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CNH Global N.V. (NYSE:CNH)

Q3 2011 Earnings Call

October 27, 2011 3:00 PM ET

Executives

Manfred Markevitch – VP, IR

Richard Tobin – CFO

Harold Boyanovsky – President and CEO

Andrea Paulis – Treasurer

Analysts

Ann Duignan – JPMorgan

Andrew Obin – Merrill Lynch

Henry Kirn – UBS

Jerry Revich – Goldman Sachs

Larry De Maria – William Blair

Stephen Volkmann – Jefferies

Operator

Good evening, ladies and gentlemen and welcome to today’s CNH Global Conference Call. For your information the CNH conference is being recorded.

At this time, I would like to turn the call over to your host Mr. Manfred Markevitch, Vice President of IR. Please go ahead, sir.

Manfred Markevitch

Thank you, George. Good afternoon and good evening, everyone. We would like to welcome you to the CNH 2011 third quarter conference call. And I’ll just make a brief introduction. I would like to remind everybody they can refer to page three of our presentation which was 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 cnh.com.

Today, we will have the presentation by Mr. Rich Tobin, the CFO of CNH Global, followed by a short Q&A session. We have with us today Rich Tobin; Harold Boyanovsky, President and CEO of CNH; and Andrea Paulis, our Treasurer. We would like to begin with a brief presentation.

With that, I will hand over to Rich Tobin.

Richard Tobin

Thank you, Manfred. Actually, I’m going to do half the presentation and Harold is going to pick up half of the presentation. So good afternoon or good evening to everybody. We’ll start a page four of the presentation by just going over some of the highlights.

Net sales increased to 30% to 4.6 billion for the third quarter, and up 24% to 13.3 billion for the first nine months of the year. You can see the growth rates in both reported and at constant currency basis for both the third quarter, the nine months of both, the agricultural and construction equipment segment.

And the bullet points, equipment operating profit of 460 million for the quarter. Operating margins increased to 10%, compared to 6.8% in the comparable quarter, operating margin at 9.2% on a year-to-date basis versus 6.7% in the first nine months of 2010.

Equipment operations net cash position increased by 82 million to 2.3 billion in the first nine months. And net income before restructuring and exceptional items was 272 million for the third quarter and 730 million for the first nine months and you can see on the bottom both, the Q3 and year-to-date, EPS on both, a diluted and a diluted before restructuring exceptionals on the bottom of the slide.

I’ll skip to page five because that’s really what I covered in the highlights and let’s go take a look at six. Six is the chart that we use. It gives you net sales by geographic region. For the quarter you see on the 2011 bar to the right. You have the net sales change year-over-year in terms of percentages so across the group’s geographical portfolio; we demonstrated what we’ve seen pretty much on a year-to-date basis.

Some pretty good growth across the portfolio, both in construction and the agricultural segment, so a very nice balance in terms of the geographical spread. And really that’s on the back of some pretty robust conditions in terms of the commodity markets.

On the ag side and some – and are recovering off a low base on the construction equipment. Show you the arrows as a rate of change versus H1, ‘11, so the only red arrow is on Europe, Africa, the Middle East and the CIS. But that’s off of a pretty robust first half rate, so a little bit of a deceleration, but nothing of any concern.

And then you see the terms, the percent of 2011 total net sales proportionally by region and a pretty healthy split their between North America, Africa, the Middle East and CIS, Latin America and the APAC region, which is really a reflection of the diversified basis of the group’s industrial footprint.

Page seven, please. We have net sales and operating profit third quarters, so this is a comparison looking back ag in the left-hand side of the slide and construction agreement to the right side of the slide. On a sales and operating profit basis, we call your attention to the 2011 ag profit of 411 for a quarter that’s repeating the robust conditions that we have seen in 2007 and 2008.

So a very good performance on the ag side. You see a return to profitability in construction equipment, I think, as we have guided to the first half of the year you’ll see the construction going to be more of a second-half story, so you see 49 million in operating profit and construction equipment also improving revenue based getting back to within – reaching distance of 2007 and 2008 timeframes.

