CNH Industrial NV (CNHI) 2016 Q1 法說會逐字稿

Good morning, good afternoon, ladies and gentlemen, and welcome to today's CNH Industrial first-quarter 2016 results conference call.

For your information, today's 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, Bertrand.

Good morning and afternoon, everyone.

We would like to welcome you to the CNH Industrial first-quarter 2016 results webcast conference call.

CNH Industrial Group CEO, Rich Tobin, and Max Chiara, Group CFO, will host today's call.

They will use the material you should have downloaded from our website, www.CNHIndustrial.com.

After introductory remarks, we will be available to answer the questions you may have.

Before moving ahead, let me just remind you that any forward-looking statements we might be making during today's call are subject to the risks and uncertainties mentioned in the Safe Harbor statement included in the presentation material.

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

Good afternoon or good morning, everyone.

I'll make some brief comments on the quarter and then we'll go through the financials in the back -- to the segment information.

From an execution point of view, it was a good quarter.

Given the overall market demand conditions, we are continuing to navigate the challenging trading conditions and execute on our channel inventory, destocking, and agricultural equipment segment.

We are encouraged by the improved operating profits and margins in our industrial segments compared to last year, which has allowed us to offset a significant portion of the profit margin impact from ag.

Revenues for the quarter were $5.4 billion with continued demand strength in commercial vehicles, which was up 18% in Europe, buffering the impact of challenging trading conditions in the ag segments and general headwinds in Latin America.

Industrial activities operating margin was 3.5% with year-over-year operating profit and margin improvements achieved in all segments except ag.

In ag, margin was at an industry standard 4.2% for the quarter.

We'll get into the details later but positive price realization despite challenging market conditions.

Lower material costs offset a significant decline in unit production in NAFTA and LATAM.

All three other industrial segment margins in commercial vehicles, construction equipment and powertrain were up 2% plus quarter-to-quarter, again with positive price realization in CE and CV, a richer mix in powertrain, lower material costs, flow-through, and manufacturing footprint, efficiency benefits and commercial vehicle and construction equipment.

Net industrial debt at $2.5 billion and net industrial cash flow improved by $375 million as compared to Quarter 1 of 2015 as a result of lower production levels in agricultural equipment available liquidity at $8.2 billion.

As previously announced, we booked an exceptional charge of $502 million related to the European Commission investigation and related matters during the quarter.

In light of this performance and our confidence in our ability to execute for the remainder of the year, we have reaffirmed guidance that we had given in January.

That's it for the opening comments.

I'll hand it over to Max and then come back and review the segments.

Max?

Thank you, Rich.

I'm on Slide 5 with the first-quarter highlights.

At the industrial activity level, net sales were $5.1 billion, down 5.7% compared to Q1 2015 on a constant currency basis with share of total revenue increasing in CV on the back of the strong demand in Europe.

We achieved an operating profit of industrial activities for the quarter of $178 million, down 20% versus Q1 prior year with operating margin at 3.5% for the quarter.

Here the profit contribution by business shows a positive impact of the CV recovery and powertrain strong results.

Adjusted net income, which was previously defined as net income before restructuring and exceptional items, was $1 million, down $32 million year-over-year, mainly as a result of the lower operating profit.

Net industrial debt at March 31, 2016 was $2.5 billion versus $1.6 billion at the end of December.

The increase was due to seasonal investment in working capital albeit at a much slower pace than in Q1 2015.

Available liquidity $8.2 billion at the end of March, inclusive of $3 billion in undrawn committed facilities versus $9.3 billion at the end of December.

Moving to the next slide, industrial activities net sales walk by segment on a constant currency basis and net sales spread by region and currency.

Excluding the negative impact from currency translation, net sales decreased $320 million in the quarter.

Agricultural and construction equipment were down $350 million (sic -- see Slide 6 "$351 million") and $49 million respectively for the quarter as a result of weaknesses in end markets in NAFTA and LATAM partially offset by improvements in both commercial vehicles and powertrain.

Negative FX translation impact was $228 million, or 4.2%.

As you can see on the net sales by currency pie chart, our topline in Q1 continued to be negatively affected by the strengthening of the US dollar when comparing average rates in the quarter to prior year versus our major trading currencies that make up almost 75% of our revenue.

As far as net sales by region, the share of EMEA sales increased year-over-year to 59% of the total where it was 49% last year, and it was driven by increased sales in the region in all segments, excluding CE.

