CNH Industrial NV (CNHI) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's Fiat Industrial 2012 Fourth Quarter and Full Year Results Conference Call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Manfred Markevitch, Head of Fiat Industrial Investor Relations. Mr. Markevitch, please go ahead, sir.

Thank you, [Sammy]. Good afternoon, everyone. We would like to welcome you to the Fiat Industrial Fourth Quarter and Full Year 2012 Results Webcast Conference Call. Fiat Industrial Chairman, Mr. Sergio Marchionne, with Rich Tobin, Group COO, Pablo Di Si, Group CFO, and Alfredo Altavilla, COO of Fiat EMEA will host today's call. They will use the material you should have downloaded from our website, www.fiatindustrial.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. Sergio Marchionne.

Thanks very much, Manfred, and good afternoon. A very good year overall, notwithstanding what we consider -- continue to see in Europe as being sort of a persistent decline in economic activity. But overall, the Group did incredibly well, both in terms of top line and operating performance. Our net income was up a couple of hundred million over 2011. And so overall I think we're satisfied with performance.

I'm going to spend very little time describing the activities. I'll pass it on to people who have recently been appointed in new positions. And we do have Alfredo Altavilla here, who is not here as the car guy, but we're not going to redo the de-merger of 2010 and put everything back in the same box, for anybody who was really concerned.

But Alfredo is here to speak about Iveco, since most of the year was under his management. So it will be the last time that attends these meetings, and we thank you for being here, Alfredo. I'm not sure that he's glad to have gone into the car business based on the numbers that you've told me this morning about the Italian car market, but who knows?

We are happy with performance. I think the more important thing from the way I see it today is that the organizational structure to run the new organization is clearly in place. We have, as you can see from page two, and I've been reminded that the organization was only announced in November, early part of November of last year.

But the organization is fully functional now. We have allocated responsibility. We have made the final selection of the leadership team, and so the jack is [not] complete. We have done probably 99% of the filling of the positions underneath each one of these leadership roles, so the organization is ready to go.

It's going to take us some time to start reflecting this information in terms of the reporting structure that effectively reflects the way in which we run the businesses across the four regions. By the time we finish, it will look like -- hopefully like the Fiat side, with the kind of granularity that will be able -- that will allow you to look at the businesses as they're being managed. So I look forward to that sort of data being put forward and I think we'll hopefully see it by the end of the first quarter, perhaps not for external reporting purposes, but certainly for management purposes.

I really have no bad news to give you. I think that the fact that we've made the profits and there's -- and consistent with our stated strategy of paying up to roughly a third of consolidated net earnings, we're going to pay a dividend of EUR0.225 a share, which is about EUR275 million. And that is something which, by the way, which I think is going to stay as a structural element of the corporate finance structure of Fiat Industrial, even after it migrates away from its current jurisdiction and moves to the United States.

So overall, good performance. I'm happy with the progress that management is making in getting their handle -- getting their hands on the business. I think we'll see significant improvement in performance as we move forward. I think Rich is going to speak at the end about our guidance for 2013, and I think the indications are quite positive. So on that note, Mr. Di Si, you can take it over.

Thank you, Mr. Marchionne, and good morning, good afternoon, everybody. So I am on page three. Net sales increase of 6.2% to EUR25.8 billion with very strong growth in the AG segment in terms of volume and net pricing and higher sales volume in Construction Equipment. This was partially offset by lower volumes in the Truck business due to lower markets compared to 2011.

Trading profit increased by 23.3% due to strong performance of CNH. Trading margin increased by 1.2 percentages points, from 6.9% in 2011 to 8.1% in 2012, with all three sectors, CNH, Iveco, and FPT, contributing to this improvement. Net results increased by EUR220 million, or 31%, due to the strong operating results, lower financial expenses, and lower tax rate.

Our net industrial debt of EUR1.6 billion includes the payment in December of last year of the one-time dividend to CNH minority shareholders for EUR197 million, not included in the latest guidance range of EUR1.2 billion to EUR1.5 billion. Excluding this dividend payment, net debt is within 2012 guidelines. Available liquidity is down by EUR1.1 billion, and includes EUR1.6 billion in undrawn committed facilities.

Moving on to page four. In Q1 of last year, Standard & Poor's raised its outlook from negative to stable and affirmed the Company's long-term rating of BB plus. Additionally, Fiat Industrial and the European Bank signed a EUR350 million loan agreement in support of the Group's research and development, where the principal objective of this project is the reduction of fuel consumption and emissions.

