CNH Industrial NV (CNHI) 2016 Q2 法說會逐字稿

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

For your information today's conference call is being recorded.

At this time I would like to turn the call over to Federico Donati, Head of Investor Relations.

Please go ahead, sir.

Thank you, Alex.

Good morning and afternoon, everyone.

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

CNH Industrial Group CEO, Rich Tobin; 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 risk and uncertainties mentioned in the Safe Harbor statement including in the presentation material.

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

Thank you and good morning, everyone.

Second-quarter results were solid.

We continue to demonstrate our ability to execute across the breadth of our business and geographic portfolio despite the large disparity of demand conditions prevalent in the capital goods sector.

Our ability to increase operating profit in the agricultural equipment segment and our consistent trend of improved results in commercial vehicles solidifies our belief that the benefits of our efficiency plan on product cost and quality are taking hold.

Revenues for the quarter were $6.8 billion; adjusted net income was up $75 million versus the prior or the comparable period.

Industrial activities operating profit margin increased year-over-year led by improvements in agricultural equipment, commercial vehicles and powertrain.

Net industrial debt at $2.1 billion, it was $300 million lower in the comparable period coming from $600 million in cash flow generated from industrial activities.

In light of this performance and our confidence in our ability to continue to execute for the remainder of the year we have reaffirmed our full-year guidance for industrial activities of sales and operating margin guidance and our net industrial debt guidance between $1.5 billion and $1.8 billion excluding the European Commission settlement that we recently announced of approximately $500 million.

That is for the highlights; I will hand it over to Max and I will come back to discuss the operating results by the segments.

Max?

Thank you, Rich.

And good morning, good afternoon, everyone.

I am on slide 5 with second-quarter financial highlights.

At industrial activities level net sales were $6.5 billion, down 1.8% compared to Q2 2015 on a constant currency basis with CV and PT taking a bigger share of the total.

The Company achieved an operating profit from industrial activities for the quarter of $453 million, up 13% versus Q2 2015, with operating margin at 7% for the quarter.

Net income was $129 million, up 7% versus prior year, with EPS at $0.10 per share.

Adjusted net income was $216 million, up 53% year over year mainly as a result of the higher offering profit industrial activities.

Adjusted diluted EPS was up $0.05 to $0.16 per share.

Non-GAAP adjustments as listed in our reconciliation in the back with the most significant adjustments in the quarter being the non-tax-deductible true-up charge of $49 million for the European Commission settlement and a $28 million non-cash impact associated with the disposal of an unprofitable line of business in one of our JVs in China.

Net industrial debt was $2.1 billion at June 30, 2016 after the payment of around $200 million in dividends to shareholders in April 2016.

Available liquidity was $8.8 billion, including $5.8 billion of cash, cash equivalent, unrestricted cash and $3 billion of undrawn committed facilities.

And liquidity was up $0.6 billion compared to March 2016 and down $0.5 billion compared to December 2015.

Moving on the slide 6, industrial activities net sales statistics.

Excluding currency translation impact net sales decreased $120 million, or 1.8% in the quarter, with agricultural equipment and construction net sales down 6% and 18% respectively for the quarter due to continued end market weaknesses in NAFTA row crop for ag and in the heavy product class in all regions for CE.

Net sales showed improvement in commercial vehicles plus 6% with Europe up 16% and LATAM down 44% and powertrain plus 7% as a result of strong demand from non-captive customers in light duty as well as heavy-duty applications.

As far as net sales by region, EMEA's share of total net sales increased to 57% versus 53% last year and it was driven by the increases in commercial vehicles and powertrain.

On slide 7, in the quarter operating profit was up $52 million or 13% with improvements in each segment other than CE.

Ag improved 14% with pricing and cost favorability achieving a margin of 10.7%.

CV improved almost 50% on positive price realization, raw material cost and manufacturing efficiency achieving a margin of 3.9%.

While PT, powertrain, increased 25% on strong demand for its application and manufacturing efficiencies achieving a margin of 6.5%.

CE decline was an $18 million reduction achieving -- with the segment achieving a margin of 2.9%.

