CNH Industrial N.V. (CNH) Q1 2018 Earnings Report, Transcript and Summary

Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial, 2018 First Quarter Results Conference Call. For your information, today's conference is being recorded. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the call over to Mr. Federico Donati, Head of Investor Relations. Please go ahead, sir.

Thank you, Allison. Good morning and afternoon everyone. We would like to welcome you to the CNH Industrial First Quarter 2018 Results Webcast Conference Call. CNH Industrial Group's CEO, Rich Tobin and Max Chiara, Group CFO will host today's call. They will use the material you should have downloaded from CNH Industrial Group website. After their presentation, we will be holding the Q&A session. Before moving ahead, let me remind you that on January 1, 2018 the company adopted on a retrospective basis updated FASB accounting standards for revenue recognition, retirement benefits accounting and cash flow presentation. 2017 figures included in this presentation has been recapped to reflect adoption of such updated accounting standards. Furthermore effective January 1, 2018 the Chief Operating Decision Maker began to assess segment performance and make decisions about the resource allocation based upon Adjusted EBIT and Adjusted EBITDA. These new non-GAAP measures replace our previous operating profit non-GAAP metric in our earnings release this year. As a final remark, please note that any forward-looking statement we might be making during today’s call are a subject to the risk and uncertainties mentioned in the Safe Harbor statement included in the presentation material. I will now turn the call over to Mr. Rich Tobin.

Thank you, Federico. Good afternoon and good morning. I’m pleased to report a solid quarter in terms of year-over-year improvement in each of our businesses on the back of sustained market demand recovery and positive price realization, driving our industrial activities net sales up 11% for the comparable quarter and constant currency. We anticipate these positive trends and the end markets to continue for the near future on the back of a solid order book in all segments. A few highlights before we move on to the overall results. We achieved an adjusted net income of $204 million in the quarter and a corresponding adjusted diluted EPS of $0.14. In this quarter we were paid the remaining outstanding CNH Industrial Finance Europe note at 6.25% for approximately $1 billion out of our available cash. In addition, we have continued to execute on our stock buyback program adding 6.8 million of our common shares for a total consideration of $90 million repurchased under the existing program, which today as you saw from the press release has been increased to $700 million. We increased our 2018 financial guidance to the upper end of the range with net sales of industrial activities of approximately $28 billion, now reflecting current foreign exchange rates and an adjusted diluted EPS of $0.65 to $0.67, while net industrial debt remains unchanged between $0.8 billion and $1.0 billion. We had another strong quarter in demand in terms of awards and product related accomplishments. At the AE50 Awards, KISH was honored for four of the company’s latest innovations. These are included in the Trident 5550 combination applicator, the Steiger series tractor with new CVXDrive, continuously variable transmission, Early Riser Planter with an In-Cab Split-Row Lift System and additionally FPT became part of the speed history books with this quarter, but Fabio Buzzi set the fastest water speed record on Lake Como in Italy utilizing an FPT designed and engineered engine. In terms of world class manufacturing, our Sorocaba, Brazil plant received a silver medal and our own Germany plant received a bronze. I’ll hand it over to Max for the financial overview and then I’ll come back with the segmental detail. Max.

