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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

Michael Cox – Piper Jaffray

Ann Duignan – JPMorgan

Andrew Obin – Bank of America

Monica Bosio – Banca IMI

Martino De Ambroggi – Equita SIM SpA

Larry De Maria – William Blair & Company

Ashish Gupta – CLSA

CNH Global N.V. (CNH) Q1 2012 Earnings Call April 25, 2012 8:00 AM ET

Operator

Good morning ladies and gentlemen and welcome to today’s CNH Global 2012 Conference Call. For your information today’s conference is being recorded.

At this time, I would like to turn the call over to Mr. Manfred Markevitch, Head of CNH Investor Relations. Please go ahead.

Manfred Markevitch

Thank you, Arnica. Good morning and good afternoon everyone. We would like to welcome you to the CNH 2012 first quarter conference call. Let me make a brief introduction. I would like to remind everybody, you 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; and our Treasurer, Andrea Paulis with us on the call today. We would like to begin with a brief presentation and with that I will hand over the call to Rich Tobin.

Richard Tobin

Thank you, Manfred. Before Camillo goes through the bulk of the explanations [ph] on the financials I’ll make some opening comments. Clearly it’s been a strong quarter by CNH, so commercial industrial execution was satisfactory, product availability during the quarter was good which you’ll see in some of the slides on inventory both dealer and company inventory. So we were able to supply our customers with product that they’ve needed. You all know that we’ve had at least in Europe and North America a little bit of an early start to the season, so that’s driven some volume demand earlier than historically that we’ve ever seen which is generally in the Q2, Q3 period. So overall we think that we are adequately positioned to meet demand in Q2. We’ve got some information in terms of where we stand on backlogs and the like. So, overall, a good start to the year operationally and we’ll go from there.

I know that many of you are going to ask questions about [inaudible] or talking about guidance going forward as you can see from the press release and the presentation. We are reaffirming guidance that we’ve given on January 27th. We’ll revisit our guidance as we discussed in January, in July after the second quarter principally because historically that’s the way we do it, but in principle we’d like to get an idea of what the impact of the heavier demand in Q1, what that means in the second half of the year. We still have as you all know a bit of a difficult economic environment in Europe and we want to see how that plays out and we have a clear understanding as our backlogs proceed over the year there.

I know many of you are going ask the question about upgrading guidance, we’re not going do so on today’s call but we’re more than willing to take on the questions of what we see in the individual markets.

And finally, in this – a lot of the speculation about some certain announces made about our major shareholder dealing with the CNH listed position, I mean that’s really a question that we would defer to our Industrial Call which is scheduled later today, it’s not the matter for CNH to address that particular subject.

Overall, quite pleased with the performance of the quarter, I think that both commercial operations in terms of volume and price realization have done as expected and industrially the performance has been quite good as you can see by the amount of output and the beneficiary of the industrial absorption that we realized during the quarter.

With that, I’ll hand it over to Camillo and he’ll take us through the bulk of the financial presentation.

Camillo Rossotto

Thanks Rich, good morning everybody. Starting on slide four, as you’ve seen from our earlier this morning, revenues were up 22% during the quarter, $4.6 billion, $3.6 billion of Ag business and $1 billion of construction equipment. The equipment operation operating profit is up $160 million to $406 million in the quarter, that’s a 65% increase and the margin is now at 8.8%, 2.3 percentage points above same quarter last year. The Ag business has achieved double digit profitability in the quarter at 10.3% and we recorded 19% incremental margin versus last year.

The equipment operation net cash of $2.2 billion is down $400 million from where it was at year end, and that’s basically driven by seasonal working capital changes that we will comment on when we get to that part of the presentation.

Net income $269 million, that’s $1.11 per share diluted before restructuring that compared to $0.63 and $0.57 respectively in the same quarter for over last year.

Slide five, I think the only highlights here which I would like to underline is the favorable performance of not only the equipment operation but also financial services where net income was up 35% versus Q1 of the last year, about $19 million on the back of better cost of funding and portfolio performance.

Going to slide six, you can see the revenues, strong growth in North America and growth also in Latin America for the quarter, and the total sales out of North America 45% of total revenues.