Industrial activities margin in the quarter reached 7%, up 1 percentage point to last year.

Looking at the adjusted net income walk, consolidated operating profit was up $21 million where a 15% lower financial services operating profit partially offset the stronger performance in industrial activities.

Interest expenses were essentially flat versus last year.

Other net was favorable $25 million primarily due to decreased FX volatility, lower pension cost and other corporate costs.

JV income was $10 million favorable.

Lastly, we had lower taxes as a result of better effective tax rate in the quarter primarily as a result of a 50% reduction in the discrete items related to on book losses and other tax items.

Excluding the impact of the nontax deductible true-up charge for the [AC] settlement, the effective tax rate was 37% for the quarter resulting in a 46% effective tax rate year to date.

The Company long-term effective tax rate objective remains unchanged at between 34% to 36%.

Moving on to slide 8, our change in net industrial debt for the quarter which we already mentioned and some focus on specific quarterly dynamics.

Net industrial cash during the quarter was an inflow of about $600 million, 16% above -- higher than last year.

Primarily due to the positive operating cash flow performance before changes in working capital of approximately $500 million and a positive working capital for almost $200 million coming primarily from higher seasonal payable offset by our capital expenditure of $92 million.

CapEx in particular was down 32% versus prior year.

The reduction for the quarter is primarily coming from lower spending for [engine regulatory] requirements post introduction of Tier 4B and [Euro 6] in off-road and on-road applications respectively.

Moving on to slide 9, our financial services business.

Net income for the quarter was $87 million, down $11 million compared to prior year, primarily due to a reduction in operating profit as a result of a lower average portfolio and a reduction in interest spreads.

Reduced profitability at operating level was offset by improved performance in our non-consolidated JVs in Europe and by lower taxes.

In the second quarter 2016 retail loan originations were $2.3 billion, down $0.1 billion compared to 2015, primarily due to the decline in agricultural equipment sales.

The managed portfolio of $25.3 billion as of June 30, 2016 was down $0.1 billion compared to June 2015.

Credit quality remained strong with delinquencies of 3.8% for Q2, up only slightly over Q2 2015 and last quarter mainly due to an uptick in delinquencies in the LATAM market.

Slide number 10 shows the Company debt maturity schedule.

We continue to implement our strategy to reduce industrial activities bank debt versus capital market transactions with bank debt down $0.2 billion offset by new capital market transactions, mainly the new EUR500 million bond issuance finalized in May 2016.

Additionally, on June 20 we signed a renewal for our EUR1.75 billion five-year committed revolving credit facility where we extended the maturity from 2019 into 2021.

We continue to keep a strong liquidity position with our liquidity to revenue ratio at 35% in support of our goal of reaching an investment-grade rating.

This cash balance covers well the debt maturities in the next 2.5 years.

Net intersegment balance was at $1 billion at the end of June, flat compared to March 2016 as we continue to implement measures to contain the intersegment funding between industrial and financial services.

This concludes the financial review portion of our presentation.

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

Okay, thank you, Max.

Agricultural Equipment net sales decreased 7.5% for the quarter compared to 2015, 6.3% at a constant currency basis, as a result of lower industry volume and product mix in the row crop sector of NAFTA and unfavorable industry volume in the small grain sector in EMEA.

Net sales increased in APAC mainly driven by higher volume in Australia and India.

Sales in specialty tractors and harvesters in EMEA remain strong and in LATAM sugarcane harvester demand largely offset the negative impact from the industry decline in tractors.

Operating profit was $301 million for the second quarter; operating margin at 10.7%.

We had lower wholesale volumes in NAFTA row crop, but we were able to offset this with pricing discipline, cost containment actions including lower material costs and exchange benefits from our Euro-based component cost platform.

During the quarter global tractor and combine production were in line with retail demand.

Combine production was down 5% versus Q2 2015 while global tractor production was up 12% following our typical seasonal trend in low to mid HB tractors in preparation for the scheduled production shutdowns in August.

More importantly in NAFTA row crop production was 31% below last year, in line with our preliminary forecast, and that contributed to the reduction of our total channel inventory in NAFTA of 28%, which you can see in the bottom left-hand of the slide.

