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Executives

Manfred Markevitch – Head, IR

Rich Tobin – President and CEO

Camillo Rossotto – CFO

Analysts

Ashish Gupta – CLSA

Mike Shlisky – JPMorgan

Ross Gilardi – Bank of America

Eric Crawford – UBS

Alexander Virgo – Berenberg

Michael Cox – Piper Jaffray

Jerry Revich – Goldman Sachs

Larry De Maria – William Blair

Michael Tyndall – Barclays

Manfred Markevitch

CNH Global NV (CNH) Q3 2012 Earnings Call October 31, 2012 10:00 AM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to today’s CNH 2012 Third Quarter Conference Call. For your information, today’s conference is being recorded.

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

Manfred Markevitch

Thank you, Paula. Good morning and good afternoon, everyone. We would like to welcome you to the CNH 2012 third quarter 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; and our Treasurer, Andrea Paulis, with us on the call today. We would like to begin with a brief presentation.

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

Rich Tobin

Good afternoon and good morning, everybody. I know that it’s a busy day of earnings because of the markets being shut down, so we’re going to try to speed this along and not go through the detailed presentation that we usually do and kind of go through it relatively quickly so we have ample time for the Q&A.

Just as some opening comments, it was a good quarter for CNH overall. I think it’s a record in terms of revenues and profits for the Group, and it sets us up to have – likely to have a good year overall and meet our expectations that we’ve held for the full year. Camillo will take you through some of the segmental results.

And the last – as with the last call, I know it may be disappointing, but I mean, if any of you have any questions in regards to the proposed merger between Fiat Industrial and CNH, I’m not in a position, or we’re not in a position to answer those questions. That is a matter between Fiat Industrial and the special committee of the Board of Directors of CNH, so I would refer you to the Fiat Industrial call later today to address those questions.

And with that, I’ll hand it over to Camillo and he’ll take you through the presentation.

Camillo Rossotto

Thank you, Rich. I’m on slide four. So net sales up 5% on a reported basis for the quarter, that would be 11% on a constant currency basis. So $4.8 billion in the quarter, and that’s 12% up for agricultural sales, 21% down for construction equipment sales on a reported basis.

Equipment Operations operating profit $464 million, that’s a 9.6% operating margin, and for the first nine months, cash flow is up 15% to $450 million for a net cash position ending balance of $2.9 billion, up $161 million. The resulting diluted earnings per share $1.34 gives a cumulative year-to-date $3.92 earnings per share through the end of September.

On slide five, I think the only point that I would highlight is the good performance of our Financial Services branch going up from $53 million last year to $71 million this year, and again, the closing position in terms of net cash of $2.9 billion.

Slide six provides some more color in terms of the dynamics by region in the quarter. Now, the North American piece of our business is in the quarter 46% of total revenues against 42% in 2011, and when you add up North and Latin America, you’re covering almost two-thirds of our revenues and those are the two regions that record the highest growth rates, 14% and 16%, respectively, on a constant currency basis.

On slide seven, just to the point of currency, the combined impact of the devaluation of the real year-over-year by 25% and the euro down by 13% impacts negatively revenues to the tune of $280 million, so that just gives you the walk in terms of organic growth and FX impact for the quarter.

Then on slide eight, you just get the basics to kind of reverse engineer the impact of currency on our revenues as we’ve been providing for the last couple of quarters given the relevance of that factor on our geographic distribution of sales.

On slide nine, the causals and the waterfall in terms of operating margin – operating profit evolution, as I think we’ve been commenting for the last three quarters now, volume and mix overall is positive, it’s positive in Ag, negative in CE, but overall positive, and net pricing is positive both for Ag and CE, and that’s net of direct material cost, so it’s a positive impact of $169 million. Production costs are just up on favorable economics.

SG&A and R&D is essentially, in relative terms, we’re staying as efficient as we were last year. In absolute terms, we have a slight increase in SG&A, and R&D, it’s mainly driven by the efforts across the board in terms of new product introduction and Tier 4 adoption across all the product range. Other is just the cumulative impact of FX across the P&L.

On slide 10, the cash flow for the nine-month, the positive cash flow from operation of $450 million is a result of EBITDA minus change in working capital, which is a negative $907 million in the nine months, that would be a negative $264 million in Q3 alone, and the net result is an increase in net cash of $161 million as you can see from the slide, that’s significantly up versus last year.

