CNH Industrial NV (CNHI) 2018 Q2 法說會逐字稿

Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial 2018 Second Quarter and First Half Year Results Conference Call.

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

(Operator Instructions)

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

Please go ahead, sir.

Thank you, Liza.

Good morning and afternoon, everyone.

We would like to welcome you to CNH Industrial Second Quarter 2018 Results Webcast Conference Call.

This call is being broadcast live on our website and is copyrighted by CNH Industrial.

Any other use, recording or transmission of any portion of this broadcast without the express written consent of CNH industrial is strictly forbidden.

CNH Industrial interim CEO, Derek Neilson; and Max Chiara, group CFO, are hosting today's call.

They will use the material you should have downloaded from the CNH Industrial group website.

After their presentation, we will be holding a Q&A session.

As a final comment, 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.

Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent report 20F and EU Annual Report as well as other periodic reports and filings with the U.S. Securities and Exchange Commission, SEC, and the equivalent authorities in The Netherlands, AFM; and Italy, CONSOB.

The company presentation may include certain non-GAAP financial measures.

Additional information concerning these measures with reconciliation to the most directly comparable GAAP financial measures is included in the presentation material.

I will now turn the call over to Mr. Derek Neilson.

Thank you, Federico, and good morning, good afternoon, to everyone.

I'd like to start today by taking a few minutes to talk about our Chairman, Mr. Sergio Marchionne.

As you're no doubt aware, we received the terrible news yesterday morning that Sergio had passed away.

This is an incredible sad and difficult time for all of us in CNH Industrial, and our thoughts and prayers go out to Sergio's family, friends and colleagues.

The Chairman had a remarkable ability to drive us forward towards new and ever-increasing goals through a unique combination of courage, tenacity and unconventional way of thinking.

This was true leadership.

His unnerving forensic knowledge and sharp wit made a lasting impression on everyone who came into contact with him.

In his 15 years at the helm of, first, Fiat Group and then FCA and CNH Industrial, he championed transparency, responsibility, openness and respect.

We will not forget these principles and we will continue to build on the legacy he has left us.

I know that I speak on behalf of all my colleagues and the entire personnel of CNH Industrial when I say that it has been a privilege and an honor to work alongside such a unique and inspirational leader.

We will miss him immensely.

All CNH industrial locations across the globe will be observing a moment of silence during the [sabbath] to pay their respects to Mr. Marchionne.

I would please ask you to now join me in a minute of silence in memory of a very unique and special person.

As difficult as it is, if I can bring us, at this point, back to the business.

We are pleased to report a solid quarter in terms of year-over-year improvement in each of the businesses and across the key metrics.

And for that, I would like to give credit to the CNH Industrial team, who have, as you know, encountered several changes in leadership, both at the beginning and during the quarter.

Despite these changes, the team remained fully focused and delivered in line with our business plans.

This is how we will continue and honor Sergio's legacy.

If I look at end markets, I would say that we continued to demonstrate sustained demand, resulting in strengthening order books, increased production and stable inventories to comparable periods.

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

We achieved an adjusted diluted EPS of $0.20 per share, up 56% compared to Q2 last year, which marks our strongest quarterly performance since 2014.

Operating cash flow of $0.8 billion contributed to a lower net industrial debt of $1.3 billion at the end of the quarter as well as continued profitability improvements in all industrial segments with year-over-year adjusted EBIT and margin growth.

Our quarterly R&D was up 15% over 2017 as we continued to invest in new products and technologies to drive the next generation of our platforms and increase our product competitiveness.

Our CapEx was up 7%, while we continue to drive improvements not only in our products but also in the efficiency of our industrial operations.

We also have a positive message related to Moody's that Max will speak about in his section a little later.

Before moving ahead, I'd like to discuss our preliminary view on a few of the key market developments affecting our industries.

In terms of our strategy for material cost increases, the structure and timing of our supply contracts have minimized the impact during the first half of this year.

Looking ahead, we have implemented price increases and/or steel surcharges where applicable to offset the increased cost that will impact us in the second half.

So here, we are not expecting any significant negative headwind.

Despite the problematic microenvironment, uncertain farmer sentiment and the geopolitical and trade tensions underway, we believe we have a sustainable core business performance going forward, as demonstrated in this last quarter.

But the current scenario makes it more difficult to project the demand going forward.

Hence, we are adopting a cautious and sensible approach to the outlook for the balance of the year.

That said, and based on our strong Q2 performance, we are updating our guidance metrics for 2018 by increasing our adjusted diluted EPS to be between $0.67 and $0.71 per share and by lowering our net industrial debt guidance to between $0.7 billion to $0.9 billion.

If we move forward to Slide 4 and go into a bit more detail, this gives you a good overview of the industry trends we faced for each of our segments during the quarter with relevant company-specific comments.

