CNH Industrial NV (CNHI) 2015 Q2 法說會逐字稿

Good afternoon everyone.

We would like to welcome you to the CNH Industrial second-quarter and first-half 2015 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 questions you may have.

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

Thanks.

Good morning, good afternoon everyone.

I will start with some opening comments before handing over to Max and going through the slide deck.

Q2 operation performance was broadly in line with our expectations as we continue to navigate through the continued challenging conditions in the Agricultural Equipment segment and broader macro issues such as the decline in emerging markets demand particularly Brazil and the knock-on effect of US dollars strength versus the majority of the Group's trading currencies.

Despite these headwinds, we continue to execute on our efficiency program objectives which you will see in the comparable profit performance particularly in Construction Equipment and Commercial Vehicles segments.

In the Agricultural segment, we continue to execute in the market with some positive share development in the various regions and the continuation of a decisive inventory system clearing process to realign our channels stock levels to new market demand conditions which will be covered in the main presentation.

Looking forward, [management's] focus will be maintained on operational execution and cost control actions.

Channel inventory level at June end was $700 million lower than seasonally comparable from the period last year.

Our expectation is to clear a significant amount of dealer inventory in Q3 as a result of seasonal manufacturing facility shutdowns and reduced line rates.

In Construction Equipment segment, we continue to make progress in our longer-term objectives and despite particularly difficult trading conditions in the Lat Am market particularly Brazil, we were able to improve margins for the quarter.

We have made particularly good progress in our excavator strategy in LatAm and EMEA, and will be in production by the end of the year and we are 75% complete with the realignment project from a brand point of view in Europe.

In Commercial Vehicles, business environment in the truck and bus segment has been generally positive with truck trends in EMEA further improved and core Europe demand now at 15% above last year primarily driven by light and heavy range.

While demand continues to attract in LatAm, specifically in Brazil affected by very weak economic conditions with heavy trucks down 60% year-over-year.

Global order intake is reflective of these market conditions with orders up almost 50% year-over-year in EMEA with heavy trucks in Europe up 60% which precludes a strong delivery for the second part of the year while for LatAm, orders in Brazil are down somewhat offset by Argentina in preparation for the transition to Euro 5.

Commercial Vehicle in the quarter achieved a constant currency topline growth rate of 12% and an operating margin of close to 3% on the back of improved business conditions in EMEA trucks and the flow through of positive impact from the efficiency program actions.

Powertrain segment is concerned.

We continue to enjoy stable development in the segment.

We absorbed the loss of the volume in Ag, they sustained activity from third parties and continued efficiency in the manufacturing area and material cost savings in our procurement process.

Sales to non-captive customers accounted for 42% of the business during the quarter.

Those are the general comments.

I will turn it over to Max who will give you an overview of the financial performance of the quarter and I will come back with some of the segmental comments later in the presentation.

Max?

Thank you, Rich.

I am on slide four, the second-quarter financial highlights.

For the Company consolidated view including financial services, second-quarter revenues totaled $7 billion, down 10% compared to Q2 2014 on a constant currency basis or 22% as reported.

Net income was $122 million or $0.09 per share.

Net income before restructuring and other exceptional items was $141 million or $0.11 per share.

Available liquidity increased during the quarter totaling $7.8 billion at the end of June versus a $7.2 billion figure at March 31, 2015.

Balance in undrawn committed facilities of $2.8 billion at the end of June.

When we turn to the Industrial activities, net sales of industrial activities at $6.6 billion, down 10% in constant currency or down 22.5% as reported.

The Company achieved Industrial profit -- operating profit of Industrial activities for the second quarter of $401 million; $678 million was Q2 2014 for the comparable number.

Operating margin at 6%.

Net Industrial debt at June 30 was $3 billion, was $3.1 billion at the end of March with net industrial cash flow positive $520 million in Q2 2015 on the back of working capital improvements and capital expenditures containment.

On slide five now, here we have the reconciliation from consolidated operating profit to net income for the quarter.

Consolidated profit -- operating profit at $467 million of 6.7% to net income for the quarter.

Restructuring expenses totaled $22 million in the quarter, $8 million lower than last year and mainly relate to actions in Commercial Vehicle and Agricultural Equipment as part of the Company efficiency program launched in 2014.