Slide 11, that not only tells the story of the quarter in terms of the relationship between retail and the wholesale, but also allow us to sort of make a projection for Q4. On the Ag side, if you go back to Q4 that you can see on this string, you see that typically in that period of the year, retail exceeds wholesale, so much so that we’re forecasting that to happen again this year to the tune of a 20% roughly retail overproduction, over performance, that should translate into about cash flow coming in in the last quarter.

Similarly for Construction Equipment, we’re anticipating the same phenomenon. And that would put us in a position to start with a clean slate in terms of inventories getting into 2013.

Slide 12 is the recap of the breakdown of CapEx by category and region, no major change there. Again, when you add up the North and Latin American piece of the slide, you cover pretty much two-thirds of our CapEx, which is in line with the – essentially the business split from a revenue base perspective and the importance of the core industrial capacity expansion as we call it is called out also. And then the strategic long-term investment where we are progressing in Cordoba and in China.

And then now, I think I’ll pass it back to Rich.

Rich Tobin

Okay. We’ll move to slide 14. I think we’ve been using this one all year. So it’s a really a tail of two parts to the slide on the upper half. You’ve got commodity price – commodity prices and net farm income which are both proactive to current earnings and future earnings. If you take a look at future forecasts for both of those, for those metrics which is proactive to Ag, not only this year, but it gives us good signs for going into 2013.

On the bottom half of the slide with construction activity and GDP is a negative as you can see from all the red going down the line there, and we’re beginning to feel that which is reflected in our Construction Equipment results, primarily the slowdown, the drastic slowdown that we’ve seen coming through in Europe.

Next slide.

In terms of market share, on the left hand of the slide looking at Ag, so the same slide we always use that gives you the change versus prior year in the industry. So worldwide, tractors are down 6%. CNH’s performance relative to that number is positive. You see some puts and takes in terms of the regions, nothing really problematic there. It’s more of a timing issue than anything else. And then you can see, I think it’s the first time ever on combines, the lower left hand side, that CNH is outperforming the industry across the board, which considering the ticket prices of high horsepower combines is a good sign and is reflected in the earnings that we can see in the third quarter.

On the Construction Equipment side, a little bit more of a spotty performance overall in terms of the industry. And we’re not the first reporter in Construction Equipment, so I think it’s well-known from some of our larger peers of what’s going on in the marketplace, so we don’t need to rehash that.

The only thing to say of any kind of positive note is in terms of total market share on light and CE. We’ve maintained our position and haven’t given up any share on a worldwide basis.

We have been trying to be price disciplined in a declining market, and as Camillo mentioned before, during the quarter we have a positive price impact from Construction Equipment. So, despite the earnings headwind due to reduced volumes, we’re trying to stay somewhat disciplined in terms of the pricing.

16, in terms of industry outlook, really nothing of any consequence except to the downward rerating on Construction Equipment in Asia, which has just been an ongoing story all year. So in terms of full year industry, we basically are converging onto what we had put out there at the beginning of the year on the Ag side and the CE side. I think that – as we’ve talked about before, I think that we’ve been a little bit more bullish on the decline on APAC, but that is, as you’ve seen in some of the other results out there, has continued to deteriorate.

In terms of main product launches, I think that that’s covered fully in the press release, and those of you that were at Farm Progress Show saw in terms of what the competitive lineup that CNH has on the Ag side, I think that we can say at present that we don’t hold a second position in terms of the product performance that’s – and that’s allowed us in terms of that – in terms of what you can see in terms of share position and revenue and earnings.

The final slide is 18, is a little bit of clean-up in terms of what we’ve talked about before about diversifying the capital structure. CNH Financial Service, so to de-link it from its reliance on the industrial companies, as part of that, we issued a variety of different transactions during the quarter, and what you can see in the bottom is the subsequent transaction, which is the second bond that has been issued out of CNH LLC for $750 million at a pretty competitive rate for a high-yield issuance.

So that’s the presentation. In total, again, a good quarter. Obviously Ag continues to hold up, and we’re feeling in terms of retail deliveries is – as Camillo was just – was mentioning on the previous slide, that retail looks like it’s going to hold up in Q4 which will be proactive to market share – I mean, in terms of cash flow for us because we can expect a Q4 somewhat similar to what we saw last year where we’ll reduce production so we can level-load inventories and clean up our global networks going into 2013.