Slide seven gives you a bit of a breakdown both in terms of sales and profitability between Ag and CE. In the quarter the Ag business was 78% of total sales versus 81% same quarter of last year on the back of the rebounding construction equipment business in terms of volumes, profitability of construction equipment at 3.3% versus where it was, a negative 2.3 in 240% in Q1 of last year.

In terms of the colors or the waterfall on slide eight, again volume and mix is favorable and net pricing which includes recovery of raw material cost is favorable, so in total between the volume mix and pricing we have $284 million of positive bridge from Q1 2011 to Q1 2012. Production cost are up, SG&A are up, and R&D are up, but I think the SG&A piece for example on a percentage terms is lower than it was last year on the back of the higher volumes that we booked in the quarter.

R&D, the incremental spent is clearly driven by the Tier 4 by emission regulation changes and new product launches and this is going to be a constant going forward because we are seeing both R&D and CapEx trending up through the higher level of business that we are running.

In fact on slide nine you can see sort of a – since we booked $101 million of CapEx in the quarter, it is probably an all time high, definitely so for a Q1 and so it felt like wanted to give some color around it. You might recall in the last call we had - we underlined sort of the strategic nature of some of these investments dealing with Argentina, with China, and the likes. And on the left hand pie chart you can see that most of what we are doing we are investing it in going forward two-thirds into new products at Tier 1 adoptions and comparing programs and capacity expansion.

The capacity expansion really is happening in – like 40% of that is between rest of the world and Latin America. Latin America being both Brazil and Argentina where we have announced expansion plans and there is more to come as we get into the balance of 2012.

Slide 10 talks about the cash flow, as I commented briefly in the beginning, we have a significant absorption at the level of changing working capital, most of that has to do with finished good inventories filled with a view to the – the servicing demand in Q2 and Q3. So not only we have been able in the quarter to record important sales growth, but we have also been able – thanks to a well running manufacturing machine to build inventory in preparation for the stronger quarter in terms of selling season for the Ag business, and that’s really the story of the cash flow.

In terms of the sales, we are tracking favorably versus last year both at the dealer inventory level and company inventory level.

Slide 11 that’s my last slide and I will pass it back to Rich, really encapsulate the story of the quarter from a P&L and cash flow relationship perspective. We have over produced by 33% retail in the quarter that’s coming out of a Q4 where we meet the opposite, I mean you might recall we under produced retail in Q4 last year by 9% on the Ag side. So we are now going back to building inventories to adjust the higher level of demand going forward.

Not much else to say here. So on this note I would pass it back to Rich for the market outlook section of the presentation.

Richard Tobin

Okay. Thanks Camillo. Let’s move to slide 13. There is really no surprise here in terms of where commodity prices stand relative to historical levels and prior years. So it’s a proactive environment in terms of what we can expect in acreage that is going to be planted for the 2012 crop.

On a global basis the balance on construction activity and GDP are well known. I don’t think there is any surprise there, but it is somewhat a direct reflection in terms of our construction equipment business and where we are growing overall, as you can see North America would be green plus sign.

Moving to slide 14 which is unit volume first quarter and performance versus the industry. Overall a good performance on both sides of the house, both on the Ag side and the construction equipment side. Call your attention to I guess the biggest number or the biggest surprising number there which is the North American combined market being down 40% year-over-year, and that’s really just a reflection of product availability and launch timing of certain competitors in the market. We don’t expect the North American combined market to be down 40% for the full year, so you see a plus.

In terms of our market share we have done well in combines in Q1, but we expect the combine market overall which we will cover in the next slide to be flat to 2011. In the construction equipment side, I think on the right where the performance is really a continuation of what we have seen in the second half of last year where we built back our position in terms of the light equipment market share, which made the first quarter comparative number look a little bit heavy. I mean as you recall during Q1 of 2011, we were down at that time in two of our main light products as a result of new launches. So the comparative looks the way it turns but that has heavily been impacted by the fact that our market share was down significantly because of lack of product in Q1 of 2011, and now we have rebuilt that position. But overall in terms of, as I mentioned, at the opening from the commercial execution point of view so far so good going into 2012.