Interest expense net totaled $117 million for the quarter, a decrease of $41 million or 26% compared to last year primarily due to a more favorable cost of funding and the lower average indebtedness primarily from reduced working capital needs as a result of the inventory reduction in Agriculture and from our actions to reduce inter-segment financing between the industrial activities and financial services.

Other net was a charge of $93 million for the quarter, an increase of $30 million compared to last year mainly as a result of higher foreign exchange losses on our monetary asset and liability exposure.

Income taxes totaled $126 million representing an effective tax rate of 53.6% for the quarter.

The Q2 tax rate is negatively impacted by the inability to book deferred tax assets on losses in certain jurisdictions.

Due to deteriorated business conditions in certain jurisdictions primarily Brazil Commercial Vehicles and a reduced profit before tax, the Company effective tax rate for the year is expected now to be in the range of 48% to 52%.

Nonetheless we continue to reiterate that the long-term effective tax rate target of between 34% to 36% range remains unchanged as actions to restore profitability in our lossmaking jurisdictions are underway.

Basic EPS and EPS before restructuring and other exceptional items was $0.09 and $0.11 respectively for the second quarter, down $0.17 versus the prior year.

Slide six now will show the change in net industrial debt for the quarter at $3 billion net industrial debt and June was slightly better than March with positive net industrial cash flow of more than $500 million primarily as a result of positive contribution from working capital and a 30% plus contraction in capital expenditure partially offset by reduced net income.

The positive change in working capital of $400 million which was favorable $150 versus the same quarter last year, stands as a result of the inventory reduction actions in Ag and of the increase in demand for commercial vehicles in EMEA.

Change in net industrial debt is also reflective of the $300 million payment of dividends to shareholders over last April while the exchange rate impact affecting our euro denominated liabilities has been unfavorable by $200 million due to the June end mild rebound of the euro against the dollar.

For the six-month period through June, FX remains favorable $400 million so far on the net industrial debt.

Moving on to slide seven, here we have provided a focus on cash flow from operating activities.

From the bar chart on the left you can recognize a pattern of our historical quarterly seasonality.

With regards to Q2 performance, positive cash generation of 650 was down 180 versus last year mainly due to lower net income.

Looking at H1 comparison to prior year, the seasonally driven cash absorption in the first half was improved year-over-year by roughly $0.6 million from the same period last year mainly as a result of lower inventory levels as per the inventory balancing measures implemented in Ag.

Next slide, number eight, provides greater detail regarding capital expenditure in industrial activities by spending category and segment.

CapEx decelerated to $136 million.

The reduction for the quarter is mainly coming from the completion of our long-term investment in industrial capacity expansion plan and by lower spending for the (inaudible) regulatory capital.

Maintenance CapEx and other cover the remaining 46 of total spending.

Spending by segment is in line with long-term Company guidelines in terms of capital allocation weighted toward the highest return on capital business.

Next slide, financial services business performance.

Reported net income for the quarter was slightly down to $98 million as the negative impact from currency translation were partially offset by reduced SG&A expenses.

Retail loan origination in the quarter 2.4, down 0.4 compared to Q2 mostly due to the decline in Ag sales.

The managed portfolio including unconsolidated JV of $25.4 billion as of June 30, was up 0.2 compared to March but the quality of the portfolio continues to improve with delinquencies on book over 30 days at 3.5%, down 1 percentage point to the respective period of the last year.

Our next slide, number 10, shows the Company debt maturity schedule and available liquidity.

Available liquidity in the quarter increased and achieved $7.8 billion at the end of June compared to the $7.2 billion figure in March.

The increase in the quarter was mainly due to the new CNH Industrial Capital LLC, $600 million three-year bond issuance with a coupon of 3.375 and positive cash flow from operating activities that more than offset bank debt reduction and dividend distribution to shareholders.

This ultimate bond issuance proves one more CNH Industrial position of its spread in the crossover area of the yields in the fixed income market and reiterates our goal of achieving investment-grade during the planned period.

Again, we continue to advance on the reduction of the inter-segment balance with a further reduction achieved during the second quarter of $700 million with a net balance now at $1.8 billion.

This concludes the first part of the presentation.

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

Okay, thanks, Max.

I am on slide 12 and I think that Max covered this earlier in the presentation.