And with that, I’ll hand it back to you, Manfred, and we can go to the Q&A.

Manfred Markevitch

Thank you, Rich. Paula, please start the Q&A session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll now take our first question from Ashish Gupta from CLSA.

Ashish Gupta – CLSA

Hi, good morning guys. Can you give us an update on where the order board stands, maybe in total and by region?

Rich Tobin

Yeah, sure. They’re both down relative to last year, both on the Ag and the CE side, but Ag is as we’ve been saying all year has been a little bit front-loaded, so in our first quarter performance was a lot better than previous year. We were very much back-end loaded, so it’s not overly concerning. I think in terms of – I think that we’ve lost approximately a half a month in terms of backlog to the relative position that we had last year. Overall order coverage in North America is good. Really, the difference right now is Europe is little bit weaker than its position was last year.

We don’t tend to run a very long committed order board in Latin America, but what we can say is with the new FINAMI regime in Latin America, we’ve seen an upturn there and that’s proactive going into 2013.

Ashish Gupta – CLSA

Great. So I guess if I remember from last year, you guys had talked about maybe being covered through June? Or something like that? (inaudible).

Rich Tobin

No, no, I don’t think we’ve ever mentioned anything other than on a covering of future quarter. And in North America, we’re getting close, we’re getting close to that. So, like I said, we’re about a half a month off on Ag, and probably a full month off on Construction Equipment.

Ashish Gupta – CLSA

Thanks.

Operator

We’ll now take our next question from Ann Duignan from JPMorgan.

Mike Shlisky – JPMorgan

Hi there, it’s Mike Shlisky filling in for Ann Duignan today. Rich, I think you just mentioned that orders are going to – that (inaudible) are going to hold up in the fourth quarter. I was wondering if you could maybe break that down regionally, if we’ll be seeing that better or worse in the U.S. versus Europe versus South America?

Rich Tobin

Yeah, I mean, I think quarter-to-quarter, you’re talking about retail deliveries now, and not order backlog, right?

Mike Shlisky – JPMorgan

Correct.

Rich Tobin

Yeah. Okay. Retail deliveries, Q4 in North America are at par. Europe is a little bit lower, South America is trending up on the Ag side.

Mike Shlisky – JPMorgan

Okay. Great. And then I guess if I could get a little bit more – (inaudible) some granularity on Europe, are you seeing major differences between Southern and Northern Europe? I know you guys are a little stronger in Southern as far as your share is concerned. Are you seeing any big diversions there, particularly Italy, as well as I guess, Finland and Scandinavia?

Rich Tobin

Okay. Yeah, I mean, we’ve been seeing that all year. I mean, Southern, there is a big dislocation between Southern Europe and let’s call it Northern Europe. That’s existed pretty much the entire year. It continues to exist. I guess proportionally in terms of unit volume, we do, on the Ag side, we have a lot of exposure in Southern Europe. But in terms of dollar terms, it’s not as important as you can see from our market share numbers on the high horsepower and combines.

We have actually either holding our own and gaining share. So we’re just going to have to wait it out on the Southern Europe side. On the Construction Equipment side, it’s a far bigger problem because the waiting there is significantly higher, and that’s just reflected in our performance of Construction Equipment in Europe all year.

Mike Shlisky – JPMorgan

Got it. Thanks. And if I could just slip one more in there, on Brazil in Ag, we’re noticing some pretty strong market share gains during the quarter. Can you just give a little bit more detail as to what might have been the better performing products there, as well as whether they were larger or smaller horsepower products?

Rich Tobin

Yeah, I mean, I think that we don’t have to get overly excited about quarterly numbers on a year-to-date basis. We’re doing okay in Latin America. I think on the quarter, it’s probably just a reflection of having the equipment available when the FINAMI kicked in.

So I wouldn’t read too much into that. It’s – but having said that, I mean, I think that we’ve spent a significant amount of capital over the last 24 months in Latin America really repositioning the product line to a more – and dug for more industrialized farming, and if you follow Brazil, I mean, that’s the curve that it’s going on. So I think if we step away from quarter performance, I think in terms of our product positioning, all the heavy lifting that’s been done in 2011 and 2012 positions us well because as we said at Farm Progress, if we thought there was one region that was going to benefit from drought conditions in the U.S. and continued high commodity prices, it would be Latin America.

Mike Shlisky – JPMorgan

Right. Makes sense. Thanks, guys.