Slide eight we’ll go to equipment operating profit evolutions for the third quarter, no real surprise here. Volume and mix of 185 million, net pricing of 93 million. I think that’s out of all of the data that we will see in the quarter I think in terms of the performance that’s really the best news there, because that’s net pricing that is offset approximately $56 million of quarter-to-quarter headwinds on increased input cost on increased commodity, so a very good price realization both from the ag and the construction equipment side. So on the ag side that’s making up for the increased cost in Tier 4 and the community cost, so a very good execution in terms of pricing discipline and price realization during the quarter.

Production cost just a reflection of the increased volume in some of the inefficiency of dealing with ramping up to meet this increased demand to balance of the walk is really nothing to say about the rest of it going through the balance, so you see $460 million for Q3 trading profit overall.

Moving to slide nine equipment operations, just in terms of where we are in terms of our unconsolidated and our consolidated foreign operators. Very good performance you see on the top, right-hand of the slide, so an increase of 33% year-over-year for the third quarter in terms of non-consolidated joint venture performance. You can see the year-to-date at 84%, largely driven by the performance on the ag portion of the portfolio.

And as we had seen in the first two quarters of the year by truck-tractor, there is a note, I think; I will address that later in the slide about Kamaz. Construction equipment performance slowed in Q3 and non-consolidated operations, which is a reflection of the slowdown in the China market, which is principally served with our Japanese joint venture. So that’s a reflection year-over-year. And we can give some color on what we expect out of joint venture performance for the full year at the end of the presentation.

Moving to slide ten equipment operations change in net debt. Year-to-date – change in net date cash year-to-date, so really what were concentrated more on the working capital portion of it, so working capital is up year-over-year which is really largely as a result of the build of the industrial inventory supporting,1 the 30% growth rate over the period that will moderate some over the fourth quarter, because we will be doing some trimming of production in Q4 not only because of kind of level loading inventories, but some amount of vacation shutdowns around the second half of December, so expect that impact to moderate somewhat in Q4. But overall we’ll address the inventory I think in the next slide in terms of whole goods.

So moving to slide 11, this is a typical slide that we show. In terms of company and dealer inventory CNH retail sales and CNH production, so if we take a look at the left-hand side of the slide and on the Ag, third quarter of overproduction versus retail of 3%, that’s just to accommodate what we have projected for the fourth quarter demand and the fact that we will have some downtime in December.

On the construction equipment side, an overproduction, that is really a catch-up. I mean, if you recall in the first two quarters of the year they we were behind because of downtime due to launches and so it’s a reflection of the catch-up in profitability, is now delivering those whole goods into the dealer network. So I think that we are pretty comfortable where we are in terms of what’s been delivered in the network and building back our dealer inventory to accommodate future demand.

At that point, I think I’ll turn it over to Harold here and I think he will start with slide 13 and then hand it back to me for the balance of the end of the presentation.

Harold Boyanovsky

Yes, thanks, Rich. Slide 13 just gives an overview of current view of commodity prices and forecast it out through 2014 as well as U.S. net farm income and some indicators for the construction market.

In general, summing it up, we’re going to have a very solid 2011 and we expect the farm income to be equivalent in 2012, so, were looking forward to continued good year in agriculture. And, construction equipment will continue to grow and as we move forward but maybe not at the pace that we’re seeing in 2011, as we have a lot of national fleet dealer rental yards rebuilding some of that inventory this year. So, when it gets to be a more normalized level, then we will let the flow through of retail demand pull the business.

Slide 14, starting with the agricultural side of the business. The global market in the quarter was up 12% worldwide. The same for the tractor side of the business and combines were up 6%. CNH had a good share performance overall, particularly in Europe, Africa, Middle East, CIS and Latin America. And the U.S. and Canadian market share was strong in the over 40 and particularly the over 100 where we grew share in the major categories, 100 to 139, 140 plus in four-wheel drives. Where we gave back some performance was in the under 40 which is an area that profit margins are tight and we are in transition to some new product lines in that area.