You can see that more than 50% of the change in revenue quarter to quarter is due to FX translation.

You can see the table on the bottom left-hand side versus the dollar and its corresponding impact in terms of operating profit.

The only thing change we would see here would be net sales by currency with the dollar representing less than in previous periods as a result of a downturn in the agricultural market.

Slide 13 I think I will get to in the individual presentations of the sector so let's move to slide 14.

Net sales in the quarter down 24% on a constant currency basis, the result of lower industry volumes in the row crop sector and dealer inventory destocking actions primarily in NAFTA.

Operating profit was $263 million for the quarter at a margin of 8.7% driven by lower sales volume and less favorable product mix in the lower crop sector primarily in NAFTA and negative foreign exchange translation impacts primarily as a result of the strengthening of the US dollar against all currencies primarily the euro and the Brazilian real.

And we were also negatively impacted by some prior year hedged positions on the euro but this is a one-time impact which we don't expect to see in the second half of the year.

Going forward we expect unfavorable translation impact net of hedge to hold the currency movement within a tight volatility band.

These effects are slightly offset by positive net pricing and cost control actions including purchasing efficiencies, structural cost reductions.

Decremental margins achieved in Ag was 26% which is slightly higher than in Q1 largely as a result of change in SG&A but less than 30 as we have been dieting at the beginning of the year.

Moving to slide 15, inventory dynamics as anticipated in the opening remarks, production level was down 33% versus Q2 2014 on a production versus retail of 14% Company inventory was down 17% versus Q1 2015 and down 21% versus Q2 2014.

Company dealer inventories were down 14% and looking at FMS tractors now in line with the end of 2013, down one month and combines down two months for the period.

For the balance of the year we are expecting a 25% reduction in total channel inventory, approximately -- this is dealer and company inventory -- approximately $1.7 billion of liquidation over the balance of the year.

Worldwide Agricultural Equipment industry sales were down 4% for tractors and 17% for combines.

Industry outlook has been confirmed in regards to tractors across the regions.

We have further revised downward our outlook for combines in both LatAm and APAC and now forecast down 25% to 30% from the 15% to 20% respectively.

Moving onto slide 16, I think that I discussed a lot of this in the opening remarks.

We continue to manage our level of production of the amount of wholesales that are going into the channel particularly in the row crop sector where quarter-to-quarter production is down 41%.

And then you see there in terms of management actions in terms of SG&A and R&D as we continue to right size the cost base and deal with inventory overhang with the new market realities in terms of demand in Ag.

So we are making good progress.

I will cover later in the presentation of what our expectation for production is for the balance of the year but we are seeing the benefits at least you can see the benefits of pricing as a result of limiting inbound wholesales of the channel continues to hold up and one of the goals that we have for the balance of the year is to manage that particular position.

Moving on to slide 17 and construction equipment, net sales were down 15% compared to Q2 2014 which is all LatAm, which is all Brazil.

Despite this headwind, Construction Equipment reporting operating profit of $35 million for the quarter compared to $28 million, operating margin increased 1.7% as cost containment actions more than offset negative impact of lower volume in LatAm particularly in Brazil.

Moving to slide 18, worldwide production levels were 16 above retail to accommodate seasonal shutdowns scheduled for August in NAFTA and EMEA so really no issue there.

We may be intervening somewhat on production in Brazil for the second half of the year because our expectation is for that market not to recover until 2016.

Moving on to slide 19 in Commercial Vehicles.

Net sales were $2.5 billion for the quarter, up 12% on a constant currency basis confirming a positive trend in EMEA for trucks and buses.

In APAC, net sales increased mainly driven by the performance of buses while trucks performance was affected by the market decline in Russia.

In LatAm, sales decreased mainly due to further decline in Brazilian market for heavy trucks partially offset by modest recovery in Argentina.

In the quarter, total deliveries were 38,000 (technical difficulty) increase compared to the comparable quarter.

Volumes were higher in all segments with light up 14%, medium up 18%, and heavy up 7%.

Commercial vehicle deliveries increased 22% in EMEA while LatAm and APAC were down 8% in 17% respectively.

Total orders were up 32% versus the comparable quarter with EMEA up close to 40% and LatAm up 17%, partially offset by APAC which is down 10%.

