CNH Industrial NV (CNHI) 2017 Q1 法說會逐字稿

Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial 2017 First Quarter Results Conference Call.

For your information, today's conference call will be recorded.

(Operator Instructions)

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

Please go ahead, sir.

Thank you, Claire.

Good morning and afternoon, everyone.

We would like to welcome you to the CNH Industrial First Quarter 2017 Results Webcast Conference Call.

CNH Industrial Group's CEO, Rich Tobin; and Max Chiara, group's 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.

Good morning, everyone, and good afternoon.

We are encouraged by the first quarter results, particularly in Agricultural Equipment segment, which returned to growth by posting a revenue increase of 10.5% and delivering 31% incremental margin for the segment.

We are in the path to deliver year-over-year improvements in operating profit and net income by executing in the marketplace and maintaining disciplined cost management.

As a result, we are reaffirming our full year guidance.

Revenues were up -- revenues are at $5.7 billion, we're up 5.8% versus last year with significant contributions from LATAM and APAC regions.

Industrial operating margin was at 4.1% for the quarter, up 0.6 percentage points versus last year.

Net industrial debt at $2.1 billion increased from the end of 2016, a result as planned seasonal increase in inventory despite the increase in business activity.

Operating cash flow was better than the comparable quarter as a result of retail velocity and disciplined working capital policies.

The results were better than Q1 last year across the board from both the top line level and the bottom line.

The Agricultural business is off to an encouraging start and you'll see that we've refined some of our estimates on the regional volumes for the year.

Our book-to-bill in CV remains strong, and Powertrain continues to deliver.

It is obviously a difficult quarter in Construction Equipment, and our expectation is that Q1 will be the low point for the year, and we'll move into quarterly profit position by Q2.

Before I hand it over to Max for the usual finance overview, in the next slide, we have highlighted some key product awards and achievements attained during the year.

I will not touch on them all, but wanted to highlight the fact that on April 7, we announced that the Iveco Commercial Vehicles manufacturing facility in Madrid, Spain, has become the company's first site to achieve gold status in the world-class manufacturing program.

With this achievement, the plant is now the highest-ranking facility in terms of manufacturing excellence among the group's 64 manufacturing facilities worldwide and a performance benchmark for the group.

I would like to congratulate all of our Madrid employees for reaching this significant milestone.

Okay, with that, I'll hand it over to Max to go over the financial portion of the presentation.

Max?

Thank you, Rich.

I'm on Slide 6 with Q1 financial highlights.

Net sales of Industrial Activities at $5.4 billion for Q1, up 6.5% or approximately $330 million on a constant currency basis, driven by strong demand for Agricultural Equipment in LATAM as well as favorable demand trend in EMEA and APAC in Powertrain and Commercial Vehicles segment.

Operating profit of Industrial Activities at $219 million for the quarter, realizing an increase of 23% with the margin at 4.1%.

Adjusted net income, which excludes restructuring charges, was $58 million and improved by $57 million or $0.04 per share year-over-year.

This improvement comes from a combination of increased operating profit, lower interest expense and higher JV income.

Available liquidity was $7.6 billion, down $1.2 billion compared to December 2016.

Moving on to Slide 7. Industrial Activities net sales for the quarter, Agricultural Equipment was up 8.5% as a result of strong rebound in demand in LATAM in constant currency with revenue in the region up 67% and the continuation of a positive market momentum in APAC.

Construction Equipment net sales were down 2.8% on a constant currency basis, primarily as a result of a 5% decline in heavy industry demand in NAFTA and continued with markets in EMEA and LATAM-heavy.

For Commercial Vehicles, net sales were up 4.7% as a result of favorable truck and bus volume, partially offset by lower specialty vehicle activity.

And Powertrain was up approximately 17% due to higher volume.

As far as net sales by region, share of total net sales decreased in NAFTA and EMEA, and increase in LATAM and APAC.

Slide 8, next slide, in the quarter, operating profit of Industrial Activities was up 23% or $41 million versus last year, with improvements in Agricultural Equipment and Powertrain and declines in Construction Equipment and Commercial Vehicles.