On the construction equipment side, strong market – the CE business worldwide was up 15%, the strength was in the light side up 28% while heavy was up 4%. All regions in light equipment were up double-digits on the heavy side, this industry was off nine points in Asia-Pacific predominately driven by the slowdown in China which the TIBs were down 19% in the quarter. From a share perspective, on the construction equipment side, we kept up with the market pace on share.

Looking to page 15, the outlook for the industry. We still think the unit worldwide ag sales being up 10% as well as tractors and worldwide combine, TIB being up 15% to 20%.

On the CE side, we see growth of 20% to 25%, light being up 25 to 30 and the heavy 15 to 20 mainly impacted by the slowdown in the APAC region. Rich, back to you.

Richard Tobin

Thank you, Harold. So going to slide 16, the 2011 trends and financial outlook. During the quarter we signed three partnership agreement, two with OEM partners for planters and feeders in Latin America and cutting and preparation equipment for North America with the European partner we also signed an agreement that we have announced with the (inaudible) for retail financing and for the Russian Federation that will be branded through the CNH Capital brand starting in 2012.

Our strategic investment plans that we have been announcing through the year are on schedule for 2012, so, Argentina the final duration of the initial investments in Córdoba facility.

In Russia additional investments with the JV with (inaudible) in the production facility for tractors and combines, which is slated at least the initial phase to be completed by the end of this year.

Our upgrades of the Sorocaba and Córdoba plants in Brazil to accommodate the higher horsepower tractor launches in Córdoba and the build out of the lineup of combines in the Sorocaba plant. And in India, on the ag side capacity expansion for whole goods and components remains on pace.

Incurred in future quarters in terms of main product launches, we purposely didn’t put in the slides that we had in the past that shows graphically because when we count up product launches and take into account re-powering, the numbers get kind of dizzy.

If you count them up and start doing it by region by region we’re going to have a very, very busy year. Because of Tier 4 compliance and a lot of related product launches as mentioned earlier are spending in R& D and product development has gone up significantly over the last two years and we are going to begin to see the fruition of a lot of that spending accelerating to 2012.

So as of last count, were in 30 tractors coming in 2012 and ‘13, and that is not all unit some of them are accommodated by the different standards around the world, but this is going to be a very, very busy year in terms of what new products we will be bringing into the market.

CNH Financial Services main funding transactions in the quarter was 875 million retail ABS and a 330 million retail ABS in Australia and 1.2 billion retail warehouse facility was renewed and extended maturity from a sub one year maturity to a two year maturity which I think that was in preparation of some of the volatility that we have been seeing in the capital markets up until today, I guess, is the best way to put it.

The feedback that we have been getting since we’ve post the result is about our guidance for the full year, so I’ll give you a little bit more color rather than just reading it. Maybe we should have said not the upper end, but the top end and it is our expectation to outperform the top end on a full-year basis.

Putting color around that and taking that down to an EPS level, a little bit difficult right now because of all of the different signals that have been coming out of the market in terms of what’s going on with capital availability in Europe, we seen some slowdown in a very short-term in the construction equipment side in Europe that we would attribute to some of the kind of that conditions that we have seen over the last 60 days or so as the sovereign debt crisis has manifested itself.

So, I think in a nutshell, we expect to be at the top end and clearly our intention is to beat the top end of our guidance that we had given at the end of Q2. On some color I can put around that is in terms of if you take a look at our tax rate for the quarter, it’s at the very low end of the range we would expect to remain at the low end of the range for the full year.

As I mentioned earlier in the presentation, that we would expect the JV non-consolidation income to be down Q to Q, so Q4 2010 versus 2011 largely as a result of the slowdown of the construction equipment business in Asia PAC region so there is quite a few moving parts. As Harold mentioned, order backlogs remained strong even into the first quarter selling season. So, we are not call its conservative or what you will, I think just in terms of what we see out there we would like to get in to Agritechnica and get a very good feel of what our customers are thinking about in terms of 2012 and the balance of the year.

So, overall, conservative or not, in light of what we posted of 5.2% operating margin Q4 of last year it is a lower quarter, traditionally, but right now I think that we are quite confident to be at the top end of the range and if not beat those figures for the full year.

