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CNH Global NV (NYSE:CNH)

Q4 2012 Earnings Call

January 31, 2013, 8:00 a.m. ET

Executives

Manfred Markevitch – Head, IR

Richard Tobin – President and CEO

Pablo Di Si – CFO

Andrea Paulis - Treasurer

Analysts

David Raso – ISI

Ann Dykeman – JPMorgan

Jerry Revich – Goldman Sachs

Michael Tyndall – Barclays

Brian [Inaudible] – Capelli

Manfred Markevitch – Media Banker

Alexander Virgo – Berenberg Bank

Ashish Gupta – CLSA

Operator

Operator

Good afternoon ladies and gentlemen, and welcome to today's CNH 2012 fourth quarter and full year conference call. For your information, today's conference is being recorded.

At this time, I would like to turn the conference over to Manfred Markevitch, head of CNH Investor Relations. Mr. Markevitch, please go ahead Sir.

Manfred Markevitch

Thank you, Sami. Good morning and good afternoon, everyone. We would like to welcome you to the CNH 2012 fourth quarter and full year conference call. Let me make a brief introduction.

I would like to remind everybody they can refer to page three of our presentation, which were distributed earlier today and posted on the internet regarding certain forward-looking statements. Also all information that will be used in the conference call today is available on our website at www.cnh.com.

Today, we will have the presentation followed by a short Q&A session. We are pleased to have our president and CEO, Rich Tobin, our CFO, Pablo Di Si, and our treasurer, Andrea Paulis with us on the call today.

We would like to begin with a brief presentation. With that, I will hand the call over to Rich.

Rich Tobin

Thank you, Manfred and good morning everybody. I'll start on page four of the presentation that you should be able to upload from the web.

Overall, a good quarter capping a good year for CNH. As you can see from the headline figures, net sales up 8% on a full year basis to $19.4 billion, which is a reflection of the strength of the agricultural market, which has offset some overall weakness in the construction equipment segment. Equipment operating profit for the year of $1.7 billion, which is a 14% on a full year basis at an operating margin of 8.6%, all of which are records for CNH.

Net income before restructure and exceptional items for the full year at $4.83 a share. Pablo will go through a lot of the details further in the presentation.

Next slide please. This is just really the numerical version of what I just reviewed. So I think that we can go to slide six and I'll hand it off to Pablo. And then we'll deal with the market conditions later in the presentation.

Pablo Di Si

Thanks, Rich. Good morning, good afternoon everybody. So we're flipping over to page six.

CNH posted strong net sales growth across all regions at constant currency. The North American sales growth was driven primarily by strong price realization and increase in specialty product volumes, specialty products, hay and forage, and crop production. Year-over-year tractor industry growth of approximately 10%. And over 25% industry growth in both heavy and light segments of the construction equipment.

Additionally, Europe, Africa, and the Middle East areas growth was primarily driven by the AG sector volume, better mix and price realization and an approximate 9% growth in the combine industry.

Finally, the Latin American region and Asia-Pacific were driven by strong AG sectors volume, mix, and pricing.

Turning over to page seven, it shows the impact of the foreign exchange on our net sales due to the weakening of the euro and the Brazilian real, which had a 4% negative impact on our net sales. Excluding this exchange impact, CNH realized strong double-digit growth of 12.1% due to volume drivers I discussed on the previous page.

On page eight, you can see the full year 2012 distribution of our net sales by currency. As we have discussed, the two major currencies impacting our net sales are the euro and Brazilian real. On a year-to-year, the average of the year weakens the dollar by 8% and the real weakened by 17%. We have also provided you with the sensitivity of a change of plus or minus 10% from the 2012 average rates.

Moving onto page nine, the equipment operating profit increased by $209 million or 14% due to the increased volume in both AG and CE. But a mix and pricing in both sectors, purchasing efficiencies, partially offset by higher R&D spending and negative currency impact. Our net pricing was positive for both AG and CE. And SG&A increases support the business growth. While on a percentage basis, the net sales remain stable.