Adjusted net income increased by $57 million, held by the improvement in interest expense due to the efforts made last year to improve our debt structure by retiring higher rate bonds and replacing them with lower rate notes.

Income tax expense is higher as a result of the higher profit before tax, but the adjusted effective tax rate declined 35 percentage points from last year to 56%.

The adjusted ETR is still impacted by a benefit of losses in certain jurisdictions and continues to be a focus of our structural improvement efforts.

We are reconfirming that we expect the full year adjusted ETR to improve from the prior year 39%.

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

Net industrial debt increased by $0.6 billion since the beginning of the year as a result of increased inventory to meet seasonal demand.

This buildup of inventory in the first quarter is necessary to support the heavy spring selling season, especially in the Agricultural Equipment segment.

However, net industrial cash flow improved $0.1 billion compared to the first quarter of 2016, primarily from a more efficient use of the working capital.

Next slide, #10.

Capital expenditures were down 7.5% to $74 million.

The reduction is primarily from lower spending for regulatory-related investments.

We do expect increased spending to restart in the remaining on the year in preparation of the upcoming Stage V for off-road applications and as a result of the acceleration of precision, solution and telematics in AG.

Moving on to Slide 11, our Financial Services business.

Net income for the quarter was $87 million, flat compared to last year.

For the quarter, retail loan origination were $1.9 billion, flat as well compared to the same quarter last year.

The managed portfolio of $24.7 billion as of March 31 was down 0.2 with NAFTA down offset by other regions, primarily LATAM.

Credit quality remains strong with delinquencies of 3.3% for Q1 '17, down 0.4 percentage point versus comparable quarter last year.

Slide 12 illustrates the company debt maturity schedule and available liquidity.

As of March 31, available liquidity was $7.6 billion, down 1.2 compared to December.

Liquidity to revenue ratio remains at a solid 30%.

We continue to execute on our capital structure optimization and are working diligently toward achieving the investment-grade rating.

On April 10, we completed an offering of $500 million in aggregate principal amount on 4 3/8 notes due 2022 issued at par by CNH Industrial Capital LLC, which extends the maturities of our debts and reduces our reliance on secured debt.

In addition, today, we announced the early redemption of all of the remaining 7 7/8 Senior Notes maturing in December '17, which allows us to further improve our financial ratios as well as simplify the debt issuing structure.

Both transactions are consistent with our financial policy aimed at achieving the investment-grade rating.

This concludes the financial review portion of the presentation.

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

Thank you.

Okay.

Thanks, Max.

I'm on Slide 14.

Agricultural's net sales, as I mentioned earlier, increased 10.5% in the first quarter as a result of strong -- the expected strong rebound in demand and LATAM and the continuation of positive market momentum in APAC.

Revenue in NAFTA and EMEA regions were flat to slightly down, mitigated by positive pricing in all regions.

Operating profit was $159 million in the quarter.

Operating margin increased 2.6 percentage points to 6.8% compared to the first quarter of 2016 as a result of increased revenues in LATAM and APAC, improved fixed cost absorption, disciplined net pricing realization and manufacturing efficiencies.

We overproduced tractors and combines compared to retail sales in the quarter to support the upcoming spring selling season.

While NAFTA row crop production was 4% higher than last year, we underproduced compared to retail sales by 12% as we continue to manage our channel inventory lower.

The market in LATAM was up strongly for both tractors and combines in the back of available financing through BNDES, while EMEA was flat and APAC was slightly up.

In Construction Equipment, net sales decreased 2.5% in the quarter as a result of the 5% decline in heavy industry demand in NAFTA and continued weak markets in EMEA and LATAM, partially mitigated by market share gains in NAFTA.

Operating loss was $22 million for the quarter.

Results were affected by a planned slowdown in production schedule in the quarter to maintain balance channel inventory, particularly in NAFTA and LATAM.

The results were also impacted by negative price environment driven by sales channel mix in NAFTA and an unfavorable foreign exchange impact on product cost and inventories during the quarter.

Our expectation is that the negative pricing in FX is a Q1 issue and that our performance will improve beginning in Q2 largely as a result of higher production volumes.