On slide 15 is the market outlook. We have launched some of the numbers, the ones that I call your attention to is Latin America. We moved a little bit down on the combined side, which is a reflection of the drought in Southern Brazil that we mentioned in the call on January and a still ongoing situation in Argentina with the ability to make product available to that particular market. And I think on the construction equipment side we’ve got a little bit of pushback on our guidance or our expectation for APAC, and I guess that you were proven right and we were proven wrong. So we’ve taken down that number on the APAC side and then moved up North America slightly.

Overall, not a dramatic change in terms of market outlook for the full year 2012.

Slide 16 is a bit of a busy slide. I mean all of that is written in the press release so I won’t go through it. But on the left hand of the slide, some of the announcements that we’ve made in Q4 of 2011 and Q1 of 2012 with our investment in Minas Gerais in Brazil for their investment in new construction equipment facility. That plant is scheduled to come online in 2014. So we are in the midst of breaking ground in that particular investment. We signed a variety of different partnership agreements and then you see the updates on our capacity expansion of our facility in Cordoba in Argentina.

On the right hand side, I think that we spent a considerable amount of time on that. 2012 is a very busy year in terms of product launches largely as a result of Tier 4A introductions that would be sequentially released throughout the year. We are on schedule right now. The higher horsepower segment will all be completed in Q1 and then we’ll progressively be introducing Tier 4 product in the lower horsepower segments throughout the year.

As I mentioned there, this is a year where our success is going to be heavily predicated upon our ability to execute on these particular launches and having the product available in the marketplace.

Final slide is slide 17. I covered Tier 4A in my comments on the earlier slide. Tier 4, finally we have announced the SCR, only solution developed by FPT, has been chosen for our large equipment segment. The other solutions incorporating a combination of SCR and EGR will be used depending on engine horsepower and equipment envelope on balance the products, but we have finalized our plans which would take us through the end of 2015 for the introduction of Tier 4 Final.

Some color on where we stand on order intake compared to what we provided to you on January. Agriculture equipment capacity is booked through into Q3. Construction equipment is booked through Q2. So backlogs haven’t been depleted significantly on what we have reported in January. So that's a helpful sign going at least into Q2 and we will update that when we get to the half year or for the second half of the year as I mentioned earlier.

We have continued to participate in the capital markets from a financial service perspective. We issued a $1 billion of retail ABS in US at AAA blended 22 basis points over benchmark, so very successful issuance during the quarter and we have successfully closed another $250 million three-year facility as part of our diversification through funding sources of our financial services business.

As I mentioned earlier in the call, what we are doing is reiterating the guidance that we’ve given you in January. I gave you the reasons why we are going to be revisiting that in July once we have got Q2 under our belt and we’ve got a good idea of where we stand in particular markets and most importantly on how we executive with our own launches for Tier 4 product going forward.

That's the end of my comments on the presentation. Manfred will take us through the Q&A.

Question-and-Answer Session

Manfred Markevitch

Thank you Rich. We will now move on to the Q&A. Arnica, please start with the first question.

Operator

Thank you. [Operator Instructions] We will now take our first question from Henry Kirn of UBS. Please go ahead.

Henry Kirn – UBS

Hey good morning guys.

Richard Tobin

How are you?

Henry Kirn – UBS

I appreciate that she is not going to review the guidance today, but maybe could you discuss how the order books in North America and South America Ag are trending relative to your expectations?

Richard Tobin

Well, I mean I gave you overall and also global comments on the order books, which is in slide 17. I think that North America I think that commercial deliveries are early. I mean because of the warmer weather we’ve had I think some estimates that the planting has moved up almost 30 days and historically has been the norm. So that has driven demand that we would have expected to see historically in Q2 into Q1. But right now order books there is really a reflection of what I gave you on a global – is really a reflection of what’s going on in North America. South America is a little bit more of a choppy situation.

As you know because of the drought situation in Southern Brazil that’s made that market difficult, but North is performing fine and then we continue to do our best during this transition of moving our production to supply the Argentinean market from Brazil to Argentina which we were in the midst of resolving. We are actually making deliveries now out of the Argentinean facility and we will progressively ramp that up over the year. Now, how much we can catch up is really going to be a reflection of our own execution on that industrial investment and the environment between the import control environment between Argentina and Brazil. So I mean I think that we are in a better position to give you more color on what's going on in Brazil once we have Q2 under our belt.

