CNH Industrial NV (CNHI) 2016 Q3 法說會逐字稿

Good morning and afternoon, ladies and gentlemen and welcome to today's CNH Industrial 2016 third-quarter results conference call. For your information, today's conference is being recorded. (Operator Instructions). At this time, I would now like to turn the conference over to Federico Donati, Head of Investor Relations. Please go ahead, sir.

Thank you, Cecilia. Good morning and afternoon, everyone. We would like to welcome you to the CNH Industrial third-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.

Thank you, Federico and good morning or good afternoon, everybody. Our third-quarter results were consistent with our expectations. Despite the challenging demand environment in agricultural business, we have been able to increase our comparable segment profit margin for the quarter as a result of proactive cost controls, measures and improved equipment demand, largely in Latin America.

Our commercial vehicle business has continued to gain marketshare in the latest quarter in Europe as our new product launches gained traction in the market. We've had some positive developments in the quarter demonstrating our commitment to technological advancement in precision farming with our autonomous tractor concept vehicle at Farm Progress in August and, additionally today we announced our agreement to acquire the tillage seeding, hay and forage segments of Kongskilde Industries.

Furthermore, we announced a new exclusive alliance with Hyundai Heavy Industries in the mini-excavator segment, which will become operational in the first quarter of 2017. And as you may have seen, CNH Industrial was again confirmed industry leader for the sixth consecutive year in the Dow Jones Sustainability Indices.

We are effectively managing our businesses in challenging market conditions by reducing our structural costs and retaining our marketshare positions and positioning ourselves to take full advantage of opportunities as they arise in the cycle.

Moving on to the financial performance of the quarter, revenues in the quarter were $5.7 billion, down 1.7%. Adjusted net income was up 79% and adjusted EPS was up 67% for the quarter. Operating profit for industrial activities was $248 million for the quarter, in line with the same period in 2015 at an operating margin of 4.5%. Net industrial debt at $2.7 billion was $500 million higher than at June 30. The increase was primarily attributed to seasonal differences in the production cycle and its impact on net working capital. It's not inventory; it's just a change in payables, but Max will cover that later in the presentation. 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.

So, with that, I will hand it over to Max and then come back with the segmental commentary.

Thank you, Rich. Good afternoon, everyone. I am on slide 5 with third-quarter financial highlights. I won't repeat the highlights that Rich already mentioned, but I would point out that, for industrial activities, while net sales of $5.5 billion were down slightly compared to Q3 last year, operating profit was actually up 1% to $248 million with operating margin at 4.5%. Net income was $39 million for the quarter with EPS of $0.03 per share. Net income includes a charge of $38 million, or $24 million after-tax, related to the repurchase of a portion of the 7 7/8 notes due in 2017. Available liquidity was $8.9 billion, up $0.1 billion compared to June 30 and down $0.4 billion compared to December 31, 2015.

Moving on to slide 6, industrial activities net sales walk. Excluding the currency translation impact, which was very minor in the quarter, net sales decreased about $100 million in the quarter with agricultural equipment down 3.5% on lower NAFTA row crop sector demand and small grain sector demand weaknesses in EMEA, while ag sales were up 28% in LATAM as a result of improved trading conditions in Brazil and Argentina.

Construction equipment net sales were flat while commercial vehicles net sales were down 3.7%, primarily as a result of lower volume across all ranges in LATAM leading to a LATAM revenue decline of 31% year-over-year. Powertrain was up approximately 6% due to higher volume primarily in engines for on-road applications.

On next slide, in the quarter, operating profit was relatively flat versus last year with improvement in all segments except CE. Ag improved 13% on pricing discipline and lower material costs, achieving a margin of 6.6%. CV improved to a margin of 3% on positive pricing and manufacturing efficiency in EMEA offsetting the said fluctuating conditions in LATAM, while powertrain increased 49% on strong demand for engines and for positive manufacturing efficiencies. CE declined 36% on unfavorable market and product mix effects and negative price realization in NAFTA.

Looking at the adjusted net income walk, the lower ag portfolio and reduced interest spreads drove financial service operating profit down by 10%. Net interest expenses were essentially flat versus last year, excluding the charge of $38 million on the note repurchased. Other net was favorable $24 million primarily due to lower effects losses and lower pension and other corporate costs.

