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Executives

Manfred Markevitch – Head of Investor Relations

Richard J. Tobin – President and Chief Executive Officer

Camillo Rossotto – Chief Financial Officer

Andrea Paulis – Treasurer

Analysts

Henry Kirn – UBS

Andrew Obin – Bank of America Securities Merrill Lynch

Michael Shlisky – JPMorgan Chase Bank

Michael Cox – Piper Jaffray & Co.

Jerry Revich – Goldman Sachs

Lawrence De Maria – William Blair & Company

Michael Tyndall – Barclays Capital

Eli Lustgarten – Longbow Securities

Nico Dil – JPMorgan Securities Ltd.

Martino De Ambroggi – Equita SIM SpA

Massimo Vecchio – Mediobanca

CNH Global N.V. (CNH) Q4 2011 Earnings Call January 31, 2011 11:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to today’s CNH Global Fourth Quarter and Full Year Results 2011 Conference Call. For your information, this conference is being recorded.

At this time, I would like to turn the conference over to your host today, Mr. Manfred Markevitch, Head of Investor Relations. Please go ahead, sir.

Manfred Markevitch

Thank you, Lorina. Good morning and good afternoon, everyone. We would like to welcome you to the CNH 2011 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 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 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, Camillo Rossotto; our Treasurer, Andrea Paulis with us on the call today. We would like to begin with a brief presentation.

With that, I will hand over the call to Rich.

Richard Tobin

Thank you, Manfred. Before we get started and Camillo goes through the financial results. Since this is the first call since the – our old CEO, Harold Boyanovsky announce his retirement effective January. On behalf of the management with CNH Group and the CNG Board of Directors, we would like to thank him for his valuable service to the company and wish him a healthy and happy retirement.

So with that, I will hand it off to our CFO, Camillo Rossotto to go through the financial results.

Camillo Rossotto

Thank you, Rich. I will start with slide four with the highlights – financial highlights for both the quarter and the full-year. With net sales up 27% in the quarter to $4.8 billion, and up 25% for the full year to $18.1 billion.

Agricultural equipment sales are up 24% in the quarter, and 23% for the full year. Construction equipment sales are up 39% in the fourth quarter, 32% for the full year.

Equipment operation operating profit, $238 million in the quarter, that’s a 35% increase versus last year, and $1.5 billion which is 65% versus the full year. That gives us an operating margin in the quarter of 5% compared with 4.7% same quarter last year, and an 8.1% on a full year basis, which is 200 basis points over 2010 operating margin.

Net cash position of equipment operation have increased by $700 million, roughly during the year to $2.7 billion and $450 million of debt was generated in the fourth quarter.

Now, there is a net income before restructuring and exceptional items worth $189 million in the fourth quarter and $918 million for the year, which is up 85% versus last year. At the bottom of the slide, you can also see the diluted earnings per share and the diluted earnings per share before restructuring and exceptional items, which for the full year is $3.82 a share versus $2.08 last year.

Slide five, I’ll just keep it, just the detail of what they went through the first slide, which brings me to the slide six, where you see the geographic split and spread of our business. The rate of change is positive, pretty much across all jurisdictions, albeit slowing down a bit in the fourth quarter in the Europe, CIS region. But it’s still an overall healthy growth, pretty much distributed across all the jurisdictions like I said. And that makes for a spread of sales of 42% in North America on a full-year basis, and 32% in Europe, 16% in Latin America and APAC being at 10%.

Now with that said, I think slide seven shows in terms of net sales evolution split by AG and CE, the strong recovery since the stroll in 2009, both in terms of revenues and operating margin on the right hand side of the table.

The AG revenues in 2011 at top levels compared to the last five years, I think it’s important to point out that AG is on a full-year basis at 9.9% operating profit margins, and there is also remarkable swing year-over-year in terms of the construction equipment, operating performance, that’s 320 basis points of improvement year-over-year.

Slide eight, it’s sort of the usual waterfall that we present in terms of bridging the full-year performance versus the previous year, and volume and mix of $621 million of this change. Net pricing is net obviously of all the headwinds in terms of increased input costs and increased commodities, and it’s a strong number, $272 million both for AG and CE, and it also makes up for input cost increases, but also Tier 4 cost increases.

SG&A up $152 million, that includes also an incremental cost for variable compensation on the full year to the previous year, which is a reflection of the achievement of the results for the company. R&D is up essentially driven by the new product introduction and Tier 4 changes in terms of R&D works.

Now, on the following slide, we just show a focus on couple of strategic initiatives in terms of geographical expansion, in terms of localization of our presence into major markets, which are China and Argentina respectively. The Chinese Harbin, Northern China initiative is a – calls for an initial investment of $90 million, and has to do with the localization and the local production of high horsepower tractors and combine harvesters and dedicated to this important segment of the Chinese market in which we already service out of – only on foreign subsidiary out of Harbin.

