CNH Industrial N.V.
Q2 2015 Earnings Call Transcript

Published: 29 Jul 2015

[Operator:]

Good afternoon ladies and gentlemen, and welcome to today’s CNH Industrial Second Quarter 2015 Results Webcast 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, Pascal. Good afternoon, everyone. We would like to welcome you to the CNH Industrial second quarter and first half 2015 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:]

Thanks. Good morning, good afternoon everyone. Most favorites in opening comments before hand it over Max, and going through the slide deck. Q2 operation performance was broadly aligned with our expectations as we continue to navigate through the continued challenging conditions in the agricultural equipment segment and broader macro issues such as the declined in emerging markets demand. Particularly Brazil and LATAM effect of U.S dollar strength versus the majority of the Group's trading currencies Despite these headwinds we continue to execute on our efficiency program objectives which we will see in the comparable profit performance, particularly in construction equipment in commercial vehicle segments. In the agricultural segment, we continue to execute in the market with some positive share development in the various regions and the continuation of decisive inventory system clearing process to realign our channel stock levels to new market demand conditions which will be covered in the main presentation. Looking forward, managing focus we maintain on operational execution and cost control actions, channel inventory level at June end was $700 million lower and seasonally comparable from the period last year. Our expectation is to clear significant amount of dealer inventory in Q3, as a result of seasonal manufacturing facility shutdowns and reduce line rates. In construction equipment segment, we continue to make progress in the longer term objectives and despite particularly difficult trading conditions in the LATAM market particularly Brazil. We’re able to improve margins for the quarter. We’ve made particularly good progress and our excavator strategy in LATAM and EMEA and will be in production by the end of the year and we are 75% complete with the realignment project from a brand point of view in Europe. In commercial vehicles in this environment in the truck and bus segment has been generally positive with tough trends in EMEA further improved in core Europe demand now at 15% above last year. Primarily driven by light and heavy range while demand continues to attract in LATAM specifically in Brazil affected by very weak economic. Conditions with heavy trucks down 60% the year-over-year. Global order intake is reflective these market conditions with orders up almost 50% year-over-year and EMEA this heavy trucks in Europe up 60% which decrease a strong delivery for the second part of the year for LATAM orders in Brazil are down somewhat offset by Argentina and preparation for the transition to Europe. Commercial vehicle in the quarter to the constant currency topline growth rate at 12% than the operating margin of course the three and the back of the improved business conditions in EMEA trucks and flow through a positive impact from efficiency program actions. Powertrain segment is concern. We continue to enjoy stable development, this segment we absorb the loss of volume at ag the sustained activity from third parties and continued efficiency in the manufacturing area, the material cost savings in our procurement process. Sales to non- captive customers accounted for 42% of the business during the quarter. Those are the general comments, I’ll turn it over to Max, he will give you an overview of the financial performance of the quarter and I’ll come back with some of the segmental comments later in the presentation. Max?

[Max Chiara:]

