CNH Industrial N.V.
Q4 2014 Earnings Call Transcript

Published: 29 Jan 2015

[Operator:]

Good afternoon ladies and gentlemen, and welcome to today’s CNH Industrial Fourth Quarter and Full Year 2014 Results Conference Call. For your information, today’s conference call is being recorded. At this time, I would like to turn the call over to Mr. Federico Donati, Head of Investor Relations. Please go ahead, sir.

[Federico Donati:]

Thank you, Alex. Good afternoon, everyone. We would like to welcome you to the CNH Industrial fourth quarter and full year 2014 results webcast conference call. CNH Industrial Group CEO, Rich Tobin and Max Chiara, Group CFO, will host today’s call. They will use the material you should have downloaded from our website, www.cnhindustrial.com. After introductory remarks we will be available to answer the questions you may have. Before moving ahead, let me just remind you that any forward-looking statements we might be making during today’s call, are subject to the risks and uncertainties mentioned in the Safe Harbor statement included in the presentation material. I will now turn the call over to Mr. Rich Tobin.

[Rich Tobin:]

Thank you. Good afternoon. I’ll begin the presentation with some opening remarks and then I’ll hand it over to Max, who will begin going into the slides. So, overall, we had a satisfactory performance for the quarter and the year. Consolidated revenues were down 2% excluding adverse currency movements we held operating margin and industrial activities of 6.4% and EPS of $0.52 per share. We were able to increase earnings per share before restructuring other exceptional items by almost to $0.69 a share Cash flow has been positive in Q4 but not enough to bring us back in line. Our net industrial debt year-end target as demand contraction exacerbated further in the Ag space with an un-forecasted decline and EMEA retail activity do not allow us to liquidate our finished goods inventory position as much as we preferred despite the good performances in construction equipment and commercial vehicles. This we will take action on in Q1 of 2015. I’ll deal with the 2015 outlook further in the presentation, let me spend a few words to summarize this year in terms of business environment highlighting the positives and negatives we had to deal with during 2014. On the positive side, in the Ag segment we’ve demonstrated operating margin resilience despite a more severe industry drop in Q4 by maintaining price discipline, industrial efficiency and flexibility and tight cost controls and SG&A, allowing segments to minimize incremental operating margin. In construction equipment, solid profit recovery as a result of repositioning initiatives, disciplined pricing and product costs as a result of improved industrial efficiency. And commercial vehicles, they made a recovery and trucks continue to confirming margin recovery despite the tough comp due to Europe pre-buy activity in 2013. Also here, we should start to see the benefit of the efficiency program particularly on SG&A expenses which we expect to realize the full year benefit of 2015 as we approach the completion of the manufacturing product specialization program. In Powertrain, increased penetration of non-captive sales coupled with industrial efficiencies contributed to improve margin notwithstanding the drop in agricultural equipment captive volume. Powertrain also benefited during the year for some stock piling and preparation for Tier 4 Final. But we’ve also been exposed to some difficult trading conditions and operational issues such as continued demands, uncertainly and LATAM across all businesses, particularly in the commercial vehicle segment, unstable agricultural equipment demand conditions in the Ukraine and Russia and second semester weakness in China, headwinds from negative FX exchange and launch costs in for the new daily launch at mid-year of 2014 and Euro VI launch cost in the bus segment. Our focus now is getting on the industrial machine ready to deal with the negative demand cycle for cash crop machinery and Ag. We’re preparing for a tough year and implementing additional efficiency actions and cost containment programs. We’re experiencing significant lower agricultural segment profitability in the first half of 2015 as we keep production at low levels to assist the inventory clearing process with the resulting decremental margin of the rental performance over here.

[Max Chiara:]

