CNH Industrial N.V.
Q2 2017 Earnings Call Transcript

Published: 26 Jul 2017

[Operator:]

Good morning and afternoon, ladies and gentlemen and welcome to today's CNH Industrial 2017 Second Quarter and First Half Year Results Conference Call. For your information, today's conference call is being recorded. After the speakers' remarks, there will be a question-and-answer session. At this time, I would like to turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir.

[Federico Donati:]

Thank you, Claire. Good morning and afternoon, everyone. We would like to welcome you to the CNH Industrial second quarter and first half 2017 results webcast conference call. CNH Industrial Group CEO, Rich Tobin and Max Chiara, Group CFO will host today's call. They will use the material you should have downloaded from our website, www.cnhindustrial.com. After introductory remarks, we will be available to answer the question you may have. Before moving ahead, let me just remind you that any forward-looking statement 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.

[Richard J. Tobin:]

Thank you, Federico. Good morning, everyone. Our second quarter results were in line or better than our expectations, and as you see in the press release, we've narrowed our earnings guidance revenue and earnings per share to the upper end of the range we projected in January, I'll give you some more color on that, because I see some of the reaction of whether we're being conservative or not, I think this is the number that we clearly believe that we can hit and then based on some development in terms of foreign exchange, and what we decide to do in terms of inventory management in Q4 reflects that number, but I'll deal with that in the Q&A. Overall, in terms of our business performance, LATAM Ag continue to perform well despite the June slowdown in Brazil to accommodate the transition to new FINAME rates. We expect this effect adjusted for a seasonality to be temporary. Construction Equipment as forecast improved its performance in Q1 (sic) [Q2], as equipment demand primarily in NAFTA and APAC and pricing improved, and we see the results of an increase in production activity on earnings which should be sustained for the balance of the year. Powertrain achieved another record quarter as a result of strong demand from third parties and advanced engine purchases in the one-off – in the off-road segment in EMEA, and preparation for Stage V transition. Our order books in Agriculture, Construction and Powertrain have increased year-over-year, so we expect production levels to be sustained or increased though the second half of the year to the comparable periods. There have also been challenges during the quarter. We reduced our production in NAFTA, hay and forage product lines to balance inventory, which negatively impacted our wholesale volumes during the quarter. This should just affect Q2. And in preparation with some important launches in Commercial Vehicles heavy segment in the second semester, we have begun to raise pricing in EMEA with a slightly negative effect on order books and share performance during the quarter. Overall, we are constructing on the development of our end markets and our performance in terms of market share, price realization and inventory management. Our goal of improving year-over-year operating performance in all of our business segments for the year remains on track. A few highlights here before I move to the overall results, we achieved an adjusted net income of $266 million in the second quarter and a corresponding adjusted diluted EPS of $0.19 a share. This was accomplished through a solid performance across all segments and increased activity levels, resulting in industrial cash flow generation of $400 million for the quarter, largely as a result of disciplined inventory management. During the quarter, S&P Global Ratings upgraded CNH Industrial and our financial arm CNH Industrial Capital LLC to investment grade, which is an objective we've been speaking out for some time now. This is just the starting point and definitely not the final achievement, it's our intention to grow into this investment grade grid with the aim of entirely closing the gap with our peers. We've been actively working our capital structure and the duration of our debt during the quarter with positive effect on our future interest expense which Max will cover further in the presentation. Our employees' efforts have not gone unnoticed during the quarter with many significant accomplishments across the group. Case IH celebrated its 175th anniversary in Racine, Wisconsin, and our Daily product line won International Minibus of the Year. Several of our manufacturing facilities also should be acknowledged especially Grand Island in NAFTA and Curitiba in Brazil with both achieve silver medals in world-class manufacturing putting them in the top 10% of our global manufacturing footprint. These are significant achievements of the group and reaffirm our commitments to product performance, safety and quality. I'll hand it over to Max for the financial review and then come back to you with the segmental detail. Max?

