CNH Industrial NV (CNHI) 0 Q0 法說會逐字稿

Good afternoon, everyone.

We would like to welcome you to the Fiat Industrial second quarter and first half 2013 results webcast conference call.

Fiat Industrial Chairman, Mr. Sergio Marchionne, with Rich Tobin, Group COO; and Pablo Di Si, Group CFO, 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. Serge Marchionne.

Thanks very much, Manfred.

This is the last official analyst call for Fiat Industrial, hopefully.

I'm going to spend a couple of minutes talking about slide number 3, and then I will pass it onto Rich for comments.

We have now completed, I think, what has been a very long process of bringing CNH and Fiat Industrial together.

As you can see from the slide, all the necessary shareholders meetings and all the approvals have been now received for the consummation of this merger, which we expect will yield a US-listed company, hopefully by the third or fourth week of September.

As I mentioned, I think it is been a very long road.

I think we have gone a long way not only structuring in terms of creating the conditions for this capital goods company, but I think also in terms of getting the management team ready to try and tackle the co-management of these activities on a global scale.

As you have seen from the results, I think we are -- I am impressed by what I think CNH has been able to do on the Ag side.

I think these are spectacular results.

Rich and I were talking about these numbers yesterday and today.

I don't think I have ever seen margins at this level or this caliber for CNH in its history, certainly since it has been created back in 1999.

So we have traveled a long way to get there and I think, as Rich will explain, when you talk about construction and trucks, I think we are now embarking on the next phase of restoration of profitability.

I think we know what needs to be done.

The truck side, as you'll see from the numbers -- and Rich will speak about it -- has been impacted negatively by a widespread economic downturn on the European side, which has had negative repercussions in terms of margin generation.

But overall, the businesses are in good shape.

I am delighted with the work that has gone on in the last 6, 7 months to try and bring these organizations together.

One more tidbit of information, which is in reference to page 3 and has to do with the so-called descent rights that are afforded legally to the shareholders of Fiat Industrial -- as of today, we received about roughly EUR21 million worth of shares that have been tendered back, subject to descent rights of shareholders.

That's substantially below the EUR325 million cap that we had set as part of the merger conditions back in the winter of 2012.

So even that last hurdle has been removed.

We are now in execution mode to try and get our filings done with the SEC and get this Company listed in the United States.

Rich and I and Pablo will be carrying out a series of road shows, hopefully within the latter part of August or early part of September to introduces CNH industrial to the US markets in a proper way.

That's going to take some time.

I think that we will try and do as wide a coverage of the institutional landscape as we can in the US.

But I am pleased; I think that -- the Board met this morning for the final time, and I think they also expressed satisfaction with the way in which the process has been carried out.

I think Rich should be commended for being the single-largest profit generator in North America for CNH industrial -- hopefully, something that will continue in the future.

Rich, over to you.

Thank you, Sergio.

For the quarter, I think that when we take a look at the results, I think that what you see is the strength of both the product mix and the geographic mix in terms of the portfolio itself.

So, despite having some difficult trading conditions in the Construction Equipment and Commercial Vehicle segments, the Group was able to post satisfactory performance with a top-line increase and with trading profit remaining flat despite some of the difference in the conditions, which I will go through later in the segmental part of the presentation.

But just in terms of the highlights, revenue is up 3.1% for the comparable period; sales increases for Agricultural Equipment and Powertrain segments compensating for the Construction Equipment and Commercial Vehicle segments; trading profit and trading margin largely flat quarter to quarter; net profit before exceptional items up EUR9 million and EUR77 million, respectively, with inclusive exceptional items.

Net industrial debt was down EUR263 million with positive cash flow from operating activities more than offsetting the EUR276 million dividend distribution and higher levels of capital expenditure, and available liquidity is positive at EUR5.3 billion for the period.

Sergio covered slide 3, so we can skip to slide 4. I'll hand the presentation over to Pablo, who will go through the financial slides up until slide 9, and then I will take over and we can discuss the segmental performance of the group.

Pablo?

Thank you, Rich.

So I am on slide 4. You can see that revenues have increased in the Agricultural and Construction Equipment segment by 6.6%, which is 9.3% on a constant currency basis over Q2 of last year.

The Ag Equipment sales increased by 10.8%, driven by the increased volumes and positive [NIM] pricing and favorable product mix that Rich mentioned on the previous slide.