On the basis of 2012 estimated profit and retained earnings available for distribution at Fiat Industrial SpA, as already mentioned by Mr. Marchionne, the board of directors intends to propose a EUR275 million dividend. For year 2013 guidance, of increased revenues by 5%, and trading margin improvement from 8.1% in 2012 to a range of 8.3% to 8.5%, and net industrial debt between EUR1.1 billion to EUR1.4 billion.

Moving on to slide five, net sales increased by 2.8% during Q4 of 2012, primarily due to CNH performance. The sales increase in the Agricultural sector was primarily due to price increase across all regions and volume mix in Latin America and Europe. Construction Equipment sales volume and pricing was slightly higher versus last year.

Additionally, Iveco's volume increased by 4.6% versus Q4 2011. We had strong trading profit growth of 10.9% during Q4, primarily due to volumes in CNH, price realization in the AG business, industrial efficiencies, and overhead reductions in Iveco, an improvement in financial services at both CNH and Iveco. All of these partially offset by the depressed truck volume and pricing due to market conditions.

Moving on to page six, purchasing activities contributed positively in raw material cost reductions during full year 2012. Efficiencies primarily came from the electrical and mechanical commodities, partially offset by chemical commodities. We expect a positive trend to continue during Q1 of this year.

Moving on to page seven, full year trading profit of EUR2.079 billion, 23.3% higher compared to 2011. You can see that below the trading profit line we have unusual items of EUR217 million, primarily due to Iveco's manufacturing footprint restructuring plan combined with charges incurred in connection with the unwinding of CNH JV with Kobelco. Our 2012 effective tax rate of 38% is in line with expectations.

Moving on to slide eight, you can see the details behind the financial charges improvement of EUR88 million, or 16.1%. The financial charges reduction versus 2011 is mainly due to lower cost of funding on short-term debt and lower losses on foreign exchange, partially offset by an increased average outstanding gross industrial debt. Short-term rates were reduced by 1 percentage point, from 6.2% in 2011 to 5.2% in 2012. Furthermore, in 2011 we recorded a one-time charge of EUR72 million for costs in connection with the early repayment of debt deriving from the de-merger.

Moving on to the cash flow on slide nine. Cash flow from operations reached EUR1.4 billion, with EUR325 million of working capital absorption, primarily due to the Truck business slowdown in Latin America and Europe. We have had very strong cash flows in Q4, primarily due to inventory reductions due to a 19% underproduction versus retail in the Ag sector and 21% in Construction Equipment. Additionally, Iveco recorded a 16% decrease in inventories during Q4.

CapEx reached EUR1.3 billion, EUR353 million higher than 2011, primarily due to new product launches at CNH and CNH capacity expansion in China, India, Brazil, and Argentina, as well as engine emissions compliance programs. Net debt reached EUR1.6 billion, an increase of EUR403 million over year-end 2011. The main variances for net debt are due to the dividend payments of EUR400 million during 2012, which includes the EUR197 million of one-time dividend to CNH minority shareholders and change in working capital mentioned before.

Now I will turn it over to Mr. Marchionne.

We won't take up a lot of your time, but slide 10 deals with what remains to be done now to complete the merger between FI and CNH. Just a couple of things. We need to go through the normal statutory annual shareholders' meetings are required for both organizations. The shareholders' meeting for FI has already been called for I think the beginning of April. I think it's April the 8th.

And so we're trying to find out now whether we'll have a cleared registration statement in the United States to try and combine that meeting and the meeting that's required so to approve the merger. We don't know the answer to that question, but they're not going to be far apart anyway. So there may be two shareholders' meetings required, an AGM and an EGM.

And the objective here is to -- obviously, there's a lot of work that's going on inside the house to try and get ready for the filing in the US and clear SEC hurdles. Once those issues are behind us, then I think we can start the shareholder process of approving the merger and effectively giving people the right to dissent, which was one of the agreements that we -- one of the conditions that we included in the offer to the minority shareholders. There's a cap on that dissent right, up to above EUR325 million under the agreement. It is highly doubtful based on what we know today that that withdrawal rights will be exercised. I don't see that as an impediment to the completion of the merger.

And so hopefully by the time all these things get executed and done we should be listed in the US market sometime in the third quarter of 2013. It's in our collective interest to get this done as quickly as we can. There's nothing to be gained by holding back on this. I think that the CNH side is ready. And I think a lot of work has gone on, certainly since we announced the merger proposal back in May of last year, to get the house ready for that day. But we're working with the regulators. Again, expected date is third quarter of 2013, and probably in the first half of that quarter.