[Massimiliano Chiara:]

Thank you, Rich, and good morning, afternoon, everyone. I'm on slide 5 with Q1 financial highlights. In the quarter we achieved industrial net sales of $6.7 billion with an increase of 3% versus last year or 4.5% at constant currency with favorable contributions from Latin America and APAC across all segment as end markets continue to improve. That translated into an operating profit of $481 million, up 6% year-on-year with the solid performance from all segment. Industrial Activities' operating margin at 7.2%, slightly above last year. Adjusted net income was up 23% year-on-year to $266 million with an adjusted EPS of $0.19 a share. Net industrial debt at $2.1 billion, in line with – at the end of March 2017, with cash flow generation from industrial operations of more $400 million in the second quarter, offset by the payment of $160 million in our annual dividends to shareholders in May 2017, and the foreign exchange impact on our euro denominated debt. Available liquidity including undrawn committed facilities at $8.3 billion, up $0.8 billion versus March 31, 2017. Moving on to slide 6, Industrial Activities' net sales, for the quarter Agricultural Equipment was up 3% as a result of a strong rebound in demand in LATAM, where market participants are absorbing the extensional of the FINAME package into the new season. Construction Equipment net sales increased 14% as a result of a strengthening end-user demand in NAFTA and APAC markets. For Commercial Vehicles, net sales decreased 1%, but were slightly up in constant currency, as higher volume in APAC and LATAM offset lower volume in EMEA, the latter due to the positive effect of the Euro VI pre-buy in the light vehicle range last year. Powertrain was up 11% due to higher volume, primarily in APAC and EMEA, the latter being mainly in preparation of the transition to Stage V. As far as net sales by region, share of total net sales decreased in NAFTA and EMEA, and increased in LATAM and APAC as we continue to see end-user demand rebounding in those regions. Next slide, number 7, in the quarter, operating profit of Industrial Activities was up 6.2% or $20 million versus year with an operating margin of 7.2% as a result of a solid performance in all segments, as we continue to carefully manage our cost structure and achieve net positive price realization across the portfolio. Relevant to note, we achieved another record quarterly profit and margin in Powertrain segment. Adjusted net income increased by $50 million, helped by the improvement in interest expense due to the efforts made last year and continuing this year to improve our debt structure by retiring higher coupon bonds and replacing them with lower-rate notes. Additionally, the adjusted effective tax rate for the quarter improved to 34% from 36% last year due to increased profit and favorable jurisdictional mix. Moving on to slide 8, our change in net industrial debt. Net industrial debt came in at $2.1 billion, which was largely in line with March 31, with cash flow generation from industrial operations of more than $400 million in the second quarter as a result of disciplined inventory management, offset by the payment of $161 million in our annual dividend to shareholders and a foreign exchange impact on the debt. Next slide, capital expenditures were flat at $91 million. We do expect increased spending in the back half of the year in preparation of the upcoming Stage V for off-road applications, and as a result of the acceleration of Precision Solutions & Telematics in Ag. For the full year, we expect CapEx guidance to be confirmed, up between 5% and 10% year-on-year. Moving on to slide 10, our Financial Services business. Net income for the quarter was $87 million, flat compared to last year as compressed interest margins were offset by a moderation of risk cost as a result of a better credit quality of the portfolio. For the quarter, retail loan originations were $2.3 billion, flat compared to the same quarter last year. The managed portfolio of $25.6 billion as of the end of June was up $0.3 billion. As said, credit quality remains strong, with delinquencies of 3.3% on a global scale for Q2 2017, is flat sequentially and is down 0.5 basis point year-on-year. Slide 11 illustrates the company debt maturity schedule and available liquidity. As of June 30, 2017 available liquidity, which comprises $5.3 billion in cash and $3 billion in available undrawn committed facilities, was $8.3 billion. In June, S&P Global raised its long-term corporate credit ratings on both CNH Industrial NV and CNH Industrial Capital LLC to investment grade, with stable outlook. With the upgrade also the notching down of our issue level rating on our CNH Industrial Capital LLC notes have disappeared and now these notes are also rated BBB-. Finally, it is worth mentioning that with the upgrade, our Eurobonds can now benefit from ECB eligibility. As many of you know, this is something we have been working very hard to achieve. We will continue to put a lot of emphasis on this matter going forward, as we're aspiring at further compressing the rating gap we have with our peers going forward. Additionally, in terms of our main capital market transactions, on June 2, we completed the redemption of the remaining $636 million outstanding on the 7.875% senior notes due 2017. On May 23, we settled the offering of €500 million guaranteed 1.375% notes due May 2022 issued by CNH Industrial Finance Europe S.A., our European treasury vehicle. Both of these transactions further improve our financial ratios, simplified the debt issuing structure and will contribute to reduced interest expense going forward. This concludes the financial review portion of our presentation. Let me now turn it back over to Rich for the business overview section.