Q2 book to bill at 1.06 is up versus last year.

Operating profit for the quarter was up $88 million from the comparable period at an operating margin of 2.7% as a result of higher volume, better product and market mix, positive pricing, manufacturing efficiencies and SG&A expense reductions.

In EMEA, the increase in operating profit was attributed to trucks and buses.

LatAm despite the negative market trend was able to reduce its cost base to offset the negative impact of reduced wholesale volumes.

Results in APAC were substantially flat.

Move on to slide 20.

Second quarter -- just like Construction Equipment, second-quarter over production retail 11% in preparation for seasonal shutdowns particularly in EMEA.

The industry trends for the quarter -- I think you could read them -- I think I commented already.

So EMEA showing we are actually upping the EMEA objective for the year and lowering LatAm slightly.

Moving on to slide 22, or excuse me let me move back one to 21, I think what is important here is in terms of the strategy that we laid out a year and a half ago now, we are beginning to see the fruits of some of the positioning that we have done, the launch of the New Daily, the launch of the Hi-Matic transmission which has been very successful.

Medium despite the market being difficult, we are gaining share in our core markets.

You can see order intake as I commented before is up 50% and in the buy segment you can see that all three segments are up and you can see in EU 28, our core Europe market share, we have done reasonably well.

We have gained market share versus the previous quarter.

So I think that we are helped by the fact that the market is up but I think we are encouraged by the market share performance and we are also encouraged that we are gaining this market share with having to not do anything with pricing.

So overall it is a good lead-in I think for the balance of the year and I think that we are especially pleased in terms of the order intake which we are going to be increasing production over the balance of the year in EMEA truck and the order book is going to be able to justify that.

In powertrain, net sales were down 7% on a constant currency basis.

All of that is related to the decline in the offload segment particularly in Ag, operating profit was substantially flat in constant currency as we were able to offset the volume decline on the off-road engine with increases in production in axles and transmissions.

Next slide.

I think I addressed that one.

Go to the next.

In terms of full-year, you have seen that we revised the guidance, it is particularly on the back -- I think we are making small adjustments in terms of CE, in terms of production which is more or less based on my comment I said before what we expect for LatAm for the balance of the year.

We don't see any impetus for that to return.

We are cutting Ag production almost exclusively at NAFTA in the high horsepower segment.

I think we are just making a decision to clear more inventory so you can see in terms of net debt, we are moving that number up in order to protect pricing and to make it through the balance of the year.

We've spent a considerable amount of time with our dealers.

Overall market conditions in EMEA are not bad overall.

NAFTA and LatAm are where the pressures are.

In NAFTA actually the sentiment is not as bad as it was at the second half of last year but I think that everybody is sitting on their hands a little bit in terms of order intake for the second half of the year.

I think there is a concern about the effect of pricing in terms of inventory clearing.

So I think we are making the prudent decision to take out some production that we believe -- that we believe we can wholesale the second half of the year but the fact of the matter is we will probably get hung up in inventory so we would rather protect pricing and clear as much as we can for the balance of the year.

So you can go to the next slide which is slide 26.

As anticipated in the previous slide as a result of continued demand weakness in the row crop sector and in order to foster additional clearing of finished goods inventory primarily in North America and LatAm, the Company will adjust production accordingly in the second half of 2015.

Full-year guidance is therefore updated to reflect the negative impact on operating margin and the positive impact on working capital due to these production adjustments.

I think that is the last slide so that will conclude the presentation and we can open it up to Q&A.

Thank you, Mr. Tobin.

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

Pascal, please take the first question.

(Operator Instructions).

Mike Shlisky, Global Hunter.

Good morning.

Maybe I will start off with asking about commercial vehicles first.

Looks like some pretty good market share gains.

In Europe, are the gains due at all to maybe a change in the mix of what countries are doing better than others right now with some of Southern Europe coming off of a pretty low base?

And then in LatAm, I saw your truck orders were up 17% there.

Is there anything you can say about your plans for share gains there?

To the first part of the question, the answer is yes.

So if you look at demand conditions in the southern tier, those moved up and traditionally that has been areas of strength for the commercial vehicle segment.

So yes, there is a knock-on effect from where the market is growing in 2015 versus what our backlog is.