While the market for light Construction Equipment increased in all regions, demand for heavy equipment fell in all regions, but APAC, primarily a result of China where our participation is low.

After significantly underproducing retail demand in last quarter, we overproduced globally in Q1, but at a lower absolute rate than last year negatively impacting industrial absorption.

Looking at the industry retail demand in Q1, the market environment continued to be challenging for heavy in all regions, except APAC, and light was up across the board.

In Commercial Vehicles, net sales increased 4.7% on constant currency basis as a result of a favorable truck and bus volume, partially offset by lower volume of specialty vehicles.

In LATAM, recoveries in the Argentinian truck demand more than offset Brazilian weakness.

Operating profit was $28 million for the first quarter 2017, a decrease versus last year was mainly due to unfavorable product and market mix in EMEA due to the significant light vehicle prebuy backlog in Q1 of 2016, lower specialty vehicle volumes and negative foreign currency impact, partially offset by manufacturing efficiencies and material cost reduction.

So if you look at the table in the top right, we expect that the volume mix will be mitigated starting in Q2 as we move back in production at a healthier mix of light Commercial Vehicles and that the FX is a Q1 event.

Slide 19, quarterly overproduction versus retail is 18%.

Worldwide production level was up 3% for the last quarter of last year, with LATAM up 10% quarter-on-quarter.

For the quarter, European truck market grew 7% versus last year.

LATAM and APAC markets were flat and up 5%.

Market share for trucks in Europe was held during the quarter.

Order intake for trucks in Europe was down 7% for the quarter compared to last year.

Light orders were down 9%, significantly impacted by the positive prebuy effect 1 year ago.

Truck deliveries were flat and book-to-bill in total remains at a healthy 1.23.

In Powertrain, net sales increased 17% on a constant currency basis as a result of higher volumes.

Sales to external customers accounted for 45% of total net sales.

Operating profit for the quarter was $74 million, a $21 million increase compared to the first quarter of 2016, at an operating margin of 7.4%, which is the highest first quarter operating margin in Powertrain's history as a result of higher volumes and manufacturing efficiencies.

During the quarter, Powertrain sold 148,000 engines, an increase of 14% compared to Q1 of 2016.

49% of the engine units delivered to captive customers, the remaining 51% to external customers.

Additionally, Powertrain delivered 19,000 transmissions and over 50,000 axles during the quarter.

Moving on to the industry outlook.

For 2017, if you take a look at the outlook, you'll see that our industry forecast has changed modestly since we provided our financial guidance in January.

In NAFTA, we now expect a slightly stronger market for combines and Heavy Construction Equipment.

In EMEA, we now expect Agricultural Equipment markets to be flat year-over-year, whereas we're previously expecting them to be slightly negative.

I think we can go over the countries and the rationale during the Q&A.

In LATAM, we expect markets there to improve over the last year.

We've lowered our expectations for Commercial Vehicles and Construction Equipment until such time as we have a clearer picture for financing terms and availability in the second half of the year.

Finally, in APAC, our expectations are largely in line with our previous expectations.

We're -- as I mentioned previously, we're reaffirming guidance for the full year.

I think that we need to see, despite the Q1 top line performance and -- if we take a look of what we expected for the year, we're in front of our expectations in AG clearly.

So the growth during the quarter was more robust than expected largely driven by LATAM.

Which begs the question of why are we not revisiting our estimates for the full year at least on the top line?

I think that we would like to see a couple of things during the second quarter.

In terms of our order backlogs, they're quite robust cover for Q2.

So there's no real issue there.

What we really like to see is a couple of things.

We'd like to see the elections in France to conclude because that may give some boost to the weakest market in Europe right now, which is the France market for Agricultural Equipment.

And we'd like to see or hear about some surety about financing packages for Brazil for the second half of the year.

As you know, the current packages, whether they be (inaudible) or BNDES related expire at mid-year.

So we'd like to get some positive news flow on that.

And then finally, from a top line point of view, FX is going our way, but we'd like to see some stability, particularly in euro-dollar over the next, let's call it, 70 days or so before we take a look at revisiting the estimates for the full year.