Rich Tobin

Thanks.

Operator

We’ll now take our next question from Ross Gilardi from Bank of America.

Ross Gilardi – Bank of America

Yeah, hi there. Thank you very much. Richard, I was wondering if you could just talk a little bit more about the success of your product launches thus far, the customers’ willingness to pay up for technology in this environment. You mentioned you did quite well in combines, but wondering if you could expand on that?

Rich Tobin

Well, I think that the answer to that is to take a look at the market share performance and the positive pricing not only in the quarter, but year-to-date. So, we’ve been running sequentially positive pricing now for seven straight quarters ever since the introduction of Tier 4, which is really the step change in terms of the product lineup, if you will. So, other than me giving you a marketing speech in terms of the product portfolio, I think it’s reflected in both the revenue and the market share.

But like I said, I mean, I think that there’s been – and this has been years in the making, I mean, I think there’s been a significant amount of time and energy spent in the new products. I think that we’re the beneficiary of using engines, captive engine supply from FPT because so far, knock wood, the solution there on Tier 4 has been readily accepted using it – going first with SCR.

There’s still a lot to go. We still have to do Tier 4 Final, so we’re not beyond the introduction of technology risk and we’re not beyond whether the customer base will accept the next phase of pricing, but so far so good. I mean, I think that overall, like I said before on the Ag side, we don’t – I think that we can’t complain about the product lineup that we have right now vis-à-vis anybody else in the marketplace.

Ross Gilardi – Bank of America

Got it. And then just wondering if you could elaborate on what you’re seeing from the dairy and livestock farmers. Has it not been as bad as you might have anticipated? Please elaborate there.

Rich Tobin

You know, I really can’t segment it to dairy and livestock because it gets caught up in the greater hay and forage number. We did see some weakness coming out of the summertime. But right now, we’re in the midst of doing pre-sales for hay and forage product line which generally goes into dairy, and it’s going quite well or a little bit better than expected.

So, hopefully it was just a one-year blip, but the fact of the matter is in terms of their own earnings, it’s unquestionable that the ones that bore the greatest impact from the drought was the dairy and livestock farmer. So, I think that our marketing people have been as creative as they can to make the product competitive into a segment that’s going through some difficulty.

Ross Gilardi – Bank of America

Got you. Okay. Thank you.

Operator

We’ll now take our next question from Eric Crawford from UBS.

Eric Crawford – UBS

Hi, good morning.

Rich Tobin

Good morning.

Eric Crawford – UBS

Thanks for the – all the color on the order board, and sorry if I missed it, but was hoping you could address the early order program for combines in the U.S. specifically?

Rich Tobin

Yeah, I can – I’ll address in totality just what I answered before. Overall, we’re let’s call it 80% through pre-sale which runs into Q1 of next year, and it seems to be holding up reasonably fine. Now, I say that in the context of what we said at the half-year that we don’t believe in 2013 that the year will be front-loaded like we saw this year. This year, because of a variety of different reasons, because of weather-related conditions, we believe that that demand would be front-loaded and that Q1 was exceptionally strong on a historical basis.

Our expectation today is that we’ll revert to the norm where it will become of a seasonal pattern where Q2 and Q3 will be the far stronger quarters going into next year. But so far so good in terms of what we can see in combines. But as what Camillo mentioned before, we’re reducing combine production in Q4 this year significantly, and that is hopefully going to allow us to take out any dealer stock of both new and used inventory going into the year, because that’s one of the key elements of making sure that we level-load ourselves going into 2013.

Eric Crawford – UBS

Understood. That’s helpful. Thank you. And on Construction, looks like you’ve lost some share in North American construction. I was hoping you could talk a bit about the dynamic that’s taking place there. Is that partly a function of price discipline on your part?

Rich Tobin

I think it’s an amount of price discipline. It’s also driven by the fact that we have a larger exposure to rental than some of our competitors, and rental was strong in the first half of the year and had been slowing down kind of the second half of Q2, and it’s slow right now, so we give up on a – I guess a distribution mix. We give up on some basis there. And it’s also a reflection of the fact that you’ve got some pretty weak markets in Europe and Asia and a lot of equipment is trying to find a home and North America still is going to post year-over-year growth just like Latin America, so it’s making those markets more competitive and thus that was my comment about price discipline. I mean, it just doesn’t make any sense for a operator of our scale to get into any price wars.