The second part of the question is I think our increases in production are following what the [TIV] change is so whether that manifests itself I think that our intention would be to hold the share gains that we have through the first half of the year and then move with the market.

I think it is a little bit too early to tell whether we have implied share gains for the second half of the year.

It is more a matter of what we expect to be the TIV change.

Great.

Secondly, I don't normally ask tax rate questions but it is pretty important here given the sheer size.

Can you maybe update us as to how long you think it might take for you guys to get from let's say 50% or so today to the 34 to 36 range, how many years might that take or how many quarters?

I would expect for us to get there in 2016.

I mean I think a lot of what we -- for a couple of reasons.

I mean I think that we have got to phenomenon.

We have got the reduction in the Ag space which is putting some pressure on Italy and Brazil.

We are rightsizing the business so we think we can squeeze down some of the issue there in addition to a variety of other tax planning strategies.

And then we have announced before in the Commercial Vehicle segment about some repatriation of volumes back into Italy that were well on the way and we would expect to see the benefit of that in 2016.

Just to be clear, once you get there that is your sort of long-term rate?

There is no major one-time items to get the tax rate to that level, correct?

No, I think it is more of -- we want to go to OECD rates is the long-term target.

There is not any, you see volatility because of these non-benefit of losses.

Once we put the structural changes in that hopefully smooth that out then you would see volatility on the tax line go down quite a bit under normal business conditions.

Great.

Thanks.

I will pass it along.

Ann Duignan, JPMorgan.

Good morning, guys.

Can you talk a little bit about North America high horsepower tractors in particular, equipment?

We are hearing of very extended leasing programs out there, 42 months at 0% financing.

First, can you confirm that there are some deals like that occurring and is that what is driving market share in North America?

And why would we be talking about increased market share in an environment such as we are seeing right now?

I don't think we are trumpeting the market share.

As you know, this is a pretty concentrated market at the high horsepower segment.

So a lot of intra-year market share movement is based on when production is taking place rather than share gains going back and forth.

So if you looked at quarter-to-quarter share movement in large and high horsepower tractors and combines for example, you see a lot of volatility in the number but the end of the year positions don't move much.

I think that is really what you see here.

But we are obligated to say here is where we are in terms of share gains.

In terms of the question of lease, the bigger issue that we have been trying to address is short-term leases and we have basically exited the short-term lease market for all intents and purposes.

There is an amount of longer-term leases in the horsepower segment especially in the contractor space but the financial risk on the longer-term leases is significantly less than the short-term lease model.

So I think that we have done the heavy lifting on limiting the amount of short-term leases that are out there but there is always going to be an amount of lease activity.

As long as the term is at a significant duration we think that the financial risk is manageable.

Why would you think that the financial risks are lower on longer-term leases?

Is that an expectation that the market will have recovered in 42 months?

There is more embedded depreciation in the lease.

Okay, I will get back in queue.

That was my biggest question.

Martino De Ambroggi, Equita.

Good morning, good afternoon, everybody.

The first question is on prices which hold well in each and every segment.

I was wondering if you believe this trend can hold for the rest of the year in each and every segment?

I think it depends.

I think that we are in control in terms of pricing as a market leader in the Ag space so pricing in Ag at least in certain categories is up for us to manage because of the market structure of the competitive base.

On Truck and Construction Equipment, I mean considering our market position we are more of a follower so if pricing was to become very competitive, then I think it would be a bigger challenge.

Despite the fact that we are a follower on the commercial vehicles and the construction equipment side, we have been able to post price through the first half of the year.

Our expectation is to hold that for the second half of the year but from a longer-term question, I think it is in our hands to a certain extent on the Ag side and less so in the other two businesses.

Okay.

And a specific question on Brazil.

The question is on Iveco in particular but can be considered valid also for the remaining businesses.

Are you planning any additional action considering the very weak market environment?

And I know you are not providing any specific data on a geographical environment but what is the visibility right now in Brazil and are you able to return profitable for Iveco?

We have been reducing production across all of the businesses in Brazil since the second half of 2014.

And that is why in terms of comparable performance, there isn't a large negative in Commercial Vehicles versus last year because a lot of the heavy lifting that we had to do we did in 2014.

So while the market is challenged in Brazil in 2015, we took a lot of the pain of rightsizing the cost base.