For the industry volume we have seen some deterioration in high horsepower tractor demand in NAFTA, largely a result of used (inaudible) process and the continuing challenge we face in the LATAM market particularly for tractors.

In combines NAFTA demand was down 20%, in line with our full-year forecast and up 23% in APAC.

In Construction Equipment net sales decreased 19.5% due to negative industry volumes [primarily] in heavy product class in all regions.

Operating profit was 17% -- excuse me, $17 million for the second quarter 2016, and [net] operating margin of 3%.

Operating profit decreased as a result of lower volumes in NAFTA, negative industrial absorption partially offset with lower product cost and other cost containment actions.

Pricing in the period was negative as slack demand conditions, primarily in NAFTA, did not allow for yen-based cost increases to be passed along to final customers.

In a nutshell, (inaudible) the total variance in profit margin quarter to quarter is almost -- it is exclusively NAFTA, all other regions worldwide are either better or at par with the comparable quarter.

The pricing environment -- I think this is the first time we have had negative pricing on one of these charts in a couple years.

And it gives a reflection of the pricing environment and our efforts to retain share.

We are still profitable in NAFTA and we will continue to fight for our position.

But this is -- this chart here is a reflection of what is going on in terms of the competitive dynamic in Construction Equipment.

Construction Equipment's worldwide overproduction versus retail was 9% in the quarter in preparation for scheduled production shutdowns in August.

Second-quarter total production was 13% lower than the previous year as we attempt to balance channel inventory and take some of the pressure off of the pricing -- NAFTA quarter-to-quarter underproduction of 23% during the quarter.

Construction Equipment's worldwide overproduction -- we did that with the channel inventory.

Looking at the industry in terms of retail demand, LATAM market environment continued to be challenging with both light and heavy segments down 37% and 19% respectively.

Demand in NAFTA and APAC was flat to slightly up for light equipment and down 10% for heavy.

So overall some more deterioration in LATAM, NAFTA deteriorating slightly.

It is more of a problem with the issue with the pricing environment and NAFTA has become incredibly difficult.

We have taken production down; we have lowered total channel inventory at NAFTA, so we are getting ahead of the curve rather than waiting to the second half of the year to balance it in the hope that some pricing discipline will emerge in the second half of the year.

Moving onto Commercial Vehicles.

Net sales increased 5% primarily as a result of favorable truck deliveries in EMEA.

In LATAM net sales decreased to lower industry volumes in Brazil and Argentina.

Specialty vehicle unit deliveries declined by 53% as a result of reduced inventories in defense vehicles in Europe.

Despite that operating profit was $100 million for the second quarter at an operating margin of 4%; this represents a $58 million increase from the comparable quarter.

This increase is primarily as a result of positive price realization in EMEA and APAC, material cost reductions and manufacturing efficiencies in EMEA as a result of our footprint optimization efforts.

Positive volume in EMEA was offset by the difficult trading conditions in LATAM commercial vehicles and, as I mentioned, reduced activity levels in specialty vehicle business.

Second-quarter overproduction retail was 10%, in line with projected pre-buy impact in light commercial range due to the transition to Euro 6 next month.

Underproduction versus retail was 11% in NAFTA and 12% in APAC as we continue to carefully manage our inventory in those regions.

In the quarter the European truck market grew 16%, light vehicle market increased by 16% while medium vehicles and heavy vehicles grew by 10% and 17% respectively.

We expect there to be continued year-over-year growth in European markets in the second half of the year but not at the same rate we saw in the first half.

In LATAM new truck registrations declined 35% as compared to Q2 2015 and APAC truck registrations increased 5% versus the comparable quarter.

Market share overall in trucks in Europe was slightly up against -- across all three categories, particularly in medium where we were up 1.4 percentage points versus Q2 2015.

Order intake for trucks in Europe was up 5% in the quarter with book to bill at [0.95%].

So overall pretty much what we saw in Q1.

EMEA doing quite well in terms of profitability improvement and share performance and demand function, LATAM continuing to suffer.