[Richard J. Tobin:]

Okay, Max. Moving on to Agricultural Equipment, net sales increased 3% in the second quarter compared to the second quarter of 2016 as a result of strong rebound in demand in LATAM. Net sales also increased in APAC, mainly driven by favorable volume in Australia and marginally better in EMEA, where we were able to offset weak demand in the important French market with the other geographies. Net sales were down in NAFTA, and we continue to destock high horsepower channel inventory and made additional quarterly adjustments to hay and forage product production and wholesales. Operating profit for the quarter was $303 million in the second quarter with an operating margin of 10.5%. Favorable volume in LATAM, including improved fixed cost absorption and disciplined net price realization across all regions offset negative volume and mix in NAFTA and increased spending on R&D. In terms of unit stats, we overproduced tractors in preparation for third quarter shutdowns, but under-produced combines compared to retail sales in the quarter, which we expect to recover in the second semester ending in balance for the year. With the exception of NAFTA, our order books in Agricultural Equipment are up in all regions for both tractors and harvesting equipment. NAFTA row crop production was 5% lower than last year leading to an underproduction compared to retail sales of 7%, which allowed us to continue to manage our channel inventory down over 20% again in this quarter, while holding margins. If we take a closer look at the ratio of high horsepower tractor, used equipment sales to new equipment sales in the U.S., you see a positive trend for used outselling new equipment by a factor of three times, which is higher than historical averages and positive trend leading into 2018 for balance production to retail and the important high horsepower tractor segment. Moving on to Construction Equipment, net sales increased 14% in the second quarter compared to 2016 as a result of strengthening demand conditions across NAFTA and APAC markets, while our important LATAM market has shown slightly positive conditions largely as a result of our efforts in Argentina began two years ago. As we expected, we returned to a profitable position in the segment with an operating profit of $17 million in the second quarter with an operating margin of 2.5%. The favorable trend was offset by foreign exchange impact on product costs largely Japanese yen on components and OEM products. Net pricing was stable across all the major markets, a positive development and an indication that Q1 destocking efforts were successful. Production in the quarter was up 4% with an overproduction of retail sales of 8% and preparation for the summer shutdown in our European and North American facilities. During the quarter, all regions for light and heavy equipment saw increased volumes, especially in APAC and China where we have little presence in construction thus not impacting our earnings in the quarter. Markets continue to stabilize and we see increased expectations for improved conditions in the second half of the year based on our order book development leading us to expect year-over-year profitability in the segment. Commercial Vehicles net sales decreased 1% in the quarter, up 1% on a constant currency basis. Higher volumes in APAC and LATAM were more than offset by lower truck and bus volume in EMEA, mainly due to unfavorable comparison in the last quarter with Euro V shipments in the light vehicle range. Operating profit of $91 million for the second with an operating margin of 3.5%. The decrease is primarily due to lower volume and unfavorable mix in EMEA, partially offset by manufacturing efficiencies and material cost reductions. Net pricing is flat year-over-year as we continue to recapture new product content and Euro VI cost in our pricing. Negative FX in the period was a result of full quarter of the weakening of the British pound sterling post Brexit referendum in June 2016. Quarterly overproduction of retail was 9% with worldwide level down 3% versus the same quarter last year, results of light commercial vehicle transition and in preparation for new product launches in the heavy commercial vehicle segment in the second semester. For the quarter, European truck market was largely unchanged compared to last year. LATAM and APAC markets were up 10% and 5%, respectively. Market share for trucks in Europe is essentially unchanged in light and slightly down in heavy. Order intake for trucks in Europe was down 6% for the quarter compared to last year, while the light range orders were down 3% versus last year and which is significantly impacted by the positive pre-buy effect of one-year ago. The heavy range is impacted mainly by the line of transitions towards the new vehicle range, especially in the rigid segments, as well as our efforts to recapture new pricing content and pricing as we continue to improve quality and reliability on our heavy-duty trucks. Truck deliveries were down 4% and book-to-bill was 0.94%. Powertrain net sales increased 11% in the quarter, compared to 2016 as a result of higher volumes. Sales to external customers accounted for 47% of total net sales. Operating profit at $98 million for the second quarter of 2017, a $32 million increase compared to the second quarter of 2016 and an operating margin of 8.6%, as a result of higher volumes and manufacturing efficiencies. This represents a new record quarter in profit and margins for our Powertrain segment as the early adoption of our SCR technology has begun to pay dividends in product performance and cost. During the quarter, Powertrain sold 160,000 engines, an increase of 9% to Q2 2016. Moving on to industry outlook. As we take a look at the 2017 industry volume by region, you'll see that our industry forecast has changed modestly since we provided it in April, and NAFTA, we now expect a stronger market for combines and light and heavy construction equipment. In EMEA, we now expect a slightly strong light and heavy construction equipment market. In the LATAM, we've raised our expectation for a stronger tractor market based on the dynamics we have seen in the first half and a more defined funding environment. Finally, in APAC, our current expectations are largely in line with the previous quarter. As I mentioned in my opening remarks, we have narrowed our 2017 guidance for sales and EPS to the upper end of the range while keeping our net industrial debt guidance unchanged. The recent strength of the euro versus the U.S. dollar over the last 90 days will further be evaluated as the third quarter progresses, and have sustained where we revisit the impact to our full-year forecast at the end of Q3 where clearly it's going to have a positive effect if – on the top line, we'd like to take a close look about projecting our input costs, our euro denominated input costs for the second half and what it'll do in terms of net debt on our euro denominated net debt in U.S. dollars. But overall, we think it should be positive to the top line to the extent that it holds over the next 90 days when we look at the average over the year. And in terms of the forecast of EPS, we came at the top end of the range of $0.41. I think that there were some that were looking for us to go beyond that range. Clearly, it is a number that we put there that we believe that we can hit. And I think to the extent that euro/dollar remains where it is today that we'd be revisiting those forecasts at the end of Q3. So, those are my final comments. Let's open it up to Q&A.

