CNH Industrial NV (CNHI) 2017 Q4 法說會逐字稿

Good morning, and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial 2017 Full Year and Fourth Quarter Results Conference Call.

For your information, today's conference call is being recorded.

(Operator Instructions)

At this time, I would like to turn the call over to Federico Donati, Head of Investor Relations.

Please go ahead, sir.

Thank you, Chevon.

Good morning and afternoon, everyone.

We would like to welcome you to the CNH Industrial 2017 full year and fourth quarter results webcast conference call.

CNH Industrial Group CEO, Rich Tobin; and Max Chiara, Group CFO, will host today's call.

They will use the material you should have downloaded from our website, www.cnhindustrial.com.

After introductory remarks, we will be available to answer the questions you may have.

Before moving ahead, let me just remind you that any forward-looking statements we might be making during today's call are subject to the risks 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, good morning, everyone.

Our full year results were better than our upgraded guidance at the end of Q3 with demand increases in all 4 of our businesses leading to revenue growth of 11% at constant currency in Q4.

As you can see at the bottom of the slide, we have meaningfully exceeded guidance for net industrial debt due to stronger-than-expected net industrial cash flow, mainly driven by working capital cash generation as we completed our drawdown of agricultural product channel inventories in NAFTA and EMEA and preserved production performance for 2018.

As a result of this, we're projecting to be in balance between production and retail in all of our operating geographies in 2018.

We continue to increase our investments in research and development and Precision Farming Solutions, partnering with leading firms to bring market solutions that will keep our ag products at the forefront of customer choice.

In terms of the balance sheet deleveraging initiatives and effective tax rate reductions, we've continued to make significant progress and have now attained recognition of these efforts by the rating agencies.

I'll expand further on these points later in the presentation, but for now, let me say we have -- we achieved much of what we set out to do in 2017, and we look forward to starting 2018 with good momentum.

A few highlights before we move on to the overall results.

We achieved a net income of $669 million in the full year and a corresponding adjusted diluted EPS of $0.48, both up almost 40% compared to last year.

This was accomplished through solid performance across the segments and increased activity levels, resulting at operating profit of $1.5 billion and 5.8% margin.

In addition, we started to unlock value below the operating profit, a result of the progress made in our capital structure and after having achieved investment-grade status with both Fitch and S&P during the year.

This is a promising development and allows us to be eligible for the main investment-grade indices in the U.S. market.

One of the relevant components of our strategy has been the ability to drive down net debt.

In 2017, we were able to overachieve our deleveraging target with a net industrial debt position of below $1 billion at year-end, primarily through careful control of working capital as we finished the rebalancing of our agricultural row crop inventory and continued to maintain disciplined level of working capital in our other businesses.

As you will see later in the presentation, this working capital drawdown caused us some potential operating leverage in Q4, but we are confident in our ability to meet projected retail demand with existing production capacity in 2018.

The Board of Directors are recommending a dividend of EUR 0.14 per common share or approximately EUR 191 million, an increase of 27%, and a reauthorization and upsizing of the company's share repurchase program to $700 million.

Both the recommendations will be subject to approval at the Annual General Meeting expected on April 13, 2018, and the ex-dividend date will be set at April 23, 2018.

Finally, we had another strong quarter in terms of rewards and product-related accomplishments.

At Agritechnica, our ag machinery brands were awarded Machine of the Year 2018 in the mid-class tractor category, and the IVECO Daily Blue Power won International Van of the Year title.

I'll hand it over to Max now to complete the financial overview and come back when we get into the segmental detail.

Max?

Thank you, Rich, and good morning, good afternoon, everyone.

I'm on Slide 5 with full year '17 financial highlights.

During the year, we achieved industrial net sales of $26.2 billion with an increase of 8.6% at constant currency versus last year with solid contributions from most segments.

That translated into an operating margin of 5.8%, up 30 basis points versus last year with positive performance in Agricultural Equipment, Construction and Powertrain.

Adjusted net income was up almost 40% year-over-year or $187 million with an adjusted diluted EPS of $0.48 per share as, in addition to our improved operating performance, we continued to pull through benefits in our interest expense as well as our adjusted effective tax rate.

As a reminder, you can find the reconciliation from net income to adjusted net income in the appendix of the presentation.

At a high level for the year, we booked a pretax restructuring charge of $93 million in relation to our efficiency program coming primarily from previous quarters.