But overall, a good quarter.

We're particularly pleased about the AG performance.

Clearly, Construction Equipment, we've got a lot of heavy lifting to do over the next 3 quarters.

But with that, let's go to the Q&A.

Thank you, Mr. Tobin.

Now we are ready to start the Q&A.

Claire, please take the first one.

(Operator Instructions) We will now take our first question from Ann Duignan.

This is Tom Simonitsch on for Ann.

Can I start with Brazil?

And you mentioned that the subsidized financing that expires in June.

So how do you view underlying demand for AG equipment in Brazil?

And can you update us on your expectations for what we might see in the second half?

Well, I think I covered it mostly.

But I mean, as you know, the financing packages are clear through June.

For what we hear, there's some positive development about making those financing packages available to larger customers, but we'd like to see that legislated before we can comment on it.

But I think that there is enough noise in the marketplace that leads us to believe the packages, and it'll be available in the second half of the year, but I think that's just a question of what the rate is going to be on those packages and whether they're going to be skewed towards smaller customers or larger customers.

I think there's a hope or an expectation that, that financing -- or the amount that will be available for larger customers will be greater at improved rates in the second half of the year.

But if you look at the first half of the year in terms of the growth rates as we expected what we're modeling in is some ensurity of that in the second half of the year.

So we're not taking Q1 growth rate and projecting it over the full year, because, clearly, there is some amount of pull forward in Q1 because of the fact that customers aren't sure what's going to happen in the second half of the year.

So we would -- that would imply a modest decline in the second half of the year from the first half of the year.

So let's see what happens.

And hopefully, we'll get some news flow in the second quarter.

And can you discuss the leasing trends that you're seeing in NAFTA row crop at the moment, in particular?

So how did operating lease originations compare to Q1 of last year?

They're down since Q1 of last year and the duration for the amount of leases that are out there is longer than Q1.

We've been extending duration and lowering the aggregate amount in AG pretty much quarter-over-quarter since 2014.

Our next question comes from Mike Shlisky from Seaport Global.

I wanted to touch first quickly on Powertrain.

I wanted to touch on what's driving the third-party sales, could you just kind of update us there?

Is this -- can we just have some more color on who is buying these products and whether you're seeing -- is it your current customers are just growing their businesses and what you already sell to them or you're putting more engines into new products and different products and displacing competitors in your outside sales?

Yes.

I mean, look, lead time for customers either adopting an engine family or transition is quite long.

So what you see is basically the success of a lot of work that's been done on the SCR technology in years past is now being accepted in the marketplace.

It's relatively broad-based, so it's a combination of existing customers volume impact and an addition of winning new customers.

But we really don't comment in terms of our -- or who our third-party customers are.

All right.

Okay.

Secondly, I wanted to ask you about your margin outlook.

I think last quarter, you said you're expecting margin improvement in all 4 segments for the full year.

Is that still the case?

And could you maybe kind of rank for us which one you feel most confident on and which one maybe you feel least confident about getting at least some small improvement this year on the operating margin side?

Yes, that's our expectation.

And clearly, because of the size of individual businesses and the margin profile of those businesses, some we feel more confident than others, but our expectation is to improve in all 4 primary segments across the board for the full year.

Our next question comes from Massimo Vecchio from Mediobanca.

Given the generalized normal production in Q1 versus retail demand, what can we expect for the aggregate of the remaining 3 quarters for 2017?

I'm asking that in the context of Powertrain volumes.

Okay.

So you want to know by segment the production or just on an AG?

No, it's generalized.

I'm trying to understand the Powertrain.

There's a lot of moving parts in there at the end of the day.

Look, in AG, it's up year-over-year.

And it was, despite the fact that we've lowered total channel inventory because of the fact that the spread between underproduction of retail has been significantly reduced.

In Powertrain, we'll see to a certain extent.

A lot of that is 50% of that business is third-party business, so we've got visibility pretty much for through the next 6 months or so, so we're not really prepared to make a comment on Q4.