[Federico Donati:]

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

[Operator:]

Thank you very much. And our first question comes from Ann Duignan from JPMorgan. Please go ahead, ma'am, your line is open.

[Ann P. Duignan:]

Hi, good morning. It's Ann Duignan here still. Rich, I'd begin with you, can you talk a little bit about the high horsepower sector and the combines sector, just if we look at North Dakota, South Dakota and Iowa, those are the three largest states for your largest dealer type machinery and those are the three states where we're probably seeing the worst weather impact on crop conditions this year. Can you just talk about, if things remain the same, how bad could it get in the row crop sector even going into 2018, if yields are well below the last couple of years?

[Richard J. Tobin:]

That's an interesting question. To the extent that if yields are poor, does that positively or negatively impact pricing in total, and so on average farm income goes up. But yeah, I mean if you do it on – if you start going by sub-regions that could have a negative effect if profitability is constrained in those particular areas. As of now, it wasn't going to be a great year for high horsepower demand, and we don't expect it to recover materially in the second half, that's not part of our plans. As we had addressed earlier in the year, combine demand is not as bad as it's been in the past, and that includes the inventory position for the entire market. So our production for retail and combines, in terms of deliveries, are actually pretty good. So, I think it's hard to say right now until we see the crop taken out, in terms of what the impact will be by sub-region. The good news, I can say overall, as we showed you in the presentation, we've reduced our channel inventory by another 20% during the quarter. Use pricing has largely stabilized in the tractor segment. So, I think that we're positioned to kind of fulfill our plans for this year. And then we can always catch up production or leave it balanced going into 2018.

[Ann P. Duignan:]

Right. And as of now, futures prices suggest that volume and price will end up as a negative, so futures would have to rally significantly for income to be up next year. Okay. Thank you for the color. And then my second – follow-up question is on the engine side, Powertrain, can you talk about whether you're seeing a pull forward of demand ahead of Stage V? Is there any stocking of engines by external customers there, and might that leave a hole into 2018, and beyond?