So I think that ends the formal presentations. I will hand it over to Manfred and we can get to the Q&A.

Manfred Markevitch

Thank you Rich. George, we will start the Q&A session, please.

Question-and-Answer Session

Operator

(Operator Instructions) Ann Duignan of JPMorgan. Please go ahead ma’am.

Ann Duignan – JPMorgan

This is Ann Duignan. Hello?

Operator

Your line is open. Please ask the question.

Ann Duignan – JPMorgan

I was waiting for somebody to say hello at least.

Manfred Markevitch

Hello Ann.

Ann Duignan – JPMorgan

Well, you’ve at least addressed what would have been mine and probably everybody else’s first question and that the implied guidance for Q4. So I guess we can take that one off the table. Can you talk a little bit about your early order program for combines in the U.S.? There is a lot of talk about used combine buildup and actually combines.

Manfred Markevitch

Yes, I think when you talk about the used combine inventory in the Park in North America particularly in the U.S., it’s a brand discussion. We feel comfortable with our level of used equipment in the dealer yards. In fact, the preseason order board for combines is quite good. We have almost four months of production covered with orders at this point in time. And, we have 75% growth in the order boards compared to October 1 of 2010 and the same statement globally would be for tractors, so we have a significant strong demand on the order board that we are seeing right now.

Ann Duignan – JPMorgan

So you’re saying orders as of October 1 but combines USR are up 75% year-over-year?

Manfred Markevitch

Yes.

Ann Duignan – JPMorgan

Okay, well that is good news.

Manfred Markevitch

And we are pleased Ann, with our relative performance in the marketplace on combines. As I indicated earlier our share is up in every region.

Ann Duignan – JPMorgan

Well, it helps when your competitor isn’t producing.

Harold Boyanovsky

I think there is inventory there but that’s not for me today.

Ann Duignan – JPMorgan

Yes, Fair point, Harold. The other thing I wanted to discuss, because you focus a lot in the presentation about all of the new strategic agreement etcetera that you have put in place, but can you talk a little bit about the rationale behind your pulling out of the North American heavy-duty construction business on the new Holland brand and is there more portfolio examination going on regionally?

Harold Boyanovsky

Ann, I wouldn’t read more into it than what you have seen. when we went through the construction equipment slowdown, we continue to look at the business and make adjustments where we felt it was necessary for the health of the business and the distribution network.

The first move that as you are well aware was in Europe. In North America, clearly, the New Holland heavy business was in a very minimal contribution to the overall profitability and revenue of the Company and we felt that that could easily be picked up by the sister brand base and so that’s why we made the move. But, don’t read anything into the light side of the business. The light side of the business is particularly skid steer loaders with New Holland is quite strong and contributes to the profitability of the company.

Ann Duignan – JPMorgan

And that’s what I was going to get at, Harold, is that business is quite strong and could leave a big void but...

Harold Boyanovsky

We are not planning on any voids. In fact the strategic supply agreement that Rich mentioned are solely designed to fill gaps that we have either regionally in our brand.

Ann Duignan – JPMorgan

Okay, and just very quickly. A point of clarification, we know that the CIS particularly in Russia is improving dramatically in terms of combines, can you give us any sense of the size of the market in units?

Manfred Markevitch

I don’t have the local production on CIS, but we do have good figures on the import production and in the third quarter it was something over on combines over 700 units and close to 1100 tractors. And to your point, that business on tractors was up double digit from last year and over 60% on combines.

Ann Duignan – JPMorgan

Excellent, thank you. I will get back in line.

Operator

Thank you. The next question is coming from Mr. Andrew Obin of Merrill Lynch. Please go ahead, sir.

Andrew Obin – Merrill Lynch

Yes. Good afternoon guys. Just a question on construction equipment, you are showing very nice progress, but I thought given the scope of an inefficiencies in the first half of the year, we would have seen a nicer pop in the margin given the revenue increase and if you could just comment as to what should we expect in the fourth quarter in terms of incremental margin and what are the headwinds faced by this division in 3Q like.

