Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

CNH Industrial N.V. (NYSE:CNHI)

Q2 2014 Earnings Call

July 31, 2014 9:30 am ET

Executives

Federico Donati - Head, IR

Rich Tobin - CEO

Max Chiara - CFO

Analysts

Rob Wertheimer - Vertical Research Partners

David Raso - ISI Group

Alexander Virgo - Berenberg

Ashik Kurian - Goldman Sachs

Federico Donati

Thank you, Leon. Good afternoon everyone. We would like to welcome you to the CNH Industrial Second Quarter and First Half 2014 Results Webcast Conference Call. CNH Industrial Group CEO Rich Tobin and Max Chiara Group CFO will hold today's call. They will use the material you should have downloaded from our website www.cnhindustrial.com. After introductory remarks, we will be available to answer the question you may have.

Before moving ahead, let me just remind you that any forward-looking statement we might be making during today's call are subject to the risk and uncertainties mentioned in the Safe Harbor statement, including the presentation material.

I will now turn the call over to Mr. Rich Tobin.

Rich Tobin

Thank you. Good morning and good afternoon everyone. Overall, we've had a good performance for the quarter despite some challenging market conditions in LATAM in the Commercial Vehicles and Agricultural segments, and negative mix in Ag High Horsepower in NAFTA. We were able to offset these headwinds with improvements in operating performance in the Construction and Powertrain segments. Commercial pricing actions, improved industrial efficiency, and through the implementation of some substantial cost controls to improve the quarter EPS by 12%.

In summary, we achieved net sales of industrial operations of $8.6 billion, flat to prior year holding operating margin at 7.9%, while EPS ex-restructuring improved 12% year-over-year to $0.28 per share.

After reviewing the following slides, we expect trading conditions in the agricultural sector to be challenging for the balance of the year in most of the groups operating geographies. We'll be taking appropriate actions to align production plans to accommodate this as we have successfully executed in the past. We'll be taking action to align our cost structure for the projected business environment in the second semester.

As you've seen from the press release this morning, we have instituted a group efficiency program with particular emphasis in the commercial vehicles and construction equipment segments of the business with the aim of improving operational performance, which will be outlined later in the presentation.

So overall, good performance despite the headwinds, flat revenue with margins holding at 7.9%, which is giving us the ability to confirm full your guidance for the year.

I'll handover the presentation to Max, he will take you through the financial slides and I'll come back to you when we get to the business later in the presentation. Max?

Max Chiara

Thank you, Rich. I am on Slide 5, financial highlight. In summary, the company posted consolidated revenues of $8.9 billion, up 1% versus last year in the quarter, while revenue was $16.5 billion for the first half of 2014.

Consolidated net income was $358 million for the second quarter. Net income before restructuring and other exceptional items was $382 million for the second quarter or $0.28 per share. EPS before restructuring and other exceptional items for the first half was $0.41 per share.

Available liquidity at June end was $7.7 billion, inclusive of $2.3 billion in undrawn committed facilities, compared to $8.1 billion at March end.

The company posted net sales of Industrial activities of $8.6 billion for the quarter, flat versus last year, and up $15.8 billion for the first half. In the quarter, net sales increased in the Powertrain segment offsetting declines in net sales in Agricultural Equipment, primarily in LATAM and in NAFTA, a slight decrease in Construction Equipment and Commercial Vehicles compared to second quarter of last year.

Operating profit of industrial activities was $678 million in Q2 2014, a 1% decrease compared to last year with an operative margin of $7.9, flat to Q2 2013. Operating profit improvements in Construction Equipment, Powertrain and Commercial Vehicles in EMEA were offset by the a negative effect of poor trading conditions in Commercial Vehicles in LATAM, due to a significant decline in market demand and by negative volume and mix for Agricultural Equipment, primarily in NAFTA and LATAM.

First half operating profit stood at $1.1 billion with margin at 6.9%, inline with full-year guidance.

Net industrial debt of $3.7 billion at June 30, 2014 was $300 million lower than at March 31, 2014. Net industrial cash flow was positive at $600 million plus in the quarter as cash flow generated from operation activities, including a positive change in working capital of $0.3 billion more than offset CapEx and was partially offset by the dividend payment of $0.4 billion performed in April to deliver a net industrial debt reduction in the quarter of $300 million.