Henry Kirn – UBS

That’s helpful. China, could you talk about what you are looking for as far as sign post or recovery in that market?

Richard Tobin

On the construction equipment side?

Henry Kirn – UBS

Right.

Richard Tobin

Yeah, well, at the end of the day as you know we are not a material provider of equipment into China. I think that we had thought there would be a return to activity because the second half of the year was pretty weak as you know in China, so we thought that may be some incentives laid into bring that market back. It really hasn’t happened yet. Lending is still tighter than we had seen basically in 2010 and the first half of 2011. We don’t know. I mean we have ratcheted it down the total demand. We still expect it to post a growth for the full year, but in Q1 it’s down on a comparative basis. So we will see.

Henry Kirn – UBS

One final one if I may.

Richard Tobin

Sure.

Henry Kirn – UBS

Are you seeing any competitive pricing arising from the pullback in the Chinese market either there or throughout Asia on the whole?

Richard Tobin

No, I guess is the answer. But we are really not the ones on the Chinese market to answer that question because our participation in that particular market is relatively small.

Henry Kirn – UBS

That's fair. Congratulations on the nice quarter.

Richard Tobin

Thanks.

Operator

We will now take our next question from Michael Cox of Piper.

Michael Cox – Piper Jaffray

Good morning, congratulations on a nice quarter guys. My first question is on the slide where you showed the overproduction versus retail. Could you talk about perhaps how much that helps margins in the quarter and to the extent that it covers the cost absorption that might be at an unsustainable rate?

Richard Tobin

I’m not going to monetize it for you. But obviously I think that we had struggled in the past of chasing the market to a certain extent. So we had made a conscious decision this year because of a variety of reasons. Number one, we wanted to get ahead of the curve in terms of having product availability to meet demands. We’ve got a significant amount of launches coming this year and when we do those launches we are going to lose production capacity throughout the year as we have to transition that product. So it’s really a two-pronged issue.

One was kind of a strategic decision to make more product available for what has traditionally been Q2, Q3, the big selling season and then the fact that we have got to accommodate some lost hours of production to deal with those launches. So yeah, it’s impacted Q1’s margins because of the increase in capacity which has got a direct reflection on industrial absorption overall. If weighted towards Ag as a whole and North American construction equipment, our European construction equipment is still operating at a low level. So there has really been very little impact there.

Michael Cox – Piper Jaffray

Okay, that's very helpful, and one quick question on Brazil. I know you’ve introduced a number of new products and sort of updated the New Holland brands in Brazil. How much would you speak to the outperformance you are seeing in that region to the changes you’ve made to the product lineup versus perhaps your positioning in that Central Brazil region where the ground impact isn’t as significant?

Richard Tobin

Yeah. Well, I mean it’s really two answers. Monetarily you really can’t see it because of the fact that because of the unit demand being down on the tractor side in Southern Brazil and the difficulties that the industry is having with what’s going on between Brazil and Argentina. But in terms of product acceptance we are quite pleased with the product that’s coming off the line in terms of what our customers are saying. We feel pretty good that we took the pain to a certain extent to transition our big tract of plant in the second half of last year to introduce the new higher horsepower segment products, and we think that’s the right decision going forward for the way we believe that the Brazilian market is transitioning to kind of – from a low horsepower driven market to moving up the horsepower chain.

Michael Cox – Piper Jaffray

Very good, thanks.

Operator

We will now take our next question from Ann Duignan of JPMorgan.

Ann Duignan – JPMorgan

Hi, good morning guys.

Richard Tobin

Good morning.

Ann Duignan – JPMorgan

Could you talk a little bit about the acceptance in the marketplace on the Ag side of the SCR engines? We’ve been hearing some whispers from farmers that they’re having some problems with new equipment with SCR, and also we’ve noticed that used tractor prices are at record levels as farmers try to avoid buying tractors with the SCR technology. Can you just talk about any experience you’ve had out there or is it too early to tell yet?

Richard Tobin

I think there is going to be a significant amount of opinion on that particular subject for the balance of this year. I mean, I think that there’s been a variety of different technologies chosen by the industry participants and I think that this is the big advertising year as everybody talking about their particular solution. I think that what we can say from a CNH point of view is that our SCR products have been – at least in the high horsepower tractor segment has been in the marketplace now for some time and it’s been a direct reflection in our volume growth.

