CNH Industrial NV (CNHI) 2015 Q3 法說會逐字稿

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

For your information, today's conference 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, Sergey.

Good afternoon, everyone.

We would like to welcome you to the CNH Industrial third-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 questions 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 risks and uncertainties mentioned in the Safe Harbor statement included in the presentation material.

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

Thank you, Federico.

Good morning, or good afternoon, everyone.

I'll make a couple opening comments before Max goes through the financials.

Q3 represented a continuation of what we've seen so far through 2015: a tough agricultural environment, with unit demand down 33% year-to-date in row crop, NAFTA, and more than 25% in LatAm, which has demanded some heavy lifting actions from the group with production curtailments of 50% in NAFTA, and almost 40% in LatAm, to adjust inventory to prevailing market demand.

And a cost reduction program which has allowed us to mitigate approximately 50% of the negative gross margin impact from reduced volumes, despite a very challenging mix in agriculture.

The commercial vehicle segment has delivered a year-to-date $200 million year-over-year profit improvement as a result of improved [EMEAic] market conditions, coupled with a realization of savings from the efficiency program that we launched in 2014.

CE is holding up profitability well, despite some significant headwinds in LatAm; and net income for the quarter, at $38 million before exceptional items and restructuring.

This was before an exceptional charge that were taken during the quarter of $150 million related to the remeasurement of our Venezuelan operations at the prevailing exchange rates.

We've also updated guidance, taking down revenue as a result of foreign exchange and challenging conditions in LatAm, which I will address at the end of the presentation.

So with that, let me hand it over to Max to go through the financials, and I'll come back and do the segmental data.

Thank you, Rich.

On slide 4, from the third-quarter financial highlights, consolidated view on third-quarter revenues totaled $5.9 billion, 13% down versus prior year in constant currency; or 24% below prior year, as reported.

Net income, before restructuring and other exceptional items, were $38 million, $0.03 a share.

As already anticipated in the opening remarks, we reported a net loss of $128 million in the quarter, including the $150 million exceptional charge, due to the remeasurement of the Venezuelan operations, resulting in an EPS of negative $0.09 per share.

Available liquidity was $7.4 billion at the end of September.

That number is inclusive of $2.9 billion of undrawn committed facilities.

At the industrial activities level, net sales were $5.5 billion, down 13% compared to Q3 2014 on a constant currency basis, or 25% as reported.

The Company achieved an operating profit of industrial activities for the third quarter of $245 million, with operating margin at 4.4%.

Net industrial debt at the end of September was $3.4 billion; with net industrial cash flow, negative $500 million in the quarter, due to increased working capital related to lower payables.

Moving on to slide 5, industrial activities net sales composition and by segment: as you can see from the upper left-hand of the slide, almost half of the slowdown in that phase comes from the negative FX translation impact that was almost $900 million in the quarter, representing a 12% reduction year-over-year on sales.

Excluding such negative impact of currency translation, net sales increases for commercial vehicles of almost 5% was more than offset by declines in other segments, with ag down 25%, CE down 23%, for a net decline of 13% plus.

On slide 6, operating profit was down $255 million versus last year at constant currency basis, due to a significant decline in agricultural equipment of almost $300 million, only partially offset by commercial vehicle improvement of $40 million year-on-year.

While ag posted a reduced margin at 5.6%, CE and CV margin improved to 6.3% and 2.7%, respectively.

And PT closed at 4.4%, which led to an industrial activity operating margin of 4.4%.

Moving on to slide 7, here we have the reconciliation from consolidated profit to net income for the quarter.

The consolidated operating profit, including financial service and elimination, at $288 million for the quarter.

Restructuring expenses, $18 million in the quarter, $38 million below last year, mainly related to actions in commercial vehicles and agricultural equipment, as part of the Company efficiency program launched in 2014.

Interest expense, net, totaled $118 million for the quarter, a decrease of $32 million or 21% compared to last year, primarily due to more favorable cost of funding and lower average indebtedness in the quarter.

Other, net, was a charge of $235 million for the quarter, including the exceptional pre-tax charge of $150 million due to the remeasurement of our Venezuelan operation at the SIMADI prevailing rates; which, net of the exceptional charge of Venezuela, other net was likely reduced year-on-year.