Moving onto slide 18, we have been actively putting a lot of new product out in the marketplace.

On June 14, Iveco launched the new Stralis which introduced a completely new driveline with reliability and efficiency improvements and delivers leading edge total cost of ownership and CO2 reductions.

This three vehicle range was developed around customer emissions to meet all regulatory requirements of the on road heavy transportation sector.

We are particularly excited about the new Stralis Natural Power which is the first natural gas truck specifically designed for long-haul operations.

As a result today we have more than 15,000 natural gas vehicles in operation in Europe.

The new Stralis NP built on Iveco's extensive expertise and is the first true long-haul natural gas truck in the market that offers a viable alternative to diesel vehicles and the most sustainable long-distance transport truck introduced to date.

Moving on to powertrain, a very good performance following the Q1 net sales at $1 billion, up 8%.

Sales to external customers accounted for 46% of the total, up from 42% in the comparable quarter, as the benefits of our SCR only technology solutions continue to gain market recognition.

Operating profit was $66 million for the second quarter, up $13 million, with an operating margin of 6.5%.

This is a record high second quarter for margin for FPT due to positive product mix, higher sales volume, manufacturing and purchasing efficiencies.

During the quarter powertrain sold approximately 145,000 engines, an increase of 9% compared to 2015.

Moving on to industry outlook.

I think on touched on most of these as we went through the segments, so I think we can just go to the last slide.

Turning -- combining our performance to date and generally more cautious outlook for the balance of the year in some markets, CNH Industrial 2016 guidance remains as follows: more or less unchanged with the incorporation at the net debt of the recently announced settlement of the European Commission fine of approximately $500 million.

So overall a very good quarter.

I'm particularly pleased with our ability to increase margins in ag while continuing to manage the inventory commercial vehicles and powertrain, continuing the trajectory that we saw in the second half of last year and the first quarter this year, construction equipment being the outlier, but that is solely a NAFTA issue.

And if we are going to have to defend some market share so be it at this point until the industry corrects itself.

So we are -- despite the difficult conditions in certain of the markets I think it is a pretty good result and it sets us up to meet our announced objectives that we had for the full year.

That is the end of the presentation so we will open it up for Q&A.

Thank you, Mr. Tobin.

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

Alex, please take the first question.

(Operator Instructions).

Ann Duignan, JPMorgan.

Can you just talk about the solid performance that you delivered in operating margins in Q2, but you have maintained your full-year guidance?

Where do you expect things to be worse than maybe a quarter ago and where do you think things are better?

I don't think that -- look, we expected to have comparable margin in Q2 to be up, which is based on what our production plan was that we laid out for the full year.

So what we had said at the end of last year is that we were going to come out of the gate at relatively low production levels.

So you saw the profit margin in Q1 and Q2; we had ramped up production -- we had to anyway because of the fact that we were going to take it down in Q3 for scheduled shutdown periods.

So that is a negative going into Q3 just from an absorption point of view.

Maybe we are being cautious at this point.

I mean we don't see anything materially changing.

I think we took some of the numbers down slightly in terms of total TIV.

But we don't expect any of the benefits that we have gotten on manufacturing efficiencies, input costs and we are not making a call now on FX clearly.

So, we expected to be done in Q3 on production performance.

Q4 is kind of always for us the swing quarter in terms of performance.

Depending on what we think about demand in 2017 we may run at higher levels of production, which will be positive to margins.

If we think that 2017 is going to be flat it is likely that we will keep our current plans which means we will under produce retail in Q4 and drive for cash.

Okay and at this point, given where commodity prices are and given Brexit and everything that is going on and the agricultural sector, if you had to take a guess at 2017 at this point would you say it is flat, up, down?

If you want me to say something right now I think flat, not down.

I mean I think the fact that used pricing in NAFTA is stabilized; you have seen what we have taken out in terms of total channel inventory again.

So there is really not a requirement for us to -- likely to do that again even within a band of plus or minus 10%.

Sentiment in NAFTA isn't as bad.

I know that when you go out and do the dealer checks no one is particularly excited about buying equipment.