Thank you, Sergio. Turning to page 12, as alluded to earlier, CNH had a strong full year for 2012 with revenues of EUR16 billion, up 16%, with a healthy distribution per region with all regions contributing year-over-year growth. Trading profit of EUR1.6 billion is up 36% to EUR412 million. You can see to the chart in the bottom left that volume and mix and a healthy pricing environment contributed to the earnings increase year-over-year. Next slide, please.

In terms of industry performance and outlook on the AG sector, Q4 AG industry was up 6%, tractors up 5%, combines up 16%. Full year industry in terms of unit volume was flat overall on a global basis, and the expectation for '13 is global AG demand in unit volume up 5% versus 2012, with tractors flat to up to 5% and combines the same. In terms of market share performance, generally CNH held market share across the segments and the geographies on a worldwide basis. Next slide.

Slide 14 is the performance of Construction Equipment. Overall CE industry and unit volume was down 9%, driven down heavily by the performance of the APAC region where CNH does not have a large participation. On a full year overall basis, CE industry was down 6% with expectations going into 2013 of light equipment flat to 5% -- to positive 5%, heavy equipment demand flat to up 5%. In terms of market share, despite the difficult volume conditions, CNH has held share largely across both the product range and the geographic distribution.

Moving to slide 15, is what Pablo alluded to before as we had guided at the end of Q3, that our expectation was to generate substantially all of the cash flow for the year in the fourth quarter by under-producing retail. You can see in both the AG sector and the Construction Equipment sector the fourth quarter under-production in AG to retail was down 19% in the fourth quarter, under-production on the Construction Equipment side of 21%. So we move into 2013 protecting production performance for both segments and with adequate levels of both dealer and company inventory.

Moving to slide 16, I won't spend a lot of time here. We addressed in the previous calls through the end of 2015 we'll be in a heavy launch schedule, predominantly on the back of engine compliance in both the European and North American markets, the execution of which during 2012 was quite good on the CNH side and we're happy with the performance of the engines that have been supplied by FPT. We move into 2013 with the introduction of the Tier 4 SCR-only solution.

Moving to slide 17, in terms of strategic investments that we've addressed before, this gives you an update of where we are with our Greenfield investments in China, which the principal investment is the large harvesting and tractor plant in the north of China, in Harbin, the completion of our investment in Cordoba, which becomes fully operational in the second quarter of this year in Cordoba, Argentina, and two investments, the expansion of our tractor components facility in Noida in India, and the beginning of a Greenfield for harvesting equipment in Pune.

That completes CNH. I hand it over to Alfredo for Iveco.

Thank you, Rich. Iveco closed 2012 with 137,000 units, down 11% versus last year. As Pablo highlighted before, there was a pretty good performance in Q4 with 45,000 units sold, about 5% over Q4 2011, mainly driven by sales development in Africa, Middle East, and Central Europe, offsetting the negative market environment in Western Europe.

Revenues reached EUR8.9 billion, down 7% versus last year -- versus previous year, and decrease in sales volumes was partially offset by better mix with sales of light-duty trucks down 12% while heavy-duty truck just 6%, flat bus business, and strong improvement in special vehicle, 35% up versus 2011.

All this drove to a trading profit of EUR469 million, with trading margin pushing its way up from 5.1% to 5.3%, primarily driven by cost optimization coming from the industrial footprint restructuring done in 2011 and 2012, and an improvement in the financial services reflected in the EUR63 million positive variance on the bottom left of the chart.

Going to page 20, the market in Western Europe in 2012 was down 7.4% and Latin America 14.3%, pretty much in line with our guidance with the call at the end of Q3. For 2013, we see a pretty flat market in Western Europe while Latin America is supposed to be 10% up versus 2012. The expectation in Latin America is, of course, that the attractive FINAME package gets renewed and extended throughout the year.

In terms of order intake, on the right side of the chart, as you can see, we closed the year with a 10% improvement versus Q4 2011, and the last quarter of 2012 was the best Q4 quarter over the last five years. Overall, the order intake for the whole 2012 was down 8% versus 2011.

Moving to page 21, a piece of good news is certainly the improvement in the market share of heavy-duty trucks in Western Europe after four years of consecutive decline. We posted a gain of 0.2%, which at same market mix of 2011 would have been higher, 0.8%. We were able to contain the erosion of our market share in the light-duty segment to 11.7%, but must be said also that in the last three quarters of the year we posted positive gains thanks to the good results of our daily model year 2012.

In Latin America, we posted a good market share on the light-duty side, 17.8%, up 2 points over 2011, while the fierce competition in the heavy-duty segment [drove] to a negative performance of 1.3 points, ending at 12.7% market share.

Turning to page 22, in terms of company and dealer inventory, we kept our disciplined inventory. The Company inventory was down 10%, or 600 units, compared with Q4 2011, while in terms of dealer inventory we keep our two months policy in place and the inventory was down 12% compared to the same quarter of 2011.