Thank you Rich, and good morning, afternoon everyone. As a precautionary statement, starting the Q1, 2018, and in conjunction with the recap associated with the transaction to the new accounting standard, we have moved to a new set of financials KPI as Federico introduced to you at the beginning of this call, adjusted EBIT and adjusted EBITDA. In particular, I’d like to underline that we believe that adjusted EBITDA is a key metric for investors and will help provide additional granularity on the cash flow potential of our operating segments and better demonstrate their value within our overall portfolio, facilitating a clear view on the EBIT to EBITDA ratio by business. Moving now to the key figures of our first quarter. In summary, we closed Q1 on the back of a generally positive end market demand in our main businesses, coupled with higher production year over year and positive price realization, driving our performance in net sales of our industrial operations of up 19% year-over-year at $6.3 billion. With that top-line performance we were able to deliver an 85% increase in our adjusted EBIT, with our business improving year-on-year, as a result of increased production aiming at the balance inventory rebuild, in preparation of the spring selling season as well as maintaining a strict approach on our cost efficiency measures. Those improvements coupled up with further reduction in interest expense and in the effected tax rate allowed us to report an increase in our adjusted net income of almost $150 million year-over-year or 270%. Specifically adjusted EBITDA industrial activity closed at $261 million with margin up 1.4 percentage points to 4.1%. Adjusted EBITDA industrial activities was $547 million, up almost 40% from last year with a margin of 8.7%. Adjusted net income was up 270% versus last year Q1 and adjusted diluted EPS increased to $0.14 or up $0.10 per share from last year. Net industrial debt was $1.9 billion at March 31, 2018, $1 billion higher than 2017 year end as a result of normal seasonality in our working capital in the first quarter of 2018. The ratio of net industrial debt to adjusted EBITDA on a 12 month trailing base was at 0.8x and industrial growth net to adjusted EBITDA ratio was 2.4x. We remain fully committed at improving our credit ratings further up into the investment-grade grade. Available liquidity was $7.6 billion down $1.7 billion compared to December 31, 2017, impacted by the repayment at its maturity of the remaining outstanding 6.25 notes of approximately $1 billion issued by CNH Industrial Finance Europe. Finally liquidity to our last 12 month revenue ratio was maintained just below 30%. Turning on to slide seven, I would like to talk in greater detail about the total change in industrial activities, net sales of constant currency by each of our business. In total for the quarter net sales were up $1 billion. Net of the $450 million positive currency translation impact, net sales increased $560 million or almost 11%. With agricultural equipment contributing $243 million and was up 11% as a result of higher sales volume and positive net price realization. Construction equipment net sales increased $158 million or 32% as a result of a solid rebound in the worldwide industry demand, a strong production performance up 30% and market share gains across most of our regions. For Commercial Vehicles, net sales increased $100 million or about 5%, primarily as a result of higher industry volumes in the light commercial vehicle market in Europe. Powertrain was up $52 million as a result of higher sales volume in Powertrain applications. On a total industrial base by region, net sales were up with a strong performance in EMEA and APAC. On slide eight, now with the quarterly industrial activities adjusted EBITDA and adjusted EBIT walk. Adjusted EBITDA closed at $547 million with a margin of 8.7%, was up 1.3 percentage points compared to the first quarter of 2017. Looking at adjusted EBIT walk, all segments contributed positively with the adjusted EBIT ending up 85% year-over-year to $261 million with a margin of 4.1%. All of our operating segments contributed positively to this broad based improvement. If we turn to the next slide, adjusted net income increased by $149 million, 80% of the improvement comes from the industrial activities adjusted EBIT, which was up $120 million. Financial services contributed with an increase in adjusted EBIT for $17 million. Additionally interest expense was lower due to the refining transactions and high yield debt retirements in previous periods. Finally the adjusted effective tax rate of 26% improved as a result of a favorable geographic mix of earnings and the lower U.S. tax rate as a result of the U.S. tax back enactment at the end of 2017. For the full year 2018, we are now updating our expectations of an adjusted EPR of approximately 30%. Moving on to slide 10, our change in net industrial debt. Net industrial debt of $1.9 billion at the end of March, increased by $1.0 billion versus December, as a result of our normal seasonality in working capital in the first quarter where we normally increase the inventory levels in preparation of the spring selling season. As you can see from the chart, we have introduced a new non-GAAP measure, the operating cash flow figure to provide additional visibility on the cash generation absorption from the operations in any given period. Moving on to slide 11, our financial services business. Net income was up $16 million compared to the first quarter last year, primarily due to a better performance in EMEA and LATAM, including favorable FX translation impact and due to the lower U.S. tax rate. For the quarter retail loan originations were $2.2 billion, up slightly compared to last year. The managed portfolio of $26.5 billion as of the end of March was up $0.5 billion at constant currency. Also credit quality remains strong with delinquencies tracking historical trends on average at 3.6% of the total portfolio with NAFTA solidly below 1%. With that, I’ll conclude my part of the presentation and pass it back to Rich to the business overview section.