Next slide.

Operating profit in the quarter was down $45 million with a decline in ag that was partially offset by year-over-year improvements across all other industrial segments, showing the ability of the portfolio to buffer the impact from the adverse market conditions in agro/crop.

Margin in the quarter closed at 3.5% with margin improvements in each segment other than ag.

FX translation had no impact in the results.

Looking at the adjusted net income walk, consolidated operating profit was down $52 million with financial services operating profits flat year-over-year on improved net interest margin offsetting slightly higher provision for credit losses and currency translation impact.

Interest expense was $13 million above last year, mainly due to higher cost of carry for liquidity and higher debt in Brazil.

Other net, excluding the previously announced exception on loan tax-deductible charge of $502 million, was favorable $9 million, primarily due to lower FX losses.

JV income was $12 million unfavorable mainly due to APAC JV due to end market demand weaknesses.

Lastly, we had lower taxes as a result of the profit reduction.

Given the losses in certain jurisdictions and inability to book the related tax benefit, the Company recorded a tax charge in excess of its long-term effective tax rate objective of 34% to 36%.

Moving on to Slide 8, the change in net industrial debt for the quarter and some focus on specific quarterly dynamics.

Net industrial debt of $2.5 billion was $0.9 billion higher than in December 2015, including a $0.2 billion negative foreign-exchange translation impact.

Net industrial cash flow in the quarter was an outflow of $0.6 billion primarily as a result of the working capital investment of $0.7 billion although it was $375 million lower than in Q1 2015 primarily due to an increase in inventory related to the usual seasonal build up in the quarter in preparation for the selling season in the second quarter.

The $0.4 billion improvement over the same period last year comes as we continue to diligently optimize our investment in working capital has created a peak debt in the last three-year trend.

Capital expenditure was $80 million in the quarter.

The reduction for the quarter is mainly coming from lower spending for the good authority requirement.

Moving on to Slide 9, our financial services business, net income for the quarter at $87 million is slightly up compared to Q1 2015 with improved net interest margin more than offsetting loss, current losses, and negative impact of currency translation.

In the first quarter of 2016, retail loan originations were $1.9 billion, slightly down compared to the first quarter of 2015 on a constant currency basis, primarily due to the decline in ag sales.

The managed portfolio of $24.9 billion as of the end of March was down $0.6 billion compared to December on a constant currency basis, primarily in NAFTA and EMEA.

Credit quality remains strong with an emphasis of 3.7% for Q1, up slightly over Q1 2015.

Slide number 10 shows the Company debt maturity schedule and the available liquidity.

So at the end of March, available liquidity is $8.2 billion, up $1 billion compared to Q1 2015 and $1.1 billion lower than December 31, 2015.

The decrease is mainly attributable to the seasonal cash absorbed from operating activities and the repayment of third-party debt, including the repayment of the 7.25% $300 million bond of CNH Industrial America.

This was partially offset by a new $500 million 4 7/8% five-year bond from financial services.

Our liquidity to revenue ratio was 32% versus 35% at the end of December and 23% at the end of March 2015.

Net interest segment balance was at $1 billion at the end of March, flat compared to December end.

This concludes the financial review portion of the presentation.

And I'll turn back to Rich on the business overview segment.

Thanks, Max.

Agricultural equipment net sales decreased 13.6% in constant currency as a result of unfavorable industry volume and product mix in the rural crop sector in NAFTA and the Brazilian market and LATAM.

Net sales increased in EMEA, primarily in Western Europe and APAC.

Operating profit for the quarter was $90 million.

Operating margin of 4.2%.

The big impact in ag operating profit was the lower wholesale volumes in NAFTA and LATAM and the impact of negative fixed cost absorption and the lower industrial activity.

Despite this, we were able to post positive net pricing during the quarter and extract the benefits of lower material costs, resulting in a decremental margin of 25%.

Our expectation is that Q1 will be the lowest margin quarter for the year in ag.

As we discussed back in January when we were talking about the guidance -- go to the next slide please -- if you take a look at the underproduction in NAFTA that we were frontloading the underproduction this year as opposed last year -- remember we had cut production in Q2 and Q3 and then brought back production in Q4 this year.

We had guided back when we had given the full-year estimates that we were going to come out running very low in the beginning.

And if you look at the bottom portion of the slide, NAFTA row crop production was down 50% quarter-to-quarter and that has resulted in a 27% reduction in channel inventory.