In Q4, we also booked, as preannounced in our press release of January 25, a noncash pre- and after-tax charge of $92 million due to deconsolidation of CNH Industrial Venezuelan operations effective December 31, 2017; a noncash tax charge of $123 million due to the U.S. Tax Cuts and Jobs Act and tax legislation changes in the U.K. and certain other countries enacted during the month of December '17; as well as a total pretax charge of $64 million related to the repurchase and early redemption of notes completed in the course of 2017, as we accelerate on our call-and-extend strategy to profit from the investment-grade rating to reduce our cost of debt.

In terms of our debt, net industrial debt was $0.9 billion at year-end, a 45% reduction when compared to the prior year as a result of a strong net industrial cash flow performance at $1.3 billion, way ahead of our guidance and coming from a disciplined management of working capital.

I will elaborate more on this point in a minute.

Available liquidity was $9.4 billion, up $0.6 billion versus December 2016 with the highest level of cash balance ever reached in our Industrial Activities since company formation in 2013.

Moving on to Slide 6, Industrial Activities net sales.

Let's review the total change in constant currency by each of our business.

In total for the year, net sales were up $2 billion, with ag up $800 million plus or 8% as a result of a stronger end-user demand in all regions aside from NAFTA, which was slightly down, where we see stabilization in the row crop space being offset in 2017 by dealer destocking efforts, primarily in the hay and forage and livestock sectors.

Construction equipment net sales increased almost $300 million or 13% due to higher industry volume in all regions except EMEA, and net price realization, primarily in NAFTA and LATAM.

For commercial vehicles, net sales increased $667 million or 7% as a result of higher truck and bus sales in EMEA, higher volume and favorable mix in APAC and increased truck sales as a result of recovering end-user demand in LATAM, mainly in Argentina.

Powertrain was up almost $600 million due to higher volume to both internal and external customers.

Finally, foreign exchange translation impact was positive for $450 million, primarily as a result of the strengthening of the euro to the U.S. dollar.

I'm on Slide 7 now.

Full year operating profit of Industrial Activities was up 18% or $228 million versus last year with an operating margin of 5.8%, with all segments up year-over-year except CV.

Rich will elaborate the business performance by segment in a minute.

Adjusted net income increased by $187 million helped by the improvement in interest expense due to the efforts made last year and further accelerated this year following the investment-grade achievement to improve our debt structure by retiring higher coupon bonds and replacing them with lower-rated notes.

Additionally, the adjusted effective tax rate improved 2 percentage points to 37% when compared to 2016 where -- when it was 39%.

While we are pleased with initial progress made on the -- in the tax rate, which was in line with our expectations at the beginning of the year, our aspirations are for an acceleration of the improvement in 2018, which now includes the benefit of the recently enacted tax legislations in the U.S., the U.K. and some other countries, both in terms of book and cash taxes going forward.

For 2018, we expect the adjusted ETR for the group to be in the 30% to 32% range, down 5 to 7 points on a year-on-year basis.

Moving on to Slide 8, change in net debt.

Net industrial debt was reduced to $0.9 billion, significantly down to September, $1.7 billion; and to December a year ago, $0.7 billion, despite the adverse impact of the euro translation, as a result of a particularly strong cash flow performance in working capital in Q4 where we reduced inventories by 1 billion since September.

Next slide.

Capital expenditures were down slightly to just below $500 million.

While the majority of the spending is in maintenance CapEx now, we are also investing in preparation of the upcoming Stage V for off-road engine applications, and we are ramping up spending in the Precision Solutions & Telematics in ag to support our connectivity platform.

While we increased R&D spending about 10% year-over-year, as we anticipated at the beginning of the year, the CapEx number remains subdued as a result of timing.

Going forward, we expect R&D to further accelerate in 2018 another 10%, and we expect the full catch-up in CapEx to grow around 25% year-on-year.

As you can see on the right-hand of the slide, change in working capital was positive for $130 million for the year, fundamentally with a strong contribution from all 3 main areas, namely, a positive performance from receivables as a result of increased collections in the last part of the year; a normalized cash inflow from payables, last year, we reduced production in EMEA, while this year, we increased it; and the balanced level of inventories reached at the end of the year, thanks to the strong Q4 performance, reaching now approximately 20% of net sales in our major business.

This is in line with historical trends and definitely reduced in ag from the last 3 years.

Looking at the net industrial cash flow.

Full year 2017 was the third year in a row of our very strong cash inflow performance, with a year-over-year increase in '17 of more than 20% to $1.3 billion, driving our net debt target overachievement.

Moving on to Slide 10, our Financial Services business.

Net income was up $118 million compared to '16, primarily attributable to an improvement in income taxes as a result of the revaluation of deferred tax liabilities following the U.S. tax change.