Thank you, Rich. I’m on slide 5 now. In summary, consolidated revenues at $8.4 billion down 5% for the quarter in constant currency and a $32.6 billion for the year, down 2% in constant currency versus prior year. Consolidated net income stood at $87 million for the quarter and $708 million for the full year 2014. Net income before restructuring and other exceptional items for the quarter was $0.12 a share and $0.69 a share for the full year. Available liquidity at December end $8.9 billion inclusive of $2.7 billion in un-drawn committed facilities, this compares to a $7.9 billion available liquidity at the end of September. The company posted net sales of industrial activities of $8 billion for the quarter which is down 6 versus last year in constant currency and $31.2 billion for the year down 2.8 versus last year in constant currency gain for the full year with negative impact from currency translation approximating $600 million and this primarily relating to the Brazilian Real. Operating profit of industrial activities was $376 million in Q4 with an operating margin of 4.7%. The full year operating profit stood at $2 billion with margin of 6.4% in line with prior year. Net industrial debt of $2.7 billion at December end was $1.2 billion lower than September, with net industrial cash flow positive of $1.2 billion and negative $0.7 billion for the year. On slide 6 we have reconciliation from consolidated operating profit to net income for the quarter and full year. Consolidated operating profit stood was $4352 million for the quarter up $21 million versus Q4 ‘13. Restructuring expenses totaled $86 million in the quarter and $184 million for the year as part of the efficiency program announced in July 2014. This compares to $39 million and $71 million respectively for last year. The $86 million restructuring expenses total in the quarter are mainly due to actions to reduce SG&A expenses and business support cost as well as costs related to the completion of manufacturing product specialization program for commercial vehicles. And to cost reduction activities is a result of negative demand conditions within agricultural equipment. For Q4 ‘13, restructuring expenses were mainly related to commercial vehicles. Interest expense net totaled $164 million for the quarter flat versus prior year and $631 million for the full year, up $65 versus last year. The increase in interest expenses in the full year was primarily due to an increase in average net industrial debt during the year partially offset by more favorable interest rates primarily related to the new notes issued during the year. Other net was a charge of $313 million for full year of ‘14 was $284 million last year. The increase of $29 million was mainly due to higher foreign exchange losses. The 2014 number also includes the $71 million pre-tax charge for the measurement of the Venezuelan asset denominated in bolívares. Income taxes for the year totaled $467 million, representing an effective tax rate of almost 43%. The tax rate last year was - comparable tax rate last year was 49%. The rate was in line with company expectations for the year but was well above our expected long-term target. For 2015, company expects the tax rate to be in the range of 40% to 43% with rates still impacted by non-tax effect in book losses in certain jurisdiction. On slide 7, we show the change in net industrial debt for the quarter, representing a decrease in net debt of $1.2 billion, notwithstanding the challenging conditions in Ag. Change in working capital for the quarter was positive for $1.5 billion slightly below last year as a result of inventory reduction in the quarter. CapEx in the quarter was $159 million lower than last year, due to the expected reduction of capacity expansion investments. Net industrial cash flow was in line with Q4 ‘13, was positive for $1.2 billion. On slide 8, we show the change in net industrial debt now for the full year. As you can see, net industrial debt at December end was roughly $0.5 billion higher than prior year and also our full year target of $2.2 billion. Cash generation in the operations before changes in working capital contributed for $1.3 billion. Changes in working capital negatively impacted by $1 billion, mainly due to lower payables as a result of the relevant production curtailments in Agricultural Equipment in the fourth quarter, and of Commercial Vehicles in EMEA returning to normalized levels of production as compared to prior year’s Euro V pre-buy activity, as well as due to LATAM - to constraint in LATAM operations. Capital expenditure activity for the year totaled $1 billion and dividend payments were $400 million. Currency translation differences on Euro-denominated debt positively affected net industrial debt by $600 million. The under achievement to our full year target is primarily attributable to the further slowdown in Ag affecting inventory and payables. Slide 9, provides greater detail regarding industrial CapEx activity by spending category and segment. CapEx decelerated to $470 million and for the quarter and for the full year close almost 20% below prior year to $1 billion. Spending composition for the quarter was remaining flat with long-term investment, industry capacity expansion reducing, thus profiting from the tail-end of the engine emission CapEx and demonstrating our ability to flex the capital expenditure in the cycle. Moving on to slide 10, our financial services business performance, net income for the quarter was down 20% to $98 million, as the positive impact of the higher average portfolio and lower provisions for credit losses was more than offset by higher income taxes. For the full year net income of $364 million was up 6.4% year-over-year. Retail loan originations in the quarter were $3 billion, down $0.5 billion compared to the same quarter of last year. The managed portfolio including JV of $27.3 billion was down $2.8 billion compared to September 30, 2014. The quality of the portfolio continues to improve with delinquencies on book over 30 days at 3.5% down 1.3 percentage point versus Q4 last year. On slide 11, this slide shows the company debt maturity schedule and the available liquidity at December 31. Available liquidity was $8.9 billion that compares to $7.9 billion at September and the number includes this $2.7 billion of un-drawn committed facilities. The increase in the fourth quarter is mainly attributable to the cash generation from operating activities net of investing, partially offset by bank debt reduction and negative currency translation differences on cash balances. The amount of available liquidity maintained capital with management focus to shift indebtedness to unsecured funding, the extension of debt maturities and the reduction of inter-segment funding to our financial operations, all represent capital allocation actions consistent with management objective to drive towards an investment grade start-ups over rating. In addition, in November 21, company signed a €1.75 billion five-year committed revolving credit facility at improved terms and duration, intended for general corporate purposes, facility replacing an existing three-year €2 billion facility to mature in February 2016. This concludes this part of the presentation. Let me now turn back to Rich for the business overview.