Lastly, we had lower taxes as a result of a better effective tax rate in the quarter primarily as a result of lower relevance of unbenefited losses. Excluding the impact of the European Commission settlement and the unbenefited losses, the effective tax rate for the period year-to-date was 34%, in line with the Company's long-term effective tax rate objective of between 34% to 36%.

Moving on to slide 8, our change in net industrial debt for the quarter. The net industrial cash flow impact in the quarter was due to a decrease in trade payables of approximately $500 million. It's primarily attributable to seasonality in the production cycle due to the summer shutdown in our plants. CapEx was down 21% versus Q3 2015. The reduction primarily coming from lower spending for industrial capacity expansion due to program activity completion and regulatory-related CapEx.

Moving on to slide 9, our financial services business. Net income for the quarter was $77 million, down $17 million compared to last year primarily due to the lower ag average portfolio and the reduction into spreads. In the third quarter of 2016, retail loan originations were $2.2 billion, flat compared to 2015. The managed portfolio of $24.8 billion at the end of September was down 0.2 in constant currency basis year-on-year. Credit quality remains strong with delinquencies of 3.5% for Q3, in line with the same quarter of last year with lack of statistics on delinquencies improving from the recent trends.

On slide 10, we illustrate here the Company debt maturity schedule and available liquidity. As of September 30, 2016, available liquidity was $8.9 billion, slightly up compared to June and down $0.4 billion compared to December 2015. Net intersegment balance was at $0.3 billion at the end of September, down $0.7 billion compared to June 2016. Although we continue reducing intersegment activity, its balance could fluctuate in the short term based on timing of our capital market transactions.

We continue to keep a strong liquidity position with our liquidity-to-LTM revenue ratio at more than 35% at the end of September in support of our goal of reaching an investment-grade rating. This liquidity balance covers debt maturities until the end of 2018.

Next slide, number 11, deals with the recent capital market transactions of the industrial business and the relative effect on interest expense. On August 18, we completed an offering for $600 million in aggregate principal amount of 4.5% notes due 2023, and subsequently, on September 2, we announced the final result of a cash tender offer for Senior Notes due 2017 issued by CNH Industrial subsidiary, Case New Holland Industrial Inc. These transactions show our ability to refinance current outstanding notes with new notes at longer maturities and at substantially lower interest rates and are part of our focus on EPS-accretive initiatives on P&L items below operating profit. Subsequent to Q3 close, we have issued a $400 million note from our capital entity at a coupon of 3 7/8.

This concludes the financial review portion of the presentation. Let me turn it back to Rich for the business overview section.

Okay, thank you, Max. Agricultural equipment's net sales decreased 3% for the third quarter as a result of unfavorable industry volume and product mix in the row crop sector in NAFTA and unfavorable industry volume in the small grain sector in EMEA, which is France. Net sales of specialty tractors in EMEA remain strong. Net sales increased in LATAM due to improvements in Brazil and Argentina and improvements in credit availability.

Operating profit was $155 million for the quarter, up 13% versus last year. The increase was primarily due to net price realization, lower material costs partially offset by unfavorable volume, including fixed cost absorption and unfavorable product mix in NAFTA. Operating margin increased 1 percentage point to 6.6%.

During the quarter, global tractor production was broadly in line with retail demand with combine underproduction at 5%. Tractors worldwide production was down 6%, while combine production was up 31% versus very low comps. NAFTA row crop reduction at September year-to-date was 28% below last year, in line with our preliminary forecasts and that contributed to the reduction of our total channel inventory in NAFTA of 17%.

For industry volume, we've seen persistent deterioration in the high horsepower tractor and combine demand in NAFTA largely as a result of used inventory clearing process. While demand in EMEA was broadly flat versus last year, we have seen some initial signs of recovery in LATAM with tractors up 9% and combines up 15%. For the balance of the year, we would expect to underproduce retail and NAFTA row crop and the rest of the markets by an average of 20%, in line with expected retail market seasonality in Q4. While we believe we achieved a balanced position in combine inventory, expect efforts to reduce inventory in high horsepower tractors to continue through 2017.

It was a tough quarter in construction equipment. Net sales were largely flat driven by favorable volume in APAC offset by lower sales in NAFTA. Continuing efforts and cost-containment actions only partially mitigated the negative market and product mix in both NAFTA and LATAM. Competitive pricing pressure, particularly in NAFTA -- I think this is the first time that we've been negative on pricing in construction equipment in several years -- and because of a one-time gain on warranty in the comparable period and finally, on OEM transactional foreign exchange, which is largely yen-derived on excavator product.