On Slide 6, we have the usual reconciliation from consolidated operating profit to net income for the second quarter compared to prior year. Consolidated operating profit at $736 million, down $14 million to prior year.

Major highlights below that. Restructuring expenses totaled $30 million, $10 million higher than Q2 of last year and related construction equipment as a result of the announced production shutdown of the company Calhoun, Georgia facility in the U.S. and for the other part to commercial vehicles.

Interest expense net totaled $158 million for the quarter, $60 million higher than prior year, primarily due to an increase in average net industrial debt, partially offset by more favorable interest rate. Other net of $63 million for the quarter, basically flat to prior year.

Income taxes totaled $158 million, representing an effective tax rate of approximately 33% for the quarter. The decrease from the 42 % in Q2 of last year effective tax rate is mainly due to the favorable resolution of tax audits for which specific provisions had been made and lower losses in jurisdictions where such losses cannot be book benefited. The company's 2014 forecast effective tax rate is still expected to be in the range of 40% to 44% due to the notebook benefiting losses in certain jurisdictions.

Equity in income of unconsolidated subsidiaries and affiliates totaled $31 million for the quarter. The decrease versus prior year of $10 million is due to lower results from APAC JV, primarily as a result of lower industry volumes in China.

Consolidated net income was therefore $358 million for the quarter. Net income available to common shareholders improved $71 million to $354 million and was favorably impacted by the effect of the merger consummated last year, returning a basis and diluted EPS of $0.26 per share, up 13% to prior year.

On Slide 7, we show the overview of the industrial activities net sales for the quarter. Total industrial activities net sales at $8.6 million. The performance by segment was as follows. Agricultural equipment net sales were $4.4 billion for the quarter, down 2% from prior year, driven by lower volume primarily in LATAM and NAFTA, as well as less favorable product mix specifically on large horse power tractors and combines in NAFTA, but partially offset by net pricing. The geographic distribution of net sales for the period was 43% NAFTA, 37% EMEA, 10% each for LATAM and APAC.

Construction Equipment net sales were $931 million, down 1% as increased demand in

NAFTA was offset by a decrease in volumes in LATAM.

Commercial Vehicles net sales were $2.7 billion, flat to prior year. Increased deliveries in EMEA driven by light and heavy range vehicle were partially offset by a significant decrease in LATAM and a decrease in buses due to the transition to Euro VI application. APAC net sales benefited from better mix due to increased heavy vehicle sales. LATAM net sales significantly decreased due to sharp market declines across the region, as a result of overall weak economic conditions and a deterioration in the terms of subsidized financing. Production has been reduced to allow for dealer inventories to be aligned to market demand.

Powertrain net sales were $1.3 billion, an increase of almost 14% over the prior year, primarily attributable to higher volumes. Sales to external customers accounted for 41% of total net sales versus 33% in the same period of last year.

During the second quarter, the net impact of the currency movement has been minimal, whereby the organic change in net sales of negative 0.3% has been offset by a positive impact from currency movement of 0.6%. In detail, the negative effects impact year-over-year for the quarter continuous to come from the weakening in the Brazilian real being offset by changes in other currencies mainly Euro.

On Slide 9, we show the overview of the industrial activities operating profit performance for the quarter. Total industrial activities operating profit was $678 million, down 1% versus prior year with operating margin at $7.9 million flat.

Agricultural Equipment operating profit was $632 million for the quarter, down $14 million versus last year. Operating margin was flat to last year at 14.2%.

Construction Equipment operating profit at $28 million, up $15 million to last year, with an operating margin at 30%.

Commercial Vehicles reported an operating loss of $21 million versus $11 million last year. Powertrain operating profit of $64 million was up $10 million from the same period in '13, with an operating margin of 5.1%.

In the business overview section Rich will provide further insights to the operating profit change year-over-year.

On Slide 10, we show here the change in net industrial debt moving from $4 billion as of March 31, 2014 to $3.7 billion at the end of the Q2. This represents a reduction in the debt of $300 million.

Cash flow generated from operating activities contributed approximately $800 million plus, including a positive change in working capital for $300 million. This was partially offset by $374 million dividend payment and continued capital expenditure activity of $200 million.

On Slide 11, we provide some details regarding the industrial activities CapEx, which is net of vehicle buyback obligations by spending category and segment. At June end, CapEx for the quarter was $200 million, basically 7.4% than prior year.