[Richard J. Tobin:]

I can't comment on our third-party customer strategy in terms of stockpiling. I can tell you that internally, we've done some stockpiling in preparation for Stage V. What I can tell you, is in terms of the mix of business that we're getting in third-party, a lot of it is new, and a lot of it is due to the fact that Stage V is largely a European phenomenon right now. So there is several market participants that have whole goods sales in the EU that need a Stage V solution, that can't justify the expense based on that kind of volume, so that's driving some of the demand that we're getting. Coupled with the fact that, as I alluded to in the commentary, we've been in SCR now for several years. We've got control of the technology and the cost side of it, and I think that's being well accepted in the marketplace.

[Ann P. Duignan:]

And are you shipping Stage V engines today or are they all pre-Stage V?

[Richard J. Tobin:]

They are all pre-Stage V.

[Ann P. Duignan:]

Okay. Okay. I'll get back in line, and see you at Farm Progress.

[Richard J. Tobin:]

Thanks.

[Operator:]

Thank you very much. Our next question comes from Joe O'Dea from Vertical Research Partners. Please go ahead. Your line is open.

[Joseph John O'Dea:]

Hi, good morning. On the NAFTA high horsepower and continued underproduction there, I guess, just with now two quarters of seeing maybe some stabilization and continued sharp reductions in channel inventory, just what your outlook is for the potential to take that underproduction out, whether that's the back half of the year, whether you keep it into the end of the year. Just kind of how you're thinking about that, when we could see some of the benefit?

[Richard J. Tobin:]

Our intention would to continue through the balance of this year.

[Joseph John O'Dea:]

Okay. And then, feel pretty good at that point?

[Richard J. Tobin:]

So, barring a significant depletion, more than we're forecasting or getting some color going into 2018, our intention right now is to under-produce retail through the balance of 2017.

[Joseph John O'Dea:]

Okay. And then just on the cash deployment side of things, and with S&P's move in June, is it kind of – I guess, the timeline for any internal plans on how you're thinking about deployment, incremental actions that we could see with the investment grade rating at this point, just how to think about that moving forward?

[Richard J. Tobin:]

I think the earliest action that you'll see will be the issuance at longer dated instruments initially, as the first move. After we extend the duration of our debt profile then we'll take a look at some of the shorter-term, higher-cost instruments that are out there. So from a six-month forecast, I think those are the two types of things you would see.

[Joseph John O'Dea:]

And nothing outside of the debt structure, so just in terms of thinking of pretty low net debt to EBITDA, and maybe a little bit more flexibility to do something, whether that's beyond the dividend, but no real thinking there yet?

[Richard J. Tobin:]

Until we get beyond the extension of the duration of the capital structure, we're thinking about it, but I – just in terms of the next six months, it's a series of steps the first one I've described.

[Joseph John O'Dea:]

Got it. Appreciate it.

[Richard J. Tobin:]

Yeah.

[Operator:]

Thank you very much. Our next question today comes from Mike Shlisky from Seaport Global. Please go ahead.

[Michael David Shlisky:]

Good morning, guys. This past quarter you said that you should see expansion in the margin across all four segments for the full year. Starting in the first half, it appears as though you're sort of on your way for both Ag and Powertrain. But kind of what's your confidence level in both Construction and CV to be positive on margins for the full year here, kind of what might be drivers in the back half for both of those segments on the margins side? Thanks.

[Richard J. Tobin:]

Yeah. Well, what I said was profitability, but at the end of the day, I think that will translate the margins, once we get beyond this whole euro/dollar issue and what that does in translation to revenues. But very confident in Construction Equipment, I think and Commercial Vehicle, it's going to be highly contingent upon the success of our product launches in the second half and as I mentioned in the earlier comments, we're raising pricing right now in Commercial Vehicles, it's got somewhat of a negative effect right now in terms of our backlogs, but we think it's the right thing to do so. I mean, overall, I think that the market will drive Construction Equipment in the second half. I think, it's going to be execution on Commercial Vehicles for us.