Excluding the favorable tax impact, net income was basically flat compared to '16, with NAFTA down as a result of the smaller portfolio and some spread compression and all other regions up as a result of higher activity.

For the year, retail loan originations were $9.1 billion, relatively flat compared to the prior year.

Managed portfolio of $27 billion at the end of December, was up $0.6 billion in constant currency, again with NAFTA down, but more than offset by the other 3 regions.

Also, credit quality remains strong with delinquencies tracking on average at 3.3% of the total portfolio.

Our metric remains in balance against last year with a very minor regional remix.

Slide 11 illustrates the company's debt maturity schedule and available liquidity.

As of December 31, 2017, available liquidity was $9.4 billion, up $0.7 billion compared to December prior year, putting the liquidity-to-revenue ratio at around 34%.

We achieved a level of cash in our industrial operations of $4.9 billion.

Our liquidity buffer is well in excess of our upcoming 24 months of maturities, which enables us to continue to look at ways to optimize our debt portfolio and capitalize on the achievement of the investment-grade benefit.

During the fourth quarter, CNH Industrial N.V. issued $500 million in aggregate principal amount of 3 7/8% notes due 2027.

This was the first bond issued after the company's securities became eligible for the main investment-grade indices in the U.S. market and the first 10-year term public bond ever issued by the company.

CNH Industrial Capital LLC redeemed all of the outstanding $600 million aggregate principal amount of its 3 7/8% notes due 2018 on December 1, 2017, for approximately $615 million in cash.

And it established a new commercial paper program, under which it issues short-term, unsecured, unsubordinated commercial paper notes on a private placement basis.

As of December-end, the outstanding was $115 million.

Before I conclude my section of the presentation, I want to just mention the new revenue recognition accounting standard that we are adopting starting in 2018.

At a high level, consolidated revenue, net income, EPS and net industrial debt will not materially change, but there would be movement of revenue and profits between the Industrial and FinCo accounts including eliminations.

To preserve comparability of reported results, we will adopt the full retrospective method, and we'll recast 2017 results under the new accounting standards revenue from contracts with customers, ASC Topic 606 for U.S. GAAP purposes and IFRS 15 for IFRS.

The recast 2017 results would be available when we publish our annual report and file the form 20F in about a month.

We intend to host a webcast at the same time to walk through the changes so that it is clear what is different and what is staying the same.

With that, I conclude my part of the presentation and pass it back over to Rich, for the business overview section.

Okay.

Thank you, Max.

Agricultural net sales increased 10% for the full year 2017 compared to 2016.

In LATAM, where we had a very good result.

The increase is mainly due to higher industry volume, market share gains and a favorable mix of higher horsepower products and net price realization.

Net sales increased in APAC, mainly driven by favorable volume in Australia, Russia and Southeast Asia.

In EMEA, net sales increased due to higher industry volume, favorable product mix and net price realization.

And in NAFTA, net sales decreased as a result of destocking actions in the dealer network, primarily with high-horsepower tractors and hay and forage product line.

NAFTA industry volumes were flat overall with row crop sector higher, offset by lower livestock volumes.

Full year 2017 operating profit was $949 million, a 16% increase compared to 2016, mainly due to favorable volume and product mix in all regions except NAFTA.

1% net price realization more than offset increases in raw material and unfavorable foreign exchange fluctuations.

We incurred a material amount of increased production costs in Q4 as a result of the transition of our European product offering to the new Tractor Mother Regulation safety standards, negatively impacting incremental margins in the quarter.

We consider these costs transitory with no meaningful carry forward into 2018.

Agricultural Equipment also increased spending in R&D, primarily related to our new Precision Farming Solutions and in SG&A.

SG&A expenses still remain more than 20% lower than peak.

Operating margin increased to 8.5%.

In terms of unit stats, we overproduced tractors on a global basis and combines compared to retail sales of the year, but continued to underproduce in NAFTA despite the upturn in the market.

As discussed, we have ample capacity headroom to meet projected demand into 2018.

Considering the channel inventory stats in development of the NAFTA market, it's our intention that hopefully, we can retire this slide going into 2018.

But as you can see, we continue to manage our channel inventory down, maintaining a position that's 20% lower than 1 year ago as a result of destocking actions in high-horsepower tractors and hay and forage products in NAFTA.

Looking at the ratio of high-horsepower tractor used equipment sales to new equipment sales in the U.S., used tractors are outselling new by a factor of 3x.

And as mentioned in my opening comments, we expect to close 2018 with production matching retail demand in both segments of the markets as they perform -- if the markets perform as we are forecasting into NAFTA.