So, I guess what speaks to that – to answer your question is, it’s going to be reflected in unit volume and demands and right now, as you can see from our numbers, I think that’s the real proxy from the whisperers about the performance of the individual solutions.

In terms of fuel consumption which was the big selling point that we had put out there, one of the selling points we put out there on the SCR solution, we’re realizing that in the market place. The productivity that our clients are getting out of those machines has been demonstrated in the field, and the extent that we’ve chosen an SCR only solution that would give you an idea of what we feel about that particular technology.

Ann Duignan – JPMorgan

Yeah, that is an interesting development. And then switching gears a little bit, I know it’s early but the California BSC case yesterday, are any lessons learned, I know New Holland is very strong in the livestock sector. Are there any lessons learned as you guys look back at earlier outbreaks in the US, anything that we should be watching out for in that sector?

Richard Tobin

I don’t know I guess is the answer. What I can tell you is that New Holland is a material – it’s got a material position in the livestock sector which is not as good as we would like in California. So I think it’s unfortunate what’s going on there. But in terms of its impact on CNH restricted to the California market, yeah, I mean there is probably going to be some impact there but I don’t believe it’s going to be the overly material.

Ann Duignan – JPMorgan

Okay. I guess I would respect the one question and one follow-up, and I’ll take my questions offline. Thanks.

Richard Tobin

All right, thanks.

Operator

We will now take our next question from Andrew Obin of Bank of America.

Andrew Obin – Bank of America

Yes. Good morning guys.

Richard Tobin

Hi Andrew.

Andrew Obin – Bank of America

Can you just comment on what’s going on in Europe in terms of credit availability and if there is a significant difference between farming sector and construction segment. The follow-up question, you guys have a leading position in Russia that market has been very strong. Could you provide us more color as to what you’ve seen so far and how does your order book look in that particular region? Thank you.

Camillo Rossotto

Welcome. Let me deal with the Europe credit availability and I’ll pass it on to Rich. I think what you’re seeing in Europe is still – farmers get pretty much good credit availability across the spectrum of all north, central and southern Europe. We haven’t seen any issue there. I think banks are looking at the Ag business as a good place to lend money based on historical performance and current trends. So, no issue regardless of the jurisdiction.

I think on the CE side, which is closer maybe to the track business, you see a little bit more of differentiation whether you’re looking at the UK, the German or the French market versus the Southern European one where clearly credit availability can be an issue. Not availability is more a question of pricing as we see banks trying to reprice their assets. I think we’re fortunate there, we’ve got a well functioning arrangement that covers the whole Ag and CE, and we haven’t heard from the field major changes in terms of the appetite for retail CE customers versus what it was last year.

So, all in all slightly better on the Ag side than on the CE side, but maybe because of our geographical differentiation. I mean the distribution of sales in Europe clearly has better picture for AG than versus CE. I will turn it to Rich for the Russian question.

Richard Tobin

The Russian market continues to recover. Yeah, I mean, look I think that as you saw in the presentation we continue to develop the position, a joint venture for – I mean the real move for us is going to be the localization of production because of local content regulations. Right now we are participating in the market. We think that we can do better, but what's really going to allow us to do significantly better is to ramp up our ability to produce in our joint venture. We are making progress there overall, but right now it’s still a market that is a little bit dominated by local producers as the international producers struggle with meeting the local content requirements.

Andrew Obin – Bank of America

And what's the timeline and when do you think you will be going to be fully ready to take advantage of the market.

Richard Tobin

I think by the end of the year. I think we are progressively getting better as the year goes on. I think that will from what I can see we will do better in Q2 than we did in Q1. So it’s going to be a progressive lap over the year.

Andrew Obin – Bank of America

Fantastic! Thank you very much.

Operator

We will now take our next question from Monica Bosio of Banca IMI.

Monica Bosio – Banca IMI

Good morning everyone. I would like to ask two question which relates to the construction equipment division. Could you please tell us the capacity utilization rates in Europe and in North America for the construction equipment segment? And the second question, I'm not sure you are going to answer, but what do you believe that could be a reasonable target in terms of the operating profitability for year end for the construction equipment division assuming that market conditions in Europe will not further worsen?