The Construction Equipment sales were down by 8.1% as market conditions remained challenging in most regions around the world.

And the Truck and Commercial Vehicle sales were down by 5.6% due to weaker trading conditions, particularly in Europe and in Russia.

And this was partially compensated by top-line growth in Latin America.

Net sales in Fiat Powertrain reached EUR844 million, a 7.9% increase due to higher volumes.

As you can see, trading profit reached EUR632 million, an increase of 1%.

And as mentioned before, this was primarily due to higher volume, better pricing in the Ag business, combined with better financial results, all of these being partially offset by low results in the Truck and Construction Equipment business.

If we turn over to page 5, revenues reached EUR6.8 billion, or up 3.1% versus last quarter.

Revenues grew by 5.4% on a constant currency basis, and the unfavorable foreign-exchange impact was primarily due to the Brazilian real and euro/dollar currencies.

If we go over to page number 6, trading profit, as mentioned before, reached EUR633 million during the quarter, an improvement of EUR6 million versus last quarter.

Exceptional items were lower by EUR111 million due to higher restructuring charges during 2012.

As you can see, the increase in financial charges of EUR12 million was primarily due to foreign exchange and higher average net industrial debt.

We have had higher investment income of EUR10 million due to the income from our joint ventures in China and Japan.

First quarter 2013 effective tax rate was at 38%, in line with expectations, a net result of EUR328 million, EUR77 million higher than last quarter in 2012, or 31%.

Flipping over to page number 7, financial charges reached EUR117 million during the quarter, were EUR12 million higher than Q2 of last year.

This increase was primarily due to the increase in the average net industrial debt, as mentioned before, and foreign exchange.

All of this was partially offset by lower interest cost and pension and OPEB.

Slide number 8 -- net debt reached EUR2.3 billion, an improvement of EUR263 million during the quarter with positive cash flow due to better operating results and improved working capital, more than offsetting dividend distribution and sustained capital expenditure levels.

With that, now I will turn it over to Rich.

Moving to slide 10, Pablo took you through some of the percentage changes and everything else, so I'll just make some overall comments about the individual sectors.

As you can see in slide 10, the Ag business performed very well during the quarter with an 11% increase in revenue which was offsetting, albeit a smaller portion of the portfolio, a decline of 8.1% in the Construction Equipment.

I think they both reflected prevailing market conditions around the world in the two segments.

I think, on Ag, for the most part, we performed well in every region that we participated in.

I think that we talked quite a bit at the end of the year about our expectations for Latin American growth and we have been able to realize a significant portion of that.

I think that to a certain extent, it would have been more helpful.

With the weakness of the real versus the euro, we are not being able to translate a lot of those potential profit gains.

But overall, in terms of performance in the capital goods sector, in terms of market share and product mix, we are pleased with the performance there.

On the Construction Equipment side, we are really performing with the market.

I think we have seen a lot of the other market participants that have led this sector out.

It's difficult conditions.

Our decline is less so than the overall industry, largely as a result of our nonparticipation in the mining sector, which is suffering the most.

In terms of trading profit you have got an increase of EUR126 million year-over-year.

If you take a look at the bottom left-hand of the slide, I think positive net pricing of EUR89 million quarter to quarter is especially pleasing where we have been able to raise prices in Latin America, hold the prices in a declining market in both the NAFTA and European regions and then to gain pricing in the agricultural sector which, in certain cases, we have left some market share on the table.

But we are trying to remain disciplined before the cost increases associated with Tier 4 Final that come into play in the beginning of 2014.

So overall, in terms of revenue and trading profit margin in the Agriculture and Construction Equipment sector, a good start to the half.

So we have got some way to go, but so far we have set up the year quite well.

In slide 11, just really taking a look at retail sales to production, I don't think that you see any anomalies here, that in prior periods we overproduced on Ag in preparation for retail expectations in Q3 and Q4 and in preparation for the industrial maintenance period that we go through in August.

So we are all set up in terms of realizing -- in terms of market demand on the retail side.

We would expect to under-produce retail demand on a full second-half basis.

And if you look back in history and taken a look at Q4, that's what we preserve industrial optionality, depending on what we see going on into 2014, whether we have to adjust inventory levels overall.