Manfred Markevitch

Okay, Andrew, I will take that one. The relative performance Q-to-Q is good, I think, as I mentioned earlier in the presentation we had said that it was going to be a little bit of a second-half story. Right now, though, with the incremental are weighted towards North America and Brazil where we are not getting kind of as much as we would get from like an industrial pickup. Europe is still slow. So, we are under absorbing in Europe through Q3 and those are reflected in the earnings.

I mean, I don’t think that we are going to squeeze out as much as we can, but until Europe demand begins to pick up demonstratively that we are not going to really see a jump that mathematically that you would expect I think from the increased unit volume, because, we had been comparatively running on North American CE operations and we’ve been running business and last year we’ve been running full out in Brazil last year. So there is really no absorption pickup reflected in that topline growth.

In Q4, up until this morning, I mean we were feeling just like everybody else worse and worse about Europe. And as I mentioned on the call, we have seen some short-term slow down because of everybody getting our dealers and our clients getting more and more nervous about committing any capital.

Now, to the extent of what has happened today, we’ve got some legs to it then, I think that that is proactive to what we think in Q4 demand. But sitting here yesterday, I would have told you that we think that Q4 – we don’t expect Q4 to be better in Europe than it was in Q3. We’ll see if we get anything from the fact that some of the issues look like they may have been resolved in Q4.

Andrew Obin – Merrill Lynch

And just a follow-up question. Just to go in ag in South America. Have there been any recent changes in financing terms from the government to equipment purchases, because I mean, we’ve heard something about the government is trying to tighten but then they’re trying to loosen up. Could you just comment what you’re seeing on a financing availability down in South America and what...

Manfred Markevitch

Other than the rate everything is the same. So the only thing is changed because of the inflation down there is the rate on the financing itself has moved up, but other than that everything remains the same. On the CE side you’ve got a little bit of volatility in the CE side because there have been some problems with what’s been going on in terms of infrastructure spending and some legal issues down in Brazil of how money is been deployed. So it’s put some short-term headwinds in terms of demand on the CE side. So our Q-to-Q profitability in Brazil is actually down because of that.

Andrew Obin – Merrill Lynch

But on the economic side there is no requirement to put more money down for agriculture?

Manfred Markevitch

No, I think they were in good shape on economy side, the other issue that’s going in Brazil which is I think everybody is talked about including us is the whole issue with the import licenses with Argentina.

Harold Boyanovsky

Sure.

Andrew Obin – Merrill Lynch

Thank you very much.

Manfred Markevitch

There’s still volatility.

Andrew Obin – Merrill Lynch

Thank you very much. Great quarter.

Operator

Thank you, Andrew Ladies and gentlemen, the next question will be coming from Mr. Henry Kirn of UBS. Please go ahead sir.

Henry Kirn – UBS

Hi, everyone. Would you be disappointed if the fourth quarter only allowed you to get to the top end of your guidance? And if that happened, what would be the most likely cause that held you back?

Manfred Markevitch

Yes, we’d be disappointed, obviously. I mean it’s our intention is always to over-deliver in terms of guidance. What would hold that back? As I mentioned before, up until a day ago, there was some pretty grim scenarios floating around about what’s going on in the European markets and where the financing would be available and everything else.

Now, to the extent that that looks like it’s moderating, hopefully on some kind of permanent fashion, then scenario goes away. So, I mean other than that, we don’t project – that was the one thing that was hanging out there that we were having trouble answering. So, hopefully the actions that were taken today have some legs and we can become more confident about the near-term in terms of European demand and the economic environment.

Henry Kirn – UBS

That’s helpful.

Andrea Paulis

Just adding to Rich’s comment, I think if there is a surprise it would be more in the construction side than on the Ag side because the Ag income still looks really strong. Rich talked about some softening in Brazil, softening in Europe, and we know that there is a softening in APAC. So, if there is a downside, depending upon what happens in the financial world, it could be on the CE side not the Ag side.

Henry Kirn – UBS

Okay. And could you talk about where there might still be bottlenecks with the supply chain if that’s impacting your margin and if so when might that abate?