Eric Crawford – UBS

Great. That’s helpful. Thanks very much.

Operator

We’ll now take our next question from Alexander Virgo from Berenberg.

Alexander Virgo – Berenberg

Yeah. Hi, good morning, gentlemen. Just a couple of questions on inventory levels, I suppose. Given your – doing what you – or your cutting production I suppose into Q4, and then following on I suppose a little from the pricing questions, are you worried about inventories outside your control having a greater effect on pricing? And perhaps as part of the production question, you can talk a little bit about under absorption of costs in Q4 given we’ve already seen that a little bit in Q3 for Construction. How should we think about that Construction Equipment margin in Q4 and going forward into next year? Thank you.

Rich Tobin

Yes, we worry about inventory, not only our own, but total market inventory, because it dictates a lot of what we do ourselves in terms of production and pricing. But having said that, the majority of our actions in Q4 are to deal with our own expectations, and this was planned reductions, quite frankly. And that’s why I mentioned at the beginning of the presentation about the issue that our expectation for Q4 should be somewhat similar to Q4 of last year on a relative basis because last year we did basically the same thing. We reduced production performance in Q4, you saw that in the cash flow numbers, and that’s basically the same model that we’re going to be taking this year.

Specifically on Construction Equipment, yeah, I mean, the issue that we have in Construction Equipment is that because of scale, our breakeven point in terms of absorption is, even when the market’s going reasonably well, is tight. So when we – when the market goes down like it has in Europe, we under absorb and move into a loss position. I would expect Q4 with an additional cut in the production and Construction Equipment that results in Construction Equipment in Q4 will be similar to last year in Q4.

Going into 2013, I mean, what we’re trying to do on the Ag side is to take a look at total inventories in the marketplace, not only our own, but everybody else, with a special focus on the amount of used inventory at the dealer level. And Construction Equipment what we’re trying to do is protect production performance and the positive aspect of that benefit going into 2013. We clearly could make more product in Construction Equipment in 2012, but we don’t want to run into an inventory overhang which would be detrimental to pricing.

Alexander Virgo – Berenberg

Okay. Thank you. And just one final one follow-up I guess on combines. Am I right in thinking you’ve pulled back the full year 2012 forecast for North American combines? (inaudible).

Rich Tobin

I don’t think that we changed it this quarter. We may have changed it earlier in the year. I’ll have one of my guys take a look and as soon as he gives an answer, I don’t think we changed it quarter-to-quarter, but we may have brought it down a little bit but not a lot on a full-year basis.

Alexander Virgo – Berenberg

Okay. So there’s nothing that you – there’s nothing that you want to call out specifically?

Rich Tobin

No, no, no, no. I mean, look, I mean, we’ve made a conscious decision to build early to have product available for 2013. I think that we called the season in terms of the demand profile reasonably correct, and that’s reflected in some of the market share gains. So, I think that we were always going to be in a position of level-loading ourselves in Q4 from the beginning of the year. So, – and I’ve got it handed to me, I think that we have taken down combines another 0.5% or so from earlier in the year.

Alexander Virgo – Berenberg

Okay, great. Thanks.

Operator

We’ll now take our next question from Michael Cox from Piper Jaffray.

Michael Cox – Piper Jaffray

Thanks a lot, and congratulations on a nice quarter, guys. My question is – my first question is in terms of the North America market and considering the uncertainty that the drought created through the summer months, could you talk just maybe qualitatively about how you feel the fall season is shaping up and the pace of order flow relative to your expectations from perhaps a couple months ago?

Rich Tobin

Well, look, at the end of the day, when we did Q2 and we were at Farm Progress, it was hard to escape in the middle of the drought to feel somewhat sanguine about the Ag sector in North America. But at the time, we had given a bunch of information in terms of insurance coverage, at least at row – on row crops itself, and if you took that at face value, it painted a far better picture because we had an estimate of 75% to 80% insurance coverage on that crop at some pretty good pricing unless you had sold forward in April.

That seems to have proven true because we’re looking at now a pretty good retail delivery expectation for Q4, which – some of which is driven by tax considerations as always at the end of the year. So overall, it wasn’t as dire that everybody expected. I think that we had been a little bit cautious on our view at the end of Q2, justifiably, and it’s turning out a little bit better than we thought.