As far as composition, new products and technology 47%, maintenance running capacity 39%, while capacity expansion represent 14%, it was 30% last year.

As recent new capacity expansion project is starting to come to fruition, this inauguration of the urban plant in China just completed this week is a testimony to it.

Looking at the composition of the CapEx by segment around 50% relates to commercial vehicles, and is mainly related to the new product launches, i.e., the new Daily and the Euro VI family the bus business, 33% to ag, 10% to powertrain and the remaining 5% to CE.

Moving on to Slide 12, financial services business performance. Net income for the quarter in financial services was up 9% to $105 million, mainly due to higher activity and lower income taxes.

Retail loan originations in the quarter was $2.7 billion, flat compared to Q2 last year. The managed portfolio including JV of $29.1 billion of which retail was 65% and wholesale 35% was up $1.4 compared to March 31, 2014. The quality of the portfolio remains good with delinquencies on book over 30 days at 4.5%.

Next slide shows the company's debt maturity schedule and the available liquidity at June 30, 2014. Available liquidity at June 30 was $7.7 billion, it including $2.3 billion of undrawn facilities under the medium term committed credit lines. This is more than enough to cover debt maturities for 2014 and '15 that you can see in the chart.

The decrease of the liquidity is mainly attributable to the dividend payment, as well as the cash utilized to support increased activity for financial services, which was partially offset by the proceeds from the $500 million bond issued in June by our industrial capital vehicle. The bond is due in July, 2019 and has a fix rate coupon of 3.375, which is the second lowest coupon ever and the record tighter spread in the subinvestment grade space for a five year bond.

This issuance together with the other successful transaction of €1 billion five year note issued in Q1 in Europe demonstrate once again our ability in excess in the capital market and represent another milestone in our funding diversification strategy and maturity extension of our debt profile.

Going forward, we will maintain this opportunistic approach in order to keep what we believe is the appropriate profile of liquidity for our group consistently with our target of reaching investment grade.

This concludes the first part of the presentation. Let me now turn to Rich for the business overview section. Thank you.

Rich Tobin

Agricultural equipment operating performance variants for the quarter. Operating profits of $632 million, operating margin stood at 14.2% with negative volume in LATAM and NAFTA and negative mix in NAFTA being offset by pricing improvements, improvements in industrial performance cost control actions to cover Tier 4B content, inflation and adverse exchange movements.

Next slide. Industry volumes for ag worldwide, agricultural equipment industry unit sales were down during the second quarter of 2014, with global demand for tractors and combines down approximately 12%. Industry volume weakens is experienced across all of the regions with exception of low horse power tractors in NAFTA. The 12% reduction in tractors equates to a reduction of 60,000 tractors, the majority of which were an APAC, which is not material to CNH.

Worldwide equipment's market share performance was mainly flat for tractors with the exception of LATAM. And combines was down with the exception of NAFTA but we expect to fully recover that in the second half of the year.

In combines, the outlook for the year is not expected to improve from the quarter to trend with further deterioration expected in APAC for the balance of the year, offset by some improvement in LATAM from very low levels in Q2 where the industry was down 30%.

With the announcement of the recent motor FOTA program in Brazil, we are going to expect to have a disruption between PSI 2014 and the start of PSI 2015 as we experienced in the fourth quarter of 2013.

Next slide. Worldwide production of agricultural equipment was 6% above retail sales for the quarter to support normal seasonality and anticipation of summer facility shutdown schedule. The company now expects to under produce retail in the second half of the year, particularly in NAFTA in light of the outward trend as discussed.

Just to put some numbers on it, I mean, in combine manufacturing H1 to H2 will be down on average approximately 40% semester-to-semester. So we're going to be taking action to align inventory with the trend that we see in demand going forward. I think that's something that we have managed in the past. We have been doing a lot of work on this in terms of managing both the component dealer inventory positions, been working on, as we have discussed in previous calls, about moderating line rates at the industrial level. So I think that we have a solid plan to meet both the working capital objectives and net debt objectives that we have for the group. And to finish the year with appropriate levels of both company and dealer inventory to satisfy projected demand in 2015.