Worldwide tractor and combine industry units were up 9% versus last year.

NAFTA row crop continues to trend positively with strong performance as dealers restock inventories and customers replaced dated equipment.

In LATAM, Brazil was slightly positive with a strong finish in June after the Mother Tractor conditions were released for the new harvesting season, partially offset by a distinct weakness in Argentina due to weather and monetary instability.

Production was up 9% versus last year, flat to retail on a worldwide basis, with company inventory slightly up in tractors and up 19% in combines, due to a positive order book development in Q3 in NAFTA and in support of an improved industry outlook in Brazil for Q3.

CE, again, was positive in all regions as the global construction trends we have been seeing continue and in some cases gain strength, especially in the heavy equipment.

Worldwide light and heavy industry units were up 20% and 34%, respectively, versus last year.

In the quarter, our production levels and retail were up supporting a healthy order book, which is up approximately 15% compared to the comparable period.

Our commercial vehicle in the EMEA truck market was up 11% year-over-year, with all key markets demonstrating positive year-over-year growth and continuing to perform at a high level.

LATAM, specifically, was up 28%, with Brazil up 45% -- off a low base granted -- and Argentina slightly down 3% in the quarter.

When we turn to the market outlook for the full year on Slide 5, it's no secret that our year-to-date performance and the majority of the industries where we compete has been better than we originally anticipated at the beginning of the year.

With that in mind and despite a difficult to predict business environment, we have modestly updated several of our industry estimates as a result of the year-to-date trend and solid order book on hand.

Trade and geopolitical tensions are not making it easy to forecast, but -- although, we are not seeing material effect, so far, on end user demand.

We believe the industry will show some softening in the second part of the year compared to the first half.

That said, it's key to highlight that we are carefully monitoring the situation and are ready to quickly respond to any relevant negative twists in business sentiment that would translate into the demand weakness, if that were the case to take place.

I won't go through all the changes here, but generally speaking, EMEA AG retail is still seen as flat year-over-year and we're adjusting for more unit registrations due to factors associated with the Tractor Mother Regulation introduction at the end of 2017.

In Construction Equipment, we have increased our industry outlook across the board as we have seen and are anticipating better-than-originally expected demand, especially on heavy equipment.

Finally, in Commercial Vehicle.

The market in EMEA remains at a high level so we see it coming closer to the top of the range we laid out last quarter as fundamentals in the industry remain particularly solid in terms of fleet replacement, freight indicators and finance interest rates remain attractive to customers.

On Slide 6, we had another great quarter in terms of awards, product introductions and cost saving efforts.

Last month, Iveco Defence vehicles was awarded a contract to deliver an amphibious platform to the U.S. Marine Corps.

in partnership with BAE systems.

The initial award is for 30 vehicles with an option for over $200 million -- worth up to $400 million over the first 4 years of the contract.

In terms of product introductions, Iveco trucks has been completing the launch of the new Stralis X-WAY.

Last month, we unveiled at Intermat in Paris its natural-gas-powered vehicles.

This vehicle is developed for construction logistics and urban services that combines all of the benefits of Trakker chassis and off-road capabilities with best-in-class payload on-road performance and fuel efficiency.

I would also like to take this opportunity to congratulate the hard work of our employees at Jesi, New Holland plant in Italy.

The plant achieved the Silver Level World Class Manufacturing award.

Our world-class manufacturing program, along with other cost-saving strategies has been vital to our company's improved results.

At this time, I will now hand over to Max for the financial overview of the presentation.

Thanks, Max.

Thank you very much, Derek, and good morning, good afternoon, everyone on the call.

Before I start my section, please allow me to add a brief comment regarding Mr. Marchionne.

I would like to share with you the uniqueness of our boss, who was an inspirational and motivational leader beyond anyone else.

It is no secret that many in our organization, like me, will be ever grateful for having had the chance to be guided and inspired by him these past 5 years at CNH Industrial.

With that said, I would like to return to the business at hand, exactly as he would have expected me to do.

Moving on to Slide 7, key figures for the second quarter.

In summary, we ended the quarter with solid end-market demand in our main businesses, driving increased volume with an improved product mix and achieved positive price realization across our businesses, leading to net sales of our industrial operations, up 16% year-over-year at $7.6 billion.

With this top line performance, we were able to demonstrate strong leverage with a 44% increase in our adjusted EBIT, with all businesses improving year-over-year as a result of increased production and more favorable mix, especially in AG and CE.

Those improvements, coupled with a further reduction in interest expense and an ETR of 23%, allowed us to report an increase in our adjusted net income of almost $150 million year-over-year or 56%, despite increased FX volatility, mainly in emerging markets.