Okay Max, let’s go to slide 13. This gives you an overview of the industry trends we faced for each of our segments during the quarter. I’d like to highlight a few of the figures before moving into the individual segment performance. NAFTA row crop is all in all trending positive for the first time is some years with a strong performance in used equipment pricing driving a solid support for pricing of new equipment. If you look at the LATAM AG figures, this headwind is driven by harder comps when compared to strong Q1, 2017 as we had forecasted at the end of January. CE’s forecast is up in all regions where we’ve had particularly good performances in the quarter and NAFTA and LATAM, which is still off a low base and then CV in the European market was positive up 9% year-over-year with another strong performance in light equipment – not light equipment, in light commercial vehicles across the board in Europe, particularly France and Italy. Let’s move on the segments. Agricultural net sales increased 15% in the quarter compared to 2017 as a result of higher sales volumes and positive net price realization. Adjusted EBITDA was $265 million in the quarter, with adjusted EBITDA margin increasing 1.6 percentage points to 10.3%. Adjusted EBIT was $186 million in the first quarter and adjusted EBIT margin increasing 2.1 percentage points to 7.2%. This increase was due to a favorable volume, better mix and higher production levels with NAFTA row crop production matching retail demand as a result of an achieved balanced inventory of used equipment. Price realization of 2.5% of revenue was able to cover raw material cost increases and higher overhead costs. The company continues to invest in its product development program for precision farming and compliance with Stage V emissions requirements, resulting in an increase in R&D spending of 14% versus Q1, 2017. In construction equipment, net sales increased 36% in the quarter as a result of a solid rebound in worldwide demand and market share gains across most regions. Adjusted EBITDA was $16 million, a margin of 2.3% up from a $15 million loss in the comparable period. Adjusted EBIT was breakeven from a loss of $31 million in 2017. Results were favorably impacted by higher sales volumes due to improved end-user demand, as well as a 30% increase in production. Pricing conditions remain favorable, more than offsetting favorable foreign exchange impact and raw material cost increases. Our order book stands at up 20% at the end of Q1. Commercial vehicles net sales increased 5% on a constant currency basis, primarily as a result of higher industry volumes in the light commercial vehicle market in Europe. Net sales increased in APAC and were flat in Latin American. Adjusted EBITDA was $206 million with an adjusted EBITDA margin of 1.6 percentage points – increased 1.6 percentage points to 8.3% during the quarter. Adjusted EBIT was $49 million, up $32 million from last year. Adjusted EBIT margin increased 1.2 percentage points to 2.0%. The increase was mainly due to favorable trends in end-user demand in light commercial vehicles, improved pricing as forecast and manufacturing efficiencies, partially offset by increased spending in new product development initiatives. The market share for trucks in Europe was slightly down on light and down 1.1% in heavy as expected as a result of new pricing initiatives and model mix changes, maximizing positive price realization to improve profitability in the heavy-duty truck segments. Order intake for trucks in Europe was 9% higher as compared to last year. Truck deliveries were up 6% and book-to-bill was 1.3 in-line with historical seasonality. Moving on to Powertrain. Powertrain’s net sales increased 19% as a result of higher sales volume in engine applications. Sales to external customers accounted for 48% of total net sales in the quarter. Adjusted EBITDA was $129 million, up $25 million compared to the first quarter of 2017 with an adjusted EBITDA margin of 10.9%. Adjusted EBIT was $95 million for the first quarter, a $21 million increase compared to the first quarter of 2017 at a margin of 8.0%, up 0.6 percentage points. Moving on to slide 19, in terms of industry outlook for the full year, taking into account the recent performance we have slightly modified, industry estimates for the most segments and most regions with the exceptions of LATAM construction equipment. I won’t go through all the chances here, but generally speaking NAFTA AG is a bit better in the higher horse power tractor on the back of restored balance position on used equipment and the construction equipment we’ve increased our industry outlook across the board and the same for trucks, although please note that the regions like LATAM, those were still coming off of relatively low basis driving the margin increase as a percentage of increase. And then moving on to the final slide, as a result of the stronger than anticipated results in the first quarter and the positive developments in end user demand, CNH Industrial is increasing its net sales and adjusted diluted EPS guidance for the full year 2018 to the upper-end of the range as follows: Net sales of industrial activities of approximately $28 billion; adjusted diluted EPS of $0.65 to $0.67; and net industrial debt unchanged at $0.8 billion to $1.0 billion. On a personal note and on a final note I’d like to thank Chairman Sergio Marchione and the CNH Industrial Board of Directors for the faith they have entrusted in me as the CEO of the company. I would also like to thank my colleagues of CNH. I am humbled to have served with you all. I am also confident that Derek Neilson's abilities as my interim successor and I am quite confident that he is going to be able to deliver the full year results as we’ve forecasted. So with that, lets open up for questions.

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

[Operator Instructions]. We’ll take our first question from Michael Shlisky from Seaport Global. Please go ahead sir.

Good morning guys. I had a question on Ag and LATAM. It’s been said that many farmers are holding off until mid-year, hoping for a little bit better interest rates from the phenomenon [ph] youmight reset. So I am kind of wondering if LATAM would be tough in Q2. If folks might just be buying almost nothing for the time being until the back half and are you producing a lot during Q2 or are you still waiting to see some of these policies about soybean tariffs and how the U.S. crop might turn out before making any big changes in your bills in LATAM?