We will be ramping up production somewhat in Q2.

We've got the August shutdown in Q3 and then we'll see where we are in terms of meeting our channel inventory objectives for the year.

My estimation is that we'll probably be in balance in Q4 or slightly under retail in Q4 and slightly over production to retail in Q3, so back to a more normal seasonality.

What else do we have?

So you can see the stats.

I think the most important one is the channel inventory, so let's go on into the industry volume.

We've seen some deterioration in the high horsepower tractor demand in NAFTA, so we are changing those estimates for the year largely as a result of the used inventory clearing process and the continuing challenging market environment, particularly in tractors, and LATAM was down 41%.

In combines, demand in NAFTA was down 16%, which is aligned with our full-year forecast and up 31% in APAC.

So other than high horsepower tractors, we're pretty much in line with where we thought we would be, and I think that that retail number for Q1 in NAFTA high horsepower is somewhat affected by the amount of units that's getting cleared through the system.

So, overall, I think it's relatively healthy that this is going to be the last year of destocking.

Moving on to construction equipment, in construction equipment, net sales decreased 8% in constant currency due to negative unit volume and mix, primarily in NAFTA and LATAM, offset by improved performance in APAC, particularly in India.

Operating profit was $14 million at an operating margin of 2.6%.

Construction equipment's operating profit increased as a result of improved margins in NAFTA and APAC, lower material costs and improved productivity from our efficiency programs more than offsetting the negative effects of challenging trading conditions in NAFTA.

So, you've seen a couple of things, and we are trying to remain disciplined in pricing as best we can.

There's some return to India, which had not been a contributor to our profits over the past 24 months, and then the biggest change you see in the $28 million, that's as a result of some of the facility consolidations that we've been doing since 2014 are flowing through the P&L.

So from a demand point of view, it's been a relatively weak quarter, but we're executing well in terms of lifting the operating profit.

Next slide.

Construction equipment worldwide -- overproduction was at 18% for the quarter but it's down 18% vis-a-vis Q1 of last year.

So more or less it's a neutral position in terms of where we are with channel inventory, and that is somewhat affected by the amount of inventory that we are building up in India.

And looking at industrial retail demand during the quarter, LATAM market continued to be challenging with both light and heavy segments significantly down 40% and 45%.

Demand in NAFTA, EMEA, and APAC was flat or slightly down for light equipment and down 12% for heavy.

Next slide.

Net sales increased 5% on a constant currency basis in commercial vehicles, primarily as a result of the favorable truck volume in EMEA, Europe in particular.

In LATAM, net sales decreased 53% due to lower industry volumes in Brazil and Argentina.

Operating profit for the quarter was $38 million.

This represents a $49 million increase if we normalize for the lost profits of Venezuela which we remeasured, as you remember, last year.

The increase was a result of improved volume and mix in EMEA, which was largely offset by LATAM in defense specialty vehicles.

From an execution standpoint, it was an encouraging quarter as the segment delivered positive pricing across all regions, improved material cost, reduced cost of quality, and improved manufacturing efficiencies as a result.

Efficiency programs and world-class manufacturing programs -- we expect this trend to continue for the balance of the year.

Next slide.

First-quarter overproduction versus retail was in line at 18% with demand and the projected pre-buy impact in the light commercial range due to the transition to Euro VI later in the year.

Strong order intake for trucks in Europe across the board with the book to bill at 1.3.

In the quarter, European truck market grew 18% compared to Q1 2015.

Light vehicle market increased by 18% while medium and heavy grew by 19% respectively.

In LATAM, new truck registrations declined 34% to Q1 2015 and down 5% in APAC.

Market share overall for trucks in Europe was flat versus last year with an increase in light vehicles offsetting the marginal decreases in medium and heavy as a result of fleet sales timing and customers waiting to see the new launch that we'll have in the heavy commercial vehicle segment in June.

Order intake for trucks in the year was up double digits across the segment with book to bill, as I mentioned, at a healthy 1.32.

Additionally, Iveco participated in the European Truck Manufacturers European Truck Platooning Challenge.

I would ask if you could click on the link if you'd like to see -- we have a short video on it and I think you are well aware of it.

I think it was relatively successful for the Group.

Moving on to powertrain, net sales at $882 million slightly increased on a constant currency basis.

Sales to external customers accounted for 44% of the total sales.

Operating profit was at $53 million for the first quarter, a $17 million increase compared to the first quarter of 2015, and an operating margin of 6%.