Next slide. Operating for construction equipment, you can see volume and mix being down 10, which is predominantly LATAM. You can see positive pricing despite in terms of scale not being the largest market participant; I think that we have been very discipline in terms of pricing. The vast majority of that pricing benefit quarter-to-quarter is in NAFTA, which is the market that has been showing some signs of strength.

Overall, as we discussed during the five year plan, we are beginning to take appropriate actions in terms of production costs and overhead costs. The SG&A reduction quarter-over-quarter is the beginning steps of the realignment of the distribution of both the New Holland and Case Brands. We're beginning to realize the synergies associated with intervening of the cost structure. So overall, it’s a satisfactory performance in terms of operating profit variants. And we can see on the next slide.

Next slide. In terms of market share performance and industry, as I mentioned earlier, 7% EMEA, up 8% are the signs of strength. You can see the difference between light and heavy, LATAM being down, which is the general trend on top of what we have seen in the agricultural sector. We don't expect a significant improvement in LATAM. In the construction equipment sector, while we do see some improvement on the agricultural side in the second semester of the year. But overall, we don't expect the trajectory that we see here in the quarter to be demonstratively different on a full-year basis. So LATAM -- I mean, NAFTA improving, EMEA improving, LATAM projected to be weak but not as weak as some of the trajectory seen in a very light Q2.

Next slide. In term of dealer inventory, we see a relatively close match between dealer or retail sales and production. That will correct itself for 12% in Q2, and we are going into the shutdown schedule in August. So we'd expect in the full-year basis to match retail and production for the full year in the CE segment unless we see a turnaround in some of the particular markets I mean we may see some inventory build but that's purely a question. I think that we can move the industrial machine appropriately to catch up if we see some turn up in some of the jurisdictions in which we operate in.

Slide 21, in commercial vehicles, the segment continues to be affected by weak economic conditions in LATAM and post an operating loss of $21 million for the quarter, but represent an improved performance of the $70 million loss in Q1 of 2014. We are now starting to see some improving conditions in EMEA with positive volume and mix in pricing in both light and heavy vehicles and favorable product mix in APAC. The segment has reported a $20 million and lower in SG&A expenses as a result of cost containment actions.

I mean, to put in perspective, we respectively improved performance in EMEA significantly quarter-to-quarter. Unfortunately, we have given that up in some very weak conditions in Latin America, not just to Brazil story for us, it's we have been down and you can see it from the slide. Brazil being down 34%, Argentina down 57%. The curtailment that we took in Venezuela in Q1 that's just going to be a full-year effect. So I think we will stop reporting a 100% going forward.

But I think we're just going to have to work our way through this. Right now, we are going to take appropriate -- continue to take appropriate action on the cost of the business itself. You saw that we have announced an efficiency program. A significant amount of that program will be focused on the commercial vehicle segment, with that I'll cover later in the presentation. But it's not -- despite the headwinds in LATAM I think that we have seen some improved performance in the EMEA region, which is important as it's the bulk of our volume.

Next slide please. In terms of industry volumes, we see that EMEA up 3%, we are forecasting flat to 5% for the full-year, LATAM down 23%. We see a slight moderation but without an intervention in terms of economy rates we expect that to remain weak for the balance of the year. Market share and EMEA is 11%, is inline with last year. LATAM is down 1.3 percentage points largely as a result of the weight of the Argentinean business to the total LATAM volume. In terms of some color, I think it come up on the next slide.

Next slide please. In terms of color, we have given up a little bit of market share in EMEA in light as a result of the transition to the Daily, the new Daily, which we launched in June. Backlog for the Daily is approximately 15,000 units. So we are relatively hopeful in the second half of year and expect to run at a decent level capacity utilization.

Medium has been down and troublesome, down to 25% as a result of the Euro V pre-buy affect. This is -- an area where we have material market share approximately 30%. So any upside that we can get out of the medium sector will be positive to earnings in the second half of the year.

Heavy, down 3% as largely as result of the TIV drop in LATAM. Total units at 30,000, is down 23% from last year, which is largely as a result of the pre-buy which is very much weighted towards the medium segment. LATAM is down as a result of the poor conditions that we are finding in the market.

Q4 book-to-bill at 0.9 versus 1.2 was largely as a result of Euro V pre-buy. Book-to-bill in the bus business is 1.7 versus 1.4 last year, where essentially we're going to be running at capacity for the balance of the year. In the bus business, we expect to get some positive mix effect from the specialty business, where we'll running at significantly improved production level in both the firefighting business and the military side.