Moving onto page ten, cash flow. The cash increased by $289 million in 2012. Primarily due to higher operating profit from operations and cash flow generation of $113 million from accounts receivable. In Q4, we generated over $400 million in cash through inventory reductions primarily due to under-production versus retail of 19% in the AG sector and 21% in the constructor sector as we're going to see on the next page.

As expected, our accounts payable worsened due the slowdown of production during last quarter of 2012. Our capital spending increased by $144 million, which includes spending on some special projects, which I will be discussing on slide 12.

Going to page 11, as I had just discussed, we had strong inventory reductions in Q4. Of last year, they were managed by reduction at year end in both the AG and construction equipment segments. As we start 2013, we have an adequate level of inventory at both dealer and in company.

Moving onto page 12, we invested heavily in new products in Tier 4 in the amount of $194 million. Additionally, we spent over $240 million in core industry capacity expansions and strategic long term investment projects in China, Argentina, India, Russia, and Brazil.

Now I will turn it over to Rich.

Rich Tobin

Thank you, Pablo. We'll skip the page to 14. I won't cover this a lot. I mean it's just the update of where we stand in terms of commodity prices, which remain proactive to equipment sales. And then some which it doesn’t look as good in terms of the GDP, which we expected the year-over-year across the variety of regions, which the group operates in.

So moving forward, in terms of CNH units volumes for the full year and CNH performance, as you can see from the chart, we'll start with the AG. With the exception of below 40 horsepower, which CNH really doesn’t participate in that particular portion of the market, we performed with the industry using basically estimates for fourth quarter. It looks like to us right now that I think that we're going to end up when we get the final numbers, we will have improved share in Europe on the combine side.

In more difficult market conditions on the construction equipment side, we held share across the board with the exception of North America in the second half of the year when we gave up share mostly because of our drawdown of remaining Tier 3 inventory and less sales into rental. On the heavy side despite difficult market conditions, we held share on a global basis.

Moving to slide 16, in terms of full year industry outlook on a worldwide basis, both tractors and combines at zero to five. We can take a look at the individual views on the markets themselves. But overall, our expectation at this time is for Europe to remain flat to down. The remaining markets being flat to up, with the exception of Latin America, we expect robust conditions in the AG sector.

On the construction equipment side, a little bit of the same story. Somewhat of a bounce back in Latin America. APAC up five to ten, but as you will know that that's not a region that CNH has a large presence.

Finally moving to slide 17, we won't go through this in total. But it's going to be a heavy year in terms of product introduction. We can see some of the main new equipment launches that were conducted in 2012 and some of the product awards that the group was recognized. So overall in terms of our execution on new product launches, especially in the T4 environment, I think that we're quite pleased of how those were conducted.

Moving to slide 18, Pablo referenced these before. In the CapEx, it just gives you an update on the three main strategic investments that we have underway with the large scale manufacturing facility in Harbin, China, which is expected to start production in mid-2014. Argentina is substantially completed. The official opening of the Cordoba, Argentina facility will be in April of this year. And in India, we are expanding our existing facility in Noida for agricultural tractors and componentry. And green-fielding a site in Pune for harvesting equipment.

Next slide please. This just gives you an idea in terms of where we stand with new product introductions going through what would be the – I guess we can refer to it as the Tier 4 final cycle. So between now and the end of 2015 when we see the completion of the Tier 4 final cycle, we'll be revitalizing the entire product line for compliance for engines emissions. The only one to really call out, which you may see in terms of our outlook in North America for combines is we'll be launching our flagship combine in the second quarter of 2013. So it will be unwinding the balance of our residual inventory in combines in Q1. Then we expect shipments to pick up further from there especially in North America.

Moving to slide 20, same on construction equipment largely driven by Tier 4 again. The major launch that we have underway in 2013 presently is on the new dozer lineup in North America.