Okay Mike, yeah look I think that what we had forecasted at the beginning of the year, we said the first half was probably going to be down significantly. So if you remember in 2017 H1 was very strong and it tailed off quite bit in the second and our estimates were that it was going to be inverted, because of exactly what you referred to of this issue of the resetting of the [inaudible] rates which haven’toccurred yes. We have laid in the industrial inventory at the factory level, but we’ve slowed down quite a bit in terms of product performance and assembly operations. Our forecast for LATAM Ag are to be flat year-over-year, because we think that the dynamics in terms of the demand on LATAM, American Crop, at least Brazil and Argentina is having a little bit of a drought this year, are going to be good in the second half, but it’s going to be driven by a change in financing rates. So I would expect Q2 to be a bad comp to Q2 last year, but the second half right now we think everything is lined up and that it should be better in the second half of 2018.

Okay, great, and then perhaps more broadly speaking your price realization was looking pretty good in most of the areas during the quarter, so that was always good to hear. Prices are still gone up for a lot of different metals out there. Can you comment on whether you think you will still be seeing positive price realization in the rest of the year and for the full 2018 as a whole?

Yeah, look the [Audio Gap] is back end loaded because of the way that we buy raw materials, so we are trying to get out in front right now with the pricing. Right now our estimates take into account that we are going to have raw material headwinds in the second half of the year. So some of that price realization at the EBIT level will get squeezed a little bit. But we don’t see it being so problematic that we are going to have to do additional surcharges on top of the pricing that we have in the market. But we’ll see, I mean it’s a little bit of a moving target right now.

Okay, one last one for me real quickly. Is the guidance that you have now, is that including a buyback that you’ve already just done here or do you exclude any kind of buyback, even though you kind of said you do plan to buyback by the end of October.

Excludes.

Excludes, okay thanks. Rich, best of luck to you, thanks so much.

Thanks Mike.

The next question comes from Steven Fisher from UBS. Please go ahead, sir.

Thanks good morning. Just wondering on the instruction equipment business, based on what you have seen so far, you’ve had obviously year-over-year improvement in the profitability. Do you think you are on track to hit mid-single digit margin guidance this year given the growth of the market and your backlog?

Yes. It will be at lower, biased to the lowest at mid-single digits, but our expectation for the year is for the sequentially improved profitability as we go though the year in construction equipment.

Okay, that’s helpful and then you’re Ag outlook in Europe was a bit mixed. What’s your overall sense of farmer confidence there overall? Is it getting better or is it getting worse, are we still just kind of puts and takes and it’s just generally steady. What would we think about European AG?

Steady. I mean without getting into, because its – in our nomenclature that includes Africa and the Middle East. So it’s a little bit of a wider number than generally Europe, but overall steady. So there is some puts and takes between the individual countries, but overall what our forecast was at the beginning of the year continues to hold.

Okay and then maybe just last quickly, you mentioned Latin American construction looks like your forecast is just softened a little bit there for the industry. Can you just talk about what you’re seeing there?

It’s up and its up in percentage points. That looks a little bit heavy, but it’s down 70%, 80% from peak. So its pious, its flexing positive, but these are still very small numbers.

Was there any reason why you softened this from last quarter?

Probably because of Argentina, less Brazil and probably some Argentina.

Okay. Best wishes, thanks a lot.

Thanks.

We’ll now take our next question from Martino De Ambroggi from Equita. Please go ahead, sir.

Yes, good afternoon, good morning everybody. The first question is on some of the comments that you made over the past few months concerning the spinoff of some assets. Is it just European or is it's something that they share inside the company, knowing there is an experience in the sense just to understand. I quite understand it’s not a question to ask you right now, you are leaving, but do you believe your successor will push it or is something that was just your idea.

Yeah I think I’m going to leave that up to the Board of Directors and my successor. I mean what I mentioned about assets within the portfolio is in the relation to your question. I think what’s important to remember is that I said it was not a 2018 event. So I think we can lave that question for next quarter.

And the second one is a follow-up on the pricing in the Ag; you had plus 2.5% including a negative ForEx effect. So just to understand, it is pure price or is some of the market adjustment or none of the market adjustment for raw materials recovery of the cost increase. Just if you can elaborate a bit more on the sustainability of this level.