Michael Cox – Piper Jaffray

That’s very helpful. And one last question, on the Europe market, one of your competitors this morning noted a slower ramp of their new facility, and I was curious if that presents any sort of opportunities as you look at 2013 from a planning standpoint in that premium priced products category?

Rich Tobin

Unlike the competitor you’re referencing, I’m not going to make any statement about them specifically, although they do about us periodically. I’ve got no comment on that. I mean, I think the European market overall was a good one this year. I think that our performance in Europe has been good. I think that we’ve got some products coming into the European market with CVT transmission for example on some – on the high horsepower segment that will directly compete with that slow ramp issue that you’re referencing to.

I think for us, everything’s set up in terms of commodity prices for planting in 2013 in Europe to be good. I think it’s just purely a question of – what do I call it at this point – overall sovereign concerns about European – Europe in total. I think that’s the risk going into 2013 if any kind of shoe was to drop there and contagion effect, but if you eliminate that from the view, then Europe – it may not be at 2012 levels, but it should be reasonably strong in 2013.

Michael Cox – Piper Jaffray

Very good. Thanks a lot. I appreciate it.

Rich Tobin

Thanks.

Operator

We’ll now take our next question from Jerry Revich from Goldman Sachs.

Jerry Revich – Goldman Sachs

Hi, good morning and good afternoon.

Rich Tobin

Hi, Jerry.

Jerry Revich – Goldman Sachs

Hi. Rich, can you talk about on the Construction Equipment side, in Europe it sounds like we saw some incremental softening this quarter even though we’ve been battling with the sovereign problems for a while. Can you just talk about why you think we saw the softness now, and how are you thinking about this market in 2013 relatively to pretty low levels of demand versus history in 2012? Thanks.

Rich Tobin

Yeah, I mean, look, I think that there was some expectation for not a bad market in construction equipment in Europe and co in 2012. I think that there was an amount of dealers coming off of very low stock levels to historically low but still higher stocking levels in the beginning of the year. Those levels have just not let off, and so it’s forcing the industry to slow in the second half.

I mean, our expectation for Europe for construction equipment for next year is reasonably benign. I mean, we don’t see a lot of light at the end of the tunnel, quite frankly. So I think it’s going to be a weak year. I mean, we just were looking at it this morning. I mean, the salad days of 2007, 2008 in terms of unit volume, you can make an argument that that may never return, and that we have to plan appropriately.

Jerry Revich – Goldman Sachs

And in terms of the structural implications for your manufacturing footprint, can you talk about over what time period that you – that you’re going to be making that assessment?

Rich Tobin

Yeah, I mean, we’re in the midst of making that assessment, Jerry. But those facilities not only supply continental Europe, but a variety of other jurisdictions around the world. But clearly, that’s part of our overall assessment of this business.

Jerry Revich – Goldman Sachs

And in North America, Construction Equipment, it sounds like we had some distributors and rental channel partners add too much capacity in the first half of 2012 that’s driving the lumpiness. I’m wondering how do you feel about retail activity heading into 2013 in that business?

Rich Tobin

You know what, I don’t know yet. I mean, I think that we need to sit with our clients and look at their capital plans for next year. You would expect at least a cycle based on the age of the inventory and a total inventory turn. But from a seasonality point of view, I think that’s unclear whether they’re going to come out of the gate like this year and do it in the first half, which was slightly driven because of Tier 3, Tier 4 transition, which kind of drove it that way. So I think – I think we need some more time. But I think what we can expect in North America in 2013 would be your typical transition on the age of the fleet.

Jerry Revich – Goldman Sachs

Okay. And lastly, just a clarification though, you gave us net pricing in one of the slides, I’m wondering if you could break out gross pricing versus material costs?

Rich Tobin

No, I can’t. But the pricing is the vast majority of it. There’s not that much negative headwinds in terms of input costs.

Jerry Revich – Goldman Sachs

Thanks.

Rich Tobin

Yep.

Operator

We’ll now take our last question from Larry De Maria from William Blair.

Larry De Maria – William Blair

Hi, good morning. Thank you. Richard, where the EU order book goes, can you help us understand maybe just in row crop and high horsepower equipment side, are they holding up in the main markets, probably a little bit softer, but is there any reason for a concern that that maybe rolling over the there, or is it more of a flattening out, or, I mean, obviously dairy and livestock are impacted more right now, but can you give us some color on the high horsepower stuff right now?