In Construction Equipment, net sales increased 14% compared to 2016 due to higher industry volume in all regions except EMEA and net price realization, primarily in NAFTA and LATAM.

Full year 2017 operating profit was $21 million.

And increase was due to higher volume and includes a positive overhead absorption and net price realization, partially offset by increases in raw material cost, unfavorable foreign exchange impacts on product components, primarily yen and Korean won-denominated; and increased production costs as a result of volume ramp-ups in NAFTA in mini-excavator products in Europe.

I think particularly pleasing if you look at the Q4 line at the bottom is the net pricing of $21 million.

We are forecasting that dynamic to hold through 2018, materially affecting the profits for Construction Equipment.

Production in the quarter was up 52%, with an overproduction of retail of 3 as we continue to see global recovery in construction demand.

The global order book for Construction Equipment remains solid with an increase year-over-year of 30%.

For the full year, all regions saw increased volumes, especially APAC.

As mentioned, our order book is up significantly from this time last year, and we believe, this strength will continue through 2018.

In Commercial Vehicles, net sales increased 9% in the full year as compared to 2016, a result of higher truck and bus sales in EMEA and higher volume and mix in APAC.

Full year operating profit was $272 million with an operating margin of 2.6%.

Operating profit increased in LATAM and APAC mainly due to higher volume and favorable pricing.

In EMEA, operating profit decreased as the favorable volumes were more than offset by unfavorable mix, primarily associated with fleet channel sales, Euro VI emission content costs and negative impact of pound devaluation of $42 million.

And if we take a look at the line, at the end of the day, the FX and other where they -- where we had the costs associated with the hedge and the GBP.

We don't expect that to repeat next year but clearly, the price realization for both the quarter and the full year needs to be rectified.

And as such, we'll be chase -- we'll be changing in terms of our model mix next year, driving for less in terms of market share gains and more in terms of price realization to improve profitability in the segment and recapture the total cost of added features in the product.

Next slide.

Quarterly underproduction versus retail was 13%, and worldwide production level was up 11% versus the same quarter last year.

For the full year, European truck market was up 5% to last year.

LATAM and APAC markets were up 16% and 8%.

Market share for trucks in Europe was slightly down for the year.

Order intake for trucks in Europe was up 7% higher compared to last year.

Truck deliveries were up 2% and book-to-bill was over 1. And I think the good news is that we underproduced retail in Q4, clearing inventory in the channel and in preparation for the change in model mix leading into 2018.

Powertrain had an excellent -- continued its excellent year, increase of 18% in revenue due -- on higher volumes.

Sales to external customers accounted for 48% of total net sales.

Operating profit for the year was $362 million, $130 million increase compared to 2016, at an operating margin of 8.3%.

Now let me just highlight that in Q4, operating margin increased 2.4% to 8.8%, the highest quarterly margin ever reported in powertrain's history, reflecting the profitability of a well-balanced portfolio of engine applications.

During the year, powertrain sold over 600,000 engines, an increase of 13% as compared to 2016.

Worldwide demand for agricultural equipment is expected to improve in all regions flat to up 5%.

And you'll notice we're calling NAFTA combines to continue to remain strong and be up 10%, as farm incomes remains stable, leading to no significant changes expected in planted acreage.

With the recent weakness in the USD versus other agricultural-producing regions' currencies and the current negotiations on NAFTA and TPP, we can expect that our forecast, despite calling acreage to be stable, to have some volatility, but at current capacity utilization projections, we have the capacity to respond.

Construction Equipment demand is forecasted to be up 5% to 10% in LATAM and APAC while remaining flat to up in both EMEA and NAFTA.

Based on our order books, the new NAFTA number may be conservative, but we'll update that when we get to end of Q1.

Commercial vehicle demand is expected to be up 15% in LATAM and slightly down in EMEA and APAC.

As a result of the forecasted improvement in product demand conditions and positive impact of changes in the company's capital structure, the company is setting its full year guidance as follows: net industrial sales of net -- of Industrial Activities, $27 billion to $28 billion.

Adjusted diluted EPS from $0.63 to $0.67 per share.

Net industrial debt flat to 2018.

This equates to a growth of EPS of over 30% on a revenue growth of approximately 5%.

These forecasts were done using euro-dollar at $1.15.

So if we were to rerun it today, that's at $1.25, we'd get $1 billion in revenue if we ran it again.

And then at an operating profit, depending on the effectiveness of the hedge, we'd be largely flat.

But we'll update at that as we go through the year in terms of how the euro performs against the dollar as we go forward.

That's the extent of the prepared remarks.