[Rich Tobin:]

I’m on slide 13. It’s the industrial activities net sales growth composition and the full year 2014 regional split. As you can see, roughly 50% of the reduction in net sales for the quarter is related to foreign exchange impacts and translation. FX impact for the full year was $550 million. Net sales put by region is roughly in line with previous year with LATAM underway replaced by a stronger EMEA region. Agricultural net sales were $3.4 billion for the quarter down 18% from Q4 2013 or 14% at a constant currency basis due to negative volume of products mix partially offset by positive pricing. Construction equipment sales were down 4 or 0.5% or flat at constant currency to $800 million, with weakness in LATAM and APAC being offset by favorable trading conditions in NAFTA. Commercial net sales were down 1% in constant currency to $3.3 billion. Net sales increased in EMEA’s result of favorable mix with trucks despite lower volumes due to Euro V pre-buy effect in 2013. In APAC, commercial vehicles registered higher volumes mainly for buses, LATAM volumes were down due to protracted unfavorable market conditions and a result of inventory de-stocking actions completed in Q4. Powertrain sales were down 19% on a constant currency basis to $1 billion due to different quarterly cadence of engine production year-over-year. I won’t spend a lot of time here but what this gives you is operating performance by segments for the quarter and for the full year and the comparable margins of the quarter and the full year. I’ll deal with that in greater detail on the following slides for the quarter. So move to slide 16. Agricultural equipment performance for the quarter and the year, worldwide agricultural equipment units sales were down compared to 2013 with a more severe slowdown in the quarter. Global demand for tractors is down 7% in the year and 14% for the quarter. As we’ve previously commented, net sales for the year were down 9.3%, unfavorable volume and product mix partially offset by positive pricing. All of the regions reported decreases in net sales with the largest percent decline reported in LATAM. Full year operating margin resilience as a result of company’s actions implemented favorable pricing, industrial flexibility exceeding negative absorption and efficiencies and structural costs. Operating profit was $240 million for the quarter with a margin of 7.1% decrease, is driven by unfavorable volume and mix. Slide 17, inventory dynamics for the quarter together a snapshot in commodity prices. As anticipated during the last quarter conference call, under production versus retail was 19% due to the continued adverse industry demand and further production curtailments are now expected in Q1 of 2015 of 30% to the comparable quarter. Despite the fact, the duration of negative cycles of cash crop machinery is not completely clear yet. The structural fundamental of the Ag business remains strong. Next slide. Worldwide heavy and light construction equipment industry sales for the full year were down 9% and up 5% respectively from the prior year. Worldwide heavy industry sales in the quarter were down 20% with LATAM down 22% and APAC down 35% partially offset by NAFTA and EMEA they were up 8% and 5% respectively. Full year net sales by product, was well balanced between heavy and the light segment. As you can see all the strategic initiatives outlined in the previous - outlined previously are proceeding as planned. Looking at the operating profit watch for the quarter, favorable volume and mix as well as efficiency program together with other cost savings allowed the segment to confirm to return to profitability showing a positive swing year-over-year with $62 million for the quarter despite running at low production rates to balance inventories going into 2015, resulting in the value of inventory being reduced as compared to 2014. Operating margin for the full year was 2.4%, a positive swing of $176 million in operating income. We’re on slide 19, we under-produced fourth quarter under production versus retail as 23%. As I mentioned in my earlier comments, our value of our total inventory is lower at the end of 2014 than it was in 2013 so to the extent that you can see about positive GDP swing to the extent that the market holds up across the world and go into 2015 balancing production with demand and with dealer