The Argentina investment is just a reminder of a major initiative to localize Class 8/9 combines and specialty tractors, which will be localized in Latin America out of an existing industrial complex in Cordoba, Argentina. Startup production is in 2012 on a CKD basis at the beginning, while for the Chinese initiative, we’re looking at 2013.

Now, moving to cash and cash flow on slide 10, again sort of full year, we already mentioned the net change in net cash of $536 million, an increase which is driven from a net cash flow from operating activities of $1.1 billion that compares with $1.8 billion last year. But the big difference here is on the working capital level.

So I think we could just hope to look at the inventory, cash receivable and payables of this line. And you can see the change in working capital, net of $189 million for the full year compares with a 25% representing increase in net sales, that’s $3.6 billion of incremental revenues that we generated with a modest absorption in terms of networking capital.

When we look again at the make of that number, we see that the inventory is the largest number there. But in relative terms, in terms of the relative efficiency, our inventories of finished goods are inline with where they were in terms of turns at the beginning of the year. So the increase of inventory is really driven by the increase in revenues.

That is also a nice lead in to the next slide, which deals with slide 11, with the dynamics of company and dealer inventory both for AG and CE. And there is a clear under production through retail or let me say, definitely a very strong retail conversion activity in the fourth quarter. I think that’s driving both the cash flow and the P&L for the fourth quarter. That’s a reflection of some downtime in production. But more importantly, of brining the level out of inventories to start the year on a clean slate, both on the AG side of the business, more markedly so, and on the CE side.

So we think we’re starting 2012 with a pretty clean deck in terms of the company and dealer inventory. On that, now I’d pass it to Rich.

Richard Tobin

Okay, moving to slide 13. We won’t spend a lot of time here, just goes through some of the major drivers both on the AG and the CE side. There’s been some volatility in crop prices, but if you take a look, what’s more important of the net farm income line on a USD basis in the U.S. some of this is projected right now to see an 18% of net farmer income. So it bodes well for what we consider to be the demand curve for units, and going into 2012, housing starts, while still coming off of low base are projected to be up. And then you see GDP across the world, which is largely negative driven by some of the negativity that’s coming out of the European piece, and contingent effect on the balance of the economies.

Moving to slide 14, this is CNH performance versus the industry. On the AG, it’s been pretty stable, it's either at par or overall slightly better on the high horsepower tractor segment. Combine segment the same, some very good performance in combine performance in terms of – as Camillo mentioned, the retail performance and market share in Q4 on combines particularly in North America.

So overall CNH performed at the market on a global basis on the AG side and construction equipment, while we still see some negative on the Life side, those negatives has been narrowed significantly than what we’ve seen in the first half of the year, where we had curtailed production because of new product launches in both the AG and the skid steer segment.

So we’ve begun to call back some of that loss share on a full-year basis, so better retail performance and market share performance in the second half of the year in heavy side. Largely flat to the industry, down a little bit, largely driven by CIS, which is a little bit of a reflection of some spill over mining demand that we don't participate in. And in Latin America, which is largely a result of capacity at our Belo Horizonte plant.

More importantly, moving onto slide 15, in full year industry outlook on a worldwide basis, we’ll call the market in terms of units, up 0% to 5% in tractors, 0% to 5% in combine. So worldwide AG, industrial – in terms of units, 0% to 5% for the full-year 2012. We can talk about that I think in the Q&A, in terms of what we see in terms of loading, whether its front-end loaded or back-end loaded.

And on the construction equipment side, on the light side, worldwide demand plus 10% you see some of the splits. You see the European up plus 5%. Right now, that maybe of some doubt, but we can revisit that in terms of what we see right now in terms of backlogs for European production, and a worldwide on the heavy side of 20% to 25% that’s largely driven by a snap back in demand from the decline that we saw in Asia during the second half of 2011.

Moving to slide 16, this is just the pictorial view of some of the major launches that we have. I think we’ve spent a lot of time on this issue in 2011, we’ve got some follow-on slides. We can take a look at it from the calendarization point of view, but the challenge becomes steeper in terms of product launches with the introduction of new models and repower and because of Tier 4 compliance. You see on the left side of the slide, main new equipment launches in agriculture and construction equipment, and some of the awards that have been rendered to CNH during the second half of the year in both particular segments.

Moving to slide 17, little bit of a busy slide. But I think it highlights some of the challenges in terms of execution going forward, so the bar continues to be raised. As you all know, the legislation in terms of Tier 4 compliance both in the mature markets in North America and Europe continues to grab significantly larger share of the horsepower range. So we’ve got a variety of new product launches, new models – just to help you read the slide, where it’s got the picture of the tractor in solid red. That is the new model, where it’s got the arrow or the circular arrow that is just standard Tier 4 with some kind of upgrades associated with that. So a busy year for 2012 in both the tractor and combine segment with a variety of different launches planned and staggered through the year.

Moving to slide 18, it’s the same slide that you saw on 17, but on the construction equipment side. So again, largely driven by new model launches and Tier 4 compliance both in the light and heavy segments.