Richard Tobin

Okay, I will take the second one first. And you are right, we don’t give segmental guidance. I think the answer to your question, our capacity utilization is in excess of 80 in all markets with the exception of Europe. Europe is still running around the 50% capacity utilization rate and that’s reflected in our earnings there. We don’t expect under the current conditions from the construction equipment business in Europe to masterly recover in 2012. And it will get better from a percentage point of view, but it’s not nearly back to levels that the industry would need for it to reconsider healthier growing.

Monica Bosio – Banca IMI

Okay. Thanks.

Operator

We will now take our next question from [Unclear] of Barclays.

Unidentified Analyst

Yes, good morning. Just wanted to touch on your goal of getting to investment grade ratings. I was hoping maybe you could discuss specific things that the agencies may have sort of laid out for you to accomplish and what kind of progress you are making on those items as we move through this year and next.

Camillo Rossotto

Yeah, Matt, I will try to give you some color as obviously the dialogue is ongoing there. I think margin expansion is the first key performance indicator that they are tracking and I think we are making good progress there quarter-over-quarter. The other one is creating adequate, let’s say redundancy, in terms of our capital business being able to fund itself not only or exclusively in the ABS market, and I think what Andrea has been able to arrange in the quarter not only in terms of execution in the ABS market but diversifying away from that. Last year we started with our security deal, the capital, now we’ve added an additional piece of the capital structure in terms of revolving facilities, and we will continue to work in that direction to make sure that the equipment operation story is going to be driven by the margin expansion part of the exercise and the capital business will get progressively active through diversified source of funding.

Those are really the two key directions that we see. I mean there is no magic really.

Unidentified Analyst

Okay.

Richard Tobin

Did that help?

Unidentified Analyst

Yeah, that helps. As a follow-up just around the capital structure. You’ve got those 2013 notes, $1 billion. Just curious if you would – you have also got a lot of cash on hand and on deposit with Fiat industrial. Would you just use cash to take those notes out or are you looking to retain as much cash as you can. And secondarily are we still to assume that any refinancing of CNH bonds would be done at the Fiat industrial parent level? Thanks.

Camillo Rossotto

No, I think you should not make assumptions there. I think right now we are just trying to manage the cost of carry implied in our current debt gross cash amount. The liquidity levels when you look at the maturity schedule obviously not the issue, so we will look at various options. I think the best avenue is just to tie back to whatever the same before is going to be to continue to raise unsecured debt also at the level of CNH capital which gives the best answer in terms of the liquidity drop back to equipment operations as opposed to additional debt at the level what we released earlier today.

Unidentified Analyst

Okay. Thanks.

Operator

We will now take our next question from Martino De Ambroggi from Equita SIM SpA.

Martino De Ambroggi – Equita SIM SpA

Good morning, good afternoon everybody. I have a question on the net pricing effect, because in your slide number eight you are showing a significant price contribution to your margin improvement. I was wondering if you could elaborate on the trend of this particular feature going forward. The second is on the early season deliveries. I know it’s very difficult, but could you give us an idea of what is the impact of these anticipation of business in Q1? And lastly very quickly on the tax rate which was lower than the full year guidance in Q1, I was wondering if it’s just incidental or there is room to improve the guidance for the full year? Thank you.

Richard Tobin

Okay, let’s deal with the Q1 demand and the seasonality. I can’t answer the question now. I mean I think that’s – trying to address on the opening comments, we’re only going to be able to certain whether that was a direct pull forward of Q2 and Q3 into Q1 or whether that is – although that will allow us to move up what we have for projected demand for the full year. I think we’re only going to be in a position to really assess that once we complete Q2 in terms of whether that is a pull forward or an actual increase in aggregate demand for the full year.

In terms of pricing, we’ve announced pricing increases in Q4 for delivery Q1 so that’s – you really see the direct reflection of that. It becomes a little bit more difficult throughout the year as we introduce Tier 4 products so that’s going to be because of realization on the increase of cost for the increasing cost of the engines. We will see – we’ll try to hold that same spread to cost throughout the full year but that’s going to be depended on the competitiveness of the environment throughout the year. Our intention is to hold those spreads in terms of price increase, but it does become more difficult as we introduce more of the Tier 4 products especially in the lower horsepower segment where the sticker shock is a little higher just because of the total cost of the sold product is lower.

