 2015 is going to look like?

The typical things.

It's going to be how we perform in terms of retail sales going through the year and what that does for standing inventories.

And then it's going to be purely a question of demand in Q4.

Are we going to get bonus depreciation again?

There is a variety of moving parts out there that could swing retail demand during the quarter.

And then it will be order books at that point.

Okay.

And since you are down in Brazil, just a quick update.

Do you think there's any risk that things get worse down there in the various (technical difficulty)?

(technical difficulty) in terms of what the packages were going to be for the balance of the year.

I (technical difficulty) on both the commercial vehicle and the construction equipment segment because that has been one of the causes of the drastic decline in demand in Q1.

Okay.

I'll leave it there in the interest of time.

Thank you, appreciate the color.

Massimo Vecchio, Mediobanca.

Good afternoon to everybody.

I have some questions on the commercial vehicle and then one question on the financial charges.

On Iveco, I was wondering at which stage are you in the Daily ramp up and which countries you still need to launch the product.

And also if you can quantify the savings from the actions that you just presented in Italy and Spain.

And where is the medium vehicle production in this new footprint that you are presenting to us?

On the financial charges, that is the first quarter where the level is closer to $100 million rather than $150 million.

What do we have to expect for the remainder of the year?

Can we simply multiply this number by 4 or is this something that I am missing here?

Thank you.

On the Daily, we are -- the new Daily is European production right now.

So we've launched the Daily; we are, I would say, 95% complete.

We're in the process of ramping up the automatic gearbox, which is available in the marketplace.

So in terms of the launch of the Daily, the Daily has been launched and it's in production and to date the acceptance of the vehicle has been quite good.

We are positioned -- if the demand for light commercial vehicles in Europe sustains itself for the balance of the year, we've got the product launched and we have the standing capacity available to move to projected demand.

In terms of the reorganization of the footprint, that was part of the efficiency program that we had announced in June of -- or July of last year.

So the savings embedded in that plan are incorporated.

That we just get to the point where formally announcing the specifics of the changes incorporated in that plan, but the savings were baked into the number we announced previously.

As far as the interest expense are concerned, if you go back and look at the trend by quarter, you start seeing a decline in the interest expense already in Q4 of last year.

So that is basically a continuation of the reduction which is a combination between a more effective management on the cost of funding and on the mix of funding sources.

So basically, depending on the debt levels and as well as on additional funding activity on the fixed income market, the number may flex but the trend is very clear, I would say.

If anything, it should flex to the downside because while you are rolling your debt, you should get lower and lower cost of funding.

So, theoretically, it should go below this?

The benefit of the roll-off [is real], yes.

Thank you very much.

Kwame Webb, Morningstar.

Good morning.

I had a question on the commercial vehicle segment as well as the construction business.

Maybe just for the commercial vehicles piece; a lot of people have been talking about green shoots in Europe.

Maybe if you can confirm whether or not you think that's true.

And then in terms of the share numbers that we saw this quarter, is that more reflective of kind of better performance in northern Europe versus Southern Europe or is there something else going on there?

Look, if you go back to the slide that gives you the outlook in terms of commercial vehicles by region, we're up 12% in Q1, so we are projecting up 5% to 10% in terms of commercial vehicle volume.

We're actually running ahead of that in Q1 so hopefully the full-year projection is understated because we are running above that right now.

And I told you about where we stand in terms of order book, order books of -- at least for Iveco have increased substantially quarter to quarter.

So right now the demand function in Europe for the commercial vehicle segment is positive.

And then just in terms of the market share, the market share performance in the most recent quarter?

Right now, market share is holding so in an increasing market we are holding share.

Then just to wrap it up with the construction business, it looks like you guys have had some really nice cost control there.

You gave us some elaboration on what's going on in the commercial vehicles business, but maybe if you could just enumerate what are the big things going on in the construction business that has allowed you to really sort of hold margins quite nicely despite the revenue declines.

We are not pleased with the margin in construction equipment, obviously.

This is something that we had put out longer-term projections of substantially improving construction equipment, but we can't wait for the market to return so a lot of that is self-help.

We've been doing quite a bit of heavy lifting.

We took a plant out of the system in 2014, so we are seeing some of the benefit of that.

We've reorganized the brand structure in 2013 and 2014, and we are seeing some of the benefits in terms of the structural cost to run that business.

And we have been working heavily on the productivity.

Despite not being a market leader in construction equipment you see during the quarter we posted positive pricing, so we are remaining disciplined.

I think that there is some room to go in terms of overall manufacturing efficiency.

I think it's going to be a big year for us because we are transitioning excavator technology during the year, so we are going to be startup excavator production in Europe.

During this year we will be transitioning excavator production in LatAm.

So, overall, we are doing some good work up until this point in terms of the structural costs.

I think in terms of share performance, we are doing a good job.

We're holding share.

And then there is some significant self-help that we have in terms of capacity utilization to the extent that we are successful on the execution of the excavator strategy.

All right, thank you.

Larry De Maria, William Blair.

Thanks, good morning.

Couple questions.

First, ag pricing was up pretty small in the quarter.

Can you tell us where it was negative and what's going on there?

I think some of your competitors a bit more optimistic on price this year and where we should think about it for the full year.

There is not a lot of positives and negatives.