Despite a challenging market and competitive environment, particularly in NAFTA, we still expect to be solidly profitable in the full year. The agreement with Hyundai Heavy Industries in the mini-excavator segment that I mentioned in my earlier comments will become operational in the first quarter of 2017 and will allow us to enter one of the most dynamic segments of the light equipment space.

Together with the continuation of the efficiency program cost-containment actions, we are confident that CE segment margin will continue to improve going forward. So it was a particularly difficult period. I think we've held out longer than most in terms of being disciplined on the pricing side, but the market has really turned in terms of pricing quite negative. It's been that way all year, but it's been exacerbated in Q3, so you see the effect on drawing down dealer inventories through aggressive pricing action during the quarter. Construction equipment's worldwide overproduction for retail was 11% in the quarter with total production flat versus last year. In LATAM, production levels, down 20%.

Looking at industry retail demand during the quarter, the LATAM market environment continued to be challenging in both light and heavy portions of the segment, down 22% and 16% respectively. Demand in NAFTA was flat in light, but down 14% in heavy. EMEA and APAC were flat, largely flat for the both. For the balance of the year, expect to underproduce retail in line with seasonality with year-over-year production basically flat for the full year.

Moving onto commercial vehicles. Net sales increased 3.4% for the third quarter compared to 2015 primarily as a result of lower volume in all ranges in LATAM mainly due to continuing deterioration of market conditions in Brazil and the Euro V pre-buy impact in Argentina in the second half of 2015. So that volume split of the negative 70 impact there is half EMEA, which we will get to, is largely impacted by specialty vehicles. The balance of it is the pre-builds on the Euro V for Argentina last year.

Operating profit was $64 million for the quarter with an operating margin of 3%. The increase was due to positive pricing for trucks in EMEA and APAC and manufacturing efficiencies in EMEA trucks and buses, partially offset by lower volume in specialty vehicles and LATAM for trucks.

Next slide. Third-quarter underproduction versus retail was 3%. Worldwide production level, down 6% versus the comparable quarter with LATAM down 37% over the comparable period. Marketshare overall for trucks in Europe was up 1.1 percentage point versus last year with medium range up 3.2 percentage points and light up 1.5 percentage points. Heavy market is flat, which has increasingly become the most competitive segment in European trucks.

Order intake for trucks in Europe was slightly down in the quarter driven by lower (inaudible) for light vehicles after the strong pre-buy ahead of the introduction of Euro VI. While orders in heavy range showed a double-digit increase, deliveries are up 6% driven by light segment up 14% with a book-to-bill ratio of 0.79. For the balance of the year, we expect to underproduce retail in line with normal seasonality with production levels year-over-year slightly down in trucks in Q4, which will allow us to absorb the overproduction for the first part of the year, which is mainly driven by pre-buy impact in the light duty range.

In powertrain, an excellent performance for the quarter. Net sales increased 6.3% compared to 2015 due to higher volumes primarily in engines for on-road applications. Sales to external customers accounted for 48% versus 44% in the comparable period. During the quarter, powertrain sold approximately 127,000 engines, an increase of 13%. 42% of the engines were supplied to captive customers with the remaining 58% to external.

Moving on to the industry outlook, which I covered in the opening comments. Well, in terms of the update, the only change in NAFTA is for heavy construction. It's been lowered now to down 10 to 15. In EMEA, we've revised upward our industry forecasts for trucks to now between plus 10 to 15. And in LATAM, tractor is now expected to be down 10 to 15 and combines flat to up 5. We've revised downward the industry volumes for heavy construction equipment down 20 to 25 and trucks down 30 in LATAM. Though not overly different than what we've been clocking in all quarter, it's really a reflection of what you've seen in the revenues for Q3.

Turning to my final slide before we open it up to Q&A. As I mentioned in my opening remarks, we have reaffirmed guidance of net sales of industrial at between $23 billion and $24 billion and an operating margin between 5.2% and 5.8% and net industrial debt between $2 billion to $2.3 billion, excluding the impact, or $1.5 billion to $1.8 billion, excluding the impact of the European Commission settlement of $0.5 billion, which has been paid as a subsequent event in this month.