Specifically on tax, as a result of a more stable trend achieved now for 2 consecutive quarters, for the full year 2018, we are upgrading our expectation for an adjusted ETR of approximately 28% from 30% before.

Adjusted EBITDA of Industrial Activities closed at $571 million with margin up 1.4 percentage points to 7.5%.

Adjusted EBITDA of Industrial Activities was $843 million, up almost 30% from last year, with a margin of 11.1%.

Adjusted net income was up 56% versus last year Q2 and adjusted diluted EPS increased to $0.28 per share, up $0.10 from last year.

Net industrial debt was $1.3 billion at the end of June 2018, $0.6 billion lower than in March as a result of strong operating cash generation in the quarter.

As a result of continued actions to reduce our gross indebtedness during the first part of 2018, the ratio of gross industrial debt-to-adjusted EBITDA was 2.1x, with the equivalent net debt to adjusted EBITDA ratio at 0.5x at June 2018.

Available liquidity was $8.4 billion, up $0.7 billion compared to March 2018.

The liquidity to LTM revenue ratio was maintained just below 30%.

This performance is a clear sign that we remain fully committed to further improving our credit rating from the current levels.

Speaking about that, during the quarter, Moody's raised their outlook to positive from stable for both CNH Industrial N.V. and CNH Industrial Capital LLC.

And we booked a positive impact from the modification of our healthcare plan following the favorable judgment issued by the United States Supreme Court, as previously announced on April 16, 2018.

Turning to Slide 8. I would like to talk in greater detail 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 over $1 billion.

Net of the $220 million positive currency translation impact, net sales increased $834 million, or almost 13%, with Agricultural Equipment contributing $507 million and up 18% as a result of favorable raw crop demand, primarily in NAFTA, positive company inventory conversion in NAFTA and to a lesser extent in EMEA, and price realization across all regions.

Construction Equipment net sales increased $145 million or 22% as a result of favorable volume and mix across all regions and especially heavy equipment industry, which was up 34% year-over-year in the quarter.

For Commercial Vehicles, net sales increased $154 million or 6%, as a result of favorable volume and mix in buses and positive price realization, primarily in EMEA and LATAM truck markets.

Powertrain was up $15 million.

On a total industrial base by region, net sales were up across the board with a particularly strong performance in EMEA and NAFTA and LATAM to some extent.

Turning now to Slide 9, with the quarterly Industrial Activities adjusted EBITDA and adjusted EBIT walk.

Adjusted EBITDA closed at $843 million, with a margin of 11.1% and was up 1.1 percentage point compared to the same quarter of last year.

Looking at the adjusted EBIT walk, all segments, again, contributed positively, with AG making up more than 75% of the increase with the adjusted EBIT ending up almost 45% to $571 million with a margin of 7.5% as we continued to deliver on our profitable growth target.

Moving on to Slide 10, our change in net industrial debt.

Net industrial debt of $1.3 billion at the end of June decreased by $0.6 billion from March as a result of strong operating cash generation and a positive change in working capital, primarily coming from higher payables in support of the increased production levels.

When comparing operating cash flow generation this quarter to last year's quarter, on top of the stronger operating performance, we have an improvement in total inventory with a lower seasonal buildup coming primarily from the AG company inventory conversion and other general working capital improvements.

In CapEx, we are now starting to see an inversion in spending moving up year-over-year and with a shift in focus to new product spending.

Particularly, the spending is around Stage V engine applications, the precision farming program in agricultural equipment and a continued focus in new product development for our truck and bus division.

In April, we paid an annual dividend to shareholders for $235 million.

In addition, we have continued to execute on our stock buyback program, adding almost 4 million of our common shares for a total consideration of $44 million repurchased in the quarter.

In terms of where we expect to move from here, when we look at the cash flow performance in H2 and compare it with our full year guidance, the expectation is to generate cash in the second part of the year, albeit at a more moderate part than last year, to achieve our net industrial debt target.

Moving on to Slide 11, our Financial Services business.

Net income was up $15 million compared to the second quarter last year, primarily due to a better performance in NAFTA, EMEA and LATAM and the favorable effect from the lower U.S. tax rate.

For the quarter, retail loan originations were $2.6 billion, flat compared to last year.

The managed portfolio of almost $26 billion at the end of June was up $0.8 billion at constant currency.

Credit quality remains strong with delinquencies tracking, on average, at 3.3% of the total portfolio, mainly due to improvements in NAFTA and LATAM.

So turning now to the individual segment performance on Slide 12.

Agricultural Equipment's net sales increased 20% in the second quarter of 2018 compared to the second quarter of 2017, or up 18% on a constant currency.

A favorable end-user demand environment with NAFTA row crop industry demand up 9% in high horsepower tractors and 26% in combine harvesters, coupled with increased sales from company inventory conversion, led to the segment's strong retail performance.