level of inventories in control. Next slide. As far as industry trends, full-year 2014 EMEA market grew by 1% compared to the previous year to approximately 670,000 units while LATAM new truck registrations were down 16.5% to last year. The largest decreases registered in Venezuela and Argentina. In the quarter, total deliveries were 39,000 units down 10% versus Q4 of 2013, truck volumes were slightly down to light, mainly driven by market conditions in LATAM while medium and heavy were down 31% to 19% respectively mainly due to last year’s Euro V pre-buy in Europe. Total orders were slightly down versus Q4 ‘13 with EMEA up 13% and bus and EMEA up 45% offset by LATAM down, Q4 book-to-bill at 0.9% versus 0.1% versus last year. improved operating margin in the quarter as favorable pricing at EMEA as a result of new product launches and a positive effective efficiency program more than offset lower volumes. And negative fixed cost absorption in EMEA when compared to higher production rates achieved in Q4 as a result of Euro pre-buy. LATAM, the markets remained weak. In terms of inventory and the commercial vehicle segment of the business, fourth quarter under-production versus retail of 18% with LATAM under-production of 33%. Both dealer and company inventory levels are now below Q4 of 2013. Expectations for Q1 ‘15 are for a production levels aligned with retail. European truck market for medium heavy range maintained again below the 10-year average with market level, with next year expected to remain in that level and well below the 2007 peak. Looking ahead, only 4% of the Euro market has transitioned to Euro VI while Ag trucks are running at a higher operational PCO ex-depreciation. EU freight indicators for 2015 are a positive support for restart and demand recovery. Pent-up demand potential in Southern European markets based on historical trends remained unexploited and LATAM over-age fleet which is more than twice the size of Europe demanding rejuvenation and replacement in the mid-term, but likely to be held back by macro-uncertainties in the short-term. Our commercial vehicle brand product launches in life, and Euro V medium heavy trucks have been successfully completed. In Powertrain, I think I covered most of this. Full year third party sales, third party net sales of 41% which I believe is close to the highest ever versus 34% in 2013, really I think I commented on most of this already, so I’m moving to the next slide. Slide 24 comparisons were updated market outlook versus what we preliminarily provided in October. Revised outlook mainly reflects the continuation of challenging trading conditions in the World Crop sector of the agriculture industry, highlighted by the worsening expectations or high horsepower tractors and combines in NAFTA. While for tractors worldwide, the industry remains flat as previously forecasted combines worldwide industry outlook is forecasted down 15% to 20%. LATAM macro environment continues to remain challenging with uncertainties from the slow ramp up of FINAME rules. In construction cost, in commercial vehicles is now slightly forecast to be slightly better in the EMEA region compared to previous expectation while LATAM has deteriorated. Turning now to the full year 2015 U.S. GAAP guidance, for the full year 2015, company expects to improve profitability in commercial vehicles and the construction equipment segments. Structural cost improvement measures and from the full year benefit of the company’s efficiency program and the forecasted decline in R&D expenses resulted the completion of the majority of the Euro VI Tier 4 Final product transitions will be positive year-over-year contributors. These actions are expected to buffer the negative impact from the continuation of challenging trading conditions in the Agricultural World Crop sector but will be unable to fully offset the recent significant strengthening of the U.S. dollar and the corresponding negative translation effects on the group’s consolidated accounts. The company’s guidance for 2015 therefore is as follows. Net sales of Industrial Activities of approximately $28 billion, operating margin of Industrial Activities between 6.1% and 6.4% and net industrial debt at the end of 2015 is between $2.2 billion and $2.4 billion. That concludes the presentation. I’ll hand it back to Federico. And we can move to the Q&A.