But on the other hand there is an amount of metal that is moving through there and we can see the clearing on the used side, not to the detriment of pricing.

So, those are all good indicators that the market has stablized.

I think clearly it is going to be a question of what happens to commodity prices and what the size of the harvest is through the balance of the year.

Okay and that maybe just a little bit of color on Brexit and what impact that might have.

I know it is probably too early, but on agriculture versus commercial vehicles, maybe just provide the differences.

Yes.

Look, it is not helpful for sentiment clearly.

We don't have a big exposure to commercial vehicles in the UK; it is not one of our largest market share positions.

Right now the only thing we can say, it is not good for sentiment and we do have some translation risk from our UK total revenues.

But other than that I don't think there is anything structurally that is more recent right now.

Okay, I appreciate that.

I will get back in line in the interest of time.

Thank you.

Monica Bosio, Banca IMI.

Just one question, the cash generation in the second quarter was fairly good and actually much better than my expectation.

At this point in time I was wondering if, given your guidance between $1.5 billion and $1.8 billion, would you feel comfortable with the bottom end other guidance, which means $1.5 billion in terms of net industrial debt?

Because it seems to me that things are improving.

And second question is again on Brexit.

I know that your exposure to the UK is really not significant and also for the currency it is not a big problem.

But I was wondering do you have an internal estimate about the trend of the commercial vehicle market in Europe for the next year?

What do you expect just feeling?

Thank you very much.

Okay, Monica.

The numbers that you are quoting in terms of net industrial debt are net of the fine, okay.

Okay.

Back to the original guidance -- look, we are happy where we are right now.

I think we would like to over perform on cash generation.

I think that is going to be entirely predicated upon the demand for trucks in Q4 and the demand for ag in Q4 and whether we are going to take production down or not.

Because if we take production down because demand is slack you are going to have less inventory clearing and your payables are going to reduce within the year.

If neither one of those happens, if then we are on track to be at the upper end of cash generation.

But I think we are going to have to wait to see where we are at the end of Q3 whether we will go and revisit that number or not.

Okay.

Just to be clear.

Upper end of the cash generation so far, is that correct?

Which directly impacts the lower end of the net debt.

Yes, correct.

Excluding the fine.

Right, excluding the fine.

Okay.

In Brexit, I don't think -- look, I can't comment on 2017, I think it is too early.

I think that we are already beginning to see some weakness in truck demand in the UK market.

We don't see the negative sentiment of Brexit on the balance of the EU market.

But right now clearly the UK is showing signs of relative weakness from where it has been in the past year, which was particularly strong.

Okay, perfect.

Thank you very much.

Thank you.

Mike Shlisky, Seaport Global.

Wanted to ask a quick question about your construction outlook, it was down obviously in several parts of the world.

I was wondering if you think your construction business is a little bit more exposed to the farming sector just because a lot of farmers also buy construction equipment on their farms and obviously you are a major ag Company as well.

Any kind of comments there about your mix?

Proportionally, yes.

We have a larger exposure to the ag customer, but that is always been the case.

So even comparable trailing figures for construction would always have that same amount of exposure because we do use a large proportion of our ag distribution to sell construction equipment.

Okay.

And also wanted to ask separately on several segments you also mentioned you had some favorable material costs during the quarter.

Could you give us a little bit more color about what kinds of materials are kind of doing well right now and whether the back half will be kind of similar on a comp side to the prior year?

Anything that is commodity indexed has been positive.

So anything from tires that are indexed to petroleum prices or steel is where the tailwinds have been.

Where do I think for the second half of the year?

Look, I think that there is a lot of discussion about what is going to happen to steel prices.

Our view is that is a bit overdone.

We expect it to go up slightly, but nowhere near some of the numbers that have been quoted out there because of changes in tire (inaudible).

Okay, got it.

If I can could just squeeze in one last one here on your market share in LATAM in ag.

Can you make perhaps some -- like share with us how you feel you are doing so far this year?

I think you just said there were some positives on the sugar business.

But kind of broadly speaking do you think you are gaining share this year in ag in Brazil or perhaps losing?

It is hard to say.