Slide 19, the last slide, I think I touched or myself or Camillo have touched on most of this. So we’ve got significant launch activity slated in 2012. We have introductory launches in Brazil, India, China and Turkey, a new tractor in harvesting equipment segments. We’ve got a full revitalization of the hay and forage in crop production product line, with up to 30 plus launches of new products in 2012.

In the construction equipment side, new product launches in excavator, dozer segments in Europe and North America, a new Case TLB in Brazil. Multiple companion programs as I alluded to, and the first new product launch out of Case India post us consolidating that with the buyout of L&T executed at the end of second quarter.

In terms of order in take or order boards, these are January comparisons. Tractor orders were up 50%, combine orders up 25%, January-to-January. Construction equipment order boards were up 24%, but if we step back and take a look at that, because as you know the curve for demand during 2011 ramped up sequentially through the year.

So maybe a more relative view would be what order boards look like versus Q4. Right now, they are up a month of production in combines, and a month of production in terms of tractors. So order boards are healthier vis-à-vis Q4. So a significant portion of capacity is either covered by retail or dealer orders going into the New Year.

The same thing under construction equipment side with only some lightness in the European market right now, largely as a result of some of the more difficult conditions in terms of European demand. I think that will be the center of a lot of the questions going forward. So we’ll leave the balance of that to Q&A. I mean overall, order boards look healthy going into 2012.

Of additional note, CNH Financial Services, this is the capital arm of the group. So CNH North America LLC successfully issued its first bond during the fourth quarter, $500 million; $6.25 five year notes, and that demonstrated a continued ability to access the ABS markets with $811 million in retail ABS in the U.S. and $450 million of retail ABS transactions in Canada.

Investment grade target is supported by strong performance, strong liquidity position as covered by Camillo in the presentation, and demonstrated access to diversified sources of funding through the year. So our march towards improving the CNH to investment grade continues on.

Before I get in terms of CNH outlook for 2012, I mean overall, it’s been a good year. I think that you can see the step-up in terms of revenue, which is in excess of what we had guided at the end of Q3 for the full-year, and our operating margins in excess of what we had guided at that same period. We did a significant amount of work in Q4.

On working capital management in terms of dealing with levels of company, dealer inventory, and used dealer inventory of the network, as part of dealing with those issues in order to protect pricing going to 2012, we did curtail production in a variety of different markets, so we did not go into 2012 with excess inventory. It did put some kind of drag in terms of Q4 earnings, particularly in Brazil on the construction equipment side, and on the AG side to a certain extent in Europe.

But overall, those choices, what’s driven the cash flow performance we saw in the fourth quarter. So in terms of the bullet-proofness of the balance sheet going into 2012, I think that we feel quite good just as a low to a reduced used inventory, value overall from a year-to-year basis despite the significant increase in revenue by 25% for the full year.

So finally, in terms of CNH’s U.S. GAAP earnings outlook for 2012, recalling revenues up approximately 5% and operating margin excess of 8.6%. So more top line growth despite having some difficult market conditions out there, particularly in Europe and some accretion in terms of the operating margin going forward.

With that, I think that’s final comments that I have, I’ll hand it back to Manfred, and we can get to the Q&A.

Manfred Markevitch

Thank you, Rich. We will now move on to the Q&A session. Lorina, please go ahead and retrieve the first question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll take our first question from Henry Kirn from UBS. Please go ahead.

Henry Kirn – UBS

Hi, guys. Could you talk a little bit about the competitive dynamics and share expectations for LATAM for 2012 in both AG and Construction?

Richard J. Tobin

Yeah. In terms of share expectation, I mean, we have material share in both AG and CE right now. So I mean, no doubt that where expectation is to hold on to that. It is a competitive market, it’s been one of the best performing markets, so let’s just say the last 36 months or so. So it’s attracting a lot of interest in terms of capacity expansion in us ourselves.

And then we’ve announced capacity expansion in Argentina for a couple of different reasons, just because I think of the long-term dynamics for demand for harvesting equipment in Argentina, and because of some of the regulatory environment as it relates to cross border transactions. Then in the CE side, we have been limited by capacity, and we’re working on plans as we sit here today about expanding that capacity in 2012.

It’s probably going to be a little bit of a difficult market in Q1, largely a result of the drought that both Southern Brazil, Paraguay, Uruguay and Argentina are experiencing right now. So right now, we’re cutting production that we would have planned for, I would say three months ago in Q1, just to make sure that we can level load our inventory for that. We don’t think that, that is systematic to the market. I mean structurally the market is a growing market. I just think that in Q1, because of these drought conditions, I think that demand may be a little bit lighter than we had expected.

Henry Kirn – UBS

That’s helpful. And how does the 2012 revenue and op margin outlook write down at a segment level?

Richard J. Tobin

You want me to give you revenues and operating margin by…

Henry Kirn – UBS

A little more granular by products or by geography if possible?

