CNH Industrial NV (CNHI) 2018 Q1 法說會逐字稿

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. (Operator Instructions) At this time, I'd 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 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 have been recast to reflect the adoption of such updated accounting standards.

Furthermore, effective January 1, 2018, the Chief Operating Decision Maker began to assess segment performance and make decision about the resource allocation based upon adjusted EBIT and adjusted EBITDA. This 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 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 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% to the comparable quarter on constant currency.

We anticipate these positive trends in 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 repaid the remaining outstanding CNH Industrial Finance Europe note at 6 1/4 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 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 billion.

We had another strong quarter in demand in terms of awards and product-related accomplishments. At the AE50 awards, Case IH was honored for 4 of the company's latest innovations. These including the Trident 5550 Combination Applicator, the Steiger series tractor with new CVX drive, continuously variable transmission, Early Riser planter with an in-cab, split-row list system. And additionally, FPT became part of the speed history books with this quarter when 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 old 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 with Q1 2018 and in conjunction with the risks associated with the transition 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 sale of our industrial operations of up 19% year-on-year at $6.3 billion.

With that top line performance, we were able to deliver an 85% increase in our adjusted EBIT, with all business improving year-on-year.

As a result of increased production aiming at a balanced 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 effective tax rate, allowed us to report an increase in our adjusted net income of almost $150 million year-over-year or 270%.

Specifically, adjusted EBIT of Industrial Activities closed at $261 million, with margin up 1.4 percentage point to 4.1%. Adjusted EBITDA of 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 times, and industrial gross debt to adjusted EBITDA ratio was 2.4x.

We remain fully committed at improving our credit rating 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 1/2 notes of approximately $1 billion issued by CNH Industrial Finance Europe.

Finally, liquidity to the last 12-month revenue ratio was maintained just below 30%.

Turning on to Slide 7, I would like to talk in greater details about the total change in Industrial Activities' net sales at 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 volume 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 8, now with a 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 point compared to the first quarter of 2017.

Looking at the 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 refinings transactions and high-yield debt retirement 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 act enactment at the end of 2017. For the full year 2018, we're now updating our expectations of an adjusted ETR 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 billion versus December, as a result of our normal seasonality in working capital in the first quarter where we normally increase inventories -- the inventory level 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 $60 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 for 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 in some years, with a strong performance in used equipment pricing driving a solid support for pricing of new equipment.

We 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 as forecasted is up in all reasons where we've had particularly good performances in the quarter in 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 to 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 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 to Stage V emissions requirements, resulting in an increase in R&D spending of 14% versus Q1 of 2017.

In Construction Equipment, net sales increased 36% in the quarter as a result of solid rebound in worldwide demand and market share gains across most regions. Adjusted EBITDA was $16 million with 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 America. 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%. The increase was mainly due to favorable trend 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 in 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 subsegment. 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 to 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%, 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 most segments and most regions, with the exceptions of LATAM Construction Equipment.

We won't go through all the changes here, but generally speaking, NAFTA AG is a bit better in the high-horsepower tractor on the back of restored balance position on used equipment. And in 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 are still coming off of relatively low bases driving the margin increase or the percentage increase.

And then moving on to the final slide. As a result of the stronger-than-anticipated results from the first quarter and the positive developments in end-user demand, CNH Industrial's 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 billion.

On a personal note and on a final note, I'd like to thank Chairman, Sergio Marchionne, and the CNH Industrial Board of Directors for the faith they have entrusted in me as the CEO of the company. I'd also like to thank my colleagues at CNH. I am humbled to have served with you all.

I'm also confident that Derek Neilson's abilities and -- as my interim successor, and I'm quite confident that he's going to be able to deliver the full year results as we've reforecasted.

So with that, let's open up for questions.

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

Ladies and gentleman, today's question-and-answer session will be conducted electronically. We'll take our first question from Mike Shlisky from Seaport Global.

I had a question on AG in LATAM. It's been said that many farmers are holding off until midyear hoping for a little bit better interest rates when the (inaudible) might reset. So I'm kind of wondering if LATAM AG will be tough in Q2 and folks might just be buying almost nothing for the time being until the back half. And are you producing a lot during Q2? Or you're 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 build in LATAM.

Okay, Mike. Yes, 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 a bit in the second that we -- 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't occurred yet. We have laid in the industrial inventory at the factory level, but we've slowed down quite a bit in terms of production 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 issue, 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's lined up 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 very good to hear. Prices have still kind of gone up for a lot of different metals out there. Can you comment on whether you think you'll still be seeing positive price realization in the rest of the year and for the full 2018 as a whole?