This is the highest margin for FPT in the quarter.

The improvement is mainly due to positive product mix to third-party business, improved raw material costs and industrial efficiencies from higher component volumes and world-class manufacturing initiatives.

During the quarter, powertrain sold approximately 130,000 engines, a decrease of 1%.

For the quarter, by major customer, 46% of engines units were supplied to captive customers (technical difficulty) percent to external, which is positive to margins.

Additionally, powertrain delivered under 20,000 transmissions and over 50,000 axles, an increase of 24% and 22% respectively compared to the quarter.

In terms of outlook, I touched on, in NAFTA, we revised down the industry for high horsepower tractors now to 20% to 25% versus our previous forecasts.

Outlook for combines has maintained.

EMEA demand confirmed to be mostly stable, LATAM to be down 15% to 20% in tractors and 5% to 10% in combines.

APAC slightly improved with tractors now flat to plus 5% in combines, 5% to 10% in construction equipment.

Markets are expected to remain flat or slightly down except for light in LATAM now expected to be down 5% to 10%.

Commercial vehicles, we now expect EMEA, principally Europe, to be up between 5% to 10% and LATAM to be down 15% to 20% on the previous 10% to 15%.

The balance of the world is unchanged.

So given that, based on these outlook premises, CNH Industrial is confirming its guidance as follows: net sales of industrial activities between $23 billion and $24 billion and an operating margin of between 5.2% and 5.8%; net industrial debt between $1.5 billion and $1.8 billion excluding any potential cash payment for the EC investigation related matters where the timing of the payments is uncertain.

That concludes the presentation.

I think I'll hand it over to you, Federico, for questions and answers.

Thank you, Mr. Tobin.

And now we are ready to start the Q&A session.

Bertrand, please take the first question.

(Operator Instructions).

Joel Tiss, BMO.

I just wanted to ask on the commercial vehicle business, what's holding back the operating margins?

Is it more of a structural issue, or is there -- it's just sort of the puts and takes of all the different geographic -- Latin America being weak and other things like that?

I mean a portion of it is Latin America being weak, but it generally is backend loaded.

If you look at the seasonality of the commercial vehicle business, margins tend to climb through the year, and that's our expectation for this year.

So we expect to have margin accretion for the following three quarters.

Is this a high single-digit operating margin business in sort of normalized times if you could get all the different markets to pull in the same direction at the same time?

Let me rephrase it.

I mean we don't give out segmental operating margin targets, but we expect improve operating margins full-year 2016 versus 2015.

And I just wondered what's next after you get your debt down a little bit further.

It seems pretty -- there's not a lot of debt to begin with.

And I just wondered what are you thinking next?

Is it share repo or acquisitions or --?

I just wonder what you think.

Yes, I think that the capital structure, the way it is, is to try to get our rating improved and get to investment-grade ratings so there's less excess liquidity on our balance sheet and that will remain there until that happens.

And then to the extent that does happen, there will be a return of capital would be the likely avenue of that excess cash coming back.

Great.

Thank you very much.

You're welcome, Joel.

Robert Wertheimer, Barclays.

Yes, just a quick question on what your thoughts are on the sustainability of the particular upside I guess in southern European truck?

The fleet is very depressed, maybe not in Germany but certainly across southern Europe.

Are you seeing a lot of real optimism amongst fleet?

And do you think we can continue for some time?

We expect it, Rob, to continue through 2016 for sure.

The unemployment rates and the GDP numbers for southern Europe are continuing to improve and interest rates remain where they are.

So our expectation for the year and the reason that we had upgraded unit volume demand for 2016 for Continental Europe is influenced by southern Europe.

So at least through the balance of this year we expect it to continue.

And you have in the past outlined some long-term margins for truck I think at midcycle.

I mean I assume there's a chance to go above that target in a strong upcycle if such occurs?

Look, we are well on our way to reaching those target margins.

I think that when we reach them, you can be sure that we will try to maximize over that.

But right at this point, we are working our way to reaching those target margins.

And it's not all volume related, as you can see from the profit improvement, at least quarter to quarter if you looked at 2015.

So it's about 50% market related and 50% self-help.

We are in front on the self-help side, so we are tracking in the right direction.

Thanks, Rich.

Monica Bosio, Banca IMI.

Good afternoon and good morning, everyone.

I would have three questions.

The first is related to the provisions for the [Amtrac] investigation.

Could you please give us some more details on the timing of the investigation?