I mean I think that when you see ag shares, the data that comes out, not everybody reports and it tends to be wholesale based.

So you have to be careful with the numbers that get quoted because it depends on where you are on stocking and restocking.

I think that we are performing fine -- we always want to do better but right now we are satisfied with our performance overall.

And we think or believe that we've positioned ourselves in terms of the product mix that we have there and where we stand in terms of inventory, where in previous quarters we were long tractor inventory, the vast majority of that has been sorted out.

So I think that we are well positioned -- the market comes back in the second half of the year, that we are well-positioned to seize our fair share of it.

Okay, got it.

Thanks.

I will leave it there.

Appreciate it, Rich.

Martino De Ambroggi, Equita.

The first question is on the ag margin.

Looking at the operating profit [work], you had positive performance for each and every variable except volume mix.

First, could you give us a flavor of what will be the contribution of the variables except volume mix for the rest of the year?

And second, I know you are reluctant to discuss guidance by division.

But since 10.7% is very good performance in Q2, what should we expect for at least the Q3 if not for the second half?

We are going to endeavor to keep them all green for the balance of the year, clearly.

What we expect from the margins for the balance of the year in ag, as you alluded to, we don't give out segmental guidance.

I can just tell you that in Q3, because we are going to shut down production, scheduled shutdown production, you don't get the over performance that we had.

So, if you go back and look at the charts where we overproduced retail in tractors in Q2, when we do that that is a preparation for taking production down in Q3.

So you can expect the impact of negative absorption in Q3.

Q4, as I mentioned on a previous question, will be contingent on what we believe is going to happen in 2017.

Right now we'd go into it with a few of 2017 being flat.

If we believe that the market is showing signs that the market is going to go up in 2017 we do have the possible tailwind of ramping production going into 2017.

The likely scenario now and what is embedded in our forecast is the historical performance that you generally see in Q4 where we balance our production and over deliver on retail to deliver the cash objectives.

In terms of variables should we expect production cost -- and I assume ForEx and other is mainly ForEx -- will have a positive contribution, as strong as it was in Q1?

Maybe production cost not, but ForEx could be another positive contribution?

It is likely to be positive and green, the quantum we will see.

Okay.

And my last question is on material cost.

You already answered in a previous question, but could we have an estimate for the overall impact across the divisions?

I mean just the consolidated level for the raw material impact in the second-quarter first half?

No.

But I can -- by the end of Q3 we can give you an outlook for 2017 on raw material costs.

But I can't give you an estimate in terms of the tailwind in total consolidation of raw materials.

If you look at it by division right now it is positive in all four.

Okay, thank you.

Joe O'Dea, Vertical Research Partners.

On the op profit walk for the ag segment with FX and other positive contribution in the quarter and the first positive we have seen in a number of quarters, could you just talk about whether you are strategically realigning some of your production flows and taking advantage of some of the large currency movements that we have seen over the past couple years?

And then the degree to which we should continue to expect that FX and other as a positive contribution to op profit?

We have optionality to do that.

It is not something that you can turn on and turn off very quickly.

But if you think about where our industrial footprint is between Latin America, India, Turkey, euro-based and NAFTA, we do have some optionality to shift production to take advantage of the cost advantages of it.

The fact of the matter is that from a componentry point of view we are long euro.

So when the euro weakens against the reporting currency we get a benefit for that.

Okay, thanks.

And then you talked about ongoing efforts on clearing some of the used inventory, Rich, in NAFTA high horsepower.

But could you give kind of your view on status of where that stands, exactly how much more work there is still to do?

Whether that is in the next quarter or two that that clears up?

Just kind of your view on the current status?

I think that in combines we are largely complete or we will be complete under the current trajectory in combines.

In high horsepower tractors, that will likely drag into 2017.

I don't think it is going to be problematic in a flat market in 2017, but if we wanted to get it so-called FMS or total inventory to demand, there is probably some work left to do there.

Okay.

Thanks a lot.

Robert Wertheimer, Barclays.

And really good trailing ag margins.

Real quick question, Rich, you have touched on this twice before, you may not want to answer it, but it is very hard to see from the outside exactly how big and when the impact of steel might hit, if it does.