Next slide. In terms of commercial vehicles, we have pretty much matched retail to production and we expect to see that trend over the balance of the year.

In Powertrain, we had an excellent quarter. Engine's up 18% to 160,000 units. I think the best part is that the volumes were up across all business segments both gear boxes, axels and engines. Third party is up at 74,000 units, is up 35% of last year. And you can see that the mix between the inter -- what we call the intercompany segments or commercial vehicle, agricultural and construction equipment, third party revenues are 46% of total volumes is the highest it's been since we have split FPT at the creation of Fiat Industrial. So a good trend overall in terms of the performance of the powertrain segment.

We'll go into a lot of detail here I think you can read through it I think that the most recent announcement that we made on top of diesel of the year was the launch, as you can see in the top right, and of the new Tier 4B CR combine which is the largest capacity combine available in the marketplace.

Next slide. As I mentioned, as we wrote at the beginning, they were holding guidance for the year. I think that is seen from the previously slides we have been able to offset some of the headwinds that we have had with pricing and cost controls. We are going to have to do a lot of work in the second half of the year as we begin to moderate production on the ag side but we think that we have got the plans in place in order to do that, I mean, I had seen some estimates about decremental margins in excess of 30% on agriculture. I think that that's a bit aggressive. I think that, I think that the least we proven to Q2 that we have been able to manage the process, we have done it in the past and I think that we are confident in terms of our plans to prepare ourselves for the 2015 and to meet our capital objectives and as a result cement that for the full year.

Next slide. We have announced today an efficiency program which is a comprehensive program to enhance productivity and competitive of the industrial activities. The total accumulative charge is approximately $280 million over the next three years, the majority of which will be taken in 2014 and '15. Among the efficiency actions by segment, we'll be closing a joint venture facility in Asia which is no longer viable with the opening of our Harbin facility that we inaugurated on Monday.

And construction I think that we went over that extensively when we did the five year plan. You saw that we have closed an assembly operation last month in Calhoun, Georgia which is in connection with the recently announced enlargement of the Sumitomo machinery agreement that we signed earlier in the year. We'll be taking some related charges as we go through the balance of the repositioning the case of New Holland brands in terms of the distribution primarily in Europe. I think that you've begun to see some of the improvements in both of the cost base and the support cost for this business. These are further actions to continue the improvement that we expect to realize the goals of our five year plan.

In the commercial vehicle side, it will be largely actions taken to realize the synergy benefits of combining the commercial vehicles business into the CNHI global network, so as a result a lot of that will be transitional cost for overhead and support, and then the completion of our manufacturing product specialization programs. The vast majority of the charges will be taking in 2014 and 2015 we will begin to realize the benefits in the second half of this year.

I think that's the last slide. So we can open it up to Q&A.

Federico Donati

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

Question-and-Answer Session

Operator

(Operator Instructions) We will now take your first question from Rob Wertheimer from Vertical Research Partners. Please go ahead, sir.

Rob Wertheimer - Vertical Research Partners

Hi, good morning everybody. First question, Rich, you did go into this and really helpful detail in the inventory side. I'm just curious if you can add to it what you think about used channel inventory particularly in North American ag? We have written it, it looked like you are managing it pretty well but I think it's going to be tough to stay ahead of. Maybe you can give a little contacts around one of the normal seasonal first half to second half combine production decline with the (inaudible) great that you did (inaudible) normally a second half slide anyway. Are you starting to see tractors come off in the similar magnitude? Thank you.

Rich Tobin

Yes, I mean look part of the drag that we see in terms of other than the forecast to decline in farmer net income which is I think forecast to be down by 30% as a result of the commodity price declines there -- that is putting a drag on new which is always going to have a subsequent drag in terms of use. So we are trying to balance with our dealer network to make sure that we are not exasperating problem. So as I mentioned in terms of what our actions are, we have got some significant reductions in terms of production performance.

Now, we have done that, if you go back and look at our results on a quarter by quarter basis, in the past. So we have scheduled shutdowns every year in the month of August. So by and large that's always going to be somewhat of reduction. We're going to be taking further actions this year because we are trying to manage the entire chain. The good news among they used is despite the fact that it's taking longer for it to be liquidated so the aging of the used is stringing out somewhat which is putting a drag on new wholesales. The pricing has held up reasonably well. So and that's largely as a result of significant portion of the use being pre Tier 4 products so there still is quite the gap or the value in used equipment.