I think that generally it's flat over the year and I think that's what we talked about the end of 2014 with the expectation of a declining market what was going to happen in pricing.

We've said that we are going to remain disciplined.

Raising or getting price in this particular market under these conditions can be difficult.

But as a market leader we are committed to being disciplined and I think it was showing that during the first quarter.

Is it very different regionally or is it generally similar by region?

Larry, you get down into a level of granularity, which I don't think is helpful.

There are regions in the world where it is very competitive and other regions that are less solid, but by and large, we are holding pricing.

We are green, so we are positive quarter to quarter despite the fact that the market has dropped significantly.

We are doing our share and holding up our end in terms of price discipline.

Okay, understood.

Thanks, Rich.

Then if I could just ask, in the European ag markets have you seen any shift in sentiment, presumably maybe a little bit more positive, as the quarter went on?

And curious what the order books look like coming out of the quarter in Europe for you guys, thanks.

It's holding up, so I don't think that we have changed our outlook in terms of EMEA demand in either tractors or combines so far.

It has been a bit sentiment-driven.

I guess was the best way I can describe it.

We have a good month and then we have a light month.

But right now we have no reason to think that we should come off our expectation.

Do I see the potential for it to be better?

I think it's too early to tell.

I think we would like to go through the first half of the year, if it holds in terms of the demand cycle, and we are willing to revisit that.

But right now we have no reason to believe that it's going to be any different than we forecasted.

Okay, fair enough.

I will leave it there unless -- is there a specific order percent up or down that you want to tell us about, maybe year over year?

Thanks, Rich.

Order books are a reflection of the demand conditions in the market, so we will expect the market [move] to go down 20% and that order books would move in that same kind of direction.

Okay, thanks.

Good luck.

Mike Shlishky, Global Hunter Securities.

I just wanted to touch on construction first.

In the quarter, you outproduced versus retail.

And I don't know if that's happened in the prior couple years as well, but perhaps this particular year it was a little bit more of an outproduction than the last couple of years.

I was wondering if you could kind of tell us: are your inventories in construction perhaps a bit more than you would like at the current time?

I didn't understand, Mike, the second part of the question.

(multiple speakers) I think that what we are doing in terms of production to retail are based on what we think the demand function is going to be in EMEA and NAFTA.

We probably overproduced -- I mean we're talking about a discrete amount of units here, about 200 to 300 pieces more in NAFTA, but that is timing and deliveries into the rental cycle.

We are cutting production in LatAm, obviously, with the demand environment.

So right now I think that when we say 30% you've got to look at the amount of unit volumes we are actually making in construction equipment because it's not -- you can't compare that to ag or commercial vehicles by any stretch of the imagination.

Got it.

And then touching on your SG&A in the ag segment, nice reductions there.

I was just curious, if and when we were to see demand come back, what percentage of those reductions in your SG&A are going to be called permanent reductions and what might come back if you see demand come back.

Under current demand conditions, they're not going to come back.

They will flex depending on demand in ag, so as ag upturns there is an amount of discretionary costs -- we're talking about advertising and the like -- that we expect to flex back.

But having said that I think that one of the opportunities we get is to revisit conventional wisdom in terms of SG&A in a downturn and our expectation would be in an upturn that would be able to keep a significant proportion of those savings in SG&A.

I think what is more important to understand is that we did quite a bit on SG&A in the second half of 2014, so the comparator in terms of the decline in SG&A actually would decline quarter over quarter because you get a favorable compare in Q1.

But our expectation -- I don't want to put a number on it, but I think a substantial part of what we are taking out of the system we would consider to be permanent.

Great, thanks so much.

Alberto Villa, Intermonte.

Good afternoon; good morning to everyone.

Just one question, referring back to some statements by the Chairman Marchione at the AGM a couple of weeks ago that was mentioning the possibility to look at acquisition in the agricultural business for CNH.

Was wondering if maybe you can elaborate a little bit on if he was referring maybe to a small bolt-on acquisition as he did in the past, and if you are focusing on products or distribution or which geographies maybe, or to sort of a transformational deals.

And if you think 2015 would be already good timing for such potential opportunities.

And considering already the overweight of the agricultural business in your portfolio segments, if growing in this segment would mean maybe disposing or exiting some of the other segments you are currently involved in.

I think that we have been clear in the past in terms of, let's call, inorganic actions that the agricultural sector, because of our global market position, is the most attractive for us, both on -- because of our market position and because of the returns that are available within the segment.

With the downturn, we would expect to see valuations in terms of companies within the ag segment to become more reasonable over the last several years when the market was expanding aggressively; valuation had become quite high.

So we remain opportunistic.

We are looking at a variety of things, but in terms of valuation I think that we want to be something there.

I don't think it's necessary for us to fulfill our objectives overall, but the want is there and we can expect in terms of valuation that the ground is more fertile than it has been over the last three or four years.

Okay.

But yesterday Marchione got the presentation just specifying how important it was for the auto industry to consolidate.

Do you think the same would apply and the same benefits would be stemming out of a consolidation of the ag business?

I don't want to comment on any presentations that weren't made around CNHI.

I can just tell you that, because of our market position, there are bolt-on product lines that we would be very interested in, depending on the valuation, because we think because of our size and scale and market position that we have the ability to integrate those from an execution point of view.

Okay, thank you.

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

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

Thank you and 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.