Look I mean what we had carved out of the revenue line was that piece of the increase that was related to price. So it is what it is, right, in terms of price as it affects the revenue. Breaking that down and how it flows to the P&L versus raw math and inflations is – I don’t think we are going to go there right now. And the good news is, is that we’ve had, we’ve demonstrated the ability to pass price in Q1 in all four segments. And that’s positive because we are trying to get ahead of the curve in terms of what we saw coming in terms of raw matt increases in the second half of the year. So to the extent that we’ve got it out there, we’ve been successful so far, that pushes back against the headwind of what we got combing in the raw mats in the second half of the year.

Okay, thank you. Very last one, tractors industry units in EMEA, in your January projection you expected plus 5% now it’s minus 5% flat. What you are justifying such a big change in few months?

Yeah, I think that we’ve discussed that at the end of Q1 because of this big mess that we had with registered units because of the adoption of – well it was Tractor Mother LATAM or Tractor Mother Regulation. Our retail forecasts for the year are absolutely flat to what we had forecast at the end of January.

Okay, thank you and good luck!

Thanks.

We’ll now take our next question from Joe O'Dea from Vertical Research. Please go ahead, sir.

Hi, good morning. First question just on North American high horse power farmer customer sentiment. I think what we have seen in the headlines in terms of tariff risk and trade protection risk and some things and you know also maybe planting some speculation that it’s relaying on farmer sentiment and what we should be thinking. It certainly doesn’t seem to be laying on your outlook for the end markets. But it would be helpful just in terms if you could frame some of the cadence over the course of the quarter and your reads on those farmers and mood in kind of February, March, April as we’re seeing some of these headlines develop.

The lack of clarity has not been helpful, right, because like anything else everybody wants some amount of surety about what the tariffs are going to be and how they are going to impact export growth and everything else. So I think it does weigh a bit, but having said that in terms of planted acreage and what we can see in the activity levels are quite good overall and the most positive aspect of that is the equipment is needed to do that amount of planting and because of this inventory overhang and the reduction of late model used in the system we are able to deliver more new product in. So this period of under production versus retail has largely unwound across the segment. We will see at the end of the day how this all turns out and whether sentiment becomes further negative in the second half of not. Look right now what we can see from our order books, both from a retail perspective and a wholesale perspective, they look up right now. So we’ll have to update its quarter-by-quarter.

And just how far do those orders generally extend. I mean at this point I would expect that you, when we’re talking high horse power tractors and combines, I mean it’s pretty fully booked for the year or at least closer ..?

No, I mean it’s not that’s – I mean you got six months in high horse power, just as a general statement. It’s a little bit of a mixed bag across the lighter portfolio but for combines and large tractors its six months.

That’s helpful. Then on also North American, but on the construction side of things, I mean you have seen some strong growth here. It appears that you know that’s related to a number of things picking up across infrastructure and resi and oil. But could you frame just how are think about the market from a cycle perspective. I mean how strong is 2018 relative to prior peaks? You know what is your confidence level that there is still runway beyond this year on recovery?

There is a variety of different tailwinds there. I mean GDP just being the macro one of these North American comments obviously. GDP being one, I think that oil and gas prices and what’s going on in the mining sector helps us not because we supply into those spaces, but it takes pressure off the resi construction equipment where it’s our bread and butter to a certain extent. So overall you’ve got kind of just the general GDP, which is more a play with kind of contractor sales and municipality sales is where we sell most of our equipment, but because of the factored oil pricing has continued to climb and oil patch delivery has gone up and you’re seeing the beginning of some amount of infrastructure spending, the market participants that concentrate on that area now are returning to that area that’s taking some pressure off kind of mid-tier or mid-segment construction equipment, which is proactive for us.

Got it. And I’m also just extending our best wishes as well. We appreciate your leadership and your transparency with us over the years here and best wishes moving on.

Thank Joe.

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

Yeah, good morning. Thanks guys, and let me add my best wishes too Rich. It’s been a pleasure working with you while you’ve been leading CNH. My question is a little bit technical I guess. I’m wondering about any impact on credit metrics from the recast. Will the rating agencies calculate your leverage metrics any differently and any potential implications there for whatever portfolio transformation you might or might not embark on and any feedback from Moody’s on what’s actually holding back their enthusiasm for your credit relative to the S&P and Fitch?