[Michael David Shlisky:]

Okay. Got it. And just wanted to turn to your Ag margins as well. You had pretty flat incrementals in the last quarter, but it looks like here in Q3, this is more of a combined delivery quarter for you, does that have any kind of mix positive in the quarter and is it possible that you can get back to the 30% range on incrementals for Ag in the third and possibly the fourth quarter?

[Richard J. Tobin:]

Yeah, I think that we would expect in the third quarter, we get close there or close to it and the fourth quarter is going to be dependent on what we plan to do in terms of inventory position going into 2018. So generally speaking, it's a little bit down in the fourth quarter.

[Michael David Shlisky:]

Okay, sure. Got it. Thanks.

[Operator:]

Thank you. Our next question today comes from Massimo Vecchio from Mediobanca. Please go ahead.

[Massimo Vecchio:]

Yeah, good afternoon to everybody. You showed a very nice graph on slide 15, the used to new sales ratio, apparently you're hinting that there is, let's say, a very high level of use versus the past. Can you give some more granularity on that, do you expect any conversion from this use into new and how much of that is built into your forecast?

[Richard J. Tobin:]

It is built into our forecast, it's a ratio that we would have expected to happen because of the fact that both ourselves and the industry as a whole has been under-producing retail for some time. So the natural dynamic would be to kind of drive the liquidation of used, including off-lease vehicles. So we're pleased with the number. We would expect that that number would have to remain somewhat in the same position over the balance of the year, and if it did so then we go into 2018 in a position to probably be in balance or hopefully be in balance in terms of retail performance and production in 2018, subject to what crop conditions and pricing is. But I mean, I think, it's – we put the chart together to demonstrate that what we've tried to do is now accelerating the tractor side. We've already accomplished it on the combine harvester side. So we would expect that ratio to hold and hopefully increase over the second half of the year and set us up for a good production year in 2018.

[Massimo Vecchio:]

Great. Thank you very much. And also can you reiterate your guidance for CapEx after 1H, which is probably little bit lower than what I was expecting? Thanks.

[Massimiliano Chiara:]

Yes, Massimo. So CapEx is normally back loaded in the second half of the year. So we expect on a year-over-year basis for the full year to be up between 5% and 10%.

[Massimo Vecchio:]

All right. Thank you very much.

[Operator:]

Thank you. Our next question comes from Tim Thein from Citi. Please go ahead, sir.

[Tim W. Thein:]

Thank you. Yeah. The first one, Rich, maybe you could just clarify a bit more on your comments you made on the order books for Ag, I believe, you mentioned up in all regions, ex-North America. But maybe you could just put a little bit more color around the – even if it's by horsepower range or what other details you have, especially interested in where you're sitting in North America in terms of orders?

[Richard J. Tobin:]

Sure. I mean, LATAM, based on the trajectory of the market, you would expect it to be up. I think that we're quite pleased in the development of the order book for EMEA in the second half both in tractors and harvesting equipments. So that's the best news. And then APAC, it's up significantly but you have to remember that that's very much driven by our position in India, so take that into account in terms of its impact on profitability. But with the exception of NAFTA, both in harvesting equipments and in tractors, our order books are up in all regions ex-NAFTA.

[Tim W. Thein:]

Okay. Is that – remind us what you saw in 1Q on NAFTA?

[Richard J. Tobin:]

I don't think it's changed dramatically between Q1 and Q2. So they're not deteriorated...

[Tim W. Thein:]

Okay.

[Richard J. Tobin:]

...it's just more or less the same position.

[Tim W. Thein:]

Okay. Got it. And then just on sticking with Ag when you – the operating profit bridge you show, if – in terms of that production cost, I know currency has been a net tailwind for you there just given the imports into North America. But if you kept currency flat from where we are today and maybe just kind of give us some help in terms of what that would mean and then also just as you can foresee in terms of raw material costs and what the picture may look like in the second half, how that piece of the bridge may look like in the second half of the year?