Where we are taking action today is more on the Ag and the Commercial Vehicles space.

The Ag is purely a question of what is going to happen in terms of financing conditions.

The Construction Equipment business is driven by two phenomenon, one is the lack of federal programs for buying equipment for rural municipalities which was a significant amount of the volume that had gone through Brazil that is just not happening in 2015.

And the balance is the overall negativity that is overhanging the general construction industry in Brazil.

And that is why I said in my opening comments that we were going to intervene on production and Construction Equipment in the second half of 2015 because we don't expect that situation to improve until 2016.

And if I may one on this issue.

Iveco is unable to return profitable without any market recovery I suppose?

We don't give out regional profit by segment but Iveco like any other market participant when the market is down 50% or 60%, it needs an amount of base volume to make money.

I think we've done a very good job as I mentioned of taking out structural costs where we are not losing more money in 2016 but we need a return in terms of volume.

These are pretty dramatic decreases.

Okay, thank you.

Joe O'Dea, Vertical Research Partners.

First question just with the outlook for the remainder of the year and the second half, it is implied stronger than 2Q run rate, both on topline and margin.

If you could talk to how things will trend across the segments and kind of what you are seeing for the support particularly on the margin side to hold those up with 2Q typically the strongest margin quarter of the year?

Sure.

In Ag, we are down significantly and we showed you that they are down 40% quarter to quarter in row crop.

We will be down in terms of production in Q3 which is we are already down in terms of a line rate point of view but we are also going to summer shutdown so the inventory clearing expectation in Ag for Q3 is relatively significant.

In Q4 of last year when the market started to turn down, we intervened quite a bit in terms of production performance and then so we would expect in Q4 this year to be running at a heavier production level than we were in the comparable quarter.

So that is on the Ag side.

On Commercial Vehicle, I think historically Q4 has always been the strongest quarter for the business, you see the backlogs.

A lot of the bus business is delivered in Q4 so that is just following more of a seasonal pattern on the Commercial Vehicle side in terms of profitability.

Okay, thank you.

And then on the Commercial Vehicle pricing, it sounds like -- and I mean you already talked to being a little bit of a price follower in those markets.

But just wondering given some of the engine technology that you have and if you are seeing any more opportunity maybe given the value proposition that you can offer and maybe outperforming even a little bit on price?

I think that if you go back and turn there is a slide in there in terms of positioning of the segments.

I think that goes a long way in terms of our ability to gain pricing.

I think a lot of work has been done in a light commercial segment to position the daily at the heavier end of the LCV segment where it can retain its pricing because of its payload.

That we have been successful in and I think on the heavy side in terms of our relative price position and the total cost of ownership, I think we have done a reasonably good job there.

We are not a premium player in the heavy side, we are more of a value play but I think in terms of engine technology what you get is a lot for your money and that has helped on the heavy commercial vehicle side.

Got it.

Thanks very much.

Larry De Maria, William Blair.

Good morning, Richard.

If crop prices were lower and 2016 starts to look like looking lower as we move into later this year, can you adjust the fourth quarter rapidly enough to right size the inventory?

Or in other words, would we be more likely to under produce again next year if we take another leg down?

I don't know, Larry, if you look at the numbers in terms of the decline in the high horsepower segment, you are talking about being down 50% from the peak.

I think that if we execute correctly and I think that we are in terms of taking production down significantly, we are working with the dealers to take total channel inventory down significantly -- look, they could always go down again in terms of demand.

We don't expect crop prices to come down significantly from where they are.

I think our expectation is a pretty flat environment year-over-year.

You are not a long way to having pretty much of a flat market in terms of expectation of 2016.

So can we adjust?

Sure.

You don't get the full benefit if we had to cut production again in Q4 because of the amount of industrial inventory that is stuck there.

But we will manage it correctly.

I think as I mentioned before, there are certain products where we are a leader and a co-leader.

We are trying to take pressure off of the system in terms of pricing and the clearing of used so we are doing our best to restrict the amount of new wholesales that are going in there.

And our expectation at least today is for a flattish environment going into 2016.

And based on what we have done and what we do for the balance of the year, I think we are positioned appropriately in terms of the mix of total channel inventory.

So in other words you would not have to presumably under produce in a flattish environment.