So I mean, we are watching it closely. I think that we are trying to set ourselves up for 2015. I mean I will deal with the question about outlook of 2015 since I'm sure that somebody is going to ask it. I mean, we're really we don't have a concrete view to call the market of 2015 yet, I mean, we'll open up for writing for 2015 shortly in the late August beginning September timeframe. At that point I think by the end of Q3 we will have a much better idea, but I think right now when you got reductions that I said before in terms of reduction in terms of combine performance it’s that same quantum or reduction maybe a little bit less so in four wheel drive tractors semester to semester. So we're taking actions where we need to take it. I think that we have been planning appropriately so that we are not running into a hard stop where we not always lose the gross margin on the mix that we go in terms of that we get the negative in terms of fixed cost absorption so we are taking appropriate action to align our production system. It's going to be some heavy lifting but I think that we have got the plan in place and what we have right now is reflected in the full year guidance.

Rob Wertheimer - Vertical Research Partners

Okay. That is helpful. Can you -- the production cuts you are taking in combines as you mentioned four wheel drive would that typically flow through the P&L this year or would it be you are cutting a lot of 4Q and see it more next year? And I will stop there. Thank you.

Rich Tobin

Yes, I think it's more of a this year issue than anything else. I mean, our expectation in order to meet our working capital objectives of the year is to have -- I mean, we don't expect to go in with large levels of company inventory at the end of the year and take the volume leverage or the absorption benefit this year and only get the gross margin on the wholesale next year. I think as I was trying to articulate, we're trying to manage the issue of not losing it on mix in terms of the wholesale basis and then losing it on the industrial level, I think that as we have shown in the past. I think that there is one thing that we can do we can kind of, we can manage the industrial machine. So unless that we see a further deterioration from where we are right now and we have given an idea of what we expect for the full year, I think that we have the plans in place to execute.

Rob Wertheimer - Vertical Research Partners

Thanks.

Operator

We will now take our next question from David Raso from ISI Group. Please go ahead.

David Raso - ISI Group

Hello, at the analyst meeting you gave guidance for revenues by segment and I was just curious. Is the conformation of the guidance also incorporating maintaining the business segment guidances like, for example, agricultural sales for the year at $15.8 billion?

Rich Tobin

I think that the guide -- David, the guidance is what the guidance is. I mean, I don’t think that we have to get that granular in total I mean it’s still we are going to maximize the portfolio and its entirety. So we make it up and understand that there is somewhat of a difference in terms of the margin and totality, but what you have in terms of the guidance is the aggravation of the top-line of the different segments at the margins of those businesses we're able to deliver. But I mean in terms of giving segments guidance on a full year basis I mean I think it's a little better. I mean I think that that's cutting the quick too close.

David Raso - ISI Group

Yes, I mean just trying a picture think about the puts and takes since the analyst meeting because again just taken that sales guidance for ag if we maintain it, it implies the second half of the year sales in ag are only down 6% sequentially and even last year we had a 3% decline. So I just would have figured what the combine commentary you just gave that there is probably a little more sequential decline I would expect in ag, if that's the case where is the offset? What do you think sort of is above what we are thinking at the investor day on the revenues?

Rich Tobin

I think that right now that the -- what's changed since the investor day but we are talking two months ago as I think that the mix in terms of the backlog, and, the commercial vehicle segment is improved.

David Raso - ISI Group

Okay. I will see that you also pretend that the revenue guide for commercial, if you are giving it, that's a little bit of bump up maybe a little bump down in ag and how are you viewing construction equipment from previous start for the revenues?

Rich Tobin

Yes, the construction equipment business our expectation is that the trajectory of EMEA and NAFTA will follow a similar pattern that it is on right now. I think that the one that we are going to have to watch is we have had relatively difficult market conditions in LATAM and construction equipment there is a difference in terms of the PSI rates between the two. I mean, if we get any help there we could see some kind of bounce back in LATAM that we have seen up into this point but I mean I think it's little bit too early to tell. So our expectations on the construction equipment segment is improved performance largely driven by NAFTA and EMEA.