On the Construction Equipment segment, because of the headwinds there, we have been matching retail sales with production.

So, overall, net inventory build, while it remains flat overall, that has been a build in Latin America on increased sales and activity levels and a decline in retail to production involved in NAFTA and European markets that are experiencing the headwinds.

Moving to slide 12, these are the performance slides that we generally give in terms of the performance of the overall industry and then our full-year expectations.

There's really no change to these than what we had presented.

Our material change is what we presented at the end of Q1.

I just take into account that this is the total [TIV] of these individual markets, so you have to be a little bit careful in terms of CNH's participation strategy versus the total TIV of the marketplace themselves.

So, while certain markets may show significant increases, they may be in some of the lower-horsepower segments that are noncommercial farming related that we are not a large market participant.

But overall performance in terms of our ability to capture the markets has been satisfactory.

Slide 13 is Construction Equipment -- same formats, both by region and by segment; both light and heavy, no real change there.

And as we've talked in previous quarters, we are really a nonmaterial market participant in the APAC region, so I would not rely heavily on our numbers here.

Moving to slide 14, some just general information in terms of main product launches over here.

I think we can categorize it in two pieces, that 85% -- 85 to 90% of the spending in terms of R&D and capital is on the Agricultural product line, considering the mix in the product portfolio and the growth projections overall.

The vast majority on the Construction Equipment side is being spent on compliance programs in preparation for Tier 4 Final.

But overall, as Pablo mentioned, in a group and in the Agricultural and Construction Equipment segments, we continue to invest heavily in terms of the product portfolio.

Moving to Trucks and Commercial Vehicles in slide 16, a little bit different in terms of market conditions, revenues and geographical footprint.

So revenue is down EUR5.6 billion to EUR2.1 billion for the quarter, reflecting the persistent weak demand in Europe.

Overall, units sold down 1% versus last year.

It's not the prettiest chart.

I think that all we can say is the good news that order intake is up 10% versus last year at a book-to-bill of over 1, so we are seeing an increase of activity in terms of the quarter.

We made a profit in June, so if we take a look at order backlogs, book-to-bill and our performance in June, we have expectations to materially improve performance in the second half, vis-a-vis the first half.

Moving to slide 17, relative performance in terms of production to retail is slightly matched.

We will continue to adjust this as we go through the balance of the year.

Right now, our expectation is to match those two figures on a full-year basis, so to have a net neutral position in terms of finished goods inventory.

Moving to slide 18 and the following slides are all the segments by major regions.

I'm not going to take you through and read all the slides.

I think that a lot of the market participants have led us out there, so you all know what's going on in terms of commercial truck demand in both the European, Latin American and Asian segments.

I won't add anything to that, other than in terms of what we are seeing going forward and, as I highlighted earlier, in terms of backlog and book-to-bill.

Slide 21 is a branding slide of what's going on.

We are in the midst of -- on the back of some of the restructuring that we've done last year in Industrial the portfolio of rebranding some of the bus product lines we have.

This will be ongoing through 2014.

Moving to slide 23, on Powertrain revenue up EUR62 million for the quarter, trading profit at EUR40 million and a margin of 40%.

Largely unchanged from what we had presented at the end of Q1 where you would expect that on the engine side, driven largely on the increase on the Agricultural and Construction Equipment segment, that engines and third-party engines are up; gearboxes and axles more tied directly to the Commercial Vehicle section, down year-over-year.

But in terms of holding profitability, expectations for the full year were well on track.

Moving to slide 25, in terms of what is going on in the business, I think I can synthesize that down into we are investing heavily in both time and personnel in preparation for either Euro 6, for over the road, our Tier 4 Final for off-road applications across the entire product portfolio.

Last slide is slide 26, which is the guidance for the full year, which remains unchanged from what we disclosed at the end of the first quarter.

And that's it, Manfred.

I think we can move to Q&A.

Thank you, Rich.

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

Sorka, please take the first question.

(Operator instructions) David Russell, ISI Group.

Regarding Iveco's profitability going forward, obviously the book-to-bill above 1 and the orders up 10% were encouraging.

But can you give us a little flavor for maybe the pricing in the backlog or, maybe, if you want, even just trying to quantify how you are thinking about margins in the second half for Iveco?

Because obviously the mix and the pricing has a lot to do with how much you can leverage that order book.