Thank you, Rich. I’m delightful the second quarter financial highlights. The company consolidated view including financial services second quarter revenues total $7 billion down 10% compared to Q2 2014 on a constant currency basis or 22% as reported. Net income was $122 million or $0.09 per share. Net income before restructuring and other exceptional items was $141 million or $0.11 per share. Available liquidity increased during the quarter totaling $7.8 billion again the June versus a $7.2 billion figure of March 31, 2015. Balance in undrawn committed facilities of $2.8 billion at the end of June. When we turn to the industrial activities, net sales of industrial activities at $6.6 billion, down 10% in constant currency or down 22.5% as reported. Company achieved industrial profit – operating profit of industrial activities for the second quarter of $401 million, $678 million was Q2 2014 to the comparable number. Operating margin at 6%, net industrial debt at June 30 was $3 billion, was $3.1 billion at the end of March. With net industrial cash flow positive $520 million in Q2 2015 on the back of working capital improvements and capital expenditures containment. On Slide 5 now, here we have the reconciliation from consolidated operating profits and net income for the quarter, consolidated profit, operating profit at $467 million or 6.7% for the quarter. Restructuring expenses totaled $22 million in the quarter, $8 million lower than last year and mainly relate to actions in commercial vehicle and agricultural equipment as part of the company efficiency program launched in 2014. Interest expense net totaled $170 million for the quarter, a decrease of $41 million or 26% compared to last year primarily due to a more favorable cost of funding and the lower average indebtedness, primarily from reduced working capital needs, as a result of the inventory reduction in Ag and for more actions to reduce intersegment financing between the industrial activities and financial services. Other net was a charge of $93 million for the quarter, an increase of $30 million compared to last year mainly as a result of higher foreign exchange losses on our monetary asset and liability exposure. Income taxes totaled $126 million representing an effective tax rate of 53.6% for the quarter. The Q2 tax rate is negatively impacted by the inability to book deferred tax assets on losses in certain jurisdictions. Due to deteriorated business conditions in certain jurisdictions, primarily Brazil commercial vehicles and the reduced profit before tax. The company effective tax rate for the year is expected now to be in the range of 48% to 52%. Nonetheless, we continue to raise the rate that the long-term effective tax rate target of between 34% to 36% range remains unchanged as actions to restore profitability in our loss making jurisdictions are underway. Basic EPS and EPS before restructuring and other exceptional items was $0.09 and $0.11 respectively for the second quarter, down $0.17 versus prior year. Slide 6 now, we show the change in net industrial debt for the quarter, at $3 billion net industrial debt of June was slightly better than March, with positive net industrial cash flow of more than $500 million primarily as a result of positive contribution from working capital and a 30% plus contraction in capital expenditure. Partial offset by reduced net income. The positive change in working capital of $400 plus million which was favorable $150 versus the same quarter last year stand as a result of the inventory reduction actions in Ag and of the increase in demand for commercial vehicles in EMEA. Change in net industrial debt is also reflective of the $300 million payment of diligence to shareholders of last April, while the exchange rates impact affecting our euro denominator liabilities has been unfavorable by $200 million. Due to the June end might rebound of the euro against the dollar. For the six month period through June FX remains favorable for $100 million so far on the net industrial debt. Moving onto Slide 7, here we have provided a focus on cash flow from operating activities from the bar chart on the left you can recognize the part on our historical quarterly seasonality with regards to Q2 performance positive cash generation of $650 was down $180 versus last year mainly due to lower net income. Looking at each one comparison to prior year the seasonally driven cash absorption in the first half, was improved year-over-year by roughly $0.6 billion from the same period. Last year, mainly the result of lower inventory level as per the inventory balancing measures implemented in Ag. Next Slide number 8 provides greater detail regarding capital expenditure industrial activities by spending category and segment. CapEx decelerated to $136 million the reduction for the quarter is mainly coming from the completion of our long-term investments industrial capacity expansion plan and by lower spending for the engine regulatory capital. Maintenance CapEx and other cover the remaining 46 of total spending. Spending by segment is in line with long-term company guidelines in terms of capital allocation weighted towards highest return on capital business. Next slide financial services business performance. Reported net income for the quarter was slightly down to $98 million as the negative impact from currency translation was partially offset by reduced SG&A expenses. Retail loan origination in the quarter $2.4 million, down $0.4 million compared to Q2, mostly due to the decline in Ag sales. The managed portfolio including unconsolidated JV of $25.4 billion as of June 30 was up $0.2 million compared to March. But the quality of the portfolio continues to improve with delinquencies on book over 30 days at 3.5% to down one percentage points to the respective period of last year. Our next Slide number 10, shows the company debt maturity schedule and available liquidity. Available liquidity in the quarter increased and achieved $7.8 billion at the end of June compared to the $7.2 figure in March. The increase in the quarter was mainly due to the new CNH Industrial Capital LLC $600 million three-year bond issuance with the coupon of 3.375 and positive cash flow from operating activities that more than offset bank debt reduction and dividend distribution to shareholders. This ultimate bond issuance proves one more CNH Industrial position of its spread in the cross-selling area of the yield in the fixed income market and reiterates our goal of achieving investment grade during the planned period. Again we continue to advance on the reduction of the intersegment balance with further reduction achieved during the second quarter of $700 million with a net balance now at $1.8 billion. This concludes the first part of the presentation then we turn back to Rich for the business overview section

[Rich Tobin:]