Rich Tobin

Yeah, Larry, I’m not going to break it down by segment. That’s too proprietary. I mean, the fact of the matter is is that row crop pricing of the commodities remains strong, and those products are delivered into that segment. I guess that’s the easiest way I can put it for you.

Larry De Maria – William Blair

Okay.

Rich Tobin

But in terms of rolling over, no one sees any rolling over.

Larry De Maria – William Blair

Okay. Well, that’s fair enough. And as far as Brazil goes on the Construction side, obviously the Ag side is looking better, but is the financing help in the Construction side, and how do we think about the legs in that market continuing?

Rich Tobin

Well, it’s a little late. I mean, we’ve been waiting all year. Look, in terms of the financing, that’s proactive to the market. Whether we see it in the fourth quarter or the beginning of next year, I think it’s a little bit open to discussion. At least in terms of general activity around the sector, it seems to be moving up.

But the fact of the matter is, it’s going to be increasingly a more competitive market than it’s been historically in the past for two reasons. One, there’s been a significant amount of at least planned capacity expansions in Brazil because it’s one of the few markets that’s got a projection in terms of growing TIV, and then with weakness in mining, there’s going to be capacity looking for a home that traditionally had been used up in mining.

So, we believe that the Construction Equipment business in terms of unit volume in Brazil will be higher next year, but we believe also that it’s going to be a far more competitive environment than maybe we have seen in the past.

Larry De Maria – William Blair

Okay. You see – already seen the pressure on price, or is that more of a factor of next year, like you said, when more of the capacity frees up?

Rich Tobin

You asked me for my opinion in 2013; well, I can’t say it’s factual, but that’s what our estimate is.

Larry De Maria – William Blair

Okay. And then, finally, obviously the broader construction business is going through a challenging period, Rich. What’s the appetite to get bigger through inorganic means on that side versus maintaining and fixing the existing business? Has that debate changed at all?

Rich Tobin

No, I mean, fixing the existing business is always job one. But I don’t think that we have any prescription. I think that we’re open to a variety of different strategic options on the Construction business, whatever creates the most value.

Larry De Maria – William Blair

Okay. Thank you.

Rich Tobin

You’re welcome.

Operator

We’ll now take a final question from Michael Tyndall from Barclays.

Michael Tyndall – Barclays

Hi there. It’s Michael Tyndall from Barclays. Thanks for taking my question. I just – I wonder if you could help me a little bit in terms of understanding the dynamic for next year. So, presumably with commodity prices where they are, we’re likely to see record planting, but at the same time, used vehicle prices I’m guessing are pretty weak.

So, I’m just wondering in your conversations with farmers and dealers at the moment, what’s the propensity to replace equipment that hasn’t been fully utilized, and to what degree is that underutilization this year going to impact next year?

Rich Tobin

You’ve asked probably the most complicated question in the agricultural business.

Michael Tyndall – Barclays

Sorry.

Rich Tobin

And you’ve touched – no, but, I mean, you’ve touched on a variety of different touch points, right? I mean, we’re all doing the same thing. We’re looking at total unit demand. We’re looking at total inventory. We’re looking at total used inventory, and then everybody looks in the same place in terms of pricing of used.

Pricing of used has held up reasonably well when we consider – let’s talk about North America for a moment, when we consider we’re in year three of some pretty robust unit demand in North America. So, overall, this signals – there’s no red light flashing. But the fact of the matter is, one of the reasons that we’ve decided to cut production in Q4 is to put in somewhat of a release valve on the pricing of the used by restricting the amount of new that’s brought into the marketplace at the end of the year. Now, we’ll see where we are come the end of the year in that regard.

But – so, I mean, take that for what it’s worth. If we look at it from a metric point of view, there doesn’t seem to be an issue in terms of the amount of used, but, I mean, I think that we’re realists, we’re coming off a three pretty strong years in North America. So one could envision a flattish environment in North America in 2013, which is what I think that we said at Farm Progress and at the end of Q2 when we’re looking at globally that – since it’s a global phenomenon in terms of pricing that planting globally should go up, and in terms of potential for market growth in terms of units, I think that we would point to South America more than North America in terms of having the greatest upside potential going into 2013.

Michael Tyndall – Barclays

Okay. Thanks very much.

Rich Tobin

Welcome.

Operator

That will conclude today’s question-and-answer session. I would now like to turn the call back to the speakers for any additional or closing remarks.

Manfred Markevitch

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

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