Richard J. Tobin

Yeah, probably not as granular as you like. Well, look at the end of the day, I think that we expect significant performance year-over-year in the construction equipment side. That’s going to be largely a result as we will enter into Q1 at capacity utilization exit rates, if I take out the curtailment that we did in Brazil in Q4.

So year-over-year there is a significant benefit in terms of absorption. That’s tampered a little bit with – we had difficult market conditions in Brazil in Q4, largely a result of BNDES Financing being cut back for some specific Brazilian reasons. I mean we expect that to come back in 2012. So overall, margin expansion in the CE side is largely reflected on recalling the market up double digits would be the absorption benefit of the capacity utilization of CE.

On the AG side, I think that the margin expansion will be more on the European side because we ramped up production sequentially in Europe over 2011. So we enter into 2012 at exit rate capacity utilization there. So in terms of total volume output, which you think that it’s going to be helpful in terms of margin expansion. I’m not going to break it down between combines and tractors, it’s too much of a mix bag.

Henry Kirn – UBS

That’s helpful. I’ll get back in queue. Thank you.

Operator

And we’ll take our next question from Andrew Obin from Bank of America. Please go ahead.

Andrew Obin – Bank of America Securities Merrill Lynch

Yes, good, I guess good morning, still. Can you guys hear me?

Richard J. Tobin

I can hear you, Andrew.

Andrew Obin – Bank of America Securities Merrill Lynch

Terrific, just a very simple question, I guess I'm just a little bit confused. If I look on sequential revenue in AG and Construction, both were up, and if I look at margins, at operating margins they were down quite significantly. Relative to my model, it seems at least half of the shortfall has to do with SG&A, and I guess that variable comp kicking in; a) is that right, what I’m thinking about it? And b) what are the other items that were a significant drag to profitability in the fourth quarter, and what should we be thinking in for the first half of 2012, the same items? Thank you.

Richard J. Tobin

I think on a) you’re correct, on the SG&A side, but let's go on to the gross margin side. On the AG, there is a headwind there because of the cost of banking engines in Europe predominantly, which is the cost that we incurred in Q4 in preparation of having available Tier 3 engines, largely through most of 2012. So there’s a cost there. There are some…

Andrew Obin – Bank of America Securities Merrill Lynch

Would you quantify it?

Richard J. Tobin

It’s material.

Andrew Obin – Bank of America Securities Merrill Lynch

Okay.

Richard J. Tobin

On the CE side, it's more related to production curtailment largely in Brazil in Q4, so we took down our plant largely for the month of December, just to make sure to level order inventories because demand, because of significant reduction of BNDES financing of the construction equipment segment, came off quite a bit in Q4. So rather than just chug through and build a bunch inventory, we took the plant down. So we have a loss of absorption there.

In terms of modeling going forward, I mean I think, yeah, you got to be a little bit careful and go back on a sequential quarter-to-quarter basis. I mean production performance in both AG and CE will be up in Q1 and Q2 because of the fact that, that we ramped up sequentially over the year. So there will be a benefit, and that as I mentioned earlier largely what’s driving the margin accretion going into for a full year 2012.

Andrew Obin – Bank of America Securities Merrill Lynch

So is it fair to think that, at least on the AG side, you guys probably are not going to accrue comp in Q1. And the cost of banking engines is the one time cost, so at least on AG, we should see margins revert to sort of pattern we’ve been seeing for most of 2012. Is that a fair assumption?

Richard J. Tobin

I think that we will accrue for comp in Q1, but because the demand….

Andrew Obin – Bank of America Securities Merrill Lynch

But don’t find comp accrual?

Richard J. Tobin

Right, because the demand was parabolic going up in 2011, you had to catch up by the quarters, if you follow me.

Andrew Obin – Bank of America Securities Merrill Lynch

Right.

Richard J. Tobin

Into a completely different situation in AG, so it should be balanced over the year. So you won’t see a catch up hopefully in Q4.

Andrew Obin – Bank of America Securities Merrill Lynch

So, you hope there will be catch up for that?

Richard J. Tobin

Yeah, I’m not speaking agnostically, not for my own benefit.

Andrew Obin – Bank of America Securities Merrill Lynch

The second, and just the final question. As I look at your GAAP earnings outlook, you’re seeing revenues up approximately 5%. If I look at your industry outlook, you’re seeing AG up 5%, Construction up 15% to 20%. Is it FX, is that under production, it just seems that it’s conservative relative to your end market outlook? Thank you.

Richard J. Tobin

Yeah, we always get accused of being conservative. I mean, I think it’s a fair estimate. As I mentioned earlier, I think that our order boards going into 2012 are healthier than last year, but our visibility going into the second half of the year is what, I mean we can’t see beyond some of the things that are going out in the marketplace. So I mean, one would not expect, I don’t think to see agricultural order boards as healthy as they are considering everything that’s going on in Europe, but despite that they are. Now whether it tails off in the second half from a comparative basis, I mean I think we’re going to know better at the end of Q1 quite frankly.