The first question is that the feedback that we receive that it does not impact it. Remember in addition to the recast we also announced a week or so ago a favorable ruling on our balance sheet liabilities, which actually improves the metric on the industrial column. So even with the movement because of the change of accounting standards, we’ve got a tailwind because of a pretty significant reduction of our liabilities, because of that ruling. So things continue to trend positive. I can’t speak for the rating agencies. My feeling is that they are waiting for us to issue our 20th which we did some time ago. I’m sure they are working their way through it and hopefully we’ll hear from them shortly.

Got it, thank you. And you know there is another thing, in your recast outlook you guys are adding back $328 million of DNA attributable to operating leases to your commercial vehicle business. It certainly obviously makes the EBITDA of commercial vehicles look substantially higher than it would if you just added back $212 million of ordinary DNA. So sorry it’s a little bit of a technical accounting question, but it definitely matters for valuations. In that $328 million actually giving your commercial vehicle EBIT as you report it and just in the hypothetical event you were selling the business, do you think that’s how a buyer would look and evaluate the EBITDA of the truck business?

Okay Ross, your right, that is a very technical question. I think I can have the guys take you through that piece by piece. I can only tell you that the way that we presented it, we’ve benchmarked industry standards, so I don’t think that we’re doing anything that’s not used in commercial vehicles. But I think rather than dealing with this piece by piece on the call, you can call up our guys’ offline and they will take you through the technical accounting aspects of it.

Okay, got it. The only last thing I wanted to ask was why the $35 million increase in corporate expense in your industrial EBIT this quarter? Is that like some type of adjustment and should we expect that type of increase going forward for the next several quarters.

I think the majority of it is foreign exchange.

Okay, got it, thank you.

Yup, thanks Ross.

We’ll now take our next question from David Raso from Evercore ISI. Please go ahead. Q – David Raso: Hi, good morning. Congrats Rich and congrats to Derek as well for taking over. The sales guide, basically from the midpoint to the new numbers, you know it’s roughly $500 million. Can you just help us with how much of that was currency now that you’re using 123 to do your own, not 115? How much then is offset by the drag on the accounting change so we get a feel for the core operational revenue change wise?

Yeah, I think again because of this recast and the negative impact of revenue, because of it I think there’s some moving parts in there. I will tell you that a significant portion of it is FX related. We said at the end of Q1 we’d have a better idea where euro dollar was at the time and we were running a 115; we’re 121, 122 today. So a big portion of it is but again David, I prefer if you take that one offline, then Max can take you through the negative portion of making the account change and now because we have to recast the revenue line because of the accounting change and what element of that is FX. Q – David Raso: Yeah, I’m thinking you said last time, if we were using 125, it would add about $1 billion, right, and we went to 123, so let’s call it you know $800 million helped the drag from the accounting. It seems to be about roughly $300 million, so it seems like the $500 million increase in revenue was sort of nothing operational, right. It was just currency up, accounting drag down, but then you did bump up, at least enough of your end markets outlook. I was just curious, there was no corresponding bump up in your own core revenue despite the industry outlook and I am just curious why.

Well, I mean at the end of the day it’s the top end of the range. So $500 million is FX related out of the billion and the rest big billion, the other $500 million is volume related, right. And we\re rounding the both of us here at the end of the day, but that’s... Q – David Raso: Yeah, I mean I can – I don’t want to go back to the math, but in fact it doesn’t seem like there was any core growth in your revenue. You raise your revenue $500 million, currency probably went up $700 million, $800 million, accounting took a back down net to like you know $500 million, right. So the revenue guidance change did not seem to have any core you know equipment units driven revenue and change and I was just curious, is there any change in your production forecast, because again your industry outlooks did get bumped up a bit, but there was no corresponding increase in your core revenue it appears, hence making sure I understand why. It’s a little apprehension about production versus retail or…

No, I can follow you, but at the end of the day it’s at the end of Q1 and making sure that we’re not changing our production yet. We’d rather take that as a reduction of working capital at the end of the year, but those are the decisions that we’re going to make in Q3 and Q4. Q – David Raso: Yeah, well that’s I mean – their order book comments were interesting. I am just trying to make sure you level set the year outlook in a way for the industry. I know you’re not the industry and your production is not retail, but in a way the year-to-date numbers for the industry are running a little bit below your guidances, you know for the forecast I should say and the comps do get a little harder as the year goes on, you know at least the industry data. So I am just making sure, is the order book and maybe if you can make it simple and quantify for me, how much is your order book up in North America, high horsepower Ag, because it was interesting that you bumped up the above 140 horsepower industry outlook. Your order book must be up reasonably healthy. If you can help us with that, it would be great. Even the combine, you still have it up 10 for the industry for the year but year-to-date its down 2, so any help on the order books would be great.