So, could you tell us when the timing based on current increases that have already happened, when that might flow through?

And then if you have any sense on magnitude?

I am not going to give you the magnitude.

But on steel alone we would expect in the second half of this year for the tailwind to decline somewhere around 40%.

But I am not giving you the divisor but that is just our view.

It is not as big a number as I think everybody thinks that it is in terms of a benefit that we are enjoying now or what the detriment would be in terms of next year.

But clearly prices are beginning to move up, but I mean I have seen these issues with tariffs on Chinese steel and projections of prices moving up 30%.

This is an industry that is long capacity.

I have a very difficult time that price realization will get anywhere close to that.

Perfect, thank you.

And I wonder if you can talk a little bit about the high SVR strategy, whether you think it has provided you a cost advantage.

And it seems to be commercially successful.

So customer reactions, durability and whether you see a cost advantage from your decision to choose that strategy which seems to be working so far.

Arguably it has been a slight cost detriment up into this point in terms of vehicle cost.

I think over the long haul when you include R&D and meeting future regulatory objectives, I think the fact that the market looks like it is moving more and more towards SCR.

So, if I include the R&D I think we are going to find that we would expect that it should be the cheaper solution because we are not flopping back and forth between a variety of different solutions.

We have been on one and it looks right now to be the one that is going to ultimately be the most adopted solution.

Thanks.

Kwame Webb, Morningstar.

So.

I know that you guys have done a lot of cost reengineering over the last two years and clearly have been very tactical in terms of input costs.

Maybe if we were to think about just the last 12 months, what exactly has happened to the size of your permanent manufacturing footprint?

Is it up?

Is it down?

And by what percent?

The footprint itself, we have taken out the equivalent of two and a half plants.

Two of them have been in construction equipment and half a plant in commercial vehicles.

So the footprint, the raw footprint has gone down of the legacy footprint.

But the capacity utilization, with the exception of European commercial vehicles, is down across the board.

Okay, thanks.

So, you know.

And then just my last question.

I know you have been a bit of an advocate of more consolidation among your dealer base, particularly on the agriculture side.

I think kind of we would have seen the most activity over sort of these three lean years.

Just any sort of thoughts on the current pace of dealer consolidation, and do you feel like it has really sort of unfolded the way you would have expected it to?

I think that it is moving in the direction that we would like it to.

I think that these things take -- without intervention'; these things take more time to naturally consolidate.

But overall I think that we are pleased on the mix of dealers that we have in agriculture right now.

I think that we have done a lot of heavy lifting in construction and commercial vehicles.

I think there is probably some more that we need to do there.

But I think that we are relatively pleased with the footprint that we have.

We think it is a strength, quite frankly, on the ag side having a mix of larger dealers and a mix of dealers that are closer proximity dealers to some of the smaller dairy and livestock customers.

So, overall I think that we are happy with it, but there is clearly -- this is a multiyear project.

Great.

Thanks so much.

Larry De Maria, William Blair.

A couple of questions here.

First, you lowered the EU ag outlook.

Are you seeing a real slowdown there or just more concern about what might come?

In other words, is there a real-time weakness or are we just kind of getting out ahead of that based on order book?

And secondly, can you just discuss ag pricing a little bit more?

Not as robust as it was in the first quarter.

Are there concerns more?

Are we staying disciplined in the NAFTA market?

I know you made some comments on price but I thought it was more about construction.

Thank you.

EU it is both.

So, it is a little bit in current order book and a little bit of an estimate based on overall sentiment.

On ag, pricing has held up globally reasonably well considering the declines in the industry.

The real outright pricing pressure that we see is more in construction equipment and commercial vehicles is always highly competitive in pricing.

So, ag overall the market is performing as it has been throughout this downturn.

Okay, thanks.

And then related to that EU outlook you said -- thanks, Rich -- would you share the same sentiments as you did about NAFTA, that we might be looking at a flat market based on everything we are seeing now as the best base case for next year for now?

I don't know.

I think that the volatility in EU -- the EU market has been a lot different than NAFTA.