Okay, Thanks Max. On Slide 12, and I think the Max covered this early in the presentation you can see that more than 50% of the change in revenue, quarter-to-quarter due to FX translation you can see the table on the bottom left hand side versus the dollar and its corresponding impact in terms of operating profit. The only thing change would see you will be left sales by currency with the dollar representing less than in previous periods as a result on the downturn in the agricultural market. Slide 13, I think I’ll get to in the individual presentations of the sector. So let’s move to Slide 14. Net sales of the quarter down 24% on a constant currency basis as a result of lower industry volumes the row crop sector and dealer inventory destocking actions primarily in NAFTA. Operating profit was $253 million for the quarter at a margin of 8.7%, driven by lower sales volume in less favorable product mix in the row crop sector primarily in NAFTA – negative foreign exchange translation impacts primary as a result, strengthening of the U.S dollar can sold currencies primarily the euro and the Brazilian real. And we’re also negatively impacted by some prior year hedge position grow on the euro. So this is a one-time impact which we don’t expect to see in the second half of the year, going forward we expect unfavorable translation impact that have hedge to hold the currency movement within a tight volatility band. These effects were slightly offset by positive net pricing and cost control actions, including purchasing efficiencies and structural cost reductions, decremental margin achieving in Ag of 26% which is slightly higher than in Q1, largely as a result of change in SG&A, but less than 30 years that we have been guiding at the beginning of the year. Moving to Slide 15, the inventory dynamics as anticipated in the opening remarks production level was down 33% versus Q2 2014, on a production versus retail 14% company inventory was down 17% versus Q1 2015 and then 21% versus Q2 2014. Company given inventories were down 14% and looking at FMS tractors in outlined with the end of 2013 down nine months and combines down two months for the period, for the balance of the year expecting a 25% reduction in total channel inventory approximately this is dealer and company inventory approximately US$1.7 billion in liquidation over the balance of the year. Worldwide agricultural equipment industry sales were down 4% for tractors and 17% for combines industry outlook has been confirmed regard to tractors across the regions we have further revised downward our outlook for combines in both LATAM and APAC. And now forecast down 25% to 30% from the 15% to 20% respectively. Moving onto Slide 16, I think that I discuss the lot of this in the opening remarks. We have continue to manage the level of production of the amount of wholesales that we are going into the channel, particularly in the row crop sector were quarter-to-quarter production is down 41%. And then you see in terms of management action, in terms of SG&A and R&D as we continue to right-size the cost base and deal with the inventory overhang with the new market realities in terms of demand in Ag. So we are making good progress. I’ll cover later in the presentation of what our expectation for production and so the balance of the year, but we are seeing the benefits at least you can see in the benefits appraising as a result of limiting inbound wholesales of channel continues to hold up and way then and one of the goals we have in the balance of the year is to manage that particular position. Moving onto Slide 17, construction equipment net sales were down 15% compared to Q2 2014 which is all LATAM, which is all Brazil. Construction equipment despite this headwind, construction equipment reporting operating profit of $35 million for the quarter compared to $28 million. Operating margin increased 1.7% this cost containment actions more than offset negative impact of lower volume in LATAM particularly in Brazil. Moving to Slide 18, worldwide production levels was 16 above retail to accommodate seasonal shutdown schedule for August in NAFTA and EMEA, so really no issue there maybe intervening somewhat production in Brazil for the second half of the year, because our expectation is for that market not to recover until 2016. Okay. Moving onto Slide 19, in commercial vehicles, net sales were up – net sales were $2.5 billion for the quarter up 12% on a constant currency basis conforming a positive trend in EMEA for trucks and buses. In APAC, net sales increased mainly driven by performance of buses while trucks performance was affected by the market decline in Russia. In LATAM, sales decreased mainly due to further decline of Brazilian market for heavy trucks, partially offset by modest recovery in Argentina. In the quarter total deliveries were [indiscernible] increase compared to the comparable quarter. Volumes were higher in all segments with light up 14%, medium of 18% and heavy of 7%. Commercial vehicles deliveries increased 22% in EMEA while LATAM and APAC were down 8% and 17%, respectively. Total orders were up 32% versus the comparable quarter, with EMEA up close to 40% and LATAM up 17%, partially offset by APAC which is down 10%. Q2 book-to-bill at 1.06% is up versus last year. Operating profit for the quarter was up $88 million from the comparable period, at our operating margin of 2.7% as a result of higher volume, better product and market mix, positive pricing, manufacturing efficiencies and SG&A expense reductions. In EMEA, the increase in operating profit was attributed to trucks and buses. LATAM, despite the negative market trend was able to reduce its cost base to offset the negative impact of reduced wholesale volumes results and it was substantially flat. Move on to slide 20. Second quarter just like construction equipment, second quarter over production retail's 11%, and preparation for it's easy to shutdown particularly in EMEA. The industry trends for the quarter, I think that you can read them, I think my comment has already so EMEA showing were actually up in the EMEA, objective for the year and lowering LATAM slightly. Move on to slide 22. You can – excuse me, probably move back one to 21. I think what's important here is in terms of the strategy that laid out a year and half ago now. We are beginning to see the fruits of some of the positions that we have done; the launch of new Daily, the launch of Hi-Matic transmission which has been very successful. Despite the market being difficult we are gaining share in our core markets. You can see order intake as I commented before is up 50% in the various region and very by segment you can see they are all three segments were up and you can see EU 28 or core Europe market share will done reasonably well. We've gained market share versus the previous quarters. So I think that we are helped by the fact that the market is up but I think we are encouraged by the market share performance and we are also encouraged that gaining this market share with that not – with having to do anything with pricing. So overall it's a good. I think this was balance of the year and I think we are especially pleased in terms of the order intake which is which we are going to be increasing production over the balance of the year and EMEA truck and the order book is going to be able to justify that. In Powertrain, net sales were down 7% on a constant currency basis, all of that is related to the decline in the offload segment particularly in Ag, operating profit was substantially flat on constant currency as we are able to offset the volume decline on the offload engine with increases in production in axles and transmissions. Next slide, I'll address that one. In terms of full year you've seen that we've revised the guidance, it's particularly on the back and I think that we are making small adjustments in terms of CE, in terms of production which is more or less based on – one of my comment I said before what we expect for LATAM for the balance of the year. We don't see any impedance about to return. We are cutting Ag production almost exclusively enough in the high horsepower segment. I think they were just making a decision to clear more inventories so you can see in terms of net debt, we're moving that number up. In order to protect pricing and to make it to the balance of the year. I mean, we spent considerable amount of time with our Dealers overall market conditions in EMEA are not bad overall NAFTA and LATAM where the pressures are. In NAFTA actually the sentiment is not as bad it was as they at the second half of last year but I think that everybody sitting on their hands little bit in terms of order intake for the second half of a year. I think that there is a concern about the effect of pricing in terms of inventory clearing. So I think that they were making the prudent decision to take out some production that we believe that we believe we could wholesale in the second half of the year but the fact of the matters are probably get hang up in inventory. So we would rather protect pricing and clear as much as we can for the balance of the year. So we can go to the next slide, which is slide 26. As an participate in the previous line of result the continued demand weakness in the raw corp sector and in order to foster addition of clearing and finish goods inventory primarily in North America and LATAM the company will just production accordingly in the second half of 2015. Full year guidance is therefore updated to reflect the negative impact and operating margin and positive impact on working capital to these production adjustments. That's the last slide so we are conclude the presentation and we can open up to Q&A.