So Federico will open it up to Q&A.

Thank you, Mr. Tobin.

Now we are ready to start the Q&A session.

Chevon, please take the first one.

(Operator Instructions) We will take our first question from Rob Wertheimer from Melius.

Rich, I wonder if you could talk about R&D for a minute.

You called out a little bit of stepped up R&D expenses in a couple of divisions.

You mentioned precision ag.

Is there any shift in your philosophy towards what you need to spend on technology?

And if you don't mind, I mean, can you tell us as much as you can on what you think your strategy for precision ag needed to be?

Whether it's more hardware, software, more partners, more implementing, I mean, just like a little bit of an update there if you wouldn't mind.

Yes.

Okay, Rob.

Look, it's the fastest-growing segment of our R&D spend within ag.

The vast majority of the spend is internal to either the tractor or the combine.

We're generally pursuing a partnership strategy for kind of data transmission and kind of the balance of precision farming.

So if you think about it this way what we're spending our money on is in order for our equipment to be able to execute menus, if you will, and be able to transmit telematics data to both ourselves, our dealers and our customers.

So I think you're going to get quite a bit a lot of news flow in this area during 2018 in terms of our partnership programs and our philosophy.

But it is the fastest-growing portion other than preparations for Stage V engine or driveline introduction in 2018 and '19.

That's great.

And then if I may, I mean, construction is finally getting healthy in a bunch of markets.

Hopefully, pricing has firmed up a little bit.

Kind of had some easy comps, but maybe, you had better pricing in '17.

What are your thoughts on -- you mentioned pricing was a little bit tough here and there.

I mean, does that feel like a market that's generally improving as volumes surprise the upside and capacity gets tight, and you kind of really have a chance to make your target margins in the near future?

Yes.

I mean, look, if you look at the net price realization in Q4 of this past year, that's the highest number that I can remember in 3 years.

So I think that overall industry inventory levels are in balance with demand.

And I think that pricing discipline is taking hold.

I think that we had a pretty choppy year in 2016 in terms of price realization.

I'm talking about kind of NAFTA or the industry as a whole.

2017, because demand has picked up, pricing discipline is improved, so our expectation is what we see in Q4 in terms of price realization carries throughout 2018.

And we'll now take our next question from Mike Shlisky from Seaport Global.

I wanted to start out with maybe the CV margin cadence here.

Sounds like it had a tough quarter.

Does the Stralis X-WAY product that you put out in the fourth quarter, has that gone well so far for orders for '18?

Does the mix get better throughout the year?

Do we kind of put out challenge and end up at a much better point?

Or is it going to be a challenge for the majority of 2018?

Could you -- any kind of thoughts of cadence there, I'd appreciate it.

The Stralis X-WAY is -- because it's more of a bodybuilder product, is going to take a little while to get started and we are taking orders from it now, but we've just started.

But we are betting on the improvement of mix from that particular product line.

I mean when I mentioned before taking a hard look at price realization through model mix, it's to de-emphasize articulated tractor volume in 2018 and go to more rigid and gas vehicles.

But I think if you look overall, year-over-year, we did have a significant headwind in terms of translation impact of the GBP, which we don't expect to repeat into next year.

So I mean, you can model it yourself, but our expectation is if you put a 1% price net realization on these numbers year-over-year, you get a material impact in terms of the change.

So yes, I think we had a difficult year.

I mentioned at end of Q3, if we couldn't turn it around in terms of price realization, that we'd have to address model mix.

And we've been preparing through the quarter to do just that.

Got it, great.

Secondly, I wanted to ask about the new Mother regulation and that was the headwind, it sounds like, for margins in Q4 for ag.

Is there a way you can, first of all, quantify that and maybe comment on is there a way that having a very standardized product across Europe has some scale benefits for you for '18 and going forward?

Or is it not much of an impact there?

It's a material amount.

I don't think I'll call it out in terms of the amount.

But if you look at some of the -- if you look at the product cost line and that would give you kind of an idea.

Look, at the end of the day, we had a choice whether to get all this TMR behind us in 2017 or to carry it forward by registering pre-TMR vehicles in Q4.

We chose not to do so.

So -- and we took the pain to a certain extent in Q4, and that's been a pretty large headwind in terms of incremental margins.

But as I mentioned in my comments, we believe that's transitory.

It's done.

And everything that we're shipping out of our plants -- everything that we shipped out of our plants at end of Q4 and that we're shipping out of our plants now are 100% compliant with TMR regulation.

So I would expect and what we're -- we're looking at incremental margins for 2018 to be significantly improved over ag despite not calling a significant increase on the top line.