Page 23, I won't spend too much time on this, but just the evidence of some good product introductions that were made during the year both in Europe as well as in Brazil and in China. Just want to highlight the Chinese Truck of the Year, which is the introduction of the new Cab-over, which will also be sold in Western Europe starting the end of next year.

Page 24 deals with China. The market overall was down 8.7% versus last year, but with a very different mix across the main segments. As you can see, the light bus, where we play with the Daily, was up 5%. The light truck, pretty much flat over 2011. And the strong decrease in the heavy-duty segment, primarily driven by the Truck/Construction segment, which was down more than 30%.

Our share came at 5.2%, plus 0.6% versus 2011, pretty good in light bus with an improvement of 0.3% at 11.8% and light truck at 4.9%, while we were down on the heavy-duty side at 2.7%. Overall sales were up 3.3% to 148,000 units, primarily driven by the Yuejin trucks and the Daily and the slowdown on the SIH volumes at 17,000 units.

Investment income was EUR2.5 million in 2012, which, as you all know, is booked under equity method versus EUR22 million in 2011, reflecting also the restructuring that we made in our SIH joint venture in the third quarter of the year.

And this concludes Iveco and I'll turn it back to Rich for FPT Industrial.

Thank you, Alfredo. Despite revenues being down 9% to EUR2.9 billion for the year, trading profit at EUR142 million is up 33% over the prior year, reflecting an absence of production start-up costs incurred in 2011 as well as efficiency gains reflecting a margin of 4.8% for 2012 versus 3.3% in the prior year.

Moving to slide 27, I won't spend a lot of time here. This is more of what we previously announced in terms of the Tier 4 final solutions and Euro VI solutions for the truck side. In terms of our development, I think that the solutions are in place and will be progressively rolled out based on the schedules of the various jurisdictions.

On slide 28, in terms of third-party sales in addition to the ones that you see here with mentioning Ford's decision to use the Cursor 10 for Euro III and Euro V engines in their heavy-duty trucks and the recent announced supply agreement earlier in the week with Caterpillar for marine engines, I think it's just a reflection of the acceptance of the technology that FPT is introducing into the market in their goal to reach a split of 40% external third-party sales in terms of total revenue.

Slide 29 is just a typical excellence in awards during the year, what you see in both the CNH and FPT and Iveco sides of the business.

Turning to slide 30, which is the outlook of the Group. On the back of the Group's performance to date and our expectations of the solid trading conditions across all sectors, Fiat Industrial is setting 2013 guidance as follows -- revenues up 5%, trading margin between 8.3% and 8.5%, and net industrial debt of EUR1.1 billion to EUR1.4 billion for the full year of 2013.

Turning to the next and final page is just the financial calendar that you can all put in in terms of the announcement of the results going through the year. With that, that's the final slides, and I'll hand it back to Manfred.

Thank you, Rich. Now we're ready to start the Q&A session. Sammy, please take the first question.

(Operator Instructions). We will take our first question from Monica Bosio from Banca IMI. Please go ahead.

Good afternoon, everyone. I would have a few questions. The first one is if you can elaborate on your assumptions behind the net debt guidance. I would have expected a better net debt guidance, so I'm just wondering if it's due to CapEx or maybe from the working capital absorption or maybe if there are some pressures from the working capital absorption from Iveco. I don't know, maybe in the military segment, which is usually a cash flow generator part of the business.

And the second question is on the market outlook for Iveco. Given the order intake, which seems fairly good, I was wondering if you maybe can see some upside opportunities, upside potential in term of market outlook in comparison with your base case, which is basically flat.

And the third question is on Iveco, and are you expecting further efficiency or savings from Iveco? And if yes, if you can quantify. Thank you.

I'll take the first question, regarding net debt. So, we start with our net debt in 2012, which was within guidance, as I mentioned before, excluding the CNH payment to minority shareholders. When we look at 2013 guidance at EUR1.6 billion our net debt at year-end 2012, we're going to have very strong cash flows versus 2012 in terms of operating activities, including working capital. So we're budgeting -- we're forecasting a strong cash flow from operating activities versus 2012.

And then in terms of capital spending, we're going to be slightly higher than 2012 levels. And then we need to exclude dividends to be paid in 2013, that's why we come to a range of EUR1.1 billion to EUR1.4 billion. So, I'll pass on the --.

Okay.

On the Iveco side, the improvement in the order intake is primarily driven by Africa, Middle East, and Central and Eastern Europe. That's why the focus for the Western European market is pretty much flat over 2012. And in terms of savings, we already told you at the end of Q3 that the run rate of the savings coming from the industrial footprint rationalization will be EUR87 million per year, so this will --.