[Federico Donati:]

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

[Operator:]

[Operator Instructions] We will now take our first question from Mike Shlisky from Company Global Hunter. Please go ahead. Your line is open.

[Michael Shlisky:]

Hi guys good morning. Maybe answer if I asking about commercial vehicle first we look at the previous market share gains. In Europe are the gain do it all to maybe a change in the mix of what countries are doing better than others right now that some of selling year coming up pretty low base? And then in LATAM I saw your trucks orders were up 17% there as well even say about your plans for share gains there?

[Rich Tobin:]

To the first part of the question the answer is yes so if you look at demand condition in the Southern tier those moved up and traditionally that is been areas of strength for the commercial vehicle segment. So yeah there is a knock on effect from where the market is growing in 2015 versus what our backlog is. The second part of the question is I think that our increased in production of following what the TIV [ph] changes so whether that manifest itself. I think our intention will be the hold the share gains that we have through the first half of the year and then at move with the market I think it's a little but too early to tell whether we've implied share gains for the second half of the year its more matter of what we expect to be the TIV change.

[Michael Shlisky:]

Great. And then secondly, I don't know we have tax rate question, but its pretty important here given this year's size, can you maybe update us to how long you're thinking might take to you guys to get from let's say 50% or so today to the 34 to 36 range? How many years might that take or how many quarters?

[Max Chiara:]

I would expect for us to get there in 2016. I mean, I think a lot of what we had there is for a couple of reasons. I mean, I think that we've got two phenomenon. We've got the reduction in the Ag space was putting some pressure on Italy and Brazil. We're rightsizing the business so we think we can squeeze down some of the issue there and addition to a variety of other tax planning strategies. And then we've announced before in the commercial vehicle segment about some repatriation of volumes back into Italy that were well underway and we would expect to see the benefit of that in 2016.