Sure, but as far as having a more standardized product out the door every day in your ag facilities in Europe, does that help you at all for some additional scale?

Or does it not matter much versus the 2017 model?

TMR was a question of getting in compliance.

I mean, so you had to make a significant amount of changes to your -- to the vehicles themselves and the software.

But -- so at the end of the day you had to take the cost to make the transition.

But the scale benefits that we had before will carry into next year.

It's purely a question of, it was a significant upset in terms of -- at the manufacturing base making that transition, which we will not carry forward into next year.

And we will take our next question from Steven Fisher from UBS.

Wondering if I could just a clarification first, what tax rate and share count you assume in your EPS guidance for 2018?

The tax rate -- what do we have in the press release?

30% to 32%, and the share count unchanged.

So we don't factor in the buyback.

Right, got it.

And then could you help us bridge the net industrial debt year-over-year between 2017 and 2018, what the major components are going to be there to get you to flat year-over-year?

Look, largely at the end of the day, the significant liquidation of inventory that where we took the underabsorption this year, as I mentioned before, we're going to probably -- we are likely to produce in line with retail demand.

So there is going to be a ramp-up of working capital to support those sales.

You have a little bit of valuation because of the increase of the euro against the dollar would be the other portion of it and the increase in the dividend.

Okay.

And then just maybe last, if you could just give a little more detail on your construction industry forecast.

If your order book is a good indication, I would have thought that your forecast would show a little more growth.

I think, you said NAFTA might be a little conservative, but what's holding you back at this point?

Nothing, really.

Like I said, I mean, we take our own forecast and then we look at industry forecasts to make sure that we're not out of line.

Our forecasts right now are in line with the balance of industry participants.

As I mentioned in the comments based on our order book right now, if we're a proxy for construction equipment, which based on our size, we're really not, we would expect the market, at least at NAFTA, to perform better than we've indicated in terms of unit volume, but we'll see really at the end of Q1.

And we will take our next question from Ann Duignan from JPMorgan.

This is Tom Simonitsch for Ann.

Firstly, could you provide some more color on your expectations for EMEA ag equipment demand by country and by sector in 2018?

And in particular, what is your base assumption for the health of the EU dairy sector?

I won't give you a country-by-country estimate, because at the end of the day what we're projecting for EMEA is flat to up 5. So there's no particular market that's accelerating exponentially.

So it's a general comment that we believe total demand should be within that range, while we would expect that the one market that severely underperformed in 2017 was France, and so France would contribute in 2018 probably overproportionally to that demand.

In terms of the dairy market in total, I mean, it's almost that this question comes every year.

Every year that the market is projected to be down, every year the market is projected to come under pressure in terms of earnings, and we never seem to see it.

So we don't expect, in our forecast, that the dairy market is going to come under pressure.

It's just going to be more of the same, if you will.

Okay.

And then likewise, for your ag equipment market outlook in LATAM, what are your expectations for Brazil in 2018?

It's exactly what it says there.

I think that what we could add in terms of the color in Brazil, it's probably going to have a bad comp in the first half of the year because of the accelerate -- because of the volume that was shipped.

If you take a look at Brazilian consumption in 2017, it was very much front-end loaded into Q1, Q2, and then bled down over the balance of the year.

So I'd expect to see some bad comps in Q1 and Q2, but overall, we expect the market to be up.

And we will take our next question from Joe O'Dea from Vertical Research.

Rich, I think you mentioned some good incrementals in the ag segment in '18.

Just overall for industrial op margins, could you give a sense of roughly what you're looking for within the guidance that you've provided?

In the 20s.

20s on the incrementals.

And then what would that translate to, I guess, in terms of an actual op margin?

It -- we don't have color on some of the nonoperating items.

And so it wasn't clear from the 5.8% in 2017.

Yes, I mean, -- Joe, but are you specifically asking about ag or industrial in total?

I'm sorry.

I'm asking about total industrial and that compared to the 5.8% in '17.

Okay.

So in total industrial -- yes, in -- yes, I got you.

In total industrial, you're looking more in the teens in terms of incremental margin.

And then full year margin, you'd have some accretion because the teens are higher than the book margin right now without getting in to granularly chopping it up into pieces.

So we're looking at -- in consolidated industrial, we're looking at teens in terms of incremental margin.

I mentioned before, we're looking for 20s, because we've said that repeatedly on the ag side, but then in total, if you are getting teens in incrementals, you're going to get accretive margins year-over-year.

And if kind of FX stands where it is, we won't expect the profit to change and so that's going to be margin-negative, profit-neutral?