Okay, so --.

-- [display] full effect in 2013. No additional savings are forecasted for now.

No additional. And a very final question, it's more general. Once the merger between CNH and Fiat Industrial will be completed, what kind of future do you see for Iveco in the new combined entity? Would you believe that it would be better to [valorize] with an alliance or maybe with a separate -- in a separate way? Just a flavor in term of Iveco's future, because now Iveco is in a much better position than in the past.

Yes, and that's exactly why we intend to keep it. I think that we have spent a huge amount of time developing Iveco internationally. I think -- to be honest, I think we need to stop talking about this divestiture in Iveco. It keeps on coming up every two or three months as if it's the topic of the season.

I can find nothing structurally wrong with Iveco that would suggest that it's a divestiture candidate or that it will not benefit from the association with the rest of Fiat Industrial businesses, including reliance on the engines which Rich explained a few minutes ago, the amount of work that's gone on in making these vehicles as competitive as they are in the marketplace. There's a point in time in which you need to recognize that it is winning awards for what it's doing.

And so I think we need to stop listening to the stupid German mantra about the fact that they run the truck market in Europe, they don't. They don't run it in Latin America, and we're doing all right in China. So let us go ahead and -- let's develop the business and stop talking about divestitures. We're fine. Thank you very much.

Okay, thank you.

We will take our next question from Massimo Vecchio from Mediobanca. Please go ahead.

Yes, good afternoon. My question is on Iveco again, sorry. The Chinese joint venture was impressed by the low contribution to the -- to your net profit. What can we expect going forward from this number? Is there a way to increase this contribution? Is it --?

Let me try and give you an answer before Alfredo gets all white in this. The joint venture in China has got two fundamental elements. It's got one which is in the right end of the business, so the historical strength of Iveco, and it's been there for a long period of time. The other one has always been -- and has been started, what, 4.5 years ago? Including the localization of engines. This is a business that needs to have the runway to start developing, and I think we are beginning to see the benefits of the technology infusion out of Fiat Industrial into China.

I would expect that over the next five years this business is going to perform as well as a non-embryonic business would. And I think that the margins that we would expect out of China are above what we would normally expect out of a business that runs other than Latin America or in Europe, as we've currently done. But it needs more time.

Okay, thank you very much.

We will now take our next question from Martino De Ambroggi from Equita. Please go ahead.

Yes, thank you. And good afternoon and good morning, everybody. On the M&A side, so apart from business plan execution, once you have finalized the CNH/Fiat Industrial merger, what's your new priority between fixing Construction Equipment problems or giving Iveco global exposure? And do you --?

Do you --.

Is there any --? Okay. And is there anything potentially achievable in a reasonable short timeframe, from your point of view?

The answer is yes. I know I'm not being very helpful with my answers, but we recognize that these are two issues that need to be addressed. And I think that there are a number of things that are going on inside of Fiat Industrial today that are designed to do both -- to provide a permanent solution to our CE under-positioning that we have today, including providing clarity on executing a strategy going forward, and the other thing is that we know that the commercial vehicle business needs an opening into the United States. How we get that done is open for discussion.

I've always had the view, and I may be partial on this, that there's a great opportunity for Iveco to start leveraging the distribution and capabilities of Ram in the United States and that we need to spend some serious time to find out whether that can now be done on a joint basis between Chrysler and Iveco. And I think these are things that are going to take some time to develop.

I don't have a doubt in my mind that we have the technical know-how to enter the market and certainly we have the brand credibility now that we've carved out Ram away from the rest of the Chrysler business. So give us some time.

Okay. And on the financial cost, since the CNH/Fiat Industrial deal took more time than expected, so I imagine the EUR100 million, EUR150 million savings in terms of interest costs will be postponed. And furthermore, what's your liquidity? Is it already at an ideal level, or this will reduce the cost of carry going forward because it will reduce the liquidity at the end? What's your expectation of the trend on the financial costs? And on tax rate, we are still at the same point we commented in the last conference, there is no major impact from the new group structure?

Let me answer the easy question first. There is no major impact on the tax rate --.

Okay.

-- and that will continue. The financing side, we are carrying an excessive amount of liquidity in the system. To be perfectly honest, I don't need to carry that kind of cash balance to manage the business today. We have done it for a variety of reasons. Once the merger happens and I think we have certainty in terms of the location of the cash and the debt exposure, we can start actively beginning a process of repatriation of liquidity and bring the number down to probably in the normal steady state environment to about half of what it is today.