Yes. Look the

(technical difficulty)

is back-end loaded, because of the way that we buy raw materials, so we're trying to get in front right now with the pricing. Right now our estimates take into account that we're 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're going to have 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. Does the -- is the guidance that you have right 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're -- you do plan to buy it back by end of October?

Excludes.

Excludes? Okay.

The next question comes from Steven Fisher from UBS.

Just wondering, on the Construction Equipment business, based on what you've seen so far, you've had, obviously, year-over-year an improvement in the profitability. Do you think you're on track to hit mid-single digit margin guidance this year, given the growth of the market and your backlog?

Yes. That'll be in the lower bias to the lower at mid-single digits, but our expectation for the year is for it to sequentially improve the profitability as we go through the year in construction equipment.

Okay. And then your AG outlook in Europe was a bit mixed. What's your overall sense of farmer confidence there overall? Is it getting better? Is it getting worse? Are we still just kind of puts and takes, and it's just generally steady. What do you think about European AG?

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

Okay. Then maybe just last quickly. You mentioned Latin America construction. Looks like that -- your forecast has just roughened a little bit there for the industry. Can you just talk about what you're seeing there?

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

So was there any reason why you'd softened it from last quarter?

Probably because of Argentina. Less Brazil and probably some Argentina.

And we'll take our next question from Martino De Ambroggi from Equita.

The first question is on some of the comments that you made over the past few months concerning a spin-off of some assets that -- is it just your opinion or it's something that they share inside the company knowing there is an experience in this sense. Just to understand. I can understand it's not a question to ask you right now, you're leaving, but do you believe that your successor will push it or it's something that was just your idea?

Yes, 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 was in the relation to a question. I think what's important to remember is that I said that it was not a 2018 event. So I think you can leave that question for next quarter.

Okay. And the second is a follow-up on the pricing. In the AG, you had plus 2.5%, including a negative ForEx effect. So just to understand, is it pure price? Or is it some automatic adjustment or nonautomatic adjustment for raw materials recovery of the cost increase? Just to -- 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 through the P&L versus raw mats and inflation is -- I don't think we're going to go there right now. So I think the good news is, is that we've had the -- we've demonstrated the ability to pass price in Q1 in all 4 segments. And that's positive because we're trying to get ahead of the curve in terms of what we saw coming in terms of raw mat 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 is -- pushes back against the headwind of what we've got coming in the raw mats in the second half of the year.

Okay. Very last on tractors, industrial units in EMEA. In your January projection, you expected plus 5%. Now it's minus 5% flat. What is justifying such a big change in a few months?

Yes, I think that we discussed that at the end of the Q1 because of this big mess that we had with registered units because of the adoption of -- what was it? Tractor Mother -- TMR, Tractor Mother Regulation. Our retail forecast for the year are absolutely flat to what we had forecast at the end of January.

We'll now take our next question from Joe O'Dea from Vertical Research.

First question, just on North America high-horsepower farmer -- customer sentiment. I think what we've seen in the headlines in terms of tariff risk and trade protection risk and some things. And then also maybe late planting, some speculation that's it weighing on farmer sentiment and what we should be thinking. It certainly doesn't seem to be weighing on your outlook for the end markets, but it would be helpful just terms of if you could frame some of the cadence over the course of the quarter and your read on those farmers and mood in kind of February, March, April, as we've seen 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're 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 that 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're able to deliver more new product in. So this period of underproduction versus retail has largely unwound across the segment. We'll see at the end of the day how this all turns out and whether sentiment becomes further negative in the second half or not. I'm -- look, right now, what we can see from our order books, both from a retail perspective and wholesale perspective, they look up right now. So we'll have to update it quarter-by-quarter.

And just how far do those order generally extend? I mean at this point I would expect that you -- when we're talking high-horsepower tractors and combines, I mean it's pretty fully booked for the year or at least post...

No, I mean that's not. No, I mean you've got 6 months in high horsepower, just as a general statement. It's a little bit of a mixed bag across the wider portfolio. But for combines and large tractors, it's 6 months.

That's helpful. Then on -- also North America but on the construction side of things, we've been seeing some strong growth here. It appears that that's related to a number of things picking up across infrastructure in resi and oil. But could you frame just how you think about that market from a cycle perspective? I mean how strong is 2018 relative to prior peaks? What is your confidence level that there's still runaway beyond this year on recovery?