There is an amount of excess volume in terms of production, which you expect to run through Powertrain all year in preparation for the transition to Stage V.

Okay.

Last question, Commercial Vehicles in Latin America, revenues were up 17%.

Can you just tell how much was current in price or what is the unit like-for-like growth there?

That one I'm going to have to look up.

It is an amount of price in Brazil, which is inflation recapture, the balance of it is all volume in Argentina.

Our next question comes from Joe O'Dea from Vertical Research.

First on North America construction.

Could you just talk about a little bit of the share gains in the quarter?

What was behind that?

Whether or not that's some oscillations from quarter-to-quarter?

Or if it's something else and more sustainable?

And then, within that as well, it sounds like an improving outlook in the large equipment in the rest of the last year.

So just order activity that you've seen some of the support behind that outlook?

Yes, I think that the total market, and based on what we can see, luckily change it, but it's not significant in terms of Heavy for NAFTA, but we moved it up slightly.

In terms of our own performance, it's a good news, bad news story.

The good news is that we gained market share.

In Q1, those were contracts signed in the second half of the prior year, so the pricing, as you can see in the pricing line, while we did gain share, it came at some cost.

So we don't expect that negative pricing to continue.

Those are some volume fleet deals that we booked in the second half of 2016, where we delivered in 2017.

In terms of our share aspirations for the year, our expectation is to gain share in both light and heavy in 2017.

But we're going to be cognizant of the fact that we're going to have to be pretty -- our expectation is to collapse that negative pricing that you see in Q1 over the balance of the next 3 quarters.

Okay.

And then -- I mean, Europe AG, I guess, just broadly you spoke to some of the uncertainty around the elections.

But as we move deeper into the year, I think, if you could just talk in general kind of fundamentals within the market general sentiment among customers of how you think that unfolds in terms of demand as we move beyond some of the near-term uncertainty?

Sure, Joe.

Look, we're feeling a lot better about the European demand than we were when we gave out guidance for the full 2017.

We see increased demand in Eastern Europe, including the Ukraine.

We see good demand in small tractors, particularly in the Southern European states.

Germany has actually returned to growth during the month of March, which had been -- that we expected to be a little bit weaker than it's been performing.

The U.K., despite Brexit fears has actually been performing quite robustly.

But really, the only market in Europe that's significantly negative is France, and it's been that way since the roll off of the Macron laws in the second half of 2016.

Right now, I think that the market is waiting for some surety in terms of the elections and what's going to happen to farming policy in France.

And -- but from what we can tell, acreage being planted in France is going to be relatively consistent what we saw in 2016.

So overall, we're actually moving up our estimates in terms of demand for Europe in Agricultural Equipment, which is positive.

And that's reflected in to a certain extent in Q1 versus our estimates because it was less negative than we would have projected.

That's helpful.

I appreciate it.

One more just on Stage V and engines and some kind of conversations around or considerations at least on additional content that's required.

I mean, does that -- does this mean you're going to have to add a DPF, but from a competitive standpoint that there's still cost advantages because of an SCR-only approach?

Look, I get that -- without getting into everybody advertising the actual cost of their solutions, we're confident that our Stage V solution is going to retain its competitive advantage in terms of fuel consumption and that we will not be at a cost advantage to verse these other solutions that are out there.

Our next question comes from Renato Gargiulo, Intermonte.

My first question is still on construction equipment in NAFTA.

Some of your competitors are talking about positive price realization and announced the price increases in NAFTA.

I was wondering what are your expectations for the coming quarters given the negative price realization of the first quarter.

Then my second question was on if you can provide us an update on your expected raw materials impact this year?

And then third and last question is on, if you have any comment on the recent proposal for reduction in the U.S. taxation?

All right.

As I mentioned in my earlier comments that we do not expect to see the negative pricing that you see in Q1 for the balance of the year.

We expect that to collapse significantly versus the rate that -- that we sealed for the first 90 days.

That's a result of two things.

That the industry is pricing for the expectation of raw materials that are coming through the channel.

Whether that pricing holds remains to be seen.