David Raso - ISI Group

Yes, but (inaudible) I'm just trying to figure out how much upside are you thinking through on commercial vehicle? Because again the ag sequential decline looks maybe a little optimistic again down to 6% if it was down to 3% in the back half even last year and construction equipment if you keep the old segment guidance is implying the second half has to grow 22% after the first half was barely up at all. So I'm just trying to think if you look at those numbers and say maybe they are little optimistic from the investor day on the revenues how much can I model in where commercial is feeling better. In fact, the commercial loss this quarter is a little better than I thought but I am talking strictly of revenues. Is there that much more momentum versus what you saw in commercial vehicle to take my concerns on ag and construction revenues in sight? It's what it is its moving pieces. You feel better about trough you feel little worse about the reds on the other two from the investor day.

Rich Tobin

Yes, I think that if you are talking about sequential performance semester to semester I think that the upside is on the commercial.

David Raso - ISI Group

I'm talking full year. The full year guidance what has changed?

Rich Tobin

No, I understand what your question is, but I mean we have taken the position we are right now, right, versus what we had in terms of the investor day. So if there is any headwind, it would be in NAFTA ag. As I mentioned before during the call, I think that our expectation in LATAM ag is improved performance in the second half of the year vis-à-vis the first half, so offsetting some of the headwind down on the NAFTA piece.

David Raso - ISI Group

And last question on commercial vehicle, again, the loss was a little less than I was looking for. So it was encouraging. When we think about the profitability in the back half of commercial, I mean, or you just want to talk full year, I think folks are trying to figure out what kind of run rate can be leaving the year on truck and then starting to think through next year where maybe have Brazil back up on an easy comp, let's -- North America is still growing a bit, and then, Europe, would you care to talk a little bit about your truck margins kind of exiting the year and how do you think about next year?

Rich Tobin

Sure, I mean, in one word I think that there is two different drivers and I think that we are intervening in terms of the cost structure which is largely in Europe. Right now, we are running at a 3% growth year-to-date in European commercial vehicles and I think we are forecasting flat to 5% so really midrange at the end of the day. So the pick up in commercial vehicles from a European point of view is as a result of higher revs in the second half of the year at a much improved mix.

As I said before, we've got a variety of things that are going to be improved in terms of the cost structure, we're going to get to the follow on effect of the full year of us intervening in terms of the cost structure, you got improve mix by not having a launch cost that we have had in H1 largely as a result of Euro VI transition on the bus segment and the launch of the new Daily. So those are largely behind us. I think we have got some runway left on buses to complete that large in Q3, and then you have got improved mix for the balance year.

So right now, we have been matching revenue and production through if you look at the Q2 we were saying that we are going to move up in revs in the second half of the year. So we're moving production up. So we'll get improved production performance and the richness of the mix is there.

Our forecast for the full year in terms of profitability, commercial vehicles is I think around where we were at the investor day. So we are not coming off that and we are forecasting a profit for the full year. I think going forward and what we are expecting from the following year I would ask that let's deliver the next couple of quarters, let's realize the befits of the actions that we are taking, and then I would not expect LATAM to perform again in 2015 like it's performing right now. I mean all of the improvement which wasn’t immaterial that we made in EMEA quarter to quarter, unfortunately, was offset by LATAM. LATAM, we will take action there in terms of the cost base, but one would and we would be stocking in LATAM right now, one would expect that those conditions will improve.

Operator

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

Alexander Virgo - Berenberg

Hi, good afternoon, good morning. Just wondering if you could make a comment please on ag, I guess you over-produced in Q1 by close to 30% and again in Q2, and then you are saying that you have talked about this sequential adjustment in production to the tune of 40% in the second half. I mean that it seems like a fairly volatile approach. I'm wondering why you didn't under produce in Q2 given that as we have established the signs from I mean even the Capital Markets Day where that the retail sales were falling away particularly in after but obviously in LATAM too?

And then second question I guess is a follow on to that. You mentioned incremental margins in your prepared notes. I mean, should we be thinking all 25%, 30% drop through on the production adjustment in the second half? And then last one just as an observation, is there any chance we can have the results a little bit earlier next time? Thank you.

Rich Tobin

Okay. Yes, on the last question, yes, and I know I said that last quarter but this time I mean it. So we'll correct that the next time around.