[Michael Shlisky:]

And just to be clear, once you get there, that just sort of for a long-term, right, we did now sort of major one-time item to get to the tax rate to that level, correct?

[Rich Tobin:]

No. I think it's a more of a – I mean, we want to go OECD rates is the long-term target. There is not any mean. You see volatility because these non-put benefit of losses once we put the structural changes and that hopefully smooth that out and you'd see volatility of the tax line go down quite a bit under normal business conditions.

[Michael Shlisky:]

Great. Thanks. I'll pass along.

[Operator:]

Thank you. We will now take our next question from Ann Duignan, JPMorgan. Please go ahead.

[Ann Duignan:]

Hi. Good morning guys. This is Ann.

[Rich Tobin:]

Hi, Ann.

[Ann Duignan:]

Hi. Can you talk a little bit about not might high horsepower tractors in particular segment, we're hearing very extended leasing programs 42 months of zero percent financing. At first can you confirm that there are some deals like that occurring? And then is that's what plugging market share in North America and why would we talking about increase market share in an environment we are seeing right now?

[Rich Tobin:]

I don't think we are trumpeting the market share. As you know this is pretty concentrated market at the high horsepower segment. So lot of inter year market share movement is based on when production is taking place rather than share gains going back and forth. So if you looked at quarter-to-quarter share movement in large and high horsepower tractors and combines for example you see a lot of volatility the number, but the end of the year positions don't move much. And I think that's really what you see here. But we are obligated to say here is what we are in terms of share gain. In terms of question at least the bigger issue that we have been trying to address is short term leases and we've basically exited the short lease market for all intensive purposes. There isn't amount of longer term leases in the horsepower especially contractor space, but the financial risk on the longer term leases is significantly less than the short term less model. So I think that we have done the heavy lifting and we already take the amount of short term leases that are out there but there is always going to be amount of lease activity. As long as the term is as a significant duration we think that financial risk is manageable.

[Ann Duignan:]

And why would you think that financial risk start lower and longer term basis, is that an expectation that the market will ever cover in 42 months?

[Rich Tobin:]

There is more embedded depreciation in the lease.

[Ann Duignan:]

Okay. I'll get back in queue. That was my biggest question.

[Rich Tobin:]

Okay.

[Operator:]

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

[Martino De Ambroggi:]

Yes, good morning, good afternoon everybody. The first question is on prices which hold well in each and every segment. I was wondering if you believe this trend can help for the rest of the year in each and every segment?

[Rich Tobin:]

I think it depends. I think that we are in control in terms of pricing as a market leader in the Ag space, so, pricing in Ag in least and certain category is up for us to manage because of the market structure of the competitive base. On truck and construction equipment I mean, considering our market position were more of a followers. If pricing is to become very competitive and I think would be a bigger challenge. Despite the fact that we are follower on the commercial vehicle and the construction equipment we have been able to post price through the first half of the year, our expectation is to hold that for the second half of the year but I mean, from a longer-term question I think they were it's in our hands to a certain extent on the Ag side and less so in the other two businesses.

[Martino De Ambroggi:]

Okay. And a specific question on Brazil, the question is on Iveco in particular but can be considered validate also for the remaining businesses. Are you planning additional action considering the very weaker market environment and I know you are not to providing any specific date on a geographical environment. But what the visibility right now in Brazil and are you able to return on profitable for Iveco?

[Max Chiara:]

We have then reducing production across all with the businesses in Brazil since the second half of 2014. And that's why in terms of comparable performance here is in a large negative in commercial vehicles versus last year because lot of the heavy lifting that we have to do we did in 2014. So while the market is challenged in Brazil in 2015 we took a lot of the pain of rightsizing the cost base. We are taking action today is more on the Ag in the commercial vehicle space the Ag is purely a question of what's going to happen in terms of financing conditions. The construction equipment business is driven by two phenomenons one is the lack of federal programs for buying equipment for municipalities which is a significant amount of the volume that we gone to Brazil that has which just not happening in 2015 and the balance is the overall negativity that's overhanging the general construction in Brazil. That's why I have said in my opening comments that we are going to intervene on production and construction equipment in the second half of 2015 because you don't expect to that situation to improve until 2016.