But I think that pricing -- the pricing environment as started in 2017, not nearly as negative as it finished 2016.

As I mentioned, I think, that what you see is the pricing impact of contracts for all of our fleet customers that were signed in the second half of 2016 and delivered 2017.

So our expectation is for the pricing environment to improve in NAFTA.

What that means in terms of falling to the bottom line, net of raw material costs, I think we'll see over the next 3 quarters.

In raw mat, yes, I mean, steel is moving up.

Our -- we're ahead of the curve.

So if you see the pricing for AG, it was positive in Q1, which is the biggest business.

So we're beginning to already price for raw mats moving up through the year, but we expect the impact at the production level to be more skewed to the second half of the year.

And do you have any comment on the proposal for reduction in the U.S. taxation?

Or that you have any -- you have done any sensitivity on this issue?

Well, yes, I mean, we're a U.K. tax company.

So I mean, we're not a U.S. statutory company other than our North American operations.

So yes, we've done the modeling, but because we're not -- we're U.K. statutory company, it's got less impact on us than it does into a U.S. listed company with a U.S. statutory base.

Our next question comes from Nicole DeBlase from Deutsche Bank.

Yes.

My first question is around restructuring.

Can you just comment on the progress that you made on the $100 million plan in the first quarter?

And I guess kind of the early focuses of savings.

And what the plan is for the remainder of the year?

The total estimate for the full year is on track.

The charge-off in Q1 is relatively small, so it's skewed towards the second half of the year from a both charge-off and from savings.

But in terms of what we announced at the end of 2016, all of the actions in place are on track.

We're not going to see the charge nor the benefit until the majority of -- until the second half of the year.

Okay, understood.

And then within the Construction Equipment segment, just thinking about how the rest of the year progresses from a profitability perspective?

I guess, how soon do you think we can see profit return to positive territory?

Our expectation is to return to profit positive territory in the second quarter.

If you look at the Q1 results, as I mentioned earlier in the presentation, we expect the negative pricing that's there and the FX, which more than half of that FX is inventory revaluation.

So it's a onetime event in Q1.

We expect both of those to be significantly Q1 events.

So if our production plans remain on track for the second half of the year and you eliminate those 2, then we're not far off in terms of getting into the blacks or expectations to move into the black in Construction Equipment beginning in Q2.

Our next question comes from Martino De Ambroggi from Equita.

The first question is on the CV division because you're guiding for an improvement in each and every division.

But what are the most important drivers you expect to get your -- to achieve your guidance for CV knowing that apart from LATAM, which is expected to grow in terms of market volumes?

The other markets are flattish.

So this is my first question.

Okay.

Q1, LATAM, I believe, in terms of profitability, is up Q1 to Q1, largely as a result of Argentinian demand.

The total Q1, in aggregate, is affected by a couple of things.

One is the prebuy volume on CAB overlay Commercial Vehicles, which was skewed to Q1 of 2016, which we're not the beneficiary of Q1 this year.

So you have a negative the mix effect.

You got a negative FX in there, which we expect as a Q1 event only.

So to the extent that LATAM stays on the trajectory that it's on now, and that's off of a pretty low estimate in terms of volume in Brazil that we'd improve profits in LATAM year-over-year just based on restructuring that we had done in previous year and the fact that the Argentinian market keeps up and then we expect not to have that negative mix in EMEA.

I think the third factor would be that our expectation in specialty vehicles, which were currently running negative in the second half of the year, the profits improve in specialty vehicles compared to the second half of 2016.

So it's really an improvement in mix in EMEA, negative one-off FX in Q1, an improvement year-over-year in Brazil and then an improvement in specialty vehicles in the second half of the year.

Okay.

The second one is on the AG division.

I clearly understand that Q1 is not the most important quarter for the division, but you were able to improve by more than 200 bps the return of sales.

Is it something you are able to confirm as a magnitude for the rest of the year?

No, because if you look at the revenue line, you can't take Q1 in the growth rate and push it for the whole year, you come up with a significantly robust number.

Is it possible?

Sure.

But that is predicated upon what happens to Brazil in the second half.