It's very difficult to predict, but at the end of the day if FX does not move from here and we have a very good hedge effectiveness then we're not -- we're going to get top line growth in translation and slight negative in terms of operating margin, because of the fact that you're getting the translation benefit at top line and you're not getting that same proportion in translation benefit and operating earnings, because we're long euro in terms of our cost space.

But overall, total profits, we don't expect to change much and we expect revenue to be up higher than our guidance, because our guidance was projecting $1.15 to the -- $1.15 euro to the dollar (sic) [dollar to the euro].

So at the upper end of the revenue with really no change in operating margin -- or operating profit.

That's helpful.

And then on North America high-horsepower, when you look at large tractors, 17% underproduction in 2017, talking about aligning production with retail.

Could you just, maybe, kind of talk about the cadence of that?

I mean, were you doing some of that in the fourth quarter at all?

Or as you think about 2018 and that could mean 20%-plus kind of increase in build rates, when we should see that starting to happen?

You didn't see any of it in Q4, okay?

So what we did was increase production in combines, but we had been doing that all year because the market in 2017 was up 10%.

In high-horsepower tractors, we continued to underproduce in NAFTA in 2017.

And despite us calling the market up, we held back that production in Q4 to bring it into 2018.

And that's why, as a global comment, we believe, we should be in balance between production and retail.

I expect that, that will be back-end loaded in 2018.

We won't come out of the gate in 2017 overproducing retail significantly.

We're running at -- still at some pretty low capacity utilization level, so we've got the industrial capacity to catch up so I'd expect that would be back-end loaded.

But that will be a big contributor to the incremental margins in the 20s that we're expecting in ag on the full year.

And then we'll take our next question from David Raso from Evercore.

Can you provide us your free cash flow guidance?

Our free cash flow guidance?

2018.

Well, I am trying to reconcile no share repos in the guidance, and there's no change in the industrial debt.

And that's where I'm trying to get at.

Right.

Right, and I think what we're saying is we're calling revenues up, right?

We had the over -- we overdelivered arguably in terms of working capital this year.

If we're calling -- we're basically saying that we're going to -- if we're calling the market up there, we're going to have to build some working capital to support that and then we've got a piece of FX and the increase in dividend in there.

So overall, we should be slightly negative in working capital year-over-year.

Yes, I guess, because the revenue guide doesn't seem to be that strong at first blush to chew up that much working capital.

And then when I think about the year-over-year change, for example, on the inventory, I mean, your inventory actually went up year-over-year.

As a company, your inventory went down 3Q to 4Q actually less than it went down 3Q to 4Q the last 3 years.

So I'm just trying to reconcile, does that much working capital increase needed for really not that large a revenue increase?

I'm just trying to make sure we understand the cash flow numbers.

Yes, we got $300 million baked in and working capital change negative.

I mean, but if the dividend's $250 million at most, right, so you chew up $300 million, the CapEx is $100 million, right?

So $250 million for the dividend, $100 million for the CapEx, $120 million for the CapEx, you just said what $300 million, $350 million for the working capital?

And there still should be hundreds of millions left over unless the free -- the other components of free cash flow you expect to be lower.

I'm just making sure we understand the core conversion here.

And you have the translation impact on euro-dollar, right?

Outside of the...

That's sort of -- that's like the plug right now on those numbers.

That's right.

And we will take our next question from Larry De Maria from William Blair.

Two questions.

First, I'm sorry, if you mentioned this, but what do we need to see in order for you guys to start executing on the buyback plans at this point?

Well, we have to get the authorization done, which we'll get done at the AGM, which is the 13th of March -- of April, excuse me.

But we have the open plans now.

So we've got the opportunity to do it on the $300 million that's open.

But if we're talking about the increase to $700 million, we need to get the post AGM.

So we get post AGM and then there's nothing to think that you wouldn't start executing on it, because obviously, you've had the other one in place for a while right?

Yes.

I mean, yes, that would be correct.

Okay.

And then secondly, construction, at this point, obviously, it's kind of a subscale business, but the outlook is getting better and we're at better point in the cycle, now that you have the debt upgrade and tax reform is kind of played out.

Just curious, have you changed your thoughts on how to strategically improve the business, which is obviously subscale.

Do we invest in it or divest in it?

Or how do you think strategically about construction at this point, given that you may have some better options with it now?

Yes, look, I think that, that -- I wouldn't consider the -- what we would do with Construction Equipment, anything really to do with the balance sheet, because of its size.

Look, we believe that this is a business that we should be able to get to acceptable margins and return on invested capital.