Is that the idea?

That is correct.

I think you can make an argument that we are under producing the market decline this year.

So you have got our total production cut is larger than the change in TIV by segment for the full-year because it is not only cutting because the market is down, it is cutting for the liquidation of inventory.

So even if it is flat, inventories are stabilized and production remains arguably with more upside potential than downside potential in certain categories.

Okay.

Thanks, Richard.

Tyler Etten, Piper Jaffray.

Thanks for taking my question.

I was just wondering if you guys had any visibility on an improvement in LatAm?

It seems to be getting progressively worse, if this is something that could be turned around in a year or if we are looking at something much more longer-term?

I think you really have to split it between LatAm Commercial Vehicles and Construction Equipment and then LatAm Ag.

The Commercial Vehicles and Construction Equipment is more of a macro play so it is macro Brazil and both of those businesses are the ones that bore the brunt of a significant change in terms of the financing additions year-over-year.

What is going to improve that is an increase or is a return to post austerity for lack of a better word on the macro side and then maybe if there is a return in terms of financing conditions that we have seen in the past, that has really got to get there.

On the Ag side is more of a shorter-term issue we believe.

Financing conditions are still okay relative to the other two businesses.

I think it is just hung up a little bit just because of the overall sentiment issue.

There is not a lot of huge market in Brazil.

The machines are used to their end of the life so there is going to be a replacement cycle there.

So I think overall we are less concerned about the duration of the Ag turn down.

I think that the macro situation on the Commercial Vehicles and Construction Equipment is more important and that is going to need to be a change in terms of overall sentiment and how much money the federal government puts into the economy.

Okay, thanks.

That was a great answer.

In terms of heavy Construction Equipment in North America and Europe, are those markets fairly stabilized or could we see weakness in the back half of the year specifically more in North America?

We are not a huge market share participant so far be it from us to call the market.

I think that we had some hopes for North America at a certain point to be up 10% and it was tracking there at the end of last year, at the beginning of this year.

The sentiment is kind of flattening now so the expectation for it to be up 10% I think is not going to happen at this point.

Europe is still operating on extremely low levels relative to historical demand or even normalized demand.

So I can't expect it to go down from here.

I think that we have had a conversation around here that arguably the first portion of the business that comes back with an improvement of the economic environment is the on-road truck.

And so if we look at the on-road truck as a leading indicator for EMEA, then that is good news for Construction Equipment at least relative good news for Construction Equipment and EMEA going forward.

Okay, excellent.

Thank you very much.

Massimo Vecchio, Mediobanca.

Good afternoon, everybody.

Two questions from my side.

The first one is on your decremental margins in Ag.

What would it be without the negative foreign exchange translation from minus 26 to probably something close to minus 23 that you reported in Q1?

And the second question is a little bit more longer-term, probably more complex.

Do you think that with the current commodity prices, US farmers are making profit or in a lost position and put it in other words, do you see that if the current prices would hold, could we expect a rebound in tractors in 2016?

I will take the second question first and then Max will come back on the question in terms of the margin performance.

Our estimates right now are that producers are still making money.

The margin has been squeezed and that is what the headwind is in the marketplace.

In terms of acreage despite the margin squeeze, acreage is not moving at all in North America in terms of planted acreage.

I think there is a small swing between soya and corn but from our point of view that is somewhat irrelevant.

It is a row crop at the end of the day.

So we think that they continue to make money.

You can see a lot of estimates where margins go negative but that I think takes in a pretty caustic view of high priced rented land.

The majority of the land is owned by the producers themselves so we think there is margin available there.

Under flat commodity prices as I mentioned before, I don't want to call 2016 now but we would expect market demand to be reasonably flat next year.

But I think we need to see the balance of this year to see whether it would be a return of demand next year.

But I mean if you look at the declines at least in the row crop segment, we are down 50% or 50% plus in certain categories.

So even at flat commodity prices you could expect that there is some hope for an upside in terms of deliveries for 2016.

If we were to exclude the exchange impact which is a combination of the translation and the one-time prior-year hedge negative impact, then definitely the decrementals would be more in line with Q1, potentially better.

Okay.

Thank you very much to all of you.

Thank you.

That will conclude the question-and-answer session.

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

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

Have a good evening.