Andrew Obin – Bank of America Securities Merrill Lynch

Okay, terrific. Thank you very much.

Richard J. Tobin

Thanks.

Operator

We’ll take our next question from Ann Duignan from JPMorgan. Please go ahead.

Michael Shlisky – JPMorgan Chase Bank

Good morning, it’s Mike Shlisky filling in for Ann. Got a quick question, I’m not sure if I’m understanding this slide correctly, but you have – I don’t think you have no new combines planned for 2012. At the same time, you got 25% growth in orders at least to the end of the year, so it sounds like you may have some plans or occasions to increase your share in combines in the near term. I was wondering if you could just tell us a bit about your strategy as to how you’re going to gain that share if you are in fact planning that?

Richard J. Tobin

I think you got to look under the 2012 on slide 17. We do have new combines in 2012 coming, so it depends on the market to a certain extent, I mean some of it is in order to get Tier 4 compliance as you know. The ability to bank engines in North America you can’t do it, right, and so it’s based on engine credit.

So we have every intent of launching new combines in 2012. In terms of market share, we’re just taking a look at market share performance in North America combines for the fourth quarter, which was just quite healthy. There is always timing differences between the competitors of when product is made available, but we expect to compete in combines on a global basis in 2012.

Michael Shlisky – JPMorgan Chase Bank

Great, thanks, that's very helpful. And then secondly, what drove your construction business to a loss in the fourth quarter, I know there is some seasonality applying to it, but can you just give us a little bit more color as to your thoughts on the stability of the construction market going to the next four to eight quarters, as far as margin stuff?

Richard J. Tobin

Yeah, I think that probably the only real disappointment that we had in the fourth quarter would be that we had an operating loss in construction equipment. But as I mentioned, it was largely self inflicted because of the fact that we took down our Brazil production plant because of the fact that the market turned down, and once we lost that absorption, it just comes back to the bottom line.

So overall, I mean it gave you some color on the last, on the guidance slide, on the presentation, recalling the market up, that should be positive for absorption. If you recall, we had a pretty difficult Q1 in 2011, which was largely as a result of product launches, those are beyond us to a certain extent. So we expect unit output in at least the first half of the year to be up in construction equipment. But make no mistake, I mean we’ve got our eye on the dynamics of the market, it looks like, sitting here today, we would expect financing to be made available at some point in 2012, whether it's early in the year or at the end of the first quarter in Brazil to drive that market up.

And then we just got our eye on Europe right now, I mean Europe, I mean it depends on what side of the bed you get up in the morning, but it's our expectation to improve performance in Europe year-over-year.

Michael Shlisky – JPMorgan Chase Bank

Great, thanks. If I could just sneak one more in, we have been seeing steel prices sort of flattening a little bit year-over-year, some other material pricing going down a little year-over-year already since the fourth quarter. I was wondering if your recitations currently include current prices for dealer and other components, or if you have a sort of forecast that’s in your recitations and is there a forecast for any kind of decline in 2012 in those prices?

Richard J. Tobin

In terms of our guidance what we’ve baked in there is Q4 prices last throughout 2012, so largely flat. So anything that we get in terms of input costs positively, and in some geographies, we would hopefully would swing that way and that would be proactive to the bottom line.

Michael Shlisky – JPMorgan Chase Bank

Great. Thank you so much.

Operator

And we’ll take our next question from Michael Cox from Piper Jaffray. Please go ahead.

Michael Cox – Piper Jaffray & Co.

Hi, good morning. Thank you very much for taking my question. My first question is on the, I guess the loading of year, a kind of frontend versus backend based on the type of order boards you’re seeing right now and the growth trajectory you’re on, with your guidance that’s essentially in wide that it will be flat or even down in the back half of the year, that what we should be thinking?

Richard J. Tobin

Well, sitting here today, yes, because we had a pretty steep curve in 2011. We would expect that today for it to be flat in the second half in 2012. We’ll move better once we start rolling through the year. I mean the good news is, it’s up in the first semester in terms of order board. So that’s a positive. And I think that we will have a better idea of what’s going on in the second half of the year as we march along through the year. But right now, our guidance is largely flat in H2.

Michael Cox – Piper Jaffray & Co.

For total revenue, AG and Construction or is that just AG?

Richard J. Tobin

It’s more AG, but AG, it’s 80:20 right now. So I mean the AG is what’s really going to drive it.

Michael Cox – Piper Jaffray & Co.

Okay. And then one quick model question on the tax rate, could you talk about what happened in the fourth quarter and what we should expect tax rate wise for 2012?

Richard J. Tobin

The fourth quarter, I mean, we run a complex global system in terms of where we’re making earnings year-over-year. So you’ll have some change in valuation allowances like, I mean, I think that more importantly we’ve narrowed the guidance going into 2012, so – I think it’s on the first to second page, at the second page of the press release. I think we’re giving a range right now of 32% to 35% where it previously was 32% to 38%.

Michael Cox – Piper Jaffray & Co.

Okay. Thanks.