[Richard J. Tobin:]

Yeah. I'll go back and tie that to my comments that I made about the full-year guidance. And you're right, I mean, I think that we're long euro in terms of input costs, so clearly that's something that we have to take into account in the second half of the year if euro/dollar remains the same, I will tell you that because of the amount of lead time there is a delay before we see that impact in terms of Europe input costs before it rolls to the P&L to a certain extent. So translation is rather immediate, but in terms of input costs, there is more or less a 90-day delay before it rolls into inventory, and rolls out of inventory, and that's really we'd like to get a handle on through Q3, because all things remaining equal, we're going to get a positive impact in translation on the top line, which we really haven't factored in to our full-year guidance. We just want to get an idea what that means in terms of input costs and translation on current costs like SG&A, and I think – so I think with 90 more days, we'll be in a good position to get that pretty much rectified for the full year.

[Tim W. Thein:]

Got it. Thank you.

[Richard J. Tobin:]

Yeah.

[Operator:]

Thank you very much. Our next question comes from Nicole DeBlase from Deutsche Bank. Please go ahead, Nicole.

[Nicole DeBlase:]

Yeah, thanks, good morning, good afternoon, guys. So first question, if we could focus a little bit on Europe Ag, if you could comment on what you saw by country, and understanding that France is still weak, but if you saw an signs of life there, which countries have been strong, and then the scope for recovery in European Ag, as we move into 2018?

[Richard J. Tobin:]

Well, I mean you called it, I mean France is still weak and I don't think that we're baking in any kind of dramatic recovery in the second half. I think the order books are slightly better, but those are off of very low comps. Southern Europe specialty products, demand has been good, I think that we've done very well in Eastern Europe, Poland, Ukraine, Czechoslovakia in both tractors and combines, and we expect that to continue through the year. Germany has been bouncing around a little bit with the data. So we expect Germany to be flat to slightly up in the second half, and the UK has been doing rather well all year and we don't see any signs of that tapering off.

[Nicole DeBlase:]

Okay. Got it. Thanks, Rich. And just any scope for – what are your views on 2018, especially since the order book is starting to pick up, is it possible that we'll start to see a recovery in European Ag?

[Richard J. Tobin:]

Well, I mean, if you look at the historical numbers in terms of tractor demand, we're still well below the averages. Europe is still going through a little bit of transition in terms of horsepower mix. So it's one of these situations where it's not one for one over time in terms of replacement. But in terms of dairy pricing, looks better, we don't expect to have a terrible harvest in France this upcoming year, so the crop looks good. So, clearly, it looks like there is – if we were to sit here today, based on order book demand and based on what we know about pricing and harvest conditions, we would expect it to be better in 2018, if we were to guess right now.

[Nicole DeBlase:]

Okay, thanks. That's really helpful. And if I could just squeeze in a follow-up.

[Richard J. Tobin:]

Sure.

[Nicole DeBlase:]

On the Construction business, one of your competitors yesterday reported and talked about a more difficult pricing environment into the second half of the year. I'm just curious if you're starting to see something similar – more competitive pricing within North America Construction at all.

[Richard J. Tobin:]

Yeah, I read all that, and I hope that's not the case. In our particular case we cut production in Q1 to the detriment of earnings because some of that pricing effect is dependent on how much your dealer inventory levels are. So we cut dealer inventory levels in Q1, so we've got the benefit of a higher production rate in Q2 and a little bit – and some better pricing because of some that tension is off the system. It's still in North America, a very competitive market, To the extent that the dollar is weakening against major currencies, that's positive, I would say, for North American pricing in the second half. But clearly we're a price follower, we're just going to have to compete and hope that pricing stabilizes.

[Nicole DeBlase:]

Okay. Thanks. I'll pass it on.

[Operator:]

Thank you very much. Our next question today comes from Martino De Ambroggi from Equita. Please go ahead. Your line is open.

[Martino De Ambroggi:]

Hey, good morning, good afternoon, everybody. The first question is on the Ag volume mix evolution based on what you commented on the order book, so all the regions up apart from NAFTA. Should we expect a positive price mix in the second half of the year for the whole division or could be still negative?

[Richard J. Tobin:]

I think that we could expect volume to be positive in the second half of the year, I think that mix should be flat, because it's more tractors in the second half of the year than harvesting.

[Martino De Ambroggi:]

Okay. And the second is on the Powertrain, which achieved 8.6% greater loan sales, the best performance ever, but what should be the normalized profitability going forward? So this is a cap or there is further upside going forward?