Moving to slide 21, in terms of execution priorities in 2013, reference the new product launch timetables in Tier 4, final compliance programs, making progress on our strategic investments in Argentina. Argentina, China, and India maintaining industrial flexibility to meet geographic demand changes because quite frankly, we're still in an environment where based on where our order backlogs looks like right now, we can make a prediction. But especially the European environment, I mean I think we're just going to have to watch that closely as the year goes. And then completion of the announced merger related activities with Fiat Industrial.

The balance of what you see in the middle of the chart is the main funding transactions conducted by CNH Capital. I think we referenced most of those during the Q3 call and the main funding transaction for CNH equipment operations.

And in terms of outlook, which you're seeing in the press release released earlier today, CNH U.S. GAAP earnings outlook of revenues at 5%. And an operating margin of between 8.5% and 9%.

That completes the formal presentation. I'll hand it back to Manfred so we can start the Q&A/

Manfred Markevitch

Thank you, Rich. Sammie, we'll start the Q&A session please. Take the first question.

Question-and-Answer Session

Operator

(Operator instructions).

Operator

Thank you, sir. (Operator instructions). We will take our first question from David Raso from ISI, please go ahead.

David Raso - ISI

Good morning, for 2013, I’m trying to get a feel for why the incremental margin will be less than they were in 2012. So, maybe if you can help me with production versus retail in 2013, what are the plans for the total company, and maybe split it between agriculture and construction. And I might also lead into the idea of what do you think the sales next will be between the two segments? Again, just trying to understand why the incremental margins are being guided to more like 11% for 2013, but they just came in at a 15 last year when obviously you were under producing a lot in the later part of the year.

Rich Tobin

Sure, David – let me do your questions in reverse order, I think is the best way to do it. In terms of production to retail, as we sit here today, our plan would be to match production to retail on a full year basis. Predominately because of the fact that last year we were front end loaded, but if you take a look at our Q1 results historically, the market because of weather conditions, commodity prices, and everything else that we had been running production at a heavier rate in Q4 of the previous year running into Q1 in preparation for Q1 2012. That’s not the case this year where we actually expect to see a more seasonal demand profile that you’ve seen – you know, if you look back historically, where Q1 and Q4 being a lighter demand forcing to the air with Q2 and Q3 being the higher demand in portions of the air. So, right now, our expectation based on that demand curve is to match production in retail for the full year. Now we’ll adjust that…

David Raso - ISI

[Inaudible] can I ask the next question, Rich?

Rich Tobin

Yes, that’s for both, that’s for both.

David Raso - ISI

Okay.

Rich Tobin

You know, I think the – well, it looks – let’s go back and do a – give you some color on agriculture and in construction. On agriculture, it’s absolutely true, because we expect it to be more seasonally adjusted – on the construction equipment side we had some heavy buying going on in construction equipment primarily driven by the rental houses which started quite good if you look at our trailing results of the year – we don’t see that this year. So, we’re actually going to run at lower production rates to start the year, and hopefully the market improves overall, and we can ramp up aggressively over the balance of the year, but we’re going to start lower because we believe that we have adequate inventory to meet Q1 demand both at the dealer and at company levels. In terms of the incremental margin, the – if you take a look at where we are predicting growth year-over-year, we’re predicting Latin America, in terms of a percentage basis, to be the market that we think has got the largest potential for 2013, but it’s also a market that is subject to both transaction and translation in the currency basis, right? So, there’s a lot of imported componentry – Euro base componentry until Latin America, so when the REI is weak, you get it – you get it a negative in the transaction side, and you get a negative in the translation side coming back. So, overall, without getting into detail, which I won’t – I mean, margins in Latin America tend to be lower than they are in Europe and Latin America because of that fact. So, we’re going to – we think that we can seize the growth potential, but on an incremental margin basis, if proportionately where we’re saying the revenue is coming from is what it’s going to be, then we would see some negative head wind just because of geographical mix.

David Raso - ISI

That’s really helpful, and I’ll hop off. If you could just give us some color on the orders backlog exiting the year would be helpful, thank you.