With that, Federico, let's open up to Q&A.

Thank you, Mr. Tobin. Now we are ready to start the Q&A session. Cecilia, please take the first question.

Ann Duignan, JPMorgan.

Rich, looking at where we are today and looking into 2017, which of the businesses do you think represent the greatest downside risk? And offset by the greatest upside I suppose is LATAM. But if you could talk about weakening fundamentals in heavy construction, still weak LATAM trucks in construction. Looking around the world, where do you see the greatest downside risks?

The largest downside risk is if NAFTA continues to deteriorate. I think that we've been looking at 2017 maybe optimistically to be flat. If it was down, that's where, as you know, the product mix is its richest, so that would probably have the most impact if that was to continue to decline. Although, we are in year three now and if you look over 20-year averages -- and I get it, all the calculations of what went on between 2010 and 2013 -- we are getting kind of low. So I'm not making a statement about 2017, but if you are asking where the most pain would be, the most pain would be for NAFTA to continue to decline at the rate that it's declining at.

And you covered it in terms of it's more of a regional comment across all businesses that hopefully with the changes in the government of Brazil, we are beginning to see some light at the end of the tunnel with the return in demand in ag and if you look again at where we are in terms of construction equipment and commercial vehicles and LATAM, there's nowhere to go down from here. So I think that we are feeling positive in terms of upside that we would be getting it from LATAM going forward.

Okay. I appreciate that. Could you just comment as a follow-up on your early order program for spring row crop equipment and planting equipment?

It's largely flattish. So let me say it another way. It's in line with what we see in terms of the performance this year. Meaning that NAFTA is down at the same percentage that it's down right now in terms of total units. Although we increased production in combines, which is reflected a little bit in the earnings of Q3 because demand, as we had mentioned in previous quarters, were really at imbalance, we believe, in terms of demand in combine. So we actually increased production of combines in NAFTA in this past quarter, but largely flat. I think that if you go around the world, LATAM is moving up. EMEA, with the exception of France, is largely flat, France being down significantly.

Okay. Thank you. In the interest of time, I will get back in queue. Appreciate it.

Mike Shlisky, Seaport Global.

I want to touch on construction here. This is the first quarter we've seen your top line up year-over-year in almost two years. I guess I was asking if that business has turned the corner here, or at least it's flattening out into 2017. Secondly, just given the seasonality of your margins there based on what we just saw in Q3, is it possible we could see an operating loss here in Q4 in construction?

Our expectation is not to have a full-year loss in construction. We don't expect -- we took a lot of pricing action in Q3 reacting to the prevailing market conditions, particularly in NAFTA. We would expect relatively to have a better quarter in Q4 than we've shown in Q3. We've just had to take some action at the same time because if you look at where we were in terms of production to retail, we needed to enter -- we've been positive in construction equipment pricing, I believe, over the last three years. At a certain point, we needed to make a reaction to the marketplace because of the competitiveness of the environment. The top line being better is largely influenced by APAC largely because of demand in India.

Okay. Got it. Also wanted to ask about the acquisition today. Just wanted to know if you can give us any kind of details financially about it, or if it's just too small to make a big deal out of, and are you finding in general in the M&A market globally that you are seeing some targets out there with some of the smaller guys maybe under a little bit more stress financially than perhaps the bigger guys are?

We've signed but haven't closed the Kongskilde acquisition. I can tell you that the turnover is going to be less than EUR100 million in turnover and it's not going to be overly material, at least in 2017, to earnings, but potentially it will have a positive impact once we get through the integration phase and the cycle.

In terms of targets, yes, clearly, we are in certain jurisdictions year three of a pretty negative ag cycle, so it has had an impact on earnings across all market participants. So it's made some acquisitions, or at least some targets more attractive than they had been in the past.

Okay, great. If I could squeeze in just one last one here on the tax rate as well. Obviously, it has done well. It's in line with your longer-term goals, probably a bit earlier than you probably might have mapped out at your 2014 analyst event. Curious if you can tell us if you think that will keep on going into 2017, or are there additional changes in where you earn money this year that might make it different next year, obviously based upon each segment turns out next year?

Yes, we expect to make sequential progress on it; that's why we continued to slow our long-term goal. What's really going to trigger us making a material impact on it in the near future is how quickly Latin American demand bounces back. So once LATAM bounces back, we think that's going to have a positive impact in terms of our ETR.