And so one of the things that you kindly did not bring up is the fact that we actually missed our interest rate target for the year, which was roughly about EUR400 million. I think that the reason when we provided you with the scheduled part of it was due to the excess liquidity that we carried against our own expectations.

This is something that needs to be cured. It's getting to be a pretty expensive habit. And to be perfectly honest, there's no need for it. But once the merger happens, we'll start grinding away at these figures and I expect a substantial improvement in our financing costs associated with both that issue and the re-rating of CNH, which is I think is crucial.

Okay. If I may have a last question on the net financial position, because at the beginning the target was zero debt by this year. Maybe this would be disclosed in the next presentation for the business plan update when you merge the two entities, but is there any clue on what could be the year with zero debt or what is the trend expected going forward?

Look, I think we need to be careful. And I think Pablo explained to you that there were some things in their planned document that we put together that really have received substantial deviations. The first one is the CNH dividend to minority shareholders was never part of any plan, and that cost us about $300 million, or roughly EUR250 million. So there have been -- there are things that have happened that have taken away from that target. It doesn't justify the miss in terms of where we are.

What is different between this plan and what we're executing today and the plan that was put forward at the time of the merger is the fact that the capital expenditure profile of both CNH and Iveco has substantially changed. I don't have the exact numbers off the top of my head as to what CapEx looked like in that plan, but it wasn't anything close to the numbers that we got on the page.

And Rich, I think, painstakingly, or maybe not, he certainly gave you the information. I'm not sure he devoted enough time to this, but there's a slide that talks about the international expansion of CNH, which I can tell you when I put the plan together in 2010 I had zero clue about. And I did not know about the fact that we were going to open up three stand-alone sites in China, and that we were going to do the expansion in Cordoba, Argentina, and then we were opening and expanding into India as aggressively as we are.

So we need to be very careful here about holding us to zero debt number in the absence of a reconciliation with the capital expenditure profile and the strategic growth of the businesses. But I think your suggestion, that we give you an updated plan, together with the reviewed or revisited date for zero debt is worthwhile. And I think once we list in the United States, it may be the appropriate time for us to give you a new target date. But it's not going to be materially off from the one that we originally set for ourselves.

The great thing about this business, which is at the heart of one of the strategic arguments for the separation from Fiat, is that it is an incredibly cash-generative business. So, run well and without going through phenomenal expansion periods, as we're going through now, it can produce cash and reduce debt pretty quickly. Just give us time. We'll give you a better view, but it's not that far away.

Thank you very much.

We will now take our next question from Laura Lembke from Morgan Stanley. Please go ahead.

Yes, good afternoon. I have three questions, please. The first one is on your military business. And can you just share with us what proportion of revenues this now represents for the Group? And also, at what rate you expect to grow this business going forward? So that's my first one.

The second one is on your net debt. If I translate your CNH reported net cash number of EUR3 billion in I end up at EUR2.3 billion, and this number has actually increased in the year. So meanwhile, your implied net debt for Iveco and FPT has actually increased to EUR3.8 billion, which suggested you burned, if I'm correct, about EUR500 million in the year. I think you've already given some of the reason, what is driving this, principally the low utilization. But I'm just wondering, in your net debt guidance, what kind of underlying free cash flow do you actually expect for Iveco and FPT in 2013?

And then my last question is on inventory. You've shown a slide for Iveco and it looks like, on an absolute basis, inventories, despite the fact that you've reduced them, are still at the same level as in Q4 2010. Now, obviously that was the phase when we entered the major market improvement in Europe and now the situation is a little different. So do you actually see a further need to cut production more as we go into 2013? Thank you.

Firstly, I'll take the net debt question. You're right on when you mentioned a variance of EUR500 million, primarily due to the Truck business. That's what -- given the business slowdown in Latin America and Europe, as mentioned before. That is the negative variance on the cash flow for the year. Going forward for 2013, we expect a significant improvement of about EUR350 million for the year.

And that is on the Truck business, or for the --?

On the Truck business.

On the Truck business. So you don't actually imply a lot of improvement on the CNH side here?

On the CNH, it will be pretty much flat, as I mentioned before.

And just -- can I quickly ask, did you burn any cash on FPT, or is it really just all in Trucks?

No, it's all in Trucks. The FPT business is 65% of -- related to Iveco and CNH, so --.

Okay, great.

Laura, I think we need to be careful. I didn't step in and so as to stop Pablo from giving you the answer. One of the virtues of the FI world is that it will allow us to run this thing as an integrated business. And we're not going to start talking about sort of what I call sectorial cash flow statements -- those days are gone.