Rich Tobin

Sure, you know, as we talked about during the Q3 call, year-over-year, the order book had carved off about a month of production, so they had weakened progressively over the year. As I just mentioned, we were front loaded last year because we had accurately predicted the demand cycle to be quite heavy in Q1 of 2012 we don’t expect the same phenomenon in 2012, and that’s really why I added the comment about the flagship combine. So, order boards Q to Q are down approximately a month in production on the agriculture side and – or on the tractor side, and flat on the combine side. So, right now, order boards on a Q to Q basis are down somewhat, nothing worrying really at the end of day. Surprisingly right now, and hopefully it stands combine inventories, or combine order books, with the exception of North America, which is waiting to transition to the new product launch are up, and that’s despite the fact that we’re calling unit volume in a full year basis to be relatively flat. So, overall, you know, a pretty solid situation, I think we just need to get through Q1 to really see where we stand for the full year.

David Raso - ISI

Thank you very much, I appreciate it.

Operator

We will now take our next question from Ann Dykeman from JPMorgan, please go ahead.

Ann Dykeman – JPMorgan

Hi, good morning everybody, can you hear me okay?

Rich Tobin

Yes.

Ann Dykeman – JPMorgan

Okay, good. Can you give us a little bit more color on your comments on the construction equipment industry – I mean, I think you said you got your fingers crossed for full year demand, what are you seeing out there, and what’s happening?

Rich Tobin

Well, it’s different with each market, and you know, right now our expectation for deliveries into lentil in North America to be down year-over-year, and that was really the principle driver, at least of our own unit volume during 2012 - so, we’re going to have to make up a lot of that difference with general retail sales. Europe we don’t see any light at the end of the tunnel, at least right now in terms of unit volume demand – Latin America we expect to be up predominately because of some pretty proactive financing conditions that exist there despite the fact that pricing pressure in [inaudible] predicted last year isn’t – it’s a bit prohibitive, but overall all unit volume should be up. And then Asia is going to be up only because of the fact that China was down, depending on who you are listening to, somewhere between 25 and 40%, but at the end of the day, our ability to capture that upside is relatively limited because of our participation strategy in Latin America – or into Asia.

Ann Dykeman – JPMorgan

Good, thank you, thanks for the color. And then, specifically on agriculture in your – can you talk a little bit about what you’re seeing both in the last top diary sector versus the crop [inaudible], you – you’re well [inaudible] geographically in Europe, so – just give us some color in what you’re seeing in the fundamentals over there?

Rich Tobin

I really can’t break it down, Ann, for you between the two. It’s just overall tractor demand looks like it’s going to be down at least early in the year compared to 2012, combines are holding up. I think it’s not a question of commodity prices in market conditions, it’s more a question of the overall negative overhang of general European conditions. As I mentioned, the combine side is relatively good news right now, so that’s more of the cash crop side as you know, so we’ll see how it turns out, but with just looking at order backlogs and talking to our dealers, you know, our projection right now is for tractor sales to decline in Europe somewhere between – somewhere around the 3 to 5% range.

Ann Dykeman – JPMorgan

Okay, and I think you mentioned that you’ve gained share – you think you might have taken some share on the combine side in Europe, where specifically do you think you’ve gained that share?

Rich Tobin

You know, again, I can’t say [inaudible be any particular competitor, but it would be Western European share and we have to wait until we get the final numbers in to close the year.

Ann Dykeman – JPMorgan

Okay. I’ll get back in line then and take the rest of my questions offline. Thanks.

Operator

We will take our next question from Jerry Revich from Goldman Sachs. Please go ahead.

Jerry Revich – Goldman Sachs

Hi, good morning, good afternoon. Rich, to the extent that you’re willing to comment, could you just flush out for us your preview – your undertaking in construction equipment and just give us a sense for milestones and areas of consideration? You know, again, to the extent that you’re comfortable sharing that?