When do you expect it could be and if the provision is enough to face a potential fine?

And the second question is just general, on the back of what you have told before on the ag -- agricultural, rather, segment and commercial vehicle segment, should we expect a backloaded here so with the most of the fundamental of the Company concentrated in the last quarter?

And the very last question is your feeling about LATAM.

I know it's really difficult, but do you feel it might have reached the bottom?

Thank you very much.

Okay.

Monica, for obvious reasons, I'm not able to answer your question about the provision nor the timing of the payment.

As soon as we know, I'm sure that we are going to -- will tell everybody -- but that is still ongoing so I'm unable to comment on that.

On the ag CV side, as I mentioned before on the CV that we would expect a normal seasonality for margins to ramp through the year and then for them to be backend loaded.

On the ag side, I think we need to be careful not to model in that fourth-quarter margin that you saw last year which is heavily influenced by the fact that we had cut production in Q2 and Q3 and then re-ramped in Q4.

We would expect to see lower -- the lowest margin in Q1, margins to come up in the following two quarters and then we reserve Q4, depending on where we are in inventory, about the level of production performance.

So CV should look like every other year in terms of seasonality and ag will be less backend loaded than it was in 2015.

Okay.

On LATAM, I think let's get through the process ongoing in Brazil and see how that gets settled.

In Argentina, Argentina is actually doing quite well in ag right now.

I think truck was down but that is because of the Euro V transition at the end of last year.

So we would expect Argentina truck to be down in the first half of 2016, but market conditions in Argentina are improving in ag.

And our execution in Argentina we're doing quite well.

I think that we've gained share in both primary categories in Q1, so we're happy with the developments, are pleased with the developments of what's happening in Argentina.

Brazil, I think we need to wait until we see what happens with the political solution.

Okay.

Thank you very much.

Very, very clear.

Thank you.

Thanks, Monica.

Ann Duignan, JPMorgan.

Hi, good morning, guys.

In Europe commercial vehicles, can you just talk a little bit about whether fleets are increasing their fleet size or whether we are just seeing pull-forward of replacement because of low interest rates?

How are you feeling about the core fundamentals in European CV?

I think it is somewhat interest rate driven, as we've talked about before, but I think it's the medium-size fleet that are growing.

I think that we saw the large fleets were replacing last year which was driving the topline.

I think what we see, and especially since it's more of a southern Europe bias now, you are seeing kind of the smaller fleet and individual operators that is driving the growth here.

Okay.

That's helpful.

And I know you had 1% of your commercial vehicle sales were NAFTA.

Can you expand on that?

It's prototyping.

It's nothing.

It's not a commercial -- I don't even know how it got in there, quite frankly.

It's 1%.

You got me.

It's not distribution sales.

It's prototype material.

Okay.

I was just curious if (multiple speakers) was coming over or something.

No, if we enter North America, you will be the first one we tell.

Thank you for that disclosure, but anyways.

Just one follow-up, I think you said your debt went up in Brazil.

Can you just expand on that?

What was that about Brazil?

Sorry.

Debt increased in Brazil?

Oh, bad debt?

Bad debt.

Okay.

No, interest expense in Brazil.

Oh, interest expense.

It was an interest expense comment.

Okay.

So basically with the losses there -- higher losses in Brazil, particularly on the truck side, debt is growing over there and the cost of debt in Brazil is higher than the average.

A comment on the interest cost line.

And the interest costs.

Okay.

Great.

That's helpful.

I appreciate it.

Thank you.

Joe O'Dea, Vertical Research Partners.

Hi, good morning.

On NAFTA and underproduction and kind of outlook for the rest of the year, it sounds like the back half of the year that could be more aligned with retail.

So could you just kind of give a refresh on where you stand?

I think, a quarter ago, you were talking about taking dealer inventories down about 30%.

Maybe your comfort level with where those stand?

And then just particularly because we see the industry data out of AEM, it still looks like $100 million plus inventory is pretty high there, so helping us kind of parse out what's going on in small mid-versus higher horsepower?

Yes, sure.

The reason that we took down high horsepower tractor is, from our view, the combine inventory is almost in balance now, so the bulk that needs to be taken out is in the high horsepower segment.

That's where we've made the most significant cuts in the production to let that go.

So that's probably going to take the balance of the year.

But we took -- if you look at the slide and look at the relative cuts in production, those are relative to production numbers in Q1 where we had already cut.