Income taxes totaled $56 million in the quarter.

Excluding the impact of the exceptional charge for Venezuela, for which no corresponding tax benefit has been booked, and the impact deriving from the inability to book deferred tax assets on losses in certain jurisdictions, primarily Italy and Brazil, the effective tax rate for the third quarter in 2015 was 30%.

The Company's effective tax rate for the full year is expected now to be in the range of 60% to 63%.

The long-term effective tax rate target of between 34% to 36% range remains unchanged.

Slide 8 provides more color on the interest expense of industrial activities.

As already mentioned, interest expense was down 21% in the quarter, and 24% year-to-date.

In the quarter, gross industrial debt average was down 11% versus a year ago, primarily from reduced working capital needs as a result of the inventory reduction in ag, and from our actions to reduce intersegment financing between industrial activities and financial services.

Average debt rate also improved by 0.4% in the quarter.

At the bottom of the slide, we have inserted a chart with maturity schedule of our industrial activities major bond issues outstanding, with the relative face value and coupon rate.

As you can see, upcoming maturities with higher coupon rates will gradually improve incremental benefits; provide incremental benefits to our total interest expense going forward.

Moving on to slide 9, our change in net industrial debt.

We closed the quarter with a net industrial debt of $3.4 billion, inclusive of $133 million remeasurement impact on cash and cash equivalents on our Venezuelan operation.

Net industrial cash from the third quarter was a net outflow of $500 million, primarily related to the drop in account payables due to the forecasted production shutdown.

And it was better by $200 million versus the Q3 2014, primarily due to the lower inventory, as a result of the inventory reduction efforts continuing in ag whole goods.

Net industrial debt partially benefited by favorable foreign exchange translation impact on our non-US dollar-denominated debt for $200 million.

On slide 10, the focus on change in working capital makes more visible how changing payables was the real driver to the increase in working capital, as a result of the combination of the normal seasonal shutdown in our plants, and the significant production curtailments experienced in ag during the quarter.

On the right hand of the slide, a focus on ag whole goods inventory shows the impact of our efforts to reduce total channel inventory in constant currency, which is now 20% below last year, with a similar reduction pattern on both company and dealer inventory.

The effort to reduce inventory in ag whole goods will continue in the next quarter, as a result of under-producing retail demand.

Next slide, number 11, provides greater detail regarding capital expenditure in industrial activities, by spending category and segment.

CapEx decelerated to $150 million, and is now 36% below last year on a quarter-to-date basis.

The reduction for the quarter is mainly coming from the completion of our long-term investment in industrial capacity expansion, and by lower spending for [engine regulatory capital].

Moving on to slide 12, financial services business performance.

Activity in the quarter was affected primarily by the agricultural lower demand.

But we were able to improve net income for the quarter at $94 million, up $19 million compared to Q3 2014, mainly due to lower provisions for credit losses and reduced income taxes.

That was partially offset by negative impact of currency translation.

Retail loan originations in the quarter were $2.2 billion, down $0.6 billion compared with Q3, mostly due to the [set] decline in ag equipment sales.

The managed portfolio of $24.5 billion at the end of September was down $0.2 billion, excluding currency impact, compared to June 2015.

The quality of the portfolio continues to remain at healthy levels, with the delinquencies on book over 30 days at 3.5%, down 0.4 percentage points versus prior year.

Our next slide, number 13, shows the Company debt maturity schedule and the available liquidity.

Available liquidity in the quarter decreased to $7.4 billion.

That includes the $2.9 billion undrawn under the medium-term committed unsecured credit lines.

Net of the Venezuelan remeasurement, the decrease is mainly attributable to a reduction in bank debt and unfavorable foreign exchange impact on cash balances, partially offset by lower financing need of financial services, due to a lower portfolio receivable.

Our liquidity to revenue ratio remains unchanged, at 27%, versus June 2015 and December 2014.

Again, we continue to advance on the reduction of the intersegment balance with a further reduction achieved during the third quarter of $400 million, with a net balance now at $1.4 billion, down more than 60% from one year ago.

This concludes the financial review portion of the presentation.

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

Thank you, Max.

I'm on slide 15.