Rich Tobin

Yeah, I can give you some general commentary, Jerry. I mean, I think that the only news flow that we have there is the termination of the joint venture with Cabell-Co. Okay? And then if you look at the exceptional items that we took in the fourth quarter, substantially all of that is the write down of our equity position in that particular joint venture. Now, that’s not all compete. There may be some residual issues that we have to struggle through during 2013. I don’t think they’re going to be really material, but that was the situation that if we had not terminated that joint venture, it would have renewed itself for another five years. And quite honestly, we were unable to renegotiate a position that was economical to CNH or for both parties quite honestly. So I think that that’s part of strategically opening up some optionality in terms of solving that particular issue that we’ve had with excavators, which as you know, is the fastest growing, most profitable business – well, maybe not in 2012, but on a general – in general terms.

So that’s, you know, one of the moves. But other than that, I mean, I think that, you know, we’re working on it from a strategic point of view and I would expect that in 2013 we’ll be doing some other things.

Jerry Revich – Goldman Sachs

Okay. And Rich, in terms of the margin profile of the construction equipment business in 2013 versus ’12 as a result of that joint venture unwinding, could you give us a sense on what we’re going to see on input costs and product availability and to the extent you can comment on how should we think about equity income in ’13 versus ’12 as a result as well?

Rich Tobin

Yeah, well, I think equity and income, I think that you can carve off approximately 10 to $11 million as a result of the unwinding of the joint venture on a full-year basis. In terms of marginality, I don’t think they would get the benefit of that until 2014 because right now you’d have a drop of revenue for the reduction of those particular sales. You know, we have another joint venture partner with Sumitomo and we have the ability to continue to manufacturer Cabell-Co units for the next five years, so you know, I think that 2013 is going to be more of a transition year than anything else.

Jerry Revich – Goldman Sachs

Okay. And lastly, you’ve had excellent pricing ahead of material costs in ’12. Can you talk about how you’re thinking of those two variables for 2013?

Rich Tobin

Yeah, well, I hope that we do as well as we did in 2012 for sure. That was a very impressive performance. You know, you go back and look at the sheet that Pablo showed before in terms of, you know, volume mix and pricing, you know, I have to congratulate the guys that run the individual businesses. It was quite a good job. I think that the Ag market in itself remains a pretty disciplined market in terms of pricing. I think we’ve got another hurdle coming up now with Tier 4 final so to the extent that the demand function remains in place, our expectation is to be able to do more of the same, maybe not of the same quantum but more of the same. But that’s really going to be more of a function – more of a function of how the market – the demand function of the individual markets. I mean, if demand is declined, then getting that kind of price and performance, as you know, becomes more difficult. But based on what we see right now, our expectation is to do what we did with Tier 4 internally.

Jerry Revich – Goldman Sachs

Okay. Thank you very much.

Operator

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

Michael Tyndall – Barclays

Hi there. It’s Michael Tyndall from Barclays. Thanks for taking my questions. Two quick ones if I may. The first is just on the U.S. If you could talk a little bit about used equipment prices, I know you mentioned previously these are the guys that didn’t have crop insurance so therefore there was I guess some risk that we might see a significant weakness on the used pricing.

And then I guess the other question, staying with the U.S. is just around planting. Given that we’ve had a drought and the soil is presumably pretty dry, what are you hearing in terms of projections on planting for 2013 at this point?

Rich Tobin

Okay, well, I refer you to Machinery Peak, in terms of – it’s more of a cross business kind of view in terms of use, but use seems to be holding up well. I mean, part of the liquidation of total inventory that we conducted in Q4, a significant portion of that was reducing used at the dealer level. So we feel reasonably okay going into 2013 in both used pricings and total used units of inventory at the dealer level. I think there was a lot of work that was done there in Q4 as part of the inventory liquidation that we had conducted.

In terms of planting, look at it as, as long as commodity prices are where they are, the expectation that planted acreage is going to be similar to what it was in 2012. So pretty, pretty heavy in terms of total acreage, our expectation that acreage planted and it’s what we’re already seeing in the Brazilian market has gone up substantially. Our expectation in terms of supply consumption deficit that, you know, we’re in a, you know, a longer-term trend where total acreage at these commodity – at these types of commodity prices should rise across all geographies.