There's a variety of different tailwinds there. I mean, GDP just being the macro one, these are 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 where is -- is where we -- where we sell most of our equipment. But because of the fact that oil pricing has continued to climb, and oil patch deliveries 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 and it's taking some pressure off kind of mid-tier or mid-segment construction equipment, which is proactive for us.

Got it. And then 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.

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

Yes, good morning. Thanks, guys, and let me add my best wishes just 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 not might not embark on? And any feedback from Moody's on what's actually holding back their enthusiasm for your credit relative to S&P and Fitch?

The first question is that the feedback that we received that it does not impact it. Remember, addition -- in addition to the recast, we also announced a week or so ago a favorable ruling on our balance sheet liabilities, which is -- actually improves the metric on the industrial co. 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. I -- my feeling is that they are waiting for us to issue our 20-F, which we did some time ago. I'm sure they're working their way through it and hopefully we'll hear from them shortly.

Got it. And there's another thing, in your recast outlook, you guys are adding back $328 million of D&A attributable to operating leases to your Commercial Vehicle business. And certainly -- obviously makes the EBITDA of Commercial Vehicles look substantially higher than it would if you just add it back $212 million of ordinary D&A. So -- sorry, it's a little bit technical accounting question, but it definitely matters for valuations. Is that $328 million actually hitting 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 at -- evaluate the EBITDA of the truck business?

Okay, Ross. That's a -- you're 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 we've presented it, we've benchmarked industry standard. So I don't think that we're doing anything that's not used in Commercial Vehicles. But I think rather than deal with this piece by piece on the call, you can call up our guys offline and we'll 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 in 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's foreign exchange.

We'll now take our next question from David Raso from Evercore ISI.

Congrats, Rich. And congrats to Derek as well for taking over. The sales guide, the -- basically from the midpoint to the new number, it's roughly $500 million. Can you just help us with how much of that was currency now that you're using $1.23 to the euro, not $1.15? How much then is offset by the drag on the accounting change, so we get a feel for what the core operational revenue change was?

Yes, I think, again, because of this recast and the negative impact on 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 of where euro-dollar was at the time. I think we're running it at $1.15. We're at $1.21, $1.22 today. So a big portion of that is. But again, David, I'd prefer if you take that one offline, then Max can take you through the negative portion of making the accounting change and now because we had to recast the revenue line because of the accounting change and what element of that is FX.

Yes, it's -- at least I'm thinking. You said last time, if we were using $1.25, it would add about $1 billion, right? We went to $1.23. So let's call it $800 million help. The drag from the accounting seems to be about roughly $300 million. So it seems like the $500 million of 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-market outlooks. I was just curious there was no corresponding bump up in your own core revenues despite the industry outlooks. I was just curious.

No, I mean, at the end of the day, it's at the top end of the range. So $500 million is FX related out of the $1 billion. And then the rest, the $1 billion, or 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 -- you're not...

Yes, I mean, I can -- I don't go back through the math, but in fact it doesn't seem like there was any core growth in your revenue. You raised your revenue $500 million, currency probably went up $700 million, $800 million. Accounting took it back down net to, like, an up $500 million, right? So the revenue guidance change did not seem to have any core equipment units driven revenue in change. 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.

As you know...

I'm just making sure I understand why. Is it a little apprehension about production versus retail or...

I follow you. But at the end of the day, it's at the end of Q1 and making a change -- we're not changing our production yet. We'd rather take that in the reduction of working capital at the end of the year, but those are decisions that we're going to make in Q3 and Q4.

Yes, that's -- I mean the order book comments were interesting. I'm just trying to make sure you level set that 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 guidance is for the forecast, I should say. And the comps do get a little harder as the year goes on, at least the industry data. So I'm just making sure is the order book and maybe if you can make it simple and quantify from it -- how much is your order book up in North America high-horsepower AG. This 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, that would be great. Even the combines, you still have it up 10 for the industry for the year, but year-to-date it's down 2. So any help on the order books will be great.

4

Let me -- I'm going to have to get them. I don't have in front of me for the NAFTA order books. Hold on. Okay. Yes. I mean they're slightly up from what our forecast was, David. But not enough to really triangulate changing the revenue number nor making it change to what we had planned in production. So I mean, you're just going to have to...

Okay, so there's a little order book...

The way that we ended Q2.

There's a -- okay.

We could be here all day.

So there's a little order book uptick from what you originally had. Okay. I just wanted to make sure I understood why the revenue changed.

Our next question comes from Rob Wertheimer from Melius Research.