The change in terms of channel inventory has been a lot different.

So I think it is a bit early to say EU wise.

I think EU demand is going to be more -- I mean if we leave Brexit aside for a moment it is going to be more on how commodity prices develop over the second half of the year.

NAFTA clearly is going to be commodity price driven and then whether the industry has drawn down total inventories far enough to allow an amount of restocking, if you will.

Okay, thanks very much, Rich.

Ross Gilardi, Bank of America Merrill Lynch.

Rich, just wondering, are you seeing any signs of life in Brazil at all?

If not do you expect to?

Obviously the currency strengthened up a bit but just curious your thoughts there.

Brazil ag did actually quite well in June.

Whether that is green shoots or just some pent up demand, because of the view on the availability of financing, I think it is a bit early to say.

But the fact that it balanced some in June, I mean we will take it.

And it was a big contributor to the fact that we were able to make positive operating margins in all regions, including LATAM, during the quarter was the fact that Brazil bounced back a bit.

I think, like I said, it is a bit early to tell.

I am going there in two weeks, so we will see.

But I mean there is pent up demand there, as we discussed before.

That is a macro issue fraught with the political situation, the fact of the matter is the size of the acreage planted has been huge, the crop has been good.

We know that the machine hours are up significantly.

So any improvement in terms of sentiment or bank lending I think that there is likely -- if any region is going to show a bounce in the short-term it is going to be LATAM.

Thanks a lot.

And then just wondering, does the EU fine impact your -- like the finalization of what the number is and the timing of the payment, does it impact your thinking on buybacks?

Because you do have an outstanding authorization, it doesn't look like you have bought anything year to date.

Just wondering what you are thinking there.

No, the quantum is manageable with both.

I don't think that they are overly related, so, no.

So would you still expect to use most of that buyback this year?

Hard to say.

I mean it is -- we're restricted in terms of our market making ability.

So the amount of days even at that nominal amount is quite a bit in terms of trading days.

So we will see.

Thanks a lot.

Massimo Vecchio, Mediobanca.

In your press release you speak about specialty vehicles in -- within Iveco down 53%.

I was wondering if there is any specific reason or maybe a particular tender and if you expect to recover this performance in the second half?

That is tied to long-term contracts of defense vehicles primarily for EU customers.

We are working to free that spending out of the budget and get those commitments.

I don't expect to see a material improvement in the second half.

What we would like is some clarity because these tend to be multi-year contracts.

We would like to get some clarity going into budgetary commitments going into 2017 at this point.

Okay.

And CapEx in the first half it is running below first half last year.

What can we expect for the second half?

And you do still expect CapEx down versus last year?

We expect CapEx in the second half to catch up.

Okay.

So the -- and the full year number to be in line with last year or still slightly below?

It depends also on the final -- [finalization] on the FX.

But this is likely not going to be above last year.

Okay, last question.

Rich, you spoke before -- you touched a little bit about residual value saying that they stabilized.

Can you expand a little bit?

And also out of your total managed portfolio, what is your risk exposure to this residual value?

Obviously it is a small part but can you quantify that?

The residual values in terms of the leased units out of the [finco] you are talking about?

Yes.

My comment was more on residual values are used values, is what I say, which is more an issue about the value of a trade in vis-a-vis a new piece of equipment.

Those values have not come down.

Now there is a knock on effect of residual values within the lease portfolio.

I would have to go and get you that number off-line.

I don't have it.

Whether a stabilization -- look, if you were taking charges to write down based on residuals a stabilization would imply that those write-downs would cease at the end of the day.

So it is positive, but I am not in a position to monetize that for you right now.

So, you are talking about stabilization second quarter versus first quarter, right?

I am just saying that right now that used values are a proxy for the return of new units being sold in the marketplace.

If used values continue to drop and that value on the trade in of the new it puts a break on new sales to a certain extent.

The fact that those things have stabilized -- combines stabilized first, tractors have begun to stabilize is positive in terms of the market reaching equilibrium to between new and used pricing.

Thank you very much, very clear.

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, Alex.

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

Have a good evening and afternoon.

Bye.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.