Michael Tyndall – Barclays

Can I just ask one follow on, which is going to demonstrate that I sit at a desk rather than on a farm? If you plant and you have a drought, presumably you still have to clear the fields, so this idea that the tractors are sitting in sheds not being used, is that not necessarily the case because you actually have to use them to clear the fields?

Rich Tobin

You have less combine harvesting hours but you’ve got more tractor hours.

Michael Tyndall – Barclays

Okay. Thank you very much.

Operator

We will take our next question from Brian [Inaudible] from Capelli. Please go ahead.

Brian [Inaudible] – Capelli

Hi, good morning. I just want to see on where we stand with regard to the merger with the industrial. I noticed the press release was a little light on details. Can you take it from there, please?

Rich Tobin

Sure. Well, we’ve announced the new management structure. I think that if you want color in terms of timeline and everything else, I’d refer you to the Fiat Industrial press release and the presentation that’s up on the web where it gives you the estimated timelines for completion and then the rest of it. But right now, it’s a – looks to be a third – beginning of third quarter event in terms of completion.

Brian [Inaudible] – Capelli

Okay. And how does this change your outlook for the – or not outlook, but your strategic planning with CNH? Does it have any impact at all on what you’re doing internally as an organization?

Rich Tobin

No. It doesn’t.

Brian [Inaudible] – Capelli

Okay.

Rich Tobin

I mean, other than the background…

Brian [Inaudible] – Capelli

Rich, your sense of by ’14, if we’re looking at corn at 220 a metric ton in 2014, that’s down, you know, roughly 45% from the outlook from 2013. You know, what’s your sense that the farmers will continue to refresh their fleet even if they see a dramatic drop off in the price of corn?

Rich Tobin

Yeah, that’s – that’s a good question. I mean, I think that the farmers will respond, surely, to that kind of drop. I think that if you look back historically on forward projections of Ag and commodity prices, they haven’t been the most accurate. And I think that what’s assumed in that 2014 number is a significant portion of 2013 acreage realizes itself in terms of output if nothing else. And as we’ve seen last year, that generally speaking doesn’t always happen. You know, if they were to carve off by that amount it would have a detrimental effect on farmer income, which flows down for sure. I think that the jury’s out on whether that forward curve in terms of commodity prices is actually going to manifest itself or not.

Brian [Inaudible] – Capelli

All right. Thank you very much.

Operator

We will now take our next question from Manfred Markevitch from Media Banker. Please go ahead.

Manfred Markevitch – Media Banker

Good morning to everybody. I was wondering if you can share with us the CapEx for 2013, what you – where you expect it to land. And also, on the working capital for ’13, given your assumed increase in sales you should have some cash, but I was wondering if the underproduction of Q4 could mitigate this trend? Thanks.

Rich Tobin

Okay. I think as a percentage of revenue that CapEx remains the same as you saw in 2012, so within plus or minus of a percentage or so. And you’re spot on in terms of working capital. At a 5% growth, one would expect that totally inventories decline in relation to that number. But as Pablo mentioned earlier in the presentation, we had generated a significant amount of cash flow through inventory in Q4, which was offset by the fact that we cut production so you’re payables go down at the industrial level by, you know, a material amount. So if we were to run a heavier production performance on a sustained level in 2013, which really is predominate on what’s going to happen in 2014, then working capital or cash flow generation would actually go up. So right now what we’re saying is we expect to match production with retail, so you would see a working capital absorption, which is a reflection of the 5% increase on the revenue line.

Manfred Markevitch – Media Banker

Thank you very much.

Operator

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

Alexander Virgo – Berenberg Bank

Hi there, yeah. Good morning. Just to follow up I suppose on the outlook in terms of farm net income; am I hearing you right when you’re saying that the expectations in terms of demand are going to be driven by the fact that, or your assumption that the crop price holds up and is actually different from the numbers you presented on the pinning the ISH forecast? And I supposed the quid pro quo of that would be if farmer income does actually do what the ISH forecast do, then you’re demand, or your market [inaudible] costs are too high. Is that right or not?