Okay, David.

Pricing -- let's just talk about Europe, which is the bulk of the business.

Let's not make this complicated.

Pricing stabilized at the end of the second quarter.

We would expect with book-to-bill and backlogs moving up, especially in the segments where Iveco has got a material presence -- I'm speaking about light and the medium segments -- that our hope is to regain some of the pricing decline that we experienced as the market declined in 2012 between the second half and the first half.

I think there's going to be some time before that is realized, so arguably the third quarter will be at second-quarter pricing levels and we will just manage our way up as the cycle improves.

If I take a look at book-to-bill and backlog, and we really have July under our belts at this point, July has accelerated over the exit pace that we saw in June.

So, so far, we have got another 30 days; it is looking positive.

So our intent is to recapture the vast majority of what was given up in the second half of 2012 as the market declined.

(multiple speakers) if I can just give you some general color before you ask your follow-up question, I think you need to understand that Commercial Vehicle margins in the context of what is happening with some of our competitors who have historically been stronger performers than Iveco -- we have seen some what I consider to be less-than-stellar results being posted by some of our Nordic friends, which is an incredibly unusual event.

And I think it reflects what we have seen in the first half of this year, which is a structural weakness of pricing across the whole European arena.

The increase in the book-to-bill ratio is a very encouraging sign, a sign of a recovery and a flattening out of the pressure on pricing.

But as Rich says, I think it's going to be a gradual recovery and you will not see the full benefit of this, I think, until you get to the fourth quarter of this year.

Having said this, I think margin improvement over the current levels, which are abysmally poor, is expected.

We are now sitting flat on our butts, to be perfectly honest.

So I think upside from here is relatively assured.

The question is the quantum of the upside.

Now to my follow-up, it sounds like third quarter is more about some volumes, you know, overhead absorption, with the leverage volumes going higher.

Fourth quarter, you begin to get a little better pricing with the volume.

Would you care to give us some feel for the fourth quarter, thoughts on margins?

Because obviously that influences how we think about the profitability of Iveco going into next year.

If we are under the assumption what you do in fourth quarter is somewhat reflective of a base case for next year.

Below 5 fourth quarter.

I'm sorry, can you repeat that?

Yes, below 5 for the fourth quarter.

Below 5?

Yes.

Okay, thank you very much.

Ashish Gupta, CLSA.

Just wondering that, to the degree there's a valuation discount that sustains post-merger relative to your competitors, just wondering what the Board's appetite would be for share repurchase for CNH Industrial.

Oh, would I consider repurchase?

Look, we're always -- to begin with, I would be very, very disappointed, Ashish, if there was an arbitrage opportunity after you cover the stock.

So I sincerely hope the proper market coverage will cure the inefficiency of the price.

But we are -- institutionally, we have always been ready, and I think certainly CNH Industrial has the wherewithal to effectively intervene in the market if we saw that there was a value opportunity in terms of earnings accretion.

So, although we have not publicly stated this, I think that the availability of the house to do so is unquestioned.

Obviously, I won't tell you when and how we will do it, but, institutionally, we are ready to do it.

Thank you for that.

Just thinking about the comments you've have made historically on the complementary M&A in Construction and Trucks, just wondering if you have any interest in diversifying into mining.

Maybe you could just talk about that interest in that end market now that valuations are depressed.

Pass.

We are going to pass on the opportunity.

Great, thank you.

Martino De Ambroggi, Equita.

On the Iveco side, last year you announced important cost-cutting measures just to understand the state of the art in terms of what was already exploited in the first half and what is remaining in the second half of this year.

And always on this, my follow-up is on eventful possibility to make some additional intervention that could become a necessity in case there is not stable and significant recovery in Europe, I suppose.

I'm going to take the second question.

We have no plans of reducing capacity in the European arena.

I think we are done.

But on the first question, Rich?

It was basically the same question, I mean, overall.

In terms of the restructuring and the benefit of the restructuring taken in prior periods, I think it's fair to say that we need some volume recovery where we can see the leverage benefits of consolidating the heavy truck facility in Spain and the consolidation of the specialty vehicles and firefighting in Germany.

But we need some volume recovery before we can see that happen.

Yes, I think the cost benefits have been achieved.

I think we need the top-line growth now to make it happen.

The results would have been worse, obviously, had that restructuring not happened.