Camillo Rossotto

On the tax rate, 31% tax rate in the quarter, clearly it’s early to really extrapolate it and look at the full year picture so at this stage still reiterate the full year guidance as always between 32% or 35%. There is clearly some upside as we go forward based on the geographic mix of earnings and what it does in terms of utilization our tax [inaudible]. Let’s still stick to the original guidance and there’re some upside potential there, upside in the sense of downside I mean, you know what it means.

Martino De Ambroggi – Equita SIM SpA

Yeah, yes. Thank you.

Operator

We will now take our next question from Larry De Maria of William Blair & Company.

Larry De Maria – William Blair & Company

Hi, good morning. Thank you. Couple of questions. First off on construction equipment margins. Obviously they have been volatile in the past couple of years given the market and everything else. But, maybe you can help to quantify the impact on the transition from first quarter of last year to this year, we had the light equipment underperforming last year and now how impactful that was in terms of the margins, and this new – the margins we saw this quarter, if seasonality holds this year should there be a new base or should we expect continued volatility on the construction equipment margins?

Richard Tobin

Yeah, look we are still not satisfied with the margins that we posted, 3.3 is something that we really need to work on. But change between Q1 to Q1 is almost exclusively equipment availability of the North American market. So the vast majority of that change has been driven by having more units to wholesale. Q over Q with having product available on both [inaudible] Tier 1. And then we’ll see, I mean really what’s really going to move that number is in Europe where we’re still under absorbing on the industrial level due to the low demand. We’re trying to attack that issue. On a two pronged effect I mean it’s not a matter of just purely waiting for the European markets to turn around, we can use those facilities for the exportation of product into so-called international regions which we’re working on doing that. And we’re working on certain projects to increase the amount of vertical integration that we have on the component tree in Europe which will allow us to move closer to the breakeven point in terms of absorption. But, what’s really going to swing it is going to be our ability to execute that plan on our European facilities.

Larry De Maria – William Blair & Company

So, maybe it’s fair to infer that its typical seasonality holds and obviously even though we don’t have sort of the volatility in the market that's out of the ordinary, then margins – you would be surprised that margin went down from here?

Richard Tobin

Well, I would be surprised if they went down from here but the European market is weak and it does have the potential to get weaker unfortunately under current conditions. So it remains to be seen. We are not planning for that now and then we need to see what’s going to continue to drive the North American market, which is still largely driven by rental demand. I mean still it’s improving on the order side in terms of retails, but I mean we need to sync for that to sequentially improve on the back of GDP performance. So, I mean we will see going forward. But it has the potential to be a little bit volatile depending on what goes on in the European markets.

Larry De Maria – William Blair & Company

Okay, that's fair, and then just on the financial side. When you guys presumably eventually get investment grade rating, we hope, can you just help us quantify maybe to get some apples to apples basis how different the earnings might be? In other words how much it would drop down to the bottom-line do you think if you had investment grades for example for this year, and how big of a difference would it be?

Camillo Rossotto

That's a very good question, but not one that I could just try to do on the back of an envelope on this call Larry. I think the biggest advantage we expect we’ll be seeing on the unsecured funding cost I think on the secured funding cost it’s likely that there is going to be an improvement by way of – I mean you’ve seen the spread on the delivery that we did on the ABS side. I mean, how much tighter can it get. So I think it’s a combination of – the nice thing would be investment grade that go beyond purely the monetization of the impact on the funding cost in terms of the relationship with the suppliers and customers and the ability to tap a series of – parts of the capital market. But they would not tap in like commercial paper and the like. So really hard to answer on the fly type of question. But, the impact should be mostly seen on the unsecured cost of funding.

Larry De Maria – William Blair & Company

Okay, that's fair thanks. So obviously you would be surprised if you got it before the industrial grading, it seems like the rating agencies are waiting to give them the upgrade and then you would be given quintessentially or after them, is that right as well?

Camillo Rossotto

I think that there is some wisdom in what you are saying. I think it’s the overall consolidated picture is what's going to drive the rating of the group.