Got it. Thanks so much, Rich.

Massimo Vecchio, Mediobanca.

Good afternoon. First question is on Iveco and the specialty vehicles, if you can expand it a bit. I'm trying to understand if this is an order you didn't get in Q3 and you will get in Q4, in Q1, or if there is something more structural on this front?

It's largely the defense cycle. So we've been in a declining defense demand cycle for approximately two years now, so our profits in specialty vehicle have been going down since 2013. We've got a variety of projects in the pipe, but this is a business that's heavily predicated upon government contracts at the end of the day. So it's just part of the cycle. It is negative year-over-year, but we would expect once we move into another spending cycle in terms of defense spending in Europe that we can bounce those profits back.

Okay. Thanks. And second question on ag. You've been still destocking in Q3. Your row crop inventory is down 17%. Can you elaborate a little bit on where you are in terms of inventory versus where you want to be and when you think you are going to get there? Last time we spoke during second-quarter conference call I guess you were saying that you should be mostly over by the end of the year with some queue in Q1 or Q2 next year.

Yes, I think that's really nothing has changed since the end of Q2. We believe that we are largely in balance on combines and that's why we've taken the opportunity to increase production there. On high horsepower tractors, it's going to take some amount, if not all of 2017 to get in balance, but that's going to be dependent on what we expect for 2017 demand and we are not in a position to forecast that yet. We are going to have to wait till January.

Okay. And the residual values, the prices on the used market, last time in Q2, you said that you were seeing some sign of stabilization, so no more declines?

They have been stabilizing in both segments. Combines have been relatively stable all year and actually in certain instances moving up and there is some stability in the high horsepower and four wheel drive.

All right. Thank you very much.

Joe O'Dea, Vertical Research.

Hello. First question just on NAFTA construction equipment and we did see that the price headwinds increased a little bit from last quarter. It looked like the revenue declines were a little bit more modest, like low single digits. So could you just talk about general conditions in the market, whether or not you feel like things deteriorated a little bit sequentially from the second quarter, whether or not this is absorbing some excess fleet and more of a temporary impact or is it a bigger deterioration within the market and that's pushing pricing lower?

I think it's our participation strategy more than anything else. Pricing in heavy equipment has been tough all year. Look, we are not the largest player in the market and really we are not a price leader; we are a price follower at the end of the day. So a lot of it is, at the end, we try to remain as disciplined as we can on pricing, but then again we have to balance our inventory so we made the decision to become a little bit more aggressive in Q3 to balance that position. But the overall environment has been difficult all year.

But not necessarily worse? It's just a matter of it's tough and it stayed tough?

Yes, our position in the marketplace and our marketshare, when we act on pricing, it's -- we are reacting to what the bigger market participants are doing. So it's not getting any worse; it's just that we've been trying to not act on pricing. But at a certain point when the market continues to be difficult in terms of pricing environment, you have to intervene and we chose to do so in Q3. But it's not as if it got worse in Q3; it's just our participation strategy.

Got it. In NAFTA ag and the inventory and just how you view smaller equipment inventory levels versus larger, it sounds like -- I think you were clear about combines and some of the high horsepower. Is there any kind of overhang with excess smaller equipment inventory at this point or rather you feel pretty comfortable with that?

Well, I will only speak for us and not the industry itself. We are in balance on small. That's not where we hold the largest marketshare in terms of our participation in either brand, but we are relatively balanced in small tractor. It's a part of the market that's actually shown some signs of strength over the last 18 to 24 months.

Okay. Thanks a lot.

Ross Gilardi, Bank of America.

Good afternoon, guys. I just want to make sure I understood your answer to Ann's question at the beginning when you said North America was trending flat, but then you clarified that that was with the decline in 2016. So are you saying early orders are trending down with the minus 20%-ish that you are forecasting for large ag or are you saying flat? I didn't get that.

Well, it's relative to the decline of the market. So it's a hard answer in terms of percentage terms. It's more or less thinking about it on a unitary basis in terms of backlogs of orders. It's relative to what the running rate is today in NAFTA demand. So if the projected TIV for combines in NAFTA is 5,700 units coming off of 6,500, then proportionally we are flat taking into account that the TIV has moved down.