Because if you look at Q1, year-over-year, what you have is a very good performance driven by LATAM, and to a certain extent, APAC.

So LATAM, we need to see what's going to happen with financing packages in the second half of the year.

Additionally, what we had guided at the beginning of 2017, the underproduction in NAFTA year-over-year, even in a flat to slightly down market, that underproduction has actually collapsed to a certain extent, meaning we're underproducing less than retail.

So we actually get some production performance for year-over-year.

So depending on what happens in NAFTA for the full year, I think we're sticking to our estimates right now.

But look, we're in the planting season now.

Let's see how it goes.

And then what happens in LATAM in the second half, we'll see what can happen.

I think that the most important thing to look at is between 2014 and the end of 2016, while the market was going down, we had said and guided that our negative decremental margin was somewhere in the order of 25% to 30% and that we had delivered somewhere in the order around 14% to 15% negative or decremental margins through an amount of cost control and restructuring exercises.

And then we'd said we returned to market demand that our expectation was to recapture incremental margins between 25% and 30%.

So I think we're relatively happy that in Q1, we're delivering in excess of 30%, and that's got a negative mix impact because of that being driven by LATAM.

So as we get any robust demand in NAFTA, where the mix is significantly better in terms of profitability than LATAM or if Europe somehow turns the corner and goes back to a slight growth, then we're feeling quite good about our ability to deliver significant incremental margins in AG.

But let's see how Q2 goes before we re-rate the revenue line for AG in the second half of the year.

Our next question today comes from Ross Gilardi from Bank of America.

Sorry if you addressed some of this, and I think you just touched on it Richard, I sort of hopped on the call in progress.

But in North American large AG, your biggest publically traded dealer seems to have made a lot of progress on inventory.

So are you actually seeing positive production growth in the U.S. just because your dealers are not cutting inventory?

And are you seeing any of the improvement in the combined market that's been written about for the last 6 months start to spill over into the large tractor market from a used equipment perspective?

The short answer, Ross, is yes and yes, right?

I think that we had been underproducing retail by a significant margin over the past couple of years and that -- and we had said going into 2017, we would continue to do so in 2017, but the spread between retail and production would begin to narrow based on the fact that we've taken out a significant amount of channel inventory.

So the year-over-year production at NAFTA, which was reflected in the margins now, is up despite the fact that we've continued to underproduce retail, but relative unit production is up.

So we're the beneficiary of that absorption.

On top of that as you touched on the mix because of we've been saying now for must be 18 months or so that we believe that total combine inventories demand have been imbalanced, that we're delivering more combines into the NAFTA market right now.

And as you know, that's one of the products that we make that's got the richest margins associated with it.

So it's going, knock wood, relatively to plan.

Channel inventories continue to come down, inventories and balanced and harvesting equipment, so the demand richness is there and we're getting the production performance.

Are we going to get surprised for the upside in the second half of the year once we get into it?

I hope so.

But our expectation still would be to underproduce retail in 2017, particularly in high horsepower tractors.

Let's wait and see.

I hope really we get some good news on combines throughout the year.

And then just in terms of your prior comments on your getting back to investment-grade.

You've been clear that it's sort of seem to be contingent on improvement in AG.

Are there any sort of key milestones in the second half that the credit agencies have laid out for you that you need to achieve that would sort of get you over the line?

And what actually happens when you get back to investment-grade?

Do you get increased access to capital and your -- within your borrowing agreements?

And do you potentially have a shift in capital allocation?

Yes, that's a long question that deserves a long answer.

We've been working diligently on our capital structure and the nature of our funding, I think that it's recognized by the rating agencies, and we're particularly pleased that the AG business, which is the biggest profit contributor to the group, has begin -- has posted quarter-over-quarter growth, which is the first time since 2014.

So that's positive.

I think that Max touched on additional measures that we've taken in Q1 and some more that we announced today, which are more capital structure related.

So I think that we've done the right things, and we believe that our metrics are in line, but we'll just continue to demonstrate the track record and work with the rating agencies.

Post getting there, I think I'll just say that the benefit is that our cost of funding will be reduced, and we will not -- which has been a drag on CNH Industrial versus our major competitors in terms of cost of funding.