Larry De Maria – William Blair & Company

Okay, thanks very much.

Camillo Rossotto

Welcome.

Operator

We will now take the last question from Ashish Gupta of CLSA.

Ashish Gupta – CLSA

Hi good morning gentleman. I'm just wondering if you can get some color on back logs geographically. I think in the last quarter you also gave kind of year-over-year growth. If you can provide that would be helpful too.

Richard Tobin

Yeah I can give you the back logs in terms of the total group, it’s on the last slide. I don’t think we merely do it geographically overall because it’s, you know, we could be here all day because it’s different between product segmentation and region. I mean overall I think that will stick with the overall commentary if you compare what was reported here at the end of Q1 what we had released at the beginning of Q1. You don’t see a heavy deterioration in terms of back logs in the quarter. So we have been able to rebuild a lot of what we have delivered during Q1. So overall, it looks good and proactive, and as I mentioned I think a couple of time I think that really we need to really ascertain whether the heavier demand in Q1 is so called pull forward out of the heavier periods of Q2-Q3 or whether it’s just a reflection of increased market demand overall and then we’ll be I think in a better position to reset that at the end of Q2.

Ashish Gupta – CLSA

Yeah, I guess I was just wondering because you talked about concerns about Europe, but it looks like your European revenues in general were pretty strong year-over-year and relative to last couple of years for Q1. So, I was just basically thinking European Ag backlog.

Richard Tobin

I think the European Ag is performing well on the back of commodity prices and what we expect to see is a pretty big planting season in the European markets. I think the unknown question in Europe is not kind of the traditional dynamics of commodity prices and net farmer income. It’s more a question of all the sovereign issues going on and whether that just has a depressing effect on the market place itself. So as that situation continues to develop – I mean I think that we are pretty proactive on the traditional dynamics but we have to recognize that from an overall health point of view, the European markets is in general a bit choppy.

Ashish Gupta – CLSA

And then just more on the construction side. You guys had earlier talked about the vertical integration of components and exports from Europe being areas where they can help the business. But I know on the last call your chairman had expressed a lot of – took some blame for the performance of the business and said you guys were at ways to improvement. You said you were disappointed. Is this sort of like a – is there small fixes that you’re talking about in terms of exports and vertical integration that kind of help you get more sustainable profitability or do you think you’re just lacking scale in key markets or – I’m just kind of curious if you’re thinking about a bigger or longer term plan?

Richard Tobin

Yeah, I mean I think I should correct myself. I mean, I think that we’re overall not happy with the profit margin of the construction equipment business. I think that’s unacceptable. I mean we’ve seen what our competitors are able to do in the marketplace. We know that we have good products, we know that we have a strong dealer network, so we believe that we can return this business to an acceptable level of profitability. I think that what the Chairman had been addressing is, is that there is a lot of work to be done. I think that we have specific plans because largely the area that needs to be worked on the most is Europe. That’s a combination of attacking it from two different directions, both commercially and what we can do from an industrial point of view, and we’re in the midst of doing that. But, overall, I mean I don’t want to – you’ve seen from the market share performance of the group I think that we’re quite pleased with the products that we’ve launched over the last let's say 18 months or so. The product acceptance is there and that’s reflected in our market share gains once we’ve gone beyond those transition periods.

So, overall, from a product development point of view we believe that we have world class competitive products. I think it’s for us to really move this ball, we need a little bit of help from some of our traditional markets in Europe in terms of unit demand, but there’s quite a bit that we can do from an industrial point of view to improve the profitability of that segment and we’re working quite hard on getting that done in 2012.

Ashish Gupta – CLSA

Great, thanks a lot. Just last question would be the cash use this quarter. I’m just wondering is the cash progressing going to kind of – the last couple of years where you’re sort of generating cash in Q2, Q3 as you move through the year and this inventory build you have kind of works down?

Richard Tobin

That’s the expectation.

Ashish Gupta – CLSA

Thanks a lot.

Operator

There are no further questions. I would like to hands the call back over to Mr. Manfred Markevitch.

Manfred Markevitch

Thank you, Arnica. I would like to thank you for joining today’s call. As always, the information is available as well on our website at www.cnh.com, thank you.

Operator

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

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