Okay. Got it. And how should we think about ag margin in the fourth quarter? You've had two quarters in a row now where your ag margins are up, but you've got a tricky comp it would seem from the fourth quarter of last year where your profits were up 50% on down revenue. So I think you said that ag production would be down year-on-year, but I don't know if that was a sequential comment or not, but ag margin --?

No, that's true, Ross. Last year, when everybody had difficulty believing what we had projected for Q4 ag is because we had run the industrial machine pretty heavy in fourth quarter and wholesale simultaneously. So you got the production credit and the wholesale margin. This year, we are going to run less so, so the difference between Q4 of 2015 and Q4 of 2016 is going to be less production credit.

Okay. Was there a down 20% comment that you threw in there, or was that a sequential comment?

That's a full-year comment, not a Q4-to-Q4 comment.

Okay. Got it. And just your overall feel on European truck right now? There's been some commentary from different participants that the registration data would likely be negative for the rest of the year, but you guys have got some unique geographic and mix exposure, of course, so what's your feel on European truck into 2017?

We don't have a significant exposure to the UK, so I think that some of the bigger market participants, depending on who they are, depending on your weighting in the UK, you are going to get some fuzzy numbers out of that. Overall, the demand has been relatively stable. You can see where we are in book-to-bill and orders.

The only other commentary that I would make is on the heavy duty segment. As we had mentioned earlier in the year, our expectation that pricing would become a little bit more difficult there just because of the fact that NAFTA heavy duty is rolling over quite a bit, so it's the last market that's out there, so to speak. So I think the pricing environment in heavy is more difficult than it was this time last year, but in terms of the total demand, UK aside, it's relatively stable.

Thanks very much.

David Russell, Evercore.

Thank you. I'm trying to think about the ag margins for next year, just trying to incorporate mix. Maybe you can give us a little help on maybe LATAM markets on the way up versus North America next year say is down to some degree because it looks like for this year, and correct me if I am wrong, you are implying the ag margins are down a bit from last year. Last year was 8.6%. Maybe this year, you are looking at around 8.0%, which on a decremental basis is pretty healthy. It was actually a pretty good job, maybe down 15%, 16% decrementals.

When I think about the mix for next year, do you feel within a reasonable sales decline next year for ag let's say, are the ag margins bottoming at these levels, you'd argue, or is North America still that significant on profitability that even if LATAM is up, if North America is down, it's just hard to keep margins flat?

Yes, I think that you have it correct. It's just a question of quantum now -- how far is NAFTA -- if it is going to go down -- how far is it down and how far does LATAM need to come up. At the end of the day, for a variety of reasons, input costs and logistics costs and the like, that takes more LATAM volume to make up for NAFTA volume, product richness and a variety of other frictional costs that are out there.

We are not predicting NAFTA to be down of any quantum, David. I think we are going to wait and see how we close the year, but clearly a 1 for 1 unit by unit at constant mix, it's not good enough. But remember again that LATAM is down significantly. LATAM is down more than NAFTA in certain categories, so we will see how it is.

LATAM is only going to be a third of the size. LATAM is only a third of the size of NAFTA this year in ag, so I appreciate --?

Yes, but we are talking about the change down versus the change up. What I'm saying is you need a larger acceleration in LATAM than a deceleration in NAFTA to break even on a margin basis.

Yes. I'm just thinking if LATAM is up 25% and North America is down 10%, they may negate each other a little bit on size or revenue. I was just trying to get a feel for the mix, how comfortable can I be modeling that margin at least close to flat.

The good news about that equation -- and I'm not saying yes or no in terms of your calculation; I don't think it's that far off. The good news about the calculation is the richness of the product mix in LATAM gets better every year.

Okay. And your Company inventories basically were flat. The last few years, we've seen them fall a little bit sequentially a good 5%, 6%. Was that how you planned it, or was the inventory draw in house a little less than you thought and we've got to make a sharper sequential 3Q to 4Q on inventory cuts?

We made a cut to production in NAFTA, but largely because of market conditions, not because of -- well, at the end of the day, that does come back into Company inventory. But, as you know, if you look back historically, Q4 is when we generate a significant portion of our cash flow. Our expectation is to be at levels that we exited -- in terms of Company inventory -- where we exited last year because if you remember last year, that was a very low number of Company inventory that we exited with.

Okay. Thank you very much. I appreciate it.

On ag in North America. No problem, David. 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, Cecilia. We would like to thank everyone for attending today's call with us. Have a good day.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.