[Federico Donati:]

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

[Operator:]

[Operator Instructions]. We will take our first question from Ann Duignan of JPMorgan. Please go ahead.

[Ann Duignan:]

Thank you. Can you talk a little bit first off on the agricultural side, where are your early order programs today versus a year ago?

[Rich Tobin:]

Sure, we got you first in line this time Ann after missing you last quarter.

[Ann Duignan:]

Yes, thank you. I appreciate that.

[Rich Tobin:]

No problem. They are pretty much a reflection of what we forecasted the decline for the full year speaking mostly about NAFTA and EMEA. LATAM is weaker than we would expect, there is not a lot of pre-order activity in LATAM anyway. I think that the market is waiting to see how the FINAME rules pan out here in Q1. So, I think there is going to be a little bit of - I think it’s going to be a weak Q1 in terms of order backlog in LATAM until that gets resolved.

[Ann Duignan:]

Okay, thank you. That’s helpful. And on the credential services side, can you talk a little bit about any stress at your dealer level, any changes that you’re making to wholesale financing, we’re hearing about very, very aggressive financing particularly in agriculture, large agriculture? Can you talk about how the impact of the down-trend in agriculture is weighing on your financial services business? That will be great. Thanks.

[Max Chiara:]

I don’t think that we’ve changed anything in totality on the financial services. We’re cognizant of the fact that both our dealers and ourselves, have to reduce total inventories with out of the market, that’s why we’re cutting production. And we’re working on a dealer-to-dealer individual basis in terms of extended floor planning in a like. But extremely aggressive on our part, I don’t think that that would be true for us.

[Ann Duignan:]

But you are extending floor plans?

[Rich Tobin:]

Yes, I think that’s from - depending on the balance between new and used, I think that we’re being accommodative where we can, but on an individual dealer-by-dealer basis. But I don’t think that we’ve done anything overly aggressive.

[Ann Duignan:]

Okay. And just finally real quick, your five-year plan, your EPS target included stable demand for agricultural equipment from last year. Are you still sticking with your five-year plan?

[Rich Tobin:]

No, we don’t have any reason right now to change it. I mean I think that we’re obviously going to have from negative FX in ‘15 but whenever we do a Five-plan, we understand that we’re participating in a cyclical industry or industries if you will. So right now look, the Ag is weak, I think that the cycle being down to 2018 is a little bit over or aggressive. So right now I think we’re sticking to it.

[Ann Duignan:]

Okay, thank you. I appreciate you letting me get on the call.

[Rich Tobin:]

No problem, Ann.

[Operator:]

We will take our next question from Sam Morton of Credit Suisse. Please go ahead. Your line is open.

[Sam Morton:]

Good afternoon, good morning. First question on the balance sheet, so, in the presentation you reiterated the commitments towards getting an investment grade rating. But in the light of today’s update, I was just hoping that you could provide a little bit more detail on the steps that you think you need to take to get that? And then secondly, just on your associate holdings, I guess the valuation of those assets has increased substantially over the past couple of years reflecting the better growth prospects. And I just wanted to understand how you were thinking about these assets in the medium term, in the short-term, how do you think about these assets? Thanks a lot.

[Max Chiara:]

Okay, I’ll go back to the first one. We will continue taking the actions that we’ve been doing over the past three to four years in terms of the structure of the debt of the company and diversifying that. I don’t think that forecasted trading conditions change that in terms of our goal, in terms of improving the balance sheet of the company. In terms of the associate holdings, I mean, I think that we’re committed to all of them and we retain optionality on all of them, I mean, that’s really all I can say.

[Sam Morton:]

Okay, great. Thanks a lot.

[Operator:]

We will take our next question from Martino De Ambroggi of Equita Sim. Please go ahead. Your line is open.

[Martino De Ambroggi:]

Thank you. Good morning, good afternoon everybody. The first question is on the change in the guidance, probability for industrial activities. It was expected to be flatter when you released the Q3 results, now it’s a bit lower. Could you help us in try to understand what are the main variables for the bridges just the matter of currencies or is there any additional difference from what you expected one quarter ago?

[Rich Tobin:]

The majority is FX. The balance of it is some fine-tuning the expectations in terms of world crop equipment demand in Ag.

[Martino De Ambroggi:]

Okay. And over in the last - in your last presentation you made a lot of examples regarding cost cutting initiatives and so on. In your current updated guidance in 2015, how much is cost saving, so just to understand how things are progressing in terms of cost savings?

[Rich Tobin:]

Yes, I think that we need to separate what we had put in, in terms of the restructuring plan. I believe that the savings in 2015 is $80 million, is what the rollover of that is. Now there is still a remaining restructuring charge, it needs to be taken in 2015 to finish it. The balance of the savings, I think you got to look at the segmental of what we’ve done on both SG&A and R&D, that’s a portion of that is - was part of the restructuring plan, largely in Europe. The balance of it is tight cost control. So it’s not just the Ag, I think you can take a look at by segment what we’ve done below industrial activities and roll that forward depending on the timing of what you’re seeing.

[Martino De Ambroggi:]

Okay. If I may one more question on the pricing. If you can elaborate a bit on the trend you expect for the three main divisions?