And Rich, congratulations on your stewardship through a very volatile -- successful stewardship through a very volatile period in couple of industries, right? So great job. Question on the long term. I mean you're splitting out the depreciation in preparation or anticipation of potential changes in the structure. Can you give us just an overview of what you think CapEx depreciation might look like over the next 3 to 5 years? Do you feel like you've got ample capacity? And is that across the segments? Or is that you unique to one?

It's balanced. It's 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 next 3 to 5 years, in terms of footprint changes and expansions of our greenfield capacity, you can go back and look at where 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 because 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'd spent on greenfield expansion in the period of, let's say, 2007 to about 2013, we've pretty much build-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 1:1 ratio of CapEx to 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 listening 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 -- how do you feel like that's been shaping up over the last year or 2?

Okay. I did -- I ignored one of your questions or I forgot it at the beginning. The reason that we change 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 EV to EBITDA basis and we were getting a lot of different calculations of what the EBITDA actually was in CNH Industrial. So we've done this to clarify it now, so everybody can calculate us versus our peers in terms of our valuation EV 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 EV to EBITDA. And by providing investors that amount of clarity, we hope that we can collapse the balance of that gap. Your other question was what, again? Sorry.

Oh, I'm sorry. Yes, yes, I'm sorry. So just on the technology coming into machinery and how you adjust?

It's -- look, it's is the fastest-growing segment of our R&D right now. Our expectation as 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 equipment, so the productivity that we're going to get is no longer to be 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 that 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 powertrain and capacity.

Our next question comes from Larry De Maria from William Blair.

Hey, thanks. Good morning, and best of luck in 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 cautionary comment that we won't have these kind of recovery in growth conditions continuing beyond the near term? Or was that just more an offhanded comment to -- just comment about what to expect right now?

Larry, it's more of a -- we're looking at our order books as they build to the balance of the year. So we don't -- it's not as if we see an entry-year cliff coming by. So we expect the performance to kind of justify what we've put out there for our full year expectations.

Okay. Some of these markets recovered, 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 what innings we are in some of the recovery in some of these markets of where we are?

I don't know because look -- I mean it's a mix bag, right? We can expect as we -- as I mentioned early in the call that our expectation is that LATAM demand in the second half of the year should ramp up. That something that we deal with every year it seems because of the 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's 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. In NAFTA, 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 we should be in the position to plan for that.

Okay, thanks. And I think you said construction orders up 30%. That's on a global basis, I believe, I'm just going -- 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 order books, but just for Commercial Vehicles and for AG, what's the global order book be looking like now?

It's 20% in Construction Equipment and 10% in Commercial Vehicles. And AG, I think, on a global basis, is flat. But it's moving region by region.

Understood. Okay, thanks. And best of luck, Rich.

Our final question comes from Ann Duignan from JPMorgan.

Can we start with incremental profits and your guidance? I know as David focused on the revenue side and the lack of an 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, relatively easy comps. Have incrementals peaked? And is that why you haven't taken up your outlook for earnings per share by more than you did?

I mean, since this is our last call together, I mean there were pretty good, Ann. Don't think that they were that low. I mean we're now getting into the 20s in AG, which is pretty good, especially for a 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 traditional 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 of the year to generate significant cash flow in Q4. But as you know, if we -- by then we're going to have a view of what 2019 is setting up to be. So if we believe that demand is going in our favor, then we would revisit our production plan. So there is a possibility of additional industrial absorption and growth margin benefit than 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. I'm not in the position to do it -- to say anything about Q2 then, but let's wait until -- traditionally, we see where we are, we know our order books are and we know our inventory is and we'll have a better idea if there's any upside in terms of production performance or incremental margins.

Okay. So seasonally, Q2 should be better than Q1 then?

History would say that.

Yes. Okay. And then my second question, again, maybe not a fair one to you since this is your last call, but just conceptually, you're giving up market share in Commercial Vehicles in Europe for pricing, that's to be applauded, but that works okay in a rising end-market environment. Where's the balance between what you can afford to give up in share and volume versus pricing? What level of market share are you willing to give up?

Yes. I don't think that I'm in a position to put in numerical figure or a percentage on it, right? I think that we had said last year that we had underachieved in terms of margin performance in Commercial Vehicles, especially in the heavy truck segment 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 in our aspirations in terms of volume and move to price. As you can see in Q1, we're positive price in Q1. That's the first time we've been there and quite some time in 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. Appreciate it. And best of wishes, Rich. I'll miss being snippy with you.

As we 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, Allison. 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.