Operator

And we’ll take our next question from Jerry Revich from Goldman Sachs. Please go ahead.

Jerry Revich – Goldman Sachs

Good morning and good afternoon. Rich, can you say more about the margin structures in 2012 on the pricing versus material cost aspect, it was a nice tailwind for you. This year how should we think about that of Tier 4 cost? Thanks.

Richard J. Tobin

Yeah, I mean, look, I think that we’re pretty much where we were at this time a year ago. At this time a year ago, our expectation was to try to cover Tier 4. We got – at the end of Q1, we saw more or else, I think we forecasted $130 million of headwinds in terms of input costs going up, largely steel and rubber influence. So we’re looking for that headwind to kind of flat line through 2012. So now the expectation is what, at minimum to cover Tier 4 compliance and then to get Tier 4 compliance and then some as what we got in 2011. So I think that we’re going to have the same stance going into 2012. I think we’ve done exactly the same thing as we did in the fourth quarter of 2010, this year. So it really is going to depend on the competitive dynamics and the demand of the individual markets, but that’s kind of the stance that we go in going into 2012.

Jerry Revich – Goldman Sachs

And one of your competitors on the AG side is out there talking about 4 points of pricing as their target is above and beyond your forecast. Is that something that you thing the industry will be able to achieve, and is that what you’re targeting for your business?

Richard J. Tobin

I hope so.

Jerry Revich – Goldman Sachs

All right.

Richard J. Tobin

But, I don’t want to quantify. I mean, like I said, because it’s hard. Right, because it’s a mix bag because all the products aren’t Tier 4 and then there is different timing and the regions and everything else to the extent that our competitors are talking about getting more than Tier 4 compliance, I don’t think that’s a bad thing.

Jerry Revich – Goldman Sachs

And on the overhead side, as we think about SG&A and R&D growth in 2012 versus ’11 on a full year basis, should we think about your growth in those line items to be consistent with topline growth or anything that jump out of you looking at the ’11 numbers? And so, as you know, why these numbers are nonrecurring or maybe we need to ramp up R&D more or less as you think about your plan?

Richard J. Tobin

Yeah, I mean, I think the R&D as a percent of revenue may move up. We’re talking bps rather than anything else because we got a lower growth environment and we know that the Tier 4 transition marches on. But we’re going to have to, to the extent that revenues are in a lower growth environment and we’re going to have to be very cognizant of SG&A growth. Right, I mean we have a standing rule, SG&A moves with revenue, down and up.

Jerry Revich – Goldman Sachs

I appreciate the color. And Rich and Camillo congratulations on your new roles, and good luck. Thanks.

Richard J. Tobin

Thanks, Jerry.

Camillo Rossotto

Thank you, Jerry.

Operator

And we’ll take our next question from Larry De Maria from William Blair. Please go ahead.

Lawrence De Maria – William Blair & Company

Hi, good morning. Just hoping you guys could elaborate a little bit more on the Latin American construction, why you are underperforming? What’s going on there in terms of underperforming the market? As well as, can you elaborate a little bit on, I know you touched on it on the financing environment, is it retail demand for BNDES financing that is slower or is it availability of credit, what's driving or you talked about in terms of financing just for a clarification? Thanks.

Camillo Rossotto

Yeah, let me take the last one first. It’s none of that, really it's been a temporary issue with respect to the pipeline of the BNDES financing on the construction equipment in particular because of some additional bureaucratic process that's been put around it to get to the actual funding of the contracts. And that's why we see there is a temporary issue not a structural issue in terms of availability of all the economic plans on the construction, on the AG side being confirmed going to 2012. So it's more a timing issue than it is a structural change in the structure of the subsidized financing in Brazil.

Richard J. Tobin

Yeah, and in terms of the share, I mean what we have on the slide is full-year and it’s been, I think that that the that it’s negative is largely a result of the market being significantly up in the first half and that's running a capacity, I mean Q4, I mean because Brazil measure on wholesale as we don't really know yet where we stand in terms of Q4. What I can tell you is, we had product available in Q4 that's why we curtailed production. And I assume that everybody had product available in Q4. So to the extent that the market turns up again significantly as we mentioned previously, we’re going to have to revisit our production capacity in Brazil going forward, which we’re working on right now.

Lawrence De Maria – William Blair & Company

Okay. Thanks. And then maybe, you also can talk a little bit. But could you maybe quantify the downside to European construction volumes that you guys see. Obviously there is a base casing out there. And given that the volumes are already still, obviously still low from historical standpoint. Do you see much downside to Europe?

Richard J. Tobin

I hope not. I think it’s a little bit of a fluid situation. I mean, I think in terms of order boards, I think that our weakest single area with the exception of small horsepower tractors as a result of the drought in Brazil, which we think is relatively temporary in terms of order boards, our weakest position right now is in European CE. Whether we think it’s going to significantly take a downturn, I think it’s going to largely be a result of what happens with everything that’s going on in terms of the credit crisis and the like. Right now, our expectation is to improve performance year-over-year in construction equipment in Europe.