Rich Tobin

What was referenced before was a 2014 number versus a 2013 number and we haven’t given any guidance for 2014. So under 2013, if commodity prices hold up one could be selling forward right now at 2013.

Alexander Virgo – Berenberg Bank

Okay.

Rich Tobin

So you can lock in an amount of farmer net income depending on how you wanted to hedge yourself, or the individual farmer wanted to hedge himself based on the 2013 existing pricing. Now, the answer I gave before was if the 2014 pricing was to be in effect on December 31st of 2013, which shows a pretty sizable reduction, then that would have a negative impact. And then the only thing that a farmer would have to make a decision at that time how much acreage to plant and what the expectation of development of those pricings through the year.

So you know, the further – like any future forecasts in commodities, the further you get out, the more inaccurate it becomes. Right now our forecasts are based on what you can see on slide 14 of existing pricing and our expectation is that generally speaking there’s a sequential forward sell by the industry where they take chunks of 25% as the quarters go through to leave themselves optionality.

Alexander Virgo – Berenberg Bank

Right. Okay. Great, thanks. And then the second question is on developing the operational leverage point. If I look at the difference between Q1, last 2012, and Q1 –or what Q1 is likely to be in ’13 in terms of where production levels are and where retail sales are and then where they were in Q1 last year, you clearly overproduced quite a lot in Q1 last year arguably inflating your margins, your operational margins. Is that – do you see a sort of a double whammy on the negative side in Q1 this year, which then readdresses itself as you move through the year?

Rich Tobin

[Inaudible]. Yeah, yeah.

Alexander Virgo – Berenberg Bank

Quarterly margin performance I suppose?

Rich Tobin

Sure, and I think that we’ve been pretty open about that all through 2012, that our expectation was not to be as front loaded in 2013 than we were in 2012. And it’s just so everybody doesn’t get caught off guard on the quarter-to-quarter comparison. I think the full year number is, you know, a number we stand behind, but I think that everybody needs to realize where we are in the production cycle or the demand function going into 2013 where we think it’s going to be more that we’ve seen historically where Q1 is a weaker quarter, Q2, Q3 being strong quarters and Q4 being the option quarter depending on what conditions are going into 2014. So I wouldn’t get overly nervous in Q1, in Q-to-Q comparisons in the first quarter.

Alexander Virgo – Berenberg Bank

Great. Thank you.

Operator

We will now take our last question from Ashish Gupta from CLSA. Please go ahead.

Ashish Gupta – CLSA

Hi, good morning. Just one clarification first. Did you say China construction down 25 to 40%?

Rich Tobin

In 2012, depending on who’s numbers you want to look at, we’ve seen a variety of different ranges. It’s not exactly a reporting area that you can go do it by serial number, but you know, we’re not the Bell Weather for Asia. I would point you to a variety of different bigger market participants, but that’s the ranges that we’ve seen.

Ashish Gupta – CLSA

Okay, I was just making sure. I know you have the guidance slides, I just wanted to make sure I didn’t miss something there. I thought it was for 2013.

So the second question I had was with the strong credit markets and you know, following the merger. Do you anticipate that you’ll be able to sort of evolve the funding structure at CNH Capital so that you use less internally-generated industrial cash and can use more on secure debt?

Rich Tobin

That is the intent. Right now, I mean, we could go and get more third-party funding right now, but we’re just weighing up the P&L impact versus the cost of that funding because right now the ABS market, it doesn’t get better than where it is right now. So it is a very cheap source of funding. I know that everybody doesn’t like the intersegment debt and long term, we’re resolved to take care of that, but right now we’re just weighing up the difference between the P&L impact and the cost of funding into the capital arm.

Ashish Gupta – CLSA

Great. Thanks very much.

Operator

We have no further questions at this time.

Rich Tobin

Thank you, Sami. I would like to thank you for joining today’s call, and as always, the information is available as well on our website. Thank you.

Operator

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

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