[Rich Tobin:]

In terms of pricing?

[Martino De Ambroggi:]

Pricing, yes.

[Rich Tobin:]

Yes, we’re market leader in Ag. So, it’s dependent on us to maintain pricing discipline in the marketplace. And I think that despite Q4 in terms of volumes, if you go back to the slide, we show that we’re positive in pricing. So we’re maintaining our commitment for pricing discipline despite the fact that we’re heading into some pretty difficult market conditions. In commercial vehicles, we’re positive in pricing also. I think that that is the industry as a whole trying to recapture Euro VI related costs. And we’re not the leader, but we’ve demonstrated that we’re moving pricing up during the year and trying to improve profitability. And in LATAM it’s a little bit different, that’s more inflationary related pricing because of the environment there.

[Martino De Ambroggi:]

Okay, thank you.

[Operator:]

We will take our next question from Ross Gilardi of Bank of America Merrill Lynch. Please go ahead. Your line is open.

[Ross Gilardi:]

Yes, good morning. Thanks very much. Richard, I’ve got some more balance sheet and cash flow questions. But really on the net debt to begin with, I mean, at the end of the third quarter you guys were guiding at $2.1 billion to $2.2 billion in net debt, you finished with $2.7 billion. You burned $700 million of industry cash flow in ‘14, and the Ag business has got a pretty uncertain outlook that could last a while. So, first question, how did you miss the net debt target by $500 million with only three months left in the year? And just more fundamentally why isn’t CNH generating any cash, I mean the outlook is tough but we’re not seeing negative free cash flow most of the other companies in the space? And then I just had a follow-up to that.

[Rich Tobin:]

Okay, I’ll deal with the $500 million and then I think Max really want to step in with the balance of it. Because I think it’s more of an even just working capital, so I’ll deal with the working capital piece of it. It’s approximately $350 million of home inventory that we had expected to retail primarily in Europe, that didn’t happen, we had a significant downturn. If you look at Q4 in Europe in terms of what we had seen in September versus what happened in the fourth quarter, I think that that’s the majority of the hang there in working capital and then the fact that we had cut production severely in Q4, so you have a corresponding reduction of payables which exacerbates it.

[Max Chiara:]

In terms of cash flow for the group, we’ve been going through a significant CapEx cycle I think that we’ve basically shown that we’ve cut CapEx approximately 20% this year. And we would expect to have that same kind of cut in CapEx next year, which would possibly impact cash flow. So we’re coming out of a relatively heavy CapEx cycle. And then about whatever we can get in terms of inventory liquidation we will let it flow through. And that’s just going to be based on market conditions predominantly in Ag.

[Ross Gilardi:]

Okay. Just somewhat related to this and given your longer term balance sheet goals, I mean, you guys get asked about potential divestitures quite a bit from time to time. I mean, do you feel like you’re in a position where you’ve got a more seriously considered divestitures to move you further towards your balance sheet objectives over the next three to five years? Obviously we’re in a tough environment and you’ve also got a $300 million dividend that you’ve - that the board is recommending again this year. That’s obviously you want to sustain, so thoughts on divestitures, given the balance sheet?

[Rich Tobin:]

I don’t think that we would be considering inorganic options based on balance sheet goals. I mean, it’s really the best way I can say it. I mean, I think that we’ve got all the tools we need to continue to improve the financial position of the company I don’t think that we would consider divestitures as part of reaching those goals. I mean, that’s a completely different headset.

[Ross Gilardi:]

Okay. Well, irrespective of just the balance sheet then just what is your latest view on, does that go into construction equipment business, are they still very much core to CNH?

[Rich Tobin:]

Yes.

[Ross Gilardi:]

Okay. Thank you.

[Operator:]

We will take our next question from Michael Ralph [ph] of Kepler Cheuvreux. Please go ahead. Your line is open.

[Mike Ralph:]

Yes, hi, Mike Ralph from Kepler Cheuvreux. Hi gentlemen, I have basically two questions. I mean, looking at your guidance for industrial sales this year and the apparent around about 8% drop you seem to be expecting. I presume this is chiefly combination of the negative outlook for Ag and ForEx. But in light of that, do you think you’re going to be able to basically reach again your double-digit margin in Ag this year? And then secondly, looking at the weak spot, which apparently is cash generation ability. At what point of this year should we expect your counter measures to basically take over and hence finally prevent the cash drain and then to see starting cash basically coming in positively again?