Okay, and just a figure -- CapEx was $1.4 billion, for the full year?

I think that's a -- $1.4 billion, maybe, a little -- yes.

But within that range, we tend to be a little bit heavier in the second half than the first half.

But I don't think it would be out of historical range if you took a look at last year.

We have got a significant amount of launches, especially in the Commercial Vehicle sector coming up on the back half of Euro 6, a significant amount that we are going to have to deal with in, hopefully, a recovering market.

So that's just one of the challenges we have over, let's say, the next 9 to 12 months, because it's really across the entire product portfolio.

But it impacts our competitors equally, so I think from a pricing standpoint we should be in a good position to act consistent with what the industry is doing.

Thank you.

Michael Tyndall, Barclays.

Sorry to focus on the negatives here, but I just -- on Iveco, there was two things that struck me in the slide deck.

You talked about your European volumes being down over 12%, but the market being down 4.3%.

Is that just a function of southern Europe, or is there something else going on in the market share side of things?

It's a function of two things -- the geographic concentration in southern Europe and the fact that the portfolio is skewed towards light and medium products.

And that's what happens.

I mean, it's very simple.

Okay, and then the second question, just on SG&A -- that being a negative, that's been the first time in quite a while that we have seen that as a headwind.

Is there anything behind that, that we can think about going forward?

Thanks.

No, I don't think there's -- it should normalize itself over the year.

Okay, thanks.

It's an abnormal blip.

Thank you very much.

Larry De Maria, William Blair.

On Iveco, I was just curious if you could help us understand, as it relates to the order intake, how much is indicative of a pre-buy?

And if there is a pre-buy, which presumably there is some, if we think about the cadence of the recovery next year, which you said would be gradual, do we think about it more in terms of down in the first half and up in the second half, like this year?

And then, secondly, also on Iveco, can you help us understand fleet age versus utilization in your markets?

Because obviously the fleet is getting older, but utilization is probably underutilized.

So can you help us understand how much pent-up demand you think there is or isn't on the Iveco side?

Thank you.

Okay, Larry, if you are looking for absolute answers on both those questions, I'm just not able to give them to you.

So I can give you some overall comments on the question, but nobody that I'm aware of has the market data to monetize what you're asking.

But anyway, let's deal with fleet age.

Yes, if you take a look of what has been going on in the market -- let's talk about Europe right now, predominantly -- that with, after the last, let's say, year and a half or so; with unit volume down, that age is going up.

Now, the calculation in terms of utilization -- you would need data that is just not available, especially when you get down into the medium and light segments where it's completely unavailable.

So I think that we are going to have to say that we believe that the fleet itself is aging.

Now, how much of that age in terms of time is offset by underutilization is anybody's guess.

But I think it's weighted towards the fact that the fleet, the standing fleet in Europe continues to age, especially in southern Europe, which has been impacted for a longer period of time.

So, if and when the market recovers, on a sustainable basis, we have expectation for renewal of the existing fleet.

Okay, so in other words, the market is reflective of the actual fundamentals of the market, not a constraint as it relates to financing or anything like that?

Well, there's a variety of different things in there.

There are financing constraints in certain markets, for sure.

If you just take a look at borrowing costs and you look around Europe itself -- so there are -- the dealer bodies and the performance of those dealer bodies is a reflection of how the market is performing over the last 18 months.

So it's not a homogeneous marketplace in Europe right now.

I think it's reflective of the economic conditions that you find.

And just answer to your first question, to help Rich on this, if you wanted an estimate of what portion of the pre-buy of this is pre-buying in view of Euro 6, I think it's a difficult call to make because the market is in transition itself.

And I would be very hard pressed to try to give you a number.

There's no doubt that there's a portion of the activity that we see now which is Euro 6 pre-buy.

And it is about to happen because Euro 6 will bring about a significant cost increase in the vehicle space.

I think we will wait until the third quarter; we will give you a better read on this after we've seen completion of September.

Okay, that's fair enough.

Would you guys have more or less impact on a pre-buy, given your footprint, then, I guess, would be another way to think about it?

Come again?

Would your truck business have more or less of a pre-buy than the industry, than your competitors, given your footprint, your geographic footprint?

I think, if anything at all, it would be less.

Okay, thanks a lot.

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, Sorka.

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

Have a good evening.