[Martino De Ambroggi:]

Okay. And if I may one for wrap on that on the ratio Iveco is unable to return profitable in without any market recovery I suppose?

[Max Chiara:]

We don't give out regional profit by segment, but Iveco like any other market participant when the market is down 50% or 60% it needs amount of base volume to make money. I think we've done a very good job as I mentioned of taking our structural cost where we're not losing more money in 2016, but we need return in terms of volume. I mean, these are pretty dramatic decreases.

[Martino De Ambroggi:]

Okay. Thank you.

[Operator:]

Thank you. We will now take our next question from Joe O'Dea, company Vertical Research Partners. Please go ahead.

[Joe O'Dea:]

Hi. Good morning. First question, just with the outlook for the remainder of the year and second half its implied stronger then 2Q run rate both on top line end margin. If you could talk to whether how things will trend across the segments and kind of what you're seeing for the support I guess particularly on the margin side to hold those up with 2Q typically the strongest margin quarter of the year?

[Max Chiara:]

Sure. In Ag, we're down significantly and we showed you that they were down 40% quarter-to-quarter and woke up. It will be down in terms of production in Q3 which is – were already down in terms of line rate point of view, but we're also going to some shutdown so the inventory clearing expectation in Ag for Q3 is relatively significant. In Q4 of last year when the market start to turn down we intervened quite a bit in terms of production performance and that's so we would expect in Q4 this year to be running at a production level than we were in the comparable quarter. So that's on the Ag side. Commercial vehicle I think historically Q4 as always been the strongest quarter for the business, you see the backlog, lots of the bus business is delivered in Q4, so that is just probably more of a seasonal pattern on the commercial vehicle side in terms of profitability.

[Joe O'Dea:]

Okay, thank you. And then on the commercial vehicle pricing, it sounds like already talked to being a little bit of price follow than those markets, but just wondering given some of the engine technology that you have and if you are seeing any more opportunity maybe given kind of the value proposition that you can offer and maybe outperforming even a little bit on price.

[Max Chiara:]

Yes. I think if we go back turn and there is a slide in there in terms of the positioning of the segment. I think that goes along way in terms of our ability to gain pricing. I think there is a lot of work has been done. In the light commercial segment to position the Daily at the heavier and LCV segment where we can retain its pricing because of its payload that we have been successful. I think on the heavy side in terms of our relative price position and the total cost of ownership I think we have done a reasonably good job there. I mean we are not a premium player in the heavy side we are more of a value player, but I think that would in terms of engine technology what you get is lot for your money and that's helped on the heavy commercial vehicle side.

[Joe O'Dea:]

Get it. Thanks very much.

[Operator:]

Thank you. Our next question is from Larry T. De Maria, company William Blair.

[Larry T. De Maria:]

Hi. Good morning Rich, clearly if crop pricing are lower 2016 starts to look like looking lower as we moving in to later this year, can you adjust the fourth quarter rapidly now to right size inventory or in other words would be more likely to add on and produce again next year if get another write-down?

[Rich Tobin:]

I don't know, I mean, Larry if you look at the numbers is in terms of the decline in the high horsepower segment you are talking about being down 50% from the peak. I think that if we execute correctly and I think that we are in terms of taking production down significantly, we are working with the dealers to take total channel inventory down significantly. I you know look – they can always go down again in terms of demand, we don't expect crop prices to come down significantly from where they are, I think our expectation is pretty flat environment year-over-year. You know you're not a long way to come – you know to having a pretty much of flat market in terms of expectation of 2016. So you know can we adjust, sure. You don't get the full benefit if we had the cut production again in Q4 because of the amount of industrial inventory, that stuck there but you know or we going to manage it correctly. I mean, I think as we mentioned before there were certain products where we are leader and a co-leader we are trying to take pressure off of the system in terms of pricing and the clearing of used, so we are doing our best to restrict the amount of new wholesales that are going in there. And our expectation at least as for a flattish environment going into 2016 and based on what we have done and what we will do for the balance of the year I think we are position appropriately in terms of the mix of total channel inventory.

[Larry T. De Maria:]

In other words thanks that's possible. In other words you would not have to presumably under produce in a flattish environment is that the idea?