And so we need to start -- the main objective in doing this is to be able to run these on an integrated basis to really bring about the best operations practices on working capital management. That doesn't mean that we don't look at Trucks in particular regions, but Iveco is part of FI. And so there are issues that are associated with the operations in Latin America and Europe, which I think impact on cash flow generation. I don't know whether Alfredo wants to step in and comment, but we're fully aware of them.

In terms of the special vehicle business in 2012, it accounted for 12% of our turnover. And in terms of all of the backlog, it's double-digit growth in 2013 over 2012.

And I guess the final question was --.

Yes.

-- whether it will be full more drawdown of finished goods inventory between 2012 and 2013 in Iveco. The drawdown in inventory will not be in finished goods. The expectation of the drawdown will be more on the industrial side. Part of the burn in Iveco in Q4 2012 was industrial inventory in Brazil. You see what we're calling the market -- our expectation is to convert that industrial inventory, so we don't expect a significant drawdown of finished goods inventory in 2013.

Industrial inventory, by the way, is raw materials and work in process.

Okay, thank you very much.

We will take our next question from Alexander Virgo from Berenberg Bank. Please go ahead.

Yes. Hi, there. I wondered if you could talk a little bit about the pricing environment in Iveco, particularly given the market share gains that you have taken in the heavy truck side.

And then, just one quick one on the profit bridge at FPT. I'm wondering if you could split out the one-offs from last quarter and the efficiency gains, because if I look at sort of a normal drop-through in terms of incremental margins, it would imply EUR20 million to EUR25 million of headwind just from the volume declines. So I'm just wondering how I can sort of get back up to the absolute improvement year-on-year. Thank you.

The pricing environment in the Truck business is still very tough, although the market share gain that we've posted is primarily driven by the competitiveness of our new heavy-duty truck, which is delivering best-in-class total cost of ownership thanks to the engine technology that we have. So we didn't get market share because we did stupid things, absolutely.

Okay.

Yes, and in terms of FPT, I think that we're parsing some pretty small numbers here. I think that we called out in Q4 of 2011 start-ups costs in [Chung Ching] on the heavy engines, predominantly for CNH. But carving that figure up and comparing them when you have negative leverage and reduced volumes, monetizing that figure, I don't think, is a worthwhile event at this point. I think that what you see in terms of margins coming from FPT, our expectation is that going forward, based on the unit volume deliveries of both Iveco and CNH, to get some volume leverage going forward on the business itself.

And improve our margins.

Okay, thank you.

We will take our next question from Michael Tyndall from Barclays. Please go ahead.

Hi, there. It's Mike Tyndall from Barclays. Thanks for taking my question. Just two, if I may. The first is just a clarification, what you said on the tax rate. So, am I right in assuming that you said post-merger there won't be any significant difference? And the reason I ask is Dutch corporate tax rates, as far as I can see, 25% versus Italy at 31%. I realize it's where you book the profits, but it does seem a little bit odd that there's not going to be any -- no gains.

And then the second one just relates to the order book at Iveco. If I'm not wrong, you sold 45,000 units in Q4 and your orders were 41,000, so that's a book-to-bill of 0.9, which seems a little bit weak to me given what's happening in Latin America. But maybe I've missed something there, if you could help out. Thanks.

Just to answer the issue about the tax rate while Alfredo's trying to give you an answer on the Truck side. Jurisdictional location is going to change nothing in terms of the tax rate. It depends on where you make your money. And so the comment that was made, the Dutch jurisdiction may offer tax rates, but it doesn't impact at all on the combined tax rate for the Group. It just has zero impact, unless we were to explore our activities in Holland. I mean we're present if you ask me --.

Can I just ask one follow-up?

Sure.

I'm just speaking in Europe. I'm not sure if you're making money in every market in Europe, so I'm just wondering to what degree, just simply being in Italy, you've got to pay taxes as in payroll taxes, that you can't use losses against, which wouldn't be the case in Holland.

To the best of my knowledge, you can't offset losses against payroll taxes anyway. That's the first issue. But secondly, that anomaly is going to persist. And by the way, I'm not sure the statement about the even distribution of profits across Europe is true. Certainly, when you've got underutilized plants, as we do in some cases on the Construction Equipment side for CNH in Italy, the ability to make profits within that jurisdiction is suspect.

The blend of rates is in excess of what I would normally expect out of a healthy animal going forward. To the extent that you've got dislocations in terms of profit generation, you're going to cause an uptick against OECD rates, which is what you're seeing.

Yes. Okay, so --.