[Max Chiara:]

Okay. I don’t think that we gave a margin target for 2015 by segments, so we just gave group. So I’m not going to comment on what our expectation is in terms of Ag margins for 2015. I can only give you what we think that the range is for the consolidated industrial ops. In terms of cash flow, like I said, I mean I think that we’re looking to liquidate inventory on the Ag side because I think it’s pretty clear that the cycle is going down. I think that we have to preserve some optionality on construction equipment and the commercial vehicle segment depending on how those markets perform over the balance of the year. That coupled with the fact that I mentioned before that we can expect to be cutting CapEx in 2015 relative to 2014 which is positive to cash flow. So that would come over the 12-month cycle.

[Mike Ralph:]

But just for my understanding, if you still have excess inventory, how could pricing be positive in this year?

[Rich Tobin:]

How can pricing be positive this year?

[Mike Ralph:]

Yes, if you still have excess inventory that you need to get rid off?

[Rich Tobin:]

Yes.

[Mike Ralph:]

And you’re not the only one out there, so if I got you right, you mentioned earlier that you expect pricing to be positive or was it a misperception of mine?

[Rich Tobin:]

No, it’s not a misperception. We expect to maintain pricing discipline in the marketplace in 2014. There is part of pricing year-over-year is Tier 4 Final related depending on when those products were brought into the system.

[Mike Ralph:]

All right.

[Rich Tobin:]

We need to raise pricing in conjunction with that.

[Mike Ralph:]

All right. Thanks.

[Rich Tobin:]

Yes.

[Operator:]

We will take our next question from Alessandro Foletti of Bank Bellevue. Please go ahead. Your line is open.

[Alessandro Foletti:]

Yes, good afternoon gentlemen. I have a question on financial services. You quote in your press release that the sales there basically went up because of valuation of the portfolio. Does it mean the portfolio has been revaluated, there were like book games in it and as consequence of that could this trend also change going forward?

[Max Chiara:]

No, it’s the volume of the portfolio going up.

[Alessandro Foletti:]

I read value. I read value of the portfolio in your press release. So there is, no revaluations?

[Rich Tobin:]

Yes, now there has been no revaluation of the portfolio, its volume.

[Alessandro Foletti:]

All right, thank you.

[Operator:]

We will take our next question from Larry De Maria from William Blair. Please go ahead. Your line is open.

[Larry De Maria:]

Hi, good morning. Thank you. Couple of questions. I think Rich, you said that you’re going to under-produce retail and Ag by 30% versus year ago levels. Year ago we were up 27% over retail demand in productions. So I’m just curious why do we think that’s enough, it seems there could be downward pressure as we go through the year? And then, the one with price, if you’re going to maintain price at the corporate level, does that imply that the dealers would - if there is price concession to the dealers, they will feel the bigger impact in seeing each corporate?

[Rich Tobin:]

Yes, I won’t comment on dealer profitability. I think that, I know that there is a fear out there in terms of pricing. All I can do is demonstrate that we’ve been positive pricing through a downturn this year and our expectation is to maintain that discipline going forward. What was the other question Larry?

[Larry De Maria:]

Well, yes. Well, it sounds like obviously the price recession make come for the distribution but the production you said was going to be down 30% versus year ago levels?

[Rich Tobin:]

Okay. No I understand, it’s 30% down to Q1 of 2014.

[Larry De Maria:]

That was over-produced by.

[Rich Tobin:]

Yes, I mean, in a perfect world Larry, if you really wanted to clear, you’d go to zero. But you got to balance the economic impact of doing that over the years. So, we’re always balancing, getting the inventory right and matching demand inventory and production. The most economical way is to run it at a reduced level for a period of time. You can’t swing the industrial machine zero to 50 overnight. There is a significant amount of cost associated with doing that.

[Larry De Maria:]

Okay, no, I understand. That makes sense. And then just finally, [indiscernible] prices are lower. How comfortable with you on your flat forecast or do you think there is risk to that given that some of the prices in those segments are lower now?

[Rich Tobin:]

We’re as comfortable as we are making the forecast going into the year. I mean, I think that the relative, the prices have slipped some. But in terms of profitability it’s still in the black. So it’s just an area that we’ve got a brand, the New Orleans brand that’s been living in that space a long time. We think that we have a competitive advantage against some of our competitors that go in and out of dairy livestock. We’ve got a dedicated brand that’s the reason to exist to a certain extent. So we’re just going to have to get our fair share.