I’m going to have to get them. I don’t have them in front of me for the national order books. Hold on. Q – David Raso: Thank you.

Okay, yeah I mean they are slightly up from what our forecasts are David, but not enough to really triangulate changing the revenue number nor making a change to what we had planned in production. So I’m your just going to have to wait till the end of Q2. Q – David Raso: Okay, so there is a little order book uptick from what you originally had, okay. I just wanted to make sure I understood why the revenue changed. I really appreciate it. Thank you so much and good luck Rich.

Thanks David.

Our next question comes from Rob Wertheimer from Melius Research.

Hi, good morning. And Rich, congratulations on your successful stewardship through a very volatile period and a couple of industries right, so great job. A question on the long term; I mean your splitting out the depreciation you know in the preparation or anticipation of you know potential changes in the structure. Can you give us just an overview of what you think CapEx depreciation might look like over the next three to five years? Do you feel like you’ve got ample capacity and is that across the segments or is that unique to one?

Its balanced, its one to one, right. With the swing factor being, we can’t predict legislative changes into the future okay and foreign exchange. But in terms of this next three to five years, in terms of footprint changes and expansions of our greenfield capacity, you can go back and look at where we were in the peaks and we accommodated those kinds of volumes. I don’t envision and part of the reason Rob that we give that chart out that shows greenfield expansion and then regulatory is we’ve made the argument that if the regulatory aspect of this business declines, that that piece of the historical spending will go down and what we’ve spent on greenfield expansion in the periods of let’s say 2007 to about 2013, we’ve pretty much built out the industrial footprint. Any CapEx that we have is kind of retooling and not kind of greenfield expansion. So I think that we’re going to have either a 1:1 ratio CapEx of depreciation and arguably we’ve got some upside where we’d have an improved ratio going forward. Did I lose you?

I’m so sorry Rich. I’m still here. I muted just while I was listening to your response. If I can ask another one that’s just a little bit bigger picture, as you think about the curve as investment and tech comes into machinery and how fast things accelerate or not, I mean do you sense that you’re on the right path. Do you think that you need to step up R&D or investments in outside companies or you know just how do you feel like that’s been shaping up for the last year or two.

Okay, you know ignored one of your questions where I forgot it at the beginning. The reason that we changed the reporting for EBITDA has nothing to do with changes in the portfolio. The reason that we changed it was we believe that we’re undervalued, CNH industrial from an EBIT to EBITDA basis and we were getting a lot of different calculations of what the EBITDA actually was in the CNH Industrial. So we’ve done this to clarify now so everybody can calculate us versus our peers in terms of our valuation EBIT to EBITDA, and if you look at that on that metric, while we’ve closed the gap from an EPS point of view or a PE point of view, we have not fully closed the gap in EBIT to EBITDA and providing investors that amount of clarity we hope that we can collapse the balance of that gap. Your other question was what again?

Oh, I’m sorry! Yeah, I’m sorry. So just on the technology coming into machinery, how do you address it?

Yeah, it’s the fastest growing segment of our R&D right now. Our expectation has a percentage of our total R&D and CapEx that it will increase year-over-year for the foreseeable future. We believe that we’re reaching certain limits in terms of size and scale in some of our equipments, so the productivity that we’re going to get is no longer the kind of capacity and horsepower driven, but very much driven through automation and kind of the general precision farming ecosystem. So if you think that we’re right, then obviously then we’re going to be pushing a lot more of R&D and CapEx in that direction. Net-net I don’t think it’s going to drive up our R&D spending. I think it’s just going to be a reallocation from significant amount of spends that we’ve done over the past 10 years on power train and capacity.

Perfect! Thanks Rich. Good luck!

Yeah, thanks.

Our next question comes from Larry De Maria from William Blair. Please go ahead.

Hey, thanks. Good morning, and best of luck on your next endeavor Rich. Rich, in your opening comments you mentioned you expect the positive conditions to continue for the near future. Just curious, was that a precautionary comment that we won’t have these kind of recovering growth conditions continuing beyond the near term or was that just more of an off handed comment or just a comment about what to expect right now.

It’s more of a, we’re look at our order books as they build through the balance of the year, so we don’t – it’s not as if we see a intra year cliff coming by, so we expect the performance to kind of justify what we put out there for our full year expectations.