So to the extent that we are -- we do get an investment-grade rating, that cost of funding will be reduced over time, which is positive to net income.

We will now take our last question for today from David Raso from Evercore ISI.

I'll be quick.

Just wanted to nail down exactly, even underproducing NAFTA this year, but less so than last year, do you see your NAFTA high horsepower equipment production up in AG for 2017?

Yes.

In harvesting equipment, yes.

In absolute volume, no.

In volume, we are talking units.

I'm talking dollars, Rich.

So combine unit's up.

Tractor is, I guess, you're saying not, but in dollars.

Yes, we started really parsing it after a while, David.

I mean, the combine unit's up, four-wheel drive's probably not up.

And then where do you cut off high horsepower?

I think that certain categories where we've introduced new products, CVT transmissions than we'd expected to produce up.

But I think at the top end of, let's call it four-wheel drive, our expectation would be to underproduce in totality versus -- just in total units versus 2016.

But that'll be offset by harvesting in terms of hours consumed.

And relative to the first quarter, that was just a row crop comment, but the underproduction of 12% in the first quarter, can you maybe give us some perspective of what is the total underproduction for the year on horsepower?

I got you.

Look, I think that retail demand was better than expected in Q1, which is good.

So I'd have to recalculate that underproduction versus retail once we go and run through our backlogs and make estimates about what the retail velocity is going to be, whether that kind of continues through Q2 and Q3.

So we know -- in terms of -- we're not changing our production right now.

I think that if we were to take Q1 and look at it, I think that we would move up harvesting and we may move down hay and forage some.

So net-net in terms of total hours, as of Q1, what we'd expected in 2017 will hold for now, and hopefully, depending on how we progress through Q2, we can revisit that for the second half of the year.

And for us to better gauge your decision around underproduction versus retail, and I know a lot's going on with the spring planting.

But the orders right now or particularly first quarter, high horsepower or NAFTA.

How would be orders year-over-year?

Do you want to describe at little bit, whatever you're comfortable?

Yes, sure.

Well, I may have to go and look through this pile of paper.

I think that orders are up.

NAFTA, AG combines are up 40%.

And just to give you some data points, I think that hay and forage is down in excess of 20% and tractors are up in single digits.

And that's 140-plus horsepower?

Yes, let's not -- look, I think that the light end of this...

(inaudible)

I think that -- yes, what you see (inaudible) David, is basically how the market is performing, right?

We went through a period where row crop went down and hay and forage and light went up.

We're just rolling that over where now you're seeing some light at the end of the tunnel in row crop and higher horsepower and it's a little bit weaker at the lower end of the segment.

And the (inaudible) people just trying to figure out what Brazil (inaudible) it's hard to predict the election (inaudible) NAFTA alone upside can definitely do some of that if those markets if France gets better and Brazil stays pretty strong, NAFTA, AG, high horsepower can do a lot for the guidance.

So right now from the order book is at least suggesting, we should close that retail production gap (inaudible) but the answer (inaudible)

Yes, the answer's that it's early.

And if you look at the Q1 earnings, they're very much driven by LATAM, and we got to wait around and see.

I believe that there'll be financing available in LATAM.

It's just purely a question now of do we have pull forward in the first half of the year because of that market uncertainty and what does that mean for the second half of the year.

I find it a little bit difficult to believe that the market at this current rate holds up for a full year, but I don't want to be overly negative either.

I think that the Brazilian government is behind the agricultural producer.

And as I mentioned, we're lobbying to try to get more credit availability for the larger customers out there because right now, financing is more skewed to the smaller customers.

We're delivering into that marketplace, but we'd like to see that same kind of benefit go to kind of the more industrialized portion of the AG segment, where it's good for us in terms of its -- the richness of the mix.

That will conclude today's question-and-answer session.

I'll hand that back over for any closing remarks.

Thank you.

Thank you, Claire.

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

Have a good evening.

Ladies and gentlemen, that will conclude today's conference call.

Thank you very much for your participation.

You may now disconnect.