[Larry De Maria:]

Okay, thanks. Good luck, Rich.

[Operator:]

We will take our next question from Monica Bosio of Banca IMI. Please go ahead. Your line is open.

[Monica Bosio:]

Good afternoon, everyone. I would have two questions. The first is just a check. And maybe I love the part of the Q&A, is it on CapEx. Is it correct that the CapEx will be more or less in line with the 2014 level as for current year, just to be sure I have understood well? And the second question is regarding the oil price assumptions. What kind of oil price assumptions have you factored in your outlook? And could you please comment a little bit on positive, on potential impact of further decrease in oil price on the demand in Europe as for commercial vehicles? Thank you.

[Rich Tobin:]

Okay. The first one is, we did not it would be flat year-over-year. We said CapEx would be down 15% to 14%.

[Monica Bosio:]

Okay.

[Rich Tobin:]

In terms of oil price is positive to both - the reduction in oil prices are both positive to the both the commercial vehicle and the Ag segment because of the fact that that operating cost decline, so there is more available profitability to move towards equipment purchasing. So overall, we think its fine. But we don’t model that in a particular way and try to extrapolate something into unit volume demand. We just think that it’s constructive for both large fleet operators on the commercial vehicle side and for farming in general.

[Monica Bosio:]

Okay, thank you very much.

[Operator:]

Our final question comes from Michael Tyndall of Barclays. Please go ahead. Your line is open.

[Michael Tyndall:]

Yes, hi there, it’s Mike Tyndall from Barclays. Just two questions if I may. The first one, just thinking about your outlook to North American markets, you’ve got tractor down roughly 5%, you’ve got combined stand 25% to 30%. I mean, you probably know that one of your main competitors is significantly more bearish. Is that just a function of the mix, or are you seeing something different to what they’re seeing? I know you probably don’t want to comment about them. But I’m just trying to reconcile those two fairly diverse outlooks on the North American market? And then the second question, on a more positive note, looking at your market share in Europe, you seem to be taking share on the EVECO [ph] side in both the medium and the heavy truck side. Is that a geographic mix reflection, obviously you’re being strong in Club mid where we think demand recover or are you actually winning on a face-to-face basis against some of the other players there? Thanks.

[Max Chiara:]

Let me deal with the truck one. It’s not geographic because I think it’s a traditional stronghold of Southern Europe ex-Spain. Spain actually it was up quite a bit if my memory serves incorrectly for the year. So that’s a, we consider to be a home market for us, so that’s proactive to us gaining share in both of those segments, the balance of Southern Europe is down overall. So I don’t think that it’s overly as a result of geographic mix on the truck side.

[Rich Tobin:]

Your first question about, I think, that we’re pretty much aligned now. I mean, we came out first we tried to be helpful and set a forecast which everybody came and adjusted off. And I think that’s not a surprise that everybody came down off of our first line forecast back in October. I think we’re pretty much in-line right now between the two. I mean, they’re messy, they’re little bit messy numbers because we break tractors into segments I think we’re the only ones that do that. And then we have combines and there is other classification which are harvesting equipment which may have sprayers. And then so, there is never a completely directly correlation between the two bigger guys in the market. But I think that now we’re mostly aligned between the two of us. In terms of combined share, I think that was the third question that you had, I mean I think that overall we did reasonably well.

[Michael Tyndall:]

Can I just ask one, very quick follow-on, just in terms of flex in the machine? You’ve already talked about the fact and it’s in the EBIT walk in terms of you actually having flex. How much flex is left because we’re going further down in production by the sounds of that in Q1?

[Rich Tobin:]

Yes, I mean, we did a significant amount of work. I think we offset $100 million of absorbs, comparable absorption that none of it felt at the bottom line from the industrial side. So I think that, I think that we demonstrated that we can flex but we gave guidance on negative decremental margin for at least Q1 of being in the 30s that’s double what it was for the full year. So I mean, we’re going to have to take production down quite a bit now to level the inventories. And there is no amount of flex that you’re going to have to account for that.

[Michael Tyndall:]

Got it. Thank you very much. Cheers.

[Rich Tobin:]

Thanks.

[Operator:]

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

[Federico Donati:]

Thank you, Alex. We would like to thank everyone for attending today’s call with us. Have a good evening.

[Operator:]

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