So you can imagine the levels that we're running at right now.

It's costing us some share in the short-term, but it's healthy overall because we're trying to let the amount of late-model used get bought up in the marketplace and it's a way that we can protect pricing and so far, in Q1, it's worked.

We've lowered channel inventory.

We're working on the $140 million plus segment and it's not to the detriment of pricing that we are selling into the marketplace.

So that's where really the balance of the heavy lifting is going to have to be done between now and the end of the year.

Okay.

And you had previously talked about how, a year ago, there was a fair amount of competition chasing what was going on in the livestock sector in some of the small midsize.

I think high horsepower, if you take [100] plus and the small/midsize within that.

Has anything sort of shifted more positively in the end market there versus prior expectations?

No.

I think there was a significant amount of the growth rate that we had seen in dairy and livestock as dissipated if you look at it in terms of the horsepower class.

But in terms of pricing, it's stable.

I mean it's a competitive -- the lower the horsepower segment, the more the competitive dynamic of the industry is, so we expect it to be that way, but it's not prohibitive now that the growth rates have slowed.

Okay.

And then just one on price/cost, still some benefit from material costs in the quarter, how you see that progressing over the course of the year as we do see some increasing input costs here and how you are planning for that?

We don't expect to see input costs increasing.

I mean Brazil is a little bit of an outlier.

If that was to ramp back up, we would probably see some inflation there.

But if we're talking about EMEA and NAFTA, we expect to hold those material benefits for the balance of 2016.

Great.

Thanks very much.

Tyler Etten, Piper Jaffray.

Hi, guys.

Thanks for taking my questions.

I was wondering if we could talk a little bit more about the Brazil inventories right now?

How are you feeling about those and what kind of levels are you looking at compared to normal, or are they normal right now?

They are reaching normalization in harvesting equipment and actually at the big ag tradeshows going on right now in Brazil.

And from what I understand, the demand in sugar cane harvesters in combines is actually okay considering the conditions.

I think that there's still too much tractor inventory.

Our target is to reduce dealer inventory under current forecast somewhere in the order of 30% to 40% by the end of the year.

Okay.

Great.

That's helpful.

And again, on Brazil, I was wondering if the guidance for the year is focusing on grain prices being the status quo the entire year and if financing rates of FINAME would stay the same.

Is that what you are looking at or do you expect -- when you are forecasting, do you expect things to get worse in Brazil?

Here's what we know about Brazil -- is that modif roda expires in the beginning of June or, June 4, so we are hoping that that's going to pull some amount of demand unless something gets announced the now around FINAME rates, which clearly, under current conditions, I don't think we can expect anything.

So we would expect some amount of pull and we're seeing it, at least in harvesting, now.

But then right now, we are not expecting Brazil to get any worse.

You can see the levels that we're talking about across the businesses, but we're not expecting getting it to be demonstrably better either in our forecast.

Okay.

Great.

Thanks for the color.

Massimo Vecchio, Mediobanca.

Good afternoon.

Three questions from my side.

The first one on Iveco, I understand you don't give segment margins, but I was wondering if you can indicate an incremental margin for the second half the same way you are indicating decremental margin on (multiple speakers)?

Massimo, isn't that the same thing?

Sorry?

If I give you the growth rate and the incremental margin, it's the same thing.

But yes, we expect it to be accretive over the balance of the year.

And you can demonstrate the same seasonality that you saw in 2015.

That's the most I can give you.

2015.

Okay.

The other two questions is Brazil -- your competitors are talking about the positive pricing in ag.

Can you give some indications on these?

And the third question is Russia and Argentina probably some markets which are giving some positive signs.

I was wondering if you can expand on what is your position in those markets?

Okay.

In Brazil, we are pricing for inflation, and everybody is, but that's really at the end of the day net neutral in terms of profitability.

Argentina, as I commented before, we're pleased at what's going on in Argentina in terms of some of the laws that President Macri has put in in terms of taxation in the farming sector.

I think we need to get some stability in the banking sector for that market to really take off.

But as I mentioned before, we are doing quite well in Argentina on the ag side, gaining share in both tractors and combines, at least through Q1.

Russia, I think we need to wait.

There's some rumblings about reopening of the Russian market.

We don't see it quite yet, but at least the dialogue is improving from where it's been over the last 48 months or so.

Do you think Argentina can compensate Brazil or the dimensions are too different?

It can't.

A normal Brazil in terms of its size is significantly larger.