The question about why we didn't moderate production in Q2 and then back and loaded. I mean, I think you got to go back and look at the performance of the ag quarter by quarter for the past several years. I mean, we have historically produced less in the second half for a couple of reasons. Number one, we have go scheduled shutdowns in August at the industrial level that's just by in nature is going to drop it. Number two is there is purely a question of you make a call in terms of how much product that you need available, you need to have it available. I mean at lead times associated with ramping up production of some of the bigger most sophisticated products when you are talking about drive lines transmissions is not short chain. So it's not as if let's cut production in Q2 and then if we need to we can catch up in Q4, it just doesn't work like that because we are trying to maximize our profitability at the industrial level. So for us it's much better to have the product available for what were the projected market demand is and then to adjust in the second half when a), we can manage it from an industrial point of view and we can manage the decrementals as it relates to the absorption was and we have got the product available to the extent that the demands there, it's not as if we can just turn the machine back on if we get it wrong in Q4.

Alexander Virgo - Berenberg

Right, but I guess the issue is where you got wrong in Q2, right? Because I mean if I look back over the last four years, you under produced in Q2 of 2012, 2011, you were only a couple of percent ahead in 2010. I guess there is a more positive environment form an ag perspective. I think we are probably in a more negative environment now. I'm just wondering why you didn't take actions earlier rather than going to 27, 6 and then minus 40 and it sort of seems quite aggressive. That's all.

Rich Tobin

Yes, I think what I have explained to your before, I don't think that we have got it wrong, right. At the end of the day market conditions haven't been improving through the year for sure, but there is a cost associated with turning on and off production that there is a big ticket number that we tried to avoid. So that the extent that we have only produced in Q2 by 6% to moderate that cost. If I was to try to take action on that in the quarter there is a cost associated with that. It's far more efficient for me to take it out of the back half.

Alexander Virgo - Berenberg

Okay. And then if I may just follow up in terms of what gives you the confidence that you are going retake that market share in the second half? Thanks.

Rich Tobin

Yes, I mean that I think that when we -- if you breakdown those market share declines in units we are talking about, I can do it at the top off my head, I think it's 99 units in combines in all of Europe if the market share decline. So we are not taking, it's not like the commercial vehicle segment where you got to make up thousands of units, we are talking about discrete volumes here.

Alexander Virgo - Berenberg

All right. Thank you very much.

Operator

We will now take our last question from Ann Duignan from JPMorgan. Please go ahead.

Unidentified Analyst

Thank you, this is actually Tom (inaudible) in for Ann. Just one question. Do you still believe agricultural fundamentals in North America will be flat through 2018?

Rich Tobin

Yes, without any additional knowledge we answer it, yes.

Unidentified Analyst

Okay. Thank you.

Federico Donati

Leon, is there anybody else on the queue?

Operator

We have another question from Ashik Kurian from Goldman Sachs.

Ashik Kurian - Goldman Sachs

Hello, I have just one follow up question on the truck side. There has been some talk on the efficiency of the different talk makers on the new Euro VI technology. So could you just give us an update on how the new Euro VI is looking for you and where you rank amongst in terms of total cost and ownership and also in terms of efficiency compared to your peers?

Rich Tobin

I think that we are confident in terms of the powertrain solution that we have across the commercial vehicle segment. I mean, without getting into segment by segment. I think that what we have in terms of what we have delivered of the core technology that comes out of FPT I think that is as competitive as anything that's available in the marketplace.

Ashik Kurian - Goldman Sachs

Okay. Have your pricing improved on the back of this or is there still more pricing actions to be taken over the due course of the year --

Rich Tobin

Yes, now I got it. We are clearly not the price leader in the commercial vehicle segment. We have begun to claw back on the Euro VI side but any help the market can give us, and I think that that applies to everybody in European commercial vehicles, we are more than happy to take price where we can get it. I think that if you look at some of the segmental information that we have there I think that we have demonstrated in a variety of different market conditions in a variety of different market positions across the segment that we have been disciplined in terms of pricing. So it's up to the market to a certain extent but we are more than happy to get to the point of full recapture on Euro VI cost.

Ashik Kurian - Goldman Sachs

Thank you.

Operator

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

Federico Donati

Thank you, Leon. We would like to thank everyone for attending to this call with us. Have a good evening.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: CNH Industrial's (CNHI) CEO Rich Tobin on Q2 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts