CNH Global NV reported F1Q2009 earnings last Thursday with a 1Q EPS loss of $0.53 vs. consensus estimates of $0.22 profit. The miss was largely due to reductions in equipment revenues which were down 26% yoy and operating margins falling 5% to 1.3%.

Ag segment revenues declined 12% incrementally and construction equipment declined 59%, primarily due to global demand reductions impacting volumes and dealer orders. Earnings in the construction segment were negative with an operating margin of -19% on the quarter.  Ag maintained a positive margin at 5.1%, which was down 3% yoy. The financial services segment also continued to suffer in the quarter with net earnings falling 96% yoy to $2 million, largely due to a lack of asset securitization deals going through and losses on hedging activities.  The company did not offer any insight into whether securitizations will improve or benefit from the ongoing TALF program.

On the call, CNH did announce a $250 million consolidation and restructuring initiative including a “specific review of the construction equipment business”, which continues to be a drag on earnings and margins. The restructuring plan was not discussed in great detail, but management did note that a 10%-15% workforce reduction would be inevitable.

Going Forward

CNH did not offer earnings guidance on the call, but were quick to emphasize that the global economy continues to be a major drag on business and equipment demand. Demand forecasts from management were also not too promising. Net equipment sales for the year are expected to decline 15%-25% yoy with continued weakness in the construction segment and reductions in Ag as the strength of the North American tractor segment is offset by weakness in other Ag areas.

CNH forecasts global tractor volumes to fall 15%-20% in 2009, while combine volumes will be 25% lower than 2008 levels. Sales in the construction segment, the weaker of the heavy machinery segments, are expected to be 35%-40% lower in 2009 compared to 2008 levels.

Management did note that they believe agricultural fundamentals “remain solid” with commodity prices stabilizing and future demand characteristics that look strong. CNH also sees the near-record levels of farm income as a support function for future sales, but clearly this will not impact the bottom line until we are past a very weak 2009.

It’s obvious that 2009 will be a challenging year for CNH and other heavy equipment manufacturers in the Ag sector; however long term characteristics remain solid as commodity demand will continue to appreciate as global wealth returns and domestic fuel policies move toward more sustainable forms of energy.

-GDH