Richard Tobin

It’s been abating. I think we wrote in the press release that the whole majority of the issues of the Japanese supply base have now been resolved. I think that the suppliers, the shared suppliers that all of us are using are getting – now time has moved on they’ve been able to ramp up to meet the requirements of the industry itself. It’s still tight. There is still some inefficiencies in our numbers today and we would expect some further inefficiency in the fourth quarter, but it’s slowly unwinding as the supply base has ramped up to meet the industrial demand.

Henry Kirn – UBS

Thanks a lot. Good quarter.

Manfred Markevitch

Thanks.

Operator

Thank you, Mr. Kirn. We’ll now go to Mr. Jerry Revich of Goldman Sachs. Please go ahead, sir.

Jerry Revich – Goldman Sachs

Good afternoon. Rich, excellent pricing this year. Can you talk about how you’re seeing the pricing landscape heading into next year? Are you getting similar levels of price increase on their earlier order program. And on the next round of Tier 4 on the smaller equipment how comfortable are you with once again being able to get price ahead of material cost? Given the step up on the content?

Manfred Markevitch

Yeah, I mean, it’s our intention to fully cover Tier 4 cost escalation and then get inflation year-over-year. I mean, that’s the intention of step out there. I think it’s fair to have some caution about big ticket item demand specifically combines because we have the Tier 4 product coming in 2012. And that may be some of the rationale for some caution that’s been put out there in the market for 2012 demand and that may manifest itself. I mean, I think that as Harold mentioned before, our backlogs are good, but predominantly that’s on three products, our Tier 4. The bulk of our Tier 4 doesn’t coming in until the end of Q1.

So our intention is to do a two-step process exactly the way we handled the four-wheel drives between 2010 and 2011, but we will see. But I think that overall, when there is a question about caution, about looking forward into the market, when we take all the macroeconomic risk out of it, I mean, clearly, that is execution risk and we will see if farmer profitability remains at the levels that they are able to offset the headwinds in terms of the pricing of the equipment. I mean the good news is there, I mean, it’s always got the countervailing issue, it will hold up the price of the used equipment, because the spread between the tier four and the used will actually increase as we move throughout the year, so, it is not all a bad news story.

Jerry Revich – Goldman Sachs

And Rich are you getting equivalent levels of pricing between ag and CE, or are you getting significantly more on the ag side?

Richard Tobin

I mean in terms of the absolute number, it’s going to be weighted towards to the size of the business. So when you look at the –

Jerry Revich – Goldman Sachs

(inaudible).

Richard Tobin

Yes, but on a percentage basis I think in the first half of the year that CE was well in front of ag. I think that ag really is catching up to CE in Q3. Now CE came off of what we call liquidation level pricing coming out of 2010 as all of the old inventory was sold so that was more not so much net-net price increasing but bringing back pricing to more normalized level. On the ag side, it’s net-net increasing and relative pricing.

Jerry Revich – Goldman Sachs

And can you gentlemen say more about what you are seeing in Europe on your construction equipment business. Obviously we understand the comments on softening but can you quantify that for us because last year certainly we weren’t looking at high CE production levels to begin with. So just wondering when you say softening do you mean to levels where you would be flat year on year, or would it be down significantly from those levels?

Manfred Markevitch

I think it’s hard to say, right now. I think that our commentary up into this point was that we had been ramping up production in CE, which is reflected in the Q3 results. The decision process that we will be making in the fourth quarter, specifically, will be whether we need to trim production to manage the inventory levels depending on demand. So that’s not an absolute level, but demand is softening over let’s call it the last 60 days or so we would attribute most of that to the uncertainty in the European marketplace now whether that has been resolved and we see a bounce back I think it’s a little bit too early to tell. So until we close the quarter, it’s pretty much when we are going to know.

Jerry Revich – Goldman Sachs

Okay. And lastly in Latin America in Ag equipment you had very good performance this quarter despite the Argentina license issue that you mentioned. Can you talk about the drivers of the strength and also on the CE side; we’re hearing about project the laser is that the reason for why you saw some slowing in your sales in Latin America on the construction equipment side?