Okay, you know as some of these markets recover, do you have more concerns about the growth beyond this year or maybe another way to think about it would be could you give us maybe an idea of maybe what innings we are in some of the recovery in some of these markets or where we are?

I don’t know because – look I mean it’s a mixed bag right. We can expect as I mentioned earlier in the call that our expectation is the lock down demand in the second half of the year should ramp up. That’s something that we deal with every year it seems, because of volatility of demand, because of the non-kind of income drivers that affect that market. We hope that that – we hope two things. We hope that there’s some market signaling that leaves us some confidence that we can prepare ourselves, because the last thing we want to happen is for demand to go up quickly, because there was a lot of friction of cost associated with that, but I think as far as 2018 is concerned we’ve laid in enough industrial inventory to accommodate it. And after we’ve got the footprint and the capacity to go all the way back to 2013 kind of volumes, again that is going to be driven by commodity prices at the end of the day. So based on forward curves and everything else, I think that you should be in the position to plan for that.

Okay, thanks. And I think you said construction order is up 30%, that’s on a global basis I believe. I just to want to correct that if that’s not correct, and also can you just maybe give the – I know you might not have all the regional and everything else in the order books, but just for commercial vehicles and for Ag, what would the global order book be looking like now.

Its 20 in construction equipment and 10 in commercial vehicles and Ag I think on a global basis is flat, but its moving region by region.

Understood. Okay, thanks and best of luck Rich.

Thanks Larry.

Our final question comes from Ann Duignan from JP Morgan. Please go ahead.

Oh, thank you for squeezing me in, I appreciate it. Can we start with incremental profits and your guidance? I know as David had focused on the revenue side and the lack of increase beyond the range, on the EPS side can you talk about your incremental profits this quarter. They were okay, but they weren’t great, rather they looked like easy comps. Have incremental peaked and is that why you haven’t taken up your luck for earnings per share by more than you did.

This is our last call together. I mean, they were pretty good Ann. I don’t think that they were that low. I mean we’re now getting into the 20’s in Ag which is pretty good, especially for our Q1 period, because that’s heavily influenced by production performance. I’ll make some general comments. I think that in terms of seasonality, I think that the seasonality that we expect is going to be similar than to our additional seasonality for earnings. I think in order for us to hit our net industrial debt targets, that we’re taking a view right now that we would be building enough production capacity through the first three quarters in the year to generate significant cash flow in Q4. But as you know if we’ve – by then were going to have a view of what 2019 is setting out to be, so if we believe that demand is going in our favor then we will revisit our production plans, so there is a possibility of additional industrial absorption and growth margin benefit. Then we’ve got baked in, but it’s the end of Q1. I think that we’ve moved up to the top end of our range. Generally speaking I don’t think in my tenure here we’ve ever moved guidance at the end of Q1. We generally do it at the half year because we’ve got a good idea of where we stand both in inventories and backlog, so I am not in position to do it, to say anything about Q2 then, but let’s wait until traditionally we see where we are, we know how our order books are and we know how our inventory is and we’ll have a better idea if there was any upside in terms of production performance or incremental margins.

Okay, so seasonally Q2 should be better than Q1 then?

History would say that.

Yeah, okay. And then my second question again, maybe not a fair one for you since this is your last call, but just conceptually your giving up market share in commercial vehicles in Europe for pricing and you know that’s to be applauded. But you know if that works okay in advising end market environment, you know what, where is the balance between what you can afford to give up in share and volumes versus pricing. You know what level of market share are you willing to give up?

Yeah, I don’t think that I am in a position to put a numerical figure or a percentage on it, right. I think that we had said last year that we had under achieved in terms of margin performance in commercial vehicles, especially in the heavy truck segment and that we were going to use 2017 as a bridge year of what does additional volume do versus being competitive on pricing. We finished the year last year. I think we owned up to the fact that we needed to cut back on our aspirations in terms of volume and move to price. As you can see in Q1 we have positive price in Q1. That’s the first time we’ve been there and quite some time with commercial vehicles, but it’s not a strategy that one could go swing widely to either side. So we’re trying to manage the market the best we can, but we believe that we’ve got upside potential in pricing and we’re adopting that strategy throughout the year.

Okay, I’ll leave it there. I appreciate it and the best of wishes Rich. I’ll miss being snippy with you.

I’ll miss you too Ann. Alright, thanks.

That would conclude the question-and-answer session. I’d now like to turn the call back to Mr. Federico Donati for any additional or closing remarks.

Thank you, Alison. We would like to thank everyone for attending today’s call with us. Have a good day.

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