Lawrence De Maria – William Blair & Company

Got it. Okay, thank you.

Operator

And we’ll take our next question from Michael Tyndall from Barclays Capital. Please go ahead sir.

Michael Tyndall – Barclays Capital

Hi there, thanks very much for taking my question. Just two questions, the first is relation to pricing. When I look at the EBIT walk down that you’ve given, it looks like the tail wind you’ve enjoyed in pricing subsided significantly in Q4. So it was 235 at the end of the nine month, and it was only a 47 million increment in Q4. I am just wondering if you could talk a bit more about the pricing environment. And then the second question is, on slide 15 just looking at construction equipment and I see that you got APAC up 25% to 30% this year. I wonder if you could give a bit more of a feel for where that growth is going to come from, certainly, there are some concerns around weakness in China? Thanks.

Camillo Rossotto

Yeah, let’s do with the pricing first. Yeah, I mean, the relative pricing has come down. It actually came down in Q3 relative to Q1 and Q2 and that’s because of the commodity costs, headwind was largely backend loaded. That in the fact that there is some pricing headwind in Q4 as I mentioned in the main presentation, we did a lot of work in dealing with any kind of inventory overhang especially on the use side going into 2012. So there is a little bit of headwind there. But most of the comparable pricing compression is because of the fact that the commodity cost headwinds were backend loaded during the year.

On the industry outlook, yeah, I mean, APAC is up 25% to 30%. A lot of that is driven by some expectation that the significant slowdown that we saw in the second half of 2011 in China will moderate and begin to pick up and then the balance of Asia-Pac to move up sequentially. But not really largely driven by any individual jurisdiction kind of across-the-board.

Michael Tyndall – Barclays Capital

Okay. Thank you.

Operator

And we will take our next question from Eli Lustgarten from Longbow Securities. Please go ahead.

Eli Lustgarten – Longbow Securities

Good day, everyone. And thanks for taking my questions. Can you give us some idea, did you see any strength in buying in the fourth quarter particularly North America because of tax policies? And can you give us some idea, would inventories finish the year particularly in CE and in AG, across globally and particularly in North America versus normal – inventory levels versus normal?

Richard J. Tobin

Yeah. That’s a – no one really knows how much of the buying in fourth quarter is driven by taxation. But I mean, I think that to be clear with the amount of farmer net income in 2011, one would expect that that is the main driver and the fact that they do it at the end of the year is to get underneath the tax resume that exists. I mean our own personal view is that tax resume will continue to exist since it’s been so popular from an industrial perspective. But we’ll wait and see in terms of what the legislation says. But saying, out of 25% growth, how much of that is tax drive? I don’t think anybody can actually monetize that particular question. What was your second question again? I’m sorry.

Eli Lustgarten – Longbow Securities

Inventory levels in AG versus normal particularly in North America and in construction also?

Richard J. Tobin

Inventory returns went up this year. I mean, I think that Camillo highlighted the change in working capital relative to revenue on a year-over-year basis. And as I mentioned, I think that we put a significant effort in Q4 of dealing with the issue of inventory overhang at the dealer network and a lot of the research that was written, we’re cognizant in that market, especially, North America that has had two plus years of some pretty significant demand. And that’s the metric we have to keep an eye on. Our inventory levels we think are quite healthy. So we’re comfortable with both our company and dealer inventories going into 2012.

Eli Lustgarten – Longbow Securities

Did that both too in AG and Construction?

Richard J. Tobin

It’s good for AG and Construction, yeah. And as I mentioned, I mean, I think that we made some hard decisions in Q4 with curtailing production specifically in construction equipment segments that we went into 2012 with a healthy profile of inventory.

Eli Lustgarten – Longbow Securities

Sure. You had questions on, worry about Europe in CE and AG going up and would you just talk about APAC, you’ve got a pretty hefty gain forecast in North America in construction right up 15% to 20%, and North America up 10% to 15%. And even Caterpillar, and therefore it gets back to off of those kind of numbers a bit. Given, what the comp level you see a strong double-digit numbers, I mean it’s sort of a little bit hard, it's a bit higher than I think everybody else in the industry they know of?

Richard J. Tobin

Yeah, I mean in terms of scale, we're not Caterpillar for sure.

Eli Lustgarten – Longbow Securities

Yeah.

Richard J. Tobin

I think you need to make that relative to units.

Eli Lustgarten – Longbow Securities

I’m now looking – I am looking through industry forecast, your industry forecast is up 15% to 20% for North America and 10% to 15% in heavy equipment. And I guess my question is, what are you seeing that will give you confidence to get that strong double-digit number on units or both?

Richard J. Tobin

It’s just based on what we see in terms of order backlogs right now in North America. What’s been said by in terms of capital expenditure from some of the rental side, which was largely the driver of growth at least in North America in 2011, I mean, I don't think we’re prepared to back off of that number right now.