[Richard J. Tobin:]

One of the things around here is once – when you post a profit margin like that, we expect you to keep it. So our expectation is – look, there is going to be some inter-year volatility depending on the production cycle, but we believe that the Powertrain business, as a whole, is delivering the profits that are expected of it.

[Martino De Ambroggi:]

Okay. The last, if I may, on CE. The M&A activity restarted a little bit in the sector, not real comparables or peers for your business. But are you in a hurry to solve the sub-scale issue or we need to wait for a much better profitability before seeing anymore?

[Richard J. Tobin:]

We're in a hurry for increasing profitability in the segment and that's all we're focused on.

[Martino De Ambroggi:]

Okay. Thank you.

[Operator:]

Thank you very much. Our next question comes from David Raso from Evercore ISI. Please go ahead. Your line is open.

[David Raso:]

Thank you. Just a simple question, Rich. The balance sheet, the cash on hand, now that with the investment grade, what do you think the appropriate level of cash to hold? Obviously, it's on the high side the last few years.

[Richard J. Tobin:]

The high side would be $3 billion.

[David Raso:]

And the equipment company just ended with cash at $4 billion.

[Richard J. Tobin:]

The equipment companies – I didn't understand your second question.

[David Raso:]

I'm saying the cash in the balance sheet right now for the equipment company is over $4 billion.

[Richard J. Tobin:]

Yeah.

[David Raso:]

I'm just trying to figure out what's the appropriate run rate to think about cash going forward in light of the investment grade on the debt.

[Richard J. Tobin:]

It depends on where you are in the cycle, David, but $3 billion being a conservative figure.

[David Raso:]

Okay. Thank you very much.

[Richard J. Tobin:]

Yeah.

[Operator:]

Thank you. Our next question and final question today comes from Ross Gilardi from Bank of America Merrill Lynch. Please go ahead.

[Ross Gilardi:]

Yeah. Thanks, guys for squeezing me in. So, Rich, just following up on that, I mean, you've got new investment grade with S&P without having to divest any assets. You've been very clear for years that want investing in Construction Equipment or truck. I'm just wondering, are there any specific tax related or other strategic issues that would make a spine-off of some or all of your non-Ag assets as opposed to – make that problematic as opposed to selling them to a cash buyer?

[Richard J. Tobin:]

Yeah. Ross, welcome back by the way into the Q&A. Then – and you came back with a complicated question. The answer is, no, but clearly getting to investment grade, and allowing ourselves to lower our interest costs and extend the duration of our debt is clearly positive for the group as a whole, and it gives us more flexibility on a variety of different issues going forward. So, I mean, this is a discussion that could go on for 15 minutes, I think we're very pleased that despite being at the bottom of the cycle of Ag that we've achieved this milestone. We've got some further work to do because clearly being at the bottom notch, if not enough, we want to notch up from here. So which is very important to our FinCo to get access to commercial paper in a variety of other different things. But overall, does it increase the flexibility of the group, going forward from here? Yes, it does, but I think we have to take this in stages.

[Ross Gilardi:]

Okay. But just sieving through all that, I think what you just said is, there is no specific tax related issue that blocks a spin as a viable alternative as opposed to a sale, is that correct?

[Richard J. Tobin:]

Not that I'm aware of.

[Ross Gilardi:]

Okay. Okay. Got you. And what – your comments on Latin America, again, I'm not sure, if I heard that correctly. So you referenced the slowdown in front of the FINAME uncertainty middle of the year, have you seen order – now that that's been resolved, have you seen orders sort of pick up again kind of more over the last maybe trailing 30 days?

[Richard J. Tobin:]

Yeah. I mean, we – if you look at the stats for June, they look pretty grim, and that's because there was a transition period where contracts that had been written under the old rate had to be converted to the new rate, so it basically had a negative impact in terms of demand and deliveries in June. There is the backlog and it's there, so that's why we're calling the market to be up for the full-year because those rates are now in place through the end of 2017. Market demand is good. Our performance in the market is good, so we expect it to kick to restart based on the seasonality in Brazil through the second half of the year.

[Ross Gilardi:]

Got it. Thanks, guys.

[Richard J. Tobin:]

Thanks.

[Operator:]

Ladies and gentlemen, that will conclude today's conference call. Thank you all very much for your participation. You may now disconnect.