And the objective here, and it goes back to what both Alfredo and Rich have told you, is to solve these issues. One of the ways in which we can solve the issues, to resolve the Construction Equipment quandary that we are -- that we have been debating inside this house now and nauseum, and certainly for the last nine years since I've been inside CNH. So Rich and I are working our buns off to plug that problem, because once we do then the industrial issues associated with that lack of clarity will go away. And so we'll work our way through all of these issues.

On the Truck side, Alfredo, you want to?

45,000 is recovery of late order slowdown by some production issues that we experienced in Latin America. On a full-year basis, we closed the year with a stronger order portfolio, 140,000 units, versus 137,000 units delivered throughout the year. So we improved our order backlog at the end of the year.

And in terms of Latin America, as I said, the expectation is that the market will start the year much better than it did the last year.

Okay, thank you.

We will now take our next question from [Eric Eichland] from UBS. Please go ahead.

Good afternoon, gentlemen. I only have one question left. Could you please give us a number for the net difference between capitalized and amortized R&D in 2012? And also, if you could give us an update on what you expect for this year?

Yes, the variance you --.

Yes, go ahead.

The variance is approximately EUR350 million, negative.

And do you have any expectation for this year or --?

No. it might go slightly higher, about EUR380 million as we increase R&D and CapEx.

Okay, thanks.

We will take our next question from David Raso from ISI Group. Please go ahead.

Hi, good afternoon. My question relates to the business segments and the guidance. The full Company guidance is revenues up 5% and margins expand a bit, from 8.1% to 8.4%. I'm looking at the way CNH guided their revenues up around 5% with -- and just a little bit of margin improvement. While I can appreciate there's some difference between the international accounting and the US GAAP, but looking at that CNH guidance, can you give us a little bit of help on how you're looking at Iveco's growth and Powertrain's growth for '13 and also the margin expansion?

Because I'm just trying to figure out the way it looks, if I take the CNH guidance, those other segments are going to have to grow, call it even in-line with the 5%, but the margin expansion doesn't seem to be implied as that much, when we just came of a year where both Iveco and Fiat Powertrain had down revenues and still were able to expand their margins. And now we're looking, I would think, for growth in both of those businesses for next year, but modest margin expansion. So I'm just trying to square that up -- better revenue profile, but similar if not even quite as much margin improvement.

Yes. Hi, David, this is Rich. Yes, look, at the end of the day, I think that you can't penalize both Iveco for controlling margins in a negative revenue scenario and FPT actually increasing them, right? So then you would expect that doubling effect by the fact of [creddying] the cost control and then wanting the volume leverage, number one.

Number two is what I explained to you before on the CNH side, is that when both CNH and Iveco are calling the Brazilian market up and because of the transaction and translation negativity of a weak reais, right, that those incremental margins with more units sold in that particular region aren't as accretive as you would see some margins whether we realized those revenues in Europe or North America.

Our expectation is to over-deliver and flow down what you'd expect to be if we were to show you individual, segmental margins. Our expectation would be to maximize that on an incremental basis. But right now, based on what we see from a geographic distribution, that's why it translates back to some to flat or flattish or par kind of margins with the incremental revenue.

And just to better understand the business, if I gave you constant currency, what kind of margin expansion would you expect at Iveco and Fiat Powertrain?

Yes, but that's asking me what the margins are in Brazil for Fiat Powertrain and Iveco, which we just don't disclose.

Okay. I appreciate it. Thank you.

We will take our final question from Erich Hauser from Credit Suisse. Please go ahead.

Good afternoon, everyone. Not much left from my side, one very simple one. In the past, you've always mentioned in your presentations that you're seeking a double listing. If I look at slide number 10 in today's presentation, it only makes reference in the NYSE listing. I was just wondering if something has changed here?

No, it is still a dual listing.

Okay, cool. And the other question is related to the Iveco Stralis Hi-Way. Given the technology differential that you have versus your competitors, I was wondering if you could think that you will be able to price your Euro VI solution at less of a price difference to the Euro V solution when I compare it to someone like Volvo or Daimler, for example?

You really don't think that I'm going to give you the answer right now, anticipating all of the -- a move that all of the competitors are looking for? But certainly, the technology is best-in-class.

And it will be the most economical choice for anybody buying the vehicle.

I guess you saw that Scania is now sort of going down a similar route? Do you think it's something that they've developed themselves, or is it just -- or have they just seen your solution and now have decided to --? Well, actually that's probably not a stupid way of doing this, so we just jump on the train.

As long as it doesn't infringe our intellectual property, God bless them.

Thank you.

That will conclude the question-and-answer session. I would now like to turn the call back over to Manfred Markevitch for any additional or closing remarks.

Thank you, Sammy. We would like to thank everyone for attending this call. Have a good evening. Thank you.

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