Eli Lustgarten – Longbow Securities

And is that number – is that also subject to the same, I think you have to get good visibility in the first half, and uncertainty in the second half where you have enough visibility to carry you further in the first half of the year in North America?

Richard J. Tobin

Yeah, I mean, in a perfect world, we wish that we had backlogs that had a duration of a year, but right now, our backlogs are healthy, but by no means to recover production for the year. So we’re going to have to see as we go forward.

Eli Lustgarten – Longbow Securities

Okay. Thank you very much.

Operator

And we’ll take our next question from Nico Dil from JPMorgan. Please go ahead, sir.

Nico Dil – JPMorgan Securities Ltd.

Good afternoon, gentlemen. It’s Nico Dil from JPMorgan in London covering Capital Goods. I just have two, a sort of clarification or let’s say more detailed questions on the answers that have been given. First of all, on Asia-Pac outlook in construction equipment up 25% to 30%, would like to sort of dig into the details of what you’re expecting in China here, is that expected up 25% to 30% as well or is that perhaps a little bit higher or lower here given the weakness in H2?

Second question is around the sort of engine stock piling cost that you flagged in AG, I’m wondering whether underlying was it around 6%, 7% or even as high as 9%, 10% or would you give us a little bit of an indication of where the margin would have been underlying? Thank you.

Richard J. Tobin

Yeah. I mean, I’ll repeat myself on the stockpiling. I mean it’s a material amount. I mean, I don’t think we’re going to get into because there’s some competitive dynamics associated with that number. But it was a material amount in the fourth quarter, which we expect to be a one-time cost just because of the regulatory environment, which allowed us to do it in Europe and some of the favorable rulings on specialty tractors where we have material market share. But it was a headwind in Q4 on the gross margin line for AG predominantly.

On the CE side, I don’t have the by country numbers in front of me, but I’m going to have to do it off the top of my head. As I mentioned earlier, it’s a comparative snapback because of the significant slowdown that we saw in the second half of the year in terms of China demand. And this is market call; I mean just to call your attention to it. I mean our CNH market presence in China is relatively benign, but we have to give an industry view.

And then, across the balance of Asia-Pac, there is no country that stands out like India, although they’re all posting in our view double-digit growth numbers inclusive of India in 2012.

Nico Dil – JPMorgan Securities Ltd.

Thank you.

Operator

And we’ll take our next question from Martino De Ambroggi from Equita. Please go ahead.

Martino De Ambroggi – Equita SIM SpA

Yeah, thank you very much for taking my question. Good morning, good afternoon everybody. I have two questions. One is on the cash flow. From the cash flow perspective, if you could elaborate a bit more on CapEx and working capital in 2012? And on tax rate, the guidance you gave us for 2012 of 30% to 35%, if it’s sustainable going forward or you see eventual additional benefit after 2012? Thank you.

Camillo Rossotto

I think, I said with the last one, it is sustainable, and I would leave it at that. Don’t be greedy about it, I think it’s an improved guidance, and it’s based on some of the structural things that we see going forward in terms of the mix of profit by geography.

On your first question on CapEx and working capital, yes, we are seeing essentially a much flatter type of outlook in terms of revenue growth going into 2012. We will expect the dynamics of working capital to be kind of flexed around that lower type of growth trajectory. In other words, we think that, that we have something pretty flat in terms of change in networking capital going to 2012 as we look at the guidance there.

In terms of CapEx, I think one of the reasons why we have highlighted two initiatives around China and Argentina is because, we have some of these strategic CapEx, let me call it, that adds up on top of the Tier 4 complying type of CapEx, and all that we’re doing in terms of just addressing the current footprint of our production. So CapEx up, working capital pretty flat and tax rate sustainable.

Martino De Ambroggi – Equita SIM SpA

Okay. Thank you, Camillo.

Operator

And we will take our next question from Massimo Vecchio from Mediobanca. Please go ahead.

Massimo Vecchio – Mediobanca

Hi, good morning or good afternoon to everybody. I have a question on the construction equipment, I was wondering, if you can share with us the production capacity utilization rate?

Richard J. Tobin

Yeah, we are exiting at around the lowest 60s. And right now, we’ve got it in our plans for 2012 in terms of what we can see for demand. So kind of Q4 exit rate in the low 60s.

Massimo Vecchio – Mediobanca

In the low 60s. If for a moment we assume you got off to almost a full capacity utilization, so probably coming back to roughly $5 billion revenues or something like that. I was trying to understand were these the normalized operating profit margin for the business with the new – let’s say structure that you have now, I know, if you can help with that?

Richard J. Tobin

Yeah, I mean, I think, that where I’d point you is, if you go back to our strategic business plan, we gave margin expectations through 2014, and I think that holds true on the construction equipment side.

Massimo Vecchio – Mediobanca

Okay. Thank you very much.

Manfred Markevitch

Thank you.

Operator

Gentlemen, we currently do not have any questions in the queue at this time.

Manfred Markevitch

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

Operator

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

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