We're actually planning for a significant increase of its profitability in 2018 largely driven by NAFTA performance and to a certain extent, EMEA.

If we get any return to maybe half of the market that we had in Brazil in the past, and then that this is a business that's going to deliver the positive return on invested capital.

So that's the way we look at it.

I think this is -- 2018 is a year where we think that we're going to get some positive momentum in earnings as long as the market in terms of pricing discipline holds up.

But I don't think it's an issue of -- we've got our capital structure fixed, so let's go do something with Construction Equipment.

We will take our next question from Ross Gilardi from Bank of America.

Rich, I just want -- I just wanted to ask again about NAFTA large ag in 2017.

So you underproduced, I think, retail in high-horsepower tractors by 17% in 2017.

And now you're talking about producing in line with retail in 2018.

So are you -- you are essentially implying production growth north of 20% in 2018 in NAFTA high-horsepower tractors?

Am I understanding those comments correctly?

I think that the channel inventory is down 17%.

I got to take a look at the number here.

But I think that what we're saying is that, that we're going to produce in line with retail.

But I wouldn't take a look at total change in channel inventory, because, which is a combination of the company inventory and dealer inventory.

I think that the number is more an increase of somewhere between 10% and 12% year-over-year in high-horsepower segment.

I'm just looking at one of your slides that shows the retail sales versus production by quarter in both tractors and combines.

And in there, you have a comment that says NAFTA 140-plus four-wheel drive underproduction versus retail at 17%.

I think that's a 2017 comment.

So if you just index the numbers and you look at what you're saying about 2018 producing at retail, it would seem to imply that you're talking about 20%-plus production growth in high-horsepower tractors.

No?

Yes.

I -- look, to a certain extent, yes.

But I can tell you right now that based on the number -- when we give you the guidance in terms of tractors, right, it's all tractors, right?

We don't give you specific guidance on the high-horsepower segment from what I know that the increase into the high-horsepower segment of tractors year-over-year is in the teens, year-over-year.

And that's baked into that -- and that's baked into the incremental margin because of -- we're not going to be running the negative absorption that we've been running since 2014.

And did you have underproduction in the other -- in -- outside of North America in ag in 2017?

Or was it just NAFTA?

It was NAFTA and then it would have been a significant underproduction in Q4 in EMEA.

Okay, got it.

And then can you just talk a little bit about Iveco strategically?

Obviously, there's been a lot of speculation on what you guys may or may not do with it.

But can you just give us a general sense as to how you're even thinking about, whether it stays in the portfolio or not?

What metrics do you look at?

I mean, I think at one point, you wanted to get to a 6% -- back to 6% margin.

You've kind of been stuck around 3% for the last several years.

And arguably, we're at a more peak-ish type market in Europe, overall.

So how do you determine whether or not you keep it or divest it?

And just any thoughts there would be helpful.

Yes, I'm not going to get into the speculative issue about divesting it.

I mean, the fact to the matter is, from an execution point of view, it was not a good year for us.

We had expected to have an improvement in terms of model mix and net price realization and the honest answer is we didn't execute.

So if we had executed the way that we would have planned, we would have been within the range of the margins that we had targeted for this business.

And I don't believe that this business is incapable of doing it.

I think it's -- I mean, we own this one in terms of its execution.

And I don't think that we'd be thinking about doing anything different with the business until we get it to where we want it in terms of its -- in terms of profitability.

Okay.

And then just lastly, just interest expense, Max, could you help us on what you're embedding in your EPS outlook for interest in '18 versus '17?

We are assuming $55 million of reduced expenses in '18 versus '17.

$55 million?

Okay.

And our final question comes from Nicole DeBlase from Deutsche Bank.

I guess, a lot of them have been asked here, but I guess, thinking about the CV business, piggybacking on the back of Ross' question, you talked about how you need to drive the execution in that business.

What could -- do you think you can get the year-on-year improvement in CV in 2018?

And maybe what's the right way to think about incremental margins in that business this year?

Yes, our expectation is to improve the performance of 2017.

We're -- I think that it was pretty clear that, from an execution point of view, we just didn't deliver.

The incremental margins there would be in the teens or the high-teens if we execute appropriately.

Okay.

That's helpful.

And then you mentioned before the potential for very significant incrementals in Construction Equipment in 2018, especially since the mix is shifting towards NAFTA.

What does the significant mean?

Is that like 20% as well?

Close to it.

High teens to low 20s.

That will complete the question-and-answer session.

I would now like to turn the call back over to Federico Donati for any additional or closing remarks.

Thank you, Chevon.

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.