Manfred Markevitch

Well, I think that that our guys down there have done a pretty good job of navigating the issue with the Argentinean license. I mean it has been difficult, but I think overall we have done and I think it’s been a little more volatile than we would like. But in terms of absolute performance, I think that we are doing reasonably well. In terms of the performance in Latin America overall, I think it is just kind of the overall dynamic of that market moving to higher horsepower segment kind of what CNH sweet spot is. So the reduction in units is more on the low horsepower segment where there is not a lot of profitability, so, despite units being down, profit margins are robust. So it’s moving in the right way and that’s why I think when we were probably put more color around it at aggregate in terms of what we have launches specifically planned for the Brazilian market for 2012 is introductions and moving up the horsepower range.

Jerry Revich – Goldman Sachs

Okay, thank you.

Manfred Markevitch

You’re welcome.

Operator

Thank you, Mr. Revich. Ladies and gentlemen, this evening’s last question will be coming from Mr. Larry De Maria of William Blair. Please go ahead, sir.

Larry De Maria – William Blair

Okay, good morning. Thank you. Couple of quick questions, safe to differ from your comments that you guys feel comfortable enough with the combined market and do not feel like you need to limit production next year? In other words if demand is there you will in fact meet it.

Manfred Markevitch

That’s a correct statement. I mean, we have been out with our first portion of our pre-season combined order form through the first quarter and we have order coverage. So the demand at least as we see it is there.

Larry De Maria – William Blair

Right so no production limitations. Got it. And then on the credit side, it sounds like that each in your credit for Agee is holding up is that right and then can you update us on the timing of potential investment grade deteriorating for CNH?

Manfred Markevitch

It’s a question of the relativism of holding up in terms of Eastern European credit. I mean, it’s still a difficult environment and one of the reasons that we had announced that partnership agreement with the Log and Login was to kind to find the creative ways to open up avenues for us to be able to finance transactions in some of those more difficult markets. So, I guess the answer is that it remains difficult, but it’s not closed in terms of availability of credit right now and what we project to be to go into the next year. What was the second question?

Larry De Maria – William Blair

About investing debt rating timing on that...

Manfred Markevitch

Yeah. I mean, I think that maybe I was unclear the last time I met with you guys. It’s our intention to move toward investment grade, doesn’t say anything about getting there this year, because I’m not in control. We’re not in control of what the rating agencies think about us, but I mean I think that in terms of capital structure in terms of liquidity and in terms of earnings power, we’re all moving in the right direction.

So I think that we have an argument to move to investment grade and then – and we plan on preceding that and we’re hoping that the rating agencies will accommodate us, sometime in the future.

Larry De Maria – William Blair

Okay. Thank you, guys.

Manfred Markevitch

Thanks.

Operator

Thank you, sir. We’re now taking Mr. Stephen Volkmann of Jefferies. Please go ahead.

Stephen Volkmann – Jefferies

Hi, guys. Just one last quick one with the 2.3 billion in net cash, when do we start thinking about what to do with cash, and it doesn’t seem like share repurchase would make too much sense, but the other options that you’re kind of thinking about or is it just kind of hold onto it and go for the debt rating?

Manfred Markevitch

Yeah, I mean I think that is the latter. Right now, I mean, the biggest pickup that we can get is in terms of the total, the way that we run the company, the way that we run the capital arm of the company is to move to investment grade, and then out of the options for liquidity.

And quite frankly, up until like I said I mean, I don’t want to beat a dead horse here, but I mean, up until this morning, we could have had been having conversation a week or now about you don’t have enough liquidity, because the world’s ending, again. So I mean, I think it’s – we plan to keep a robust capital structure and if the result of that, which we would expect is to get to investment grade then that’s our intention.

Stephen Volkmann – Jefferies

Thank you very much.

Manfred Markevitch

You’re welcome

Operator

Thank you, sir. Ladies and gentlemen, as we have no further questions, I’d like to turn call back over to the organizers for any additional or closing remarks.

Manfred Markevitch

Thank you, George. I’d like to thank you for joining today’s call. And as always, the information is available as well on our website cnh.com

Operator

Ladies and gentlemen that will conclude today’s conference. We thank you very much for your participation. You may now disconnect.

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