Operating profit, at $137 million for the quarter, I mean, there's clearly the reduction in volume at a poor mix.

But if you take a look at the chart, on the far right-hand item on the slide, we remain disciplined in pricing.

We've kept the decremental margin at the same range, has actually improved it, Q3 over Q2.

And product costs were squeezing out in terms of purchasing and quality.

So in terms of the execution at the lower volumes, I think we can be quite proud of it, quite frankly.

We've under -- Max has -- if we go to 16, Max has touched a lot already on underproduction versus retail.

And if you look at the bottom-hand left of the slide, Q3 combine underproduction versus retail at close to 40%; production levels down 46% to the comparable period; while tractors were slightly up on a global basis.

The NAFTA numbers clearly are way down from these numbers, so the tractor one is not really an issue.

So I think that we're doing the right things overall in terms of trying to manage total channel inventory.

We are tracking on our objectives, in terms of the reduction for Company inventory for the balance of the year.

Moving to the next slide, slide 17 gives you a bit more granularity on management actions, in the top left-hand corner, of total row crop production.

So where most of the headwind is -- which was largely driven by NAFTA, but increasingly from LatAm -- total row crop production is down 44%.

You see the corresponding actions that we've taken on the expense line.

And in year-to-date NAFTA row crop production, we're down 55%.

So we are -- I think that we're doing what's right for the business.

Max has shown you the slides before about what we're doing to address channel inventory.

We don't see yet any leakage on the pricing.

It's becoming more competitive out there.

But I think that we're doing our part, and holding our own; and to the extent that we've posted positive pricing quarter-over-quarter, we're getting pricing where we can get it, particularly in Europe.

Moving on to construction equipment, net sales for the period at $591 million, down 23%.

You see that operating profit is largely flat as a result of the efficiency program that we kicked off in 2014, and the fact that we continue to be disciplined in pricing, despite the headwinds that we have, increasingly in NAFTA; but significant ones left [of the] volume mix of $34 million.

90% of that is LatAm, driven as a result of a severe decline in the marketplace.

But we continue to execute in terms of our cost structure which we addressed at the end of 2014, which has allowed us to protect profitability despite the headwinds which had been a very important market of ours in Brazil.

Moving on to the next slide, in terms of inventory units.

Really nothing to address here, other than the LatAm underproduction of retail is at 9%.

Production levels are down close to 50% versus Q3.

So we're -- I think in terms of execution, we were able to protect the profit margins, despite the fact taking our production in LatAm down significantly.

Moving to commercial vehicles on slide 20: net sales of $2.2 billion, up close to 5% at constant currency.

You can see, in the operating profit walk, we're benefiting from the increased volumes, largely driven by EMEA, with operating profit at $60 million, up $40 million versus the same time last year, at a margin of 2.7%.

[Forgetting] at a volume we've got positive pricing, largely as a result of light commercial vehicle pricing that we had enacted in quarter two.

We're not seeing the full benefit of that yet.

We'll begin to see it more in Q4.

Production cost is down, largely on the back of purchasing and quality in the SG&A that we had talked about as part of the efficiency program launched in 2014.

Q3 book-to-bill is slightly down, but EMEA truck deliveries were up 23% in the comparable period.

And order intake is up 13%, of which Europe is up 18%, which has allowed us to adjust up a full-year demand for the EMEA region in trucks from what was a top line of 10% to 15%.

In terms of inventory, we are generally tracking retail and production, so I think that we are fine there.

LatAm truck production level was up 17%.

But that was off an incredibly low base as a result of the beginning of the downturn of the Brazilian market in 2014; and as a result of that, we're bringing up production in Argentina on the back of the phaseout between Euro III and Euro V.

In terms of share, it's a good news story here.

European truck market share, at 11.4%, is up 1.2 percentage points across the range.

We've launched the Eurocargo product during the semester.

I think that the revitalization of the light commercial, medium commercial vehicle, and the Stralis Euro VI is now fully in the marketplace, well accepted, and it's allowed us to drive share across the region.

So a good performance.

Everything's looking -- that we're beginning to really turn the corner on the commercial vehicle side, in terms of execution of cost of more or less in the profitability, and in terms of the market share.

Moving on to powertrain: sales in the period of $800 million, down 7.4% in constant currency, all of this is related to the reduction of the off-road segment, particularly in agricultural.

Operating profit of $35 million that we've offset somewhat with industrial efficiencies.

Q3 third-party net sales of 44%, so it's moving up, largely as a result of not having the one-time banking of engines, [Pure] before Tier 4 final last year, and the reduction on the ag side.

You see the stats on the following slide in terms of deliveries.

I think that I've commented mostly on that already.

We're quite proud, moving on to slide 25, that CNH Industrial received the highest score in the principal areas of the Dow Jones Sustainability Indices in the environmental dimension, so we're doing our part in terms of being a good corporate citizen.

And I think it's congratulations to all of our employees that have participated in this effort.

Moving on to the final slide, which is slide 27.

As I mentioned in my opening comments, we've brought down the revenue, some for the full year, largely as a result of foreign exchange translation into the US dollar, and the difficulties that -- the LatAm situation is not improving.

It's actually getting a bit worse.

We're holding the margin guidance for the full year at 5.6% to 6%, and holding net industrial debt.

So what it's implying here is that we're going to continue to execute in terms of production levels, and offsetting the negative weakness that we have by making these large production cuts with operating expenses.

We expect Q4 to have a similar dynamic that we saw last year, where especially in commercial vehicles, where profitability tends to be skewed to the Q4 for the delivery cycle.

And we do pick up a small amount of production performance, Q4 versus Q3.

Because as you all know, we shut down for seasonal production in Q3, with scheduled shutdowns.

So there is a small bounce-back in terms of industrial absorption in Q4 that we should see in the ag sector.

That's all I have.

I think that we can move on to the Q&A.

Thank you, Mr. Tobin.

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

Sergey, please take the first question.

(Operator Instructions).

Robert Wertheimer, Barclays.

Two questions on the ag, because I'm not sure if you can, or would, answer the first.

On production levels, so you've given great data, you're underproducing.

It's a little hard to sort through, with the AAM and your category's differences, what the actual raw production level is.

So are you able to say?

Are you yet back down to trough levels from early part of the 2000s?

Or are you still above that?

And the second question is, have you taken any residual value changes on the lease book, or is that not yet necessary?

Thanks.

I'll answer the second one first, Rob.

We have been taking charges on the lease book since the second half of 2014.

So, nothing dramatic, but we made changes to residuals in 2014, and we've continued to monitor that position.

In terms of production levels, yes, that's a bit of a moving target, especially globally.

But I presume that you're talking about NAFTA.

Look, let me make some comments on inventory, versus the data that's out there.

From what we can tell, we're overperforming on combines and four-wheel drives.

I think we have some work to do on the 140-plus sector.

So, we're underproducing to wholesale and retail by a wide margin.

I think that we've done a pretty good job on the four-wheel drive portion of the market, and we've done a pretty good job on the combine side.

I think that we need, in the fourth quarter, to do -- to make up a little bit of ground in the midsize tractor or the 140-plus segment.

If I was to give you an idea where we think that we stand, versus the industry.

Yes, it's hard to tell from the outside.

Thank you.

Do you have ag margins up in 4Q?

Or is it mostly truck that drives the sequential margin improvement overall?

Yes, we expect ag to be up.

Because again, you get a bit of production performance only because of the fact that you've got seasonal shutdowns across ag.

And then the deliveries, not so much NAFTA-driven; a little bit NAFTA-driven, but more European-driven than anything else.

Thanks.

I'll turn it over.

Thanks, Rich.

Ann Duignan, JPMorgan.

Can you talk about the margin expectations for Q4?

If we back into what you need to get to your targets, it's going to have to be about 7.9% operating profit margin.

How exactly do you expect to get there?

Well, I'm not going to go through the individual pieces of the math for you, as usual, Ann.

But I'll just give you an idea.

Look, I think what I can point you to do is to look at Q4 last year, in terms of margin performance.

Because we were already cutting production significantly in Q4 last year in the ag side of the business.

So, Ann, you see the seasonality of commercial vehicle.

Those are the two big pieces that swing it.

So without going into segment by segment, and geography and geography, that's how I can -- that's what I would point to.

So we did in excess of 7 last year, in Q4, from an industrial point of view.

So, that's really where it comes from.

It's deliveries in commercial vehicle, and then the final deliveries and retails out of ag.

Okay.

Thank you.

My follow-up question was, if you go back to farm progress, you had talked about having the inventory problems cleared out of the system by year-end if we had flat retail sales into 2016.

Can you just talk about your order books for 2016, as it stands right now?

And how comfortable are you that retail sales will, in fact, be flat next year; again, North America row crop?

Yes, I can talk to you about where we stand on order books for the balance of the year, rather than 2016.

It's a bit early, right?

So order writing for 2016 is underway.

So it's a bit early before giving those numbers.

Order books, I think that we're -- we're talking about NAFTA, I presume, now.

Yes.

We're largely covered in the New Holland brand, and probably have a small amount to go in Case IH for the balance of the year.

So we made significant progress on order books from when we -- last time we saw each other at Farm Progress.

So we're getting increasingly more confident, in terms of the wholesale performance of the balance of the year.

Before we start talking about 2016, we're going to really have to see what happens with retail performance, quite frankly, because then we're going to make decisions in terms of what we want to do with channel inventory.

Okay.

And I assume when you say New Holland covered, and Case IH a bit to go, that was based on covered versus what you had anticipated?

No, that's an absolute number.

Yes, well, what we have planned, I guess is the best way I can say it.

Okay.

I'll leave it there and get back in line.

Thanks for the color.

Michael Shlisky, Seaport Global Securities.

Great performance on the market share in trucks in Europe during the quarter.

I was curious [if you made] kind of a bucket for us -- was all the positive growth there, was all that due to a good new product reception?

Or was any of it due to just your presence is higher in countries that are up off the back by a lot more?

The correct mix of (multiple speakers).

Yes, no, I understand what the question is.

It's more on product acceptance on a pan-European basis than it is the weighting towards traditional strong areas of Southern Europe.

Got it, got it.

That's great to hear.

And then, secondly, could you maybe just give us a little bit of a directional view on your CapEx plans for 2016?

No, quite honestly.

Look, we've got an idea of what the rollover is for next year.

We know that we have Euro VI on light commercial vehicles, which has got to come.

But I don't -- I'd be remiss to give you a number right now.

But I don't see it that we have an overhang, where it would be demonstrably higher than the 2015 exit.

Okay.

Thanks, Rich.

Appreciate it.

Henry Kirn, Societe Generale.

Wanted to ask a question on financial services.

Can you talk about the access of your ag and construction customers to financing globally?

And given that the delinquencies on book looked generally low, would CNH consider being slightly more aggressive there to maintain or grow share if there were opportunities arising?

Globally, I think that the problem that exists is Brazil right now.

So you have a lot of negative news flow in terms of financing out of BNDES, where programs -- where between now and the end of the year, there's a lot of unsurety what's going to happen in that particular area.

But that's not driven by us; that's driven by the BNDES bank.

On the balance, would we be willing to take more risk to drive performance?

No, not necessarily.

We run the financial book as a business and a stand-alone business.

It's not influenced by the industrial operations in terms of risk-taking.

It's got its own objectives.

Okay, that's helpful.

And as you look at near-term raw material and purchase components costs, could they serve as a tailwind for margins over the next few quarters?

Yes, you can already see them now.

And when you look at the individual segments in production cost, a piece of that is raw materials.

So you are beginning to see that now.

Is there any way to frame how big that could be?

On a full-year basis, maybe we could give you some color at the end of the year.

But between now and the end of the year, I think you can just take a look at the run rate that we've seen year-to-date, to give you a proxy.

Okay.

Thank you very much.

I will jump back in queue.

Joe O'Dea, Vertical Research Partners.

First question on European ag: it looked like the rate of declines improved in the quarter for you.

September did show some incremental softening in registrations.

So just in general, if you could talk about expectations into year-end, and what you're seeing in the order book, and continued progress on seeing improvement maybe in Europe ag.

Yes, Europe ag, as we had projected in the beginning of the year, has held up relatively well.

I think that we're positively -- I don't what to say surprised.

But the developments in terms of the combine demand have been terrific, both from a unit demand and from a margin [incretion].

In terms of general Europe, a comment I would make is Germany is a bit slower, but France is doing quite well.

And France happens to be one of the core markets for the New Holland brand, and you can see that in terms of our results.

Okay.

And then on the truck side in Europe, rate of growth obviously very strong in southern Europe, but off a very slow base.

Could you just give some indication of general conditions there, support for ongoing recovery, what you're seeing in fleet conditions, and the potential for that to really accelerate and see some growth there, off of a low base?

Well, I think we've moved up the number from 10% to 15%.

So in terms of our view on demand, I think that we are relatively cautious in guiding basically in what we'd seen quarter by quarter.

But in terms of backlog now, I think that we're comfortable to move the market up, with pan-European by up to 15%.

Getting into the individual countries, because of the law of small numbers and a variety of things, I think is not helpful.

But I answered the question before; whether there's this view that Iveco performs well when Southern Europe performs well.

I think that that historically is -- I'm not rejecting that.

But I think we're encouraged that a lot of the growth that we're getting is pan-European, so it's more on the back of product acceptance rather than strong hold markets returning.

Great.

Thanks very much.

Ross Gilardi, Bank of America Merrill Lynch.

Rich, I'm sorry to come back to it.

But to Ann's question on the implied fourth quarter, your full-year revenue guide basically -- it looks like it implies a 4% decline in Q4, with a 60% year-on-year increase in EBIT.

And given what you're saying about managing your production, I understand that Iveco normally goes up in margin, Q3 to Q4.

But how is that feasible with the market conditions we have right now?

Without getting into the details, in terms of the timing of production curtailments, I think that part of the reason that we gave the granularity of the numbers in terms of hours, and the significant spread between what we see in demand versus hours consumed, is to give you an indication of -- that we're frontloading a lot of what we're taking out of production.

And I mentioned in my comments, I think that Q4 -- I mean, we're talking about ag now -- I think that we get some production performance back in Q4, because of the amount that we had cut, both year-to-date and especially in Q3.

So you get -- and that's on top of the fact that in Q4 last year, we were making relatively sizable production cuts to adjust inventories as the markets turned down.

The balance of it, I think -- and if you look at it versus last year, both in -- especially in commercial vehicles, is what we've done year-to-date.

Which it takes into account the structural cost reduction, plus the performance that we had in terms of delivery in Q4 last year.

So, I'm not going to get into decomposing the group accounts, but I think that's the answer behind it.

Is it going to be easy?

Is it going to take a variety of heavy lifting?

Absolutely.

But we think, as I mentioned before, in terms of what we have in terms of backlog and order coverage, we're closing in on fully understanding the wholesale number.

Okay, thanks.

And then could you just help us on your outlook for full-year free cash flow for the industrial business?

What to expect?

If you go look at all the charts that Max went over, in terms of the change in net industrial debt, and then what the guidance is for the full year, I think that you get -- and the charts in terms of working capital -- I think that it all adds up.

I think just spend some time with a lot of the disclosures that we've given, gives you all the color you need.

Okay.

Thanks very much.

Michael Raab, Kepler Cheuvreux.

Unfortunately, I need to get back, as well, to the implied guidance for the fourth quarter.

If I take the midpoint of the industrial sales range, and do the same thing for the operating margin of the industrial activities, I'm pretty much getting to an implied operating margin of 7.9% for the fourth quarter, if my math is correct.

Now, that would imply basically two things: number one, by far, the fourth quarter would be the best of the year, which perhaps is not completely to be ruled out.

But secondly, it means that while reducing the top-line guidance by $1 billion, but keeping the operating margin guidance unchanged, you're basically saying there is no loss of positive operational leverage effects whatsoever from decline in the top line, relative to the previous guidance.

Could you please elaborate on the backdrop for that implied belief of yours?

And then secondly, if that's the case, all else equal, it would basically require roundabout $80 million to negate the negative operational gearing effect I would otherwise expect to materialize from the negative revision.

Which is not completely impossible either, but it would be a [chunky] part of your savings targets.

So how sensible, how reasonable is that, really?

Would you bet your money on that?

Did you answer your own question, Michael?

I don't know what to add.

I've answered it twice, and you've basically decomposed it for yourself.

I'm not going to verify or not verify the numbers that you've come up with.

But I've gone through the rationale of where we think we can get there, based on production performance, mix, and the CV back-loading in terms of delivery.

So ag is going to go back to double-digit margin in the fourth quarter.

That's what you're saying, right?

That's not what I said.

Not what I said.

That's what you're implying, I think.

You may believe that.

I'm not giving segmental margin targets for Q4.

I'm giving you the (multiple speakers).

Personally I don't believe it, but I'm saying this is what basically would have to be fulfilled to get there.

Anyway.

But thank you.

Kwame Webb, Morningstar.

I wanted to go back to the commercial vehicle segment.

It seems like you, as well as a number of your competitors, have noticed an improvement in that market.

Seems like you're still reluctant to say a recovery is actually occurring.

Maybe if you can kind of give me your thoughts on why you are so reluctant to commit to that right now?

I don't think there's any reluctance.

We took up the industry volume materially for the full year of what we've had it, up until this point.

So I think that what we've done with this last forecast, in terms of total industry volume, is basically said it's in excess of the upper range that we had before.

So it continues.

The positive development continues, and we expect that to continue for the balance of 2015.

So if I was to make the question a little bit more long-term, which inning do you think we're probably in?

And what's the margin that you think that business could get to, over the next 2 to 3 years?

We have a long-term target.

We had a medium-term target to get to 5% margin at -- if you go back and take a look at what we had put out in 2014 about long-term plans, and the volume assumption associated with that, that's doable.

Because I don't think it was implying a significant increase in terms of total industry volume.

And how much longer would you expect for it to take, to get to that midterm target?

I think that we're going to be making some significant progress between 2014 and 2015.

When we report 2015, you will see the components of that progress.

Because we break it down for you in terms of volume, mix, cost savings, and structural cost reduction.

And then you can take into account that the structural cost reduction is permanent in nature, because it's been part of the restructuring program that we launched in 2014.

The balance of it is going to be market share and price realization, going forward.

All right, thank you.

David Raso, Evercore ISI.

I had a quick question.

We all can debate the fourth-quarter margins.

But more as a launching point for how you were thinking about 2016, or how we should think about 2016 margins.

If you think about what you have internally for your margins in fourth quarter of 2015 for ag, how should we think about that as a launching pad for how you are thinking about 2016 margins?

Just some parameters around it would be helpful.

Yes, no, I understand the question, Dave.

You've got a trailing impact from the production cuts.

So you make the cuts, you incur the costs, and then you get the benefit.

So there's, let's say, a 90-day trail on making those cuts, in terms of production performance.

What's going to give us some idea of how we take a look at 2016, on a full-year basis -- let's not do this by quarters -- is how retail performance is in Q4, versus what we think that industry demand is going to be.

Right now, I think I gave you some color on it, that we're well on our way of getting a good balance for flat markets in four-wheel drives, in combines.

I think that we have some work to do in the fourth quarter in terms of midsize tractors.

How we do in terms of retail performance -- so total channel inventory reduction is going to give us an idea of what production performance will be next year.

And then we can, at that point, strip out what the costs that we've incurred during the year of taking that production performance down.

We already have level-loaded ourself at a new normal, in terms of how we are positioned in terms of headcount; operating shifts and the like.

We can debate the length of the downturn, pricing, everything.

But it does seem like from your numbers, what you're implying about the fourth quarter, the third quarter marks the bottom, in your mind, on ag margins.

Because the level (multiple speakers) third quarter --.

I hope.

Correct or not, I'm just stating kind of what (multiple speakers).

Yes, it depends, now.

Look, I hope so, quite honestly.

The level of underproduction in the third quarter probably is about as wide as we'll see.

And in the fourth quarter, I can debate if I'm fully on board with how big the margins can go up here sequentially -- but, again, that 5.6 sounds like, in your mind, big underproduction.

That should be about the worst of it.

We're trying to hold pricing.

And then we just have to debate how long is this downturn going to cause maybe more pain or not in 2016 and 2017.

But whatever this fourth quarter number is -- 9% margin, 9.5% -- doesn't seem to think we're going necessarily much below that, going into 2016.

It may be lumpy.

I don't think anybody is in a position to say how 2016 (multiple speakers).

Yes, I'm not trying to call the quarters.

I'm just saying, it doesn't sound like you're going to come out and guide ag margins next year at 6% or 7%.

It sounds like this fourth-quarter uptick, if you get it -- that's an interesting platform for 2016 that we all can debate -- is it sustainable or not?

Okay.

Just on NAFTA, production is down 50%, and the market is down 30%.

So you've got a 20% spread between the two.

But that incorporates total channel inventory.

It will be out from a working capital point of view.

We will clear the decks from a company point of view.

As I go back to what I said at the beginning, what we really need is that last push on the total channel inventory.

But when you've got a 20% spread between production and industry -- and we are a material player in the industry, so it's a proxy -- barring a leg down, from a net farm income point of view, it's pretty low.

The spread is pretty wide between the two.

Sure, sure.

Okay, I appreciate the thoughts.

Thank you.

Martino De Ambroggi, Equita.

On cost-cutting, which is one of the most important drivers in performance improvement, could you elaborate on where we stand today?

And what's the receivable flexibility or additional flexibility you have on the cost side?

And as a second question, the cost saving initiatives have really improved the operating leverage.

And where we are today with the operating leverage?

$100 million of savings, to date, from the 2014 restructuring plan, and which are generally structural in nature, and permanent in terms of the takeout.

On top of that, you've got a variety of different costs that have been taken out in the face of changes in revenue over a period of time, which we could classify as semi-permanent.

In a perfect world, you'd leave it all out.

But to the extent that revenues would increase, a portion of that would come back.

It would attract some of that cost back.

But what we've taken out, from a structural point of view, is taken out.

I think that the best way to look at it is to look at the commercial vehicle segment and construction equipment, where that's where we've been taking out structural cost.

And you can see that in the margins, versus prior periods.

On the ag side, we've been taking out running costs, so we haven't announced any plant shutdowns or the like.

What we've done is just taken down the plants to capacity levels that are required to meet the market demand.

Okay.

And the operating leverage today?

We have 85 plants.

We could be here all day discussing it.

I can't give you an answer.

Okay.

It's product-specific.

Richard Smith, Citigroup.

My question has been answered.

Thank you.

Larry De Maria, William Blair.

Two questions; you touched on both of them.

But with regards to Brazil financing, there's obviously some confusion.

Can you update us how you see it over the next 6 to 12 months, the availability for your various segments?

And secondly, in Europe, can you give us maybe some specific numbers on your order board in all totality?

Up, down, or flat, year-over-year, I guess?

And with France maybe doing a little bit better, are we pulling forward demand in France, with the [Mekin] laws?

Or is there a fundamental turn there?

Thank you very, very much.

The first one, you're looking for a long-term answer, in terms of the availability of PSI for Brazil.

I can't give you one.

More than that, is there financing available for your various segments over the next 6 to 12 months?

Do you have visibility on that?

No, I don't.

You've got the PSI program that's been announced.

It has an end date, as of today.

There is the PGLP program that still is out there, but it's unclear the amount of funding which is in that program.

Okay.

I'd like to give you more, but this just happened on Friday.

So we're continuing to engage with BNDES and the Treasury.

But right now, I can't give you a medium-term answer in terms of funding availability in Brazil.

Yes.

No, I understand.

We were hoping you guys would know.

But it is confusing, obviously.

But I guess maybe if you could just give us some the color on ag, on European ag and France and the order boards, that would be great.

Thanks, Rich.

Look, I think that we're largely covered on the wholesale side.

I mentioned earlier in the call, without getting into country by country, that France is performing very well, which is a stronghold market for New Holland.

Italy is actually doing quite well in the lower-horsepower segments.

The only market that is not performing well right now is Germany.

How would we characterize your orders, in totality, for that segment, then?

Are we up, down, flat?

Obviously, we're trying to get an idea for next year.

We've given a view of total EMEA industry demand, and we've given a view in terms of market share performance for us, within that demand.

That's all I can give you.

We give you the -- how the market by geography is performing, and how we're performing within that marketplace.

Okay.

Thanks, Rich.

Thank you.

That will conclude the question-and-answer session.

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

Thank you, Sergey.

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.