It buffers Brazil but it doesn't compensate for it.

All right.

Thank you very much.

Larry De Maria, William Blair.

Thanks.

Good morning, Rich.

A quick question on ag.

Can you just talk about the emissions change coming up next year and whether you plan on building more inventory later in the year and the possibility of a pre-buy considering you are obviously talking about too high of inventory and trying to get that down also, so can you just rectify that?

And then secondly, can you talk about order boards in Europe and the sustainability of European ag and how you would gauge maybe the downside risk in the second half on Europe?

Thank you.

Sure.

All right.

We are already tier 3 compliant in harvesting equipment, large tractors and sugarcane harvesters in Brazil.

And we expect to be fully compliant.

I've seen the comments before about stockpiling and pre-buy.

There may be some, but we would consider that more to be an entry year number rather than impacting the full year.

So we may be ahead of the cycle in terms of the introduction of tier 3 and electronic transmissions already, so I don't expect that we would be building up inventory during 2016 to accommodate that overall.

And then the order books in Europe are stable.

From where we ended up at the end of 2015, we are more or less the same with the roll forward.

It's been a little bit choppy.

I think that you've seen the commentary from some other competitors which, in terms of the regional splits, we'd agree with in terms of Germany being slightly down, France a little bit choppy, Poland being a little bit down but Eastern Europe being up somewhat.

We are right in line with those particular forecasts.

At the end, net-net, it ends up being a relatively stable kind of flat environment.

Okay.

That's really good color.

I appreciate that.

And as it relates to Eastern Europe being up slightly, is that a change in the market or would you attribute that to choppiness?

Because obviously, if Eastern Europe turns, that could be relatively meaningful.

I think it's just a question of some of those markets have been down for a period of time.

If you go back and look at 2014, 2015, you've had -- Germany was up quite a bit during that period.

So it's just buffering some of the impact there but it's not -- they are smaller markets at the end of the day, but they do kind of even out some of the bigger markets as they go up and down whether it's legislative driven or something else.

Okay.

Thanks, Rich.

Good luck.

Ross Gilardi, Bank of America.

Thanks a lot.

A couple of questions.

I want to squeeze one in on powertrain actually.

Your engine units sold were flat, which strikes me as being significantly better than your overall addressable markets unless you are just disproportionately tied to just the European truck market.

So could you talk a little bit about that?

We are disproportionately tied to the European truck market.

You answered the question.

Okay.

It's as simple as that.

I want to make sure.

Simple as that.

If you take a look at the growth rates in European trucks and where it happens, and we've got, in terms of unit volume, a bias to the light commercial vehicle segment in terms of third-party customers.

Okay.

And what about just transmissions and axles being up 24% year-on-year?

What's going on there?

That's all internal demand.

That's all internal?

Okay.

And then Rich, could you ballpark what your mix of small versus large ag equipment is in North America these days?

In terms of units?

Yes.

It depends on where you want to --

I don't know about units.

Actually, I'm sorry.

I didn't mean to cut you off.

Just to clarify, I don't know about units.

Just in terms of overall revenue mix?

No, we don't.

I can just tell you that we do not participate at the lower end of the AEM reports.

Our bias is 100 horsepower and up.

I realize that.

There is a significant part of the market that we don't touch.

I realize you are not in the very low end.

I'm just trying to understand how much the sort of small to mid would be buffering your overall NAFTA ag result?

Well, yes, we don't give you the regional split in the ag results, but it's more or less where it was last year.

The New Holland brand in North America serves primarily dairy and livestock.

That's been the growing portion of the market, and they've been doing quite well.

They did quite well last year.

So that is a natural buffer and one of the strengths of having the brands positioned the way they are and splitting them between low crop of KSIH at the upper end -- I mean these are not absolutes of course -- and with a bias towards the upper end and New Holland more of its traditional dairy and livestock.

That's allowed us to buffer the impact of being disproportionately weighted towards one or the other.

Got it.

Thanks.

And then one of the first questions was on capital allocation and you emphasized the desire to get back to investment-grade as sort of the top priority.

I mean you have a buyback authorization out there and it sounded like, a quarter ago, that you were going to try to use some of that.

Has that changed because of the $500 million charge at all, or would you still expect to buy back some stock this year?

Our expectation is to use the authorization.

Thanks a lot.

You're welcome.

Thanks, Ross.

That will conclude the question-and-answer session today.

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

Thank you, Bertrand.

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.