[Max Chiara:]

That's correct. I mean I think you make an argument that we are under producing the market decline this year right so you've got our total production cut is larger than the change in TIV by segment for the full year, because it's not only cutting because the markets down its cutting for the liquidation of inventory. So even if it's flat inventories are stabilized and production remains arguably with more upside potential than downside potential and in certain categories.

[Larry T. De Maria:]

Okay, all right. Thanks Rich.

[Operator:]

Thank you. Our next question is from [indiscernible] Company Piper Jaffray. Please go ahead.

[Unidentified Analyst:]

Thanks for taking my question. I was just wondering if you guys have any visibility on an improvement in LATAM it seems to be getting progressively worse if this is something that could be a turnaround in a year or if we are looking at something much more longer term?

[Max Chiara:]

I think you mean we have to split it between LATAM, commercial vehicles and construction equipment and then LATAM Ag. The -- in commercial vehicles and construction equipment is got is more of a micro play so its micro Brazil and both of those businesses are the ones that bore the blunt of a significant change in terms of the financing condition year-over-year. What's going to improve that is an increase has the return to post austerity from better word. On the macro side, and then maybe if there is a return in terms of financing conditions that we've seen in the past that's really got to give there. On the Ag side, the – is more of a shorter-term issue we believe financing conditions are still okay relative to the other two businesses. I think it just hung up a little bit just because of the overall sentiment issue. There is not a lot of used market in Brazil. The machines are use to their end of the life, so there is going to be a replacement cycle there. So I think overall we're less concerned about the duration of the Ag turndown I think that the macro situation on the commercial vehicles and construction equipment is more important than that is going to – that's going to needed to be a change in terms of overall sentiment and how much money that the Federal government puts into the economy.

[Unidentified Analyst:]

Okay. Thanks. That's a great answer. In terms of heavy construction equipment in North America and Europe, are those markets fairly stabilized or could we see just in the back half of the year specifically more in North America?

[Rich Tobin:]

We're not huge market share participants. So for it to be we must to call the market. I think that we had some hopes for North America at a certain point to be up 10% and it was tracking there at the end of last year at the beginning of this year to sentiment is kind of flattening now. So the expectation for it to be up 10%, I think that we – is not going to happen at this point. Europe is still operating on extremely low levels relative to historical demand or even normalized demand, so I would – I can't expect it to go down from here. I think that we had a conversation around here that arguably the first portion of the business that comes back with improvement of the economic environment is the on road truck. And so if we look at on road truck as a leading indicator for EMEA and that's good news for construction equipment, it's relative good news for construction equipment in EMEA going forward.

[Unidentified Analyst:]

All right, excellent. Thank you very much.

[Operator:]

Thank you. We will take our final question from Massimo Vecchio, company Mediobanca.

[Massimo Vecchio:]

Good afternoon, everybody. Few questions from my side, the first one is on the incremental margin in Ag, what will it be without the negative that from minus 26 to probably something close to minus 23 that you reported in Q1. And the second question is a little bit more longer term, probably more complex. Do you think that with the current commodity prices U.S. farmers are making a profit or loss position? And put it in other words do you see that is the current prices with old can we expect rebound in tractors in 2016?

[Rich Tobin:]

I'll take the second question first and then Max will come back on the question in terms of the margin performance. Our estimates right now that producers are still making money. The margins have been squeezed and that's what's the head win is in the market place. In terms of acreage despite the margin skews acreages moving not moving at all in terms – in North America in terms of plant of acreage I think there is a small swing between soya and corn but from our point of view that's somewhat irrelevant right its raw crop at the end of the day. So we think that they continue to make money. I mean, you can see a lot of estimates where our margins going negative but that I think takes in a pretty caustic view of high priced rented lands, majority of the land is owned by the producers themselves so we think that there is margin available there. Under flat commodity prices as I mentioned before are expect there I want to call 2016 now but we would expect the market demand to reasonably flat next year. But I think we need to see the balance of this year to see it whether it would be a return of demand next year. But I mean if you look at the declines at least in the raw crop segment it were down 50% or 50% plus in certain categories. So even at flat commodity prices you could expect that there is some hope for an upside in terms of deliveries for 2016.

[Max Chiara:]

Thank you Rich. This Massimiliano, if were to exclude the exchange impact which is a combination of the translation and the there is one time prior to your hedge negative impact, than definitely the decrement would be more inline with Q1 potentially better.

[Massimo Vecchio:]

Okay. Thank you very much.

[Operator:]

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

[Federico Donati:]

Thank you, Pascal. 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.