Price performance was also favorable across all regions.

Adjusted EBITDA was $472 million, up $135 million compared to the second quarter of 2017 with a margin of 14.3%, up 2.1 percentage points.

Adjusted EBIT was close to $400 million in the second quarter of 2018, a $135 million increase compared to the second quarter of 2017.

Adjusted EBIT margin increased 2.6 percentage points to 12% compared to last year, a level of margin we have not seen since 2014 in this business.

About half of the increase was due to a favorable volume and mix performance, including positive industrial absorption, primarily in NAFTA and EMEA.

The remainder was due to sustained price realization at 3%.

Raw material cost increase experienced during the quarter was offset by manufacturing efficiency and product cost reductions effort from our established efficiency programs.

Additionally, we had a modest increase in SG&A and a 10% increased spending in R&D, where the main focus is on precision farming and compliance with Stage V emissions requirements.

Turning to the next slide.

Construction Equipment's net sales increased to 23% in the second quarter, up 22% on a constant currency basis on the back of a favorable end-user industry demand environment substantially across the board.

Demand was up 20% in light and 34% in heavy year-over-year.

Adjusted EBITDA was $48 million, up $25 million from the same quarter in '17 with a margin of 6%.

Adjusted EBIT was $33 million in the second quarter, a $26 million increase compared to the second quarter of last year with a margin increase of 3 percentage point to 4.1% as a result of higher volume, favorable product mix, positive industrial absorption and positive price realization at 2.5%, of which 1% was FX, offsetting raw material cost increases.

We see continued year-over-year momentum building into CE as far as sales and profit margins are concerned, adjusted for summer seasonality, albeit at a more moderate path than what experienced in H1.

On Slide 14, Commercial Vehicles' net sales increased 11% in the second quarter of 2018 compared to last year, or up 6% on a constant currency basis, as a result of a favorable product mix and positive pricing primarily in EMEA and LATAM.

Total deliveries were flat year-over-year as increased volume in light commercial vehicles, as a result of favorable end-user demand in EMEA and Brazil, and buses in EMEA -- and buses deliveries in EMEA and LATAM were offset by the unfavorable unit volume impact from the refocusing of the medium heavy vehicle sales to a more profitable product portfolio which includes alternative propulsion vehicles, primarily in LNG and CNG.

Adjusted EBITDA was $239 million with a margin of 8.3% compared to the second quarter of 2017.

Adjusted EBIT was $92 million, an increase of $20 million compared to the second quarter of last year with a margin of 3.2%.

The increase was the result of a favorable volume and mix performance, primarily in buses, and positive price realization, about 2% globally, of which 1% was due to FX in the EMEA and LATAM truck markets, partially offset by a 24% increase in R&D spending in new product development initiatives aimed at enhancing our product competitiveness and fuel efficiency.

The market share for trucks in Europe was slightly down in light and down about 1% in heavy, as we anticipated, as a consequence of the refocusing strategy on more profitable customer segment in the heavy-duty range, including the reduction in sales with buyback commitment.

Trucks book-to-bill was at 0.8 EMEA and 1.3 in LATAM.

Going into the second part of the year, we are staying the course with the product and customer refocusing approach in heavy vehicles in EMEA, including increased penetration of our natural-gas-powered vehicles, which are building momentum in the marketplace and envisaged to build on the progressive improvement in profitability in the segment.

For LATAM, we expect an initial sharp slowdown in the Argentinean markets, post currency devaluation.

Our actions are focusing now on our Financial Services offering and local program subsidy schemes to revive an ailing demand, but we are also expecting to offset some of that with an increase of activity in Brazil.

Slide 15, powertrain net sales increased 7% in the second quarter of 2018 compared to the second quarter of last year.

Sales to external customers accounted for 49% of total net sales and were up 2 percentage points versus last year.

Adjusted EBITDA was $141 million, up $13 million compared to last year with a margin of 11.6%.

Adjusted EBIT was $108 million for the same period, an $11 million increase compared to the second quarter of '17, with a margin of 8.9%.

The increase was due to a favorable product mix and manufacturing efficiencies, partially offset by increased G&A in R&D expenses.

We are very pleased to see that Powertrain continues to deliver very solid profit and margin performance, and we expect that to remain for the balance of the year net of the impact of the seasonal summer shutdown in Europe in Q3.

Lastly, on Slide 17, we highlight our updated guidance for full year 2018.

As a result of the profitability improvement achieved in the second quarter of 2018, CNH Industrial is updating its guidance for the full year of 2018 as follows: Net sales of Industrial Activities unchanged at approximately $28 million.

Adjusted diluted EPS increased to between $0.67 and $0.71 per share from previously $0.65 to $0.67.

Net industrial debt at the end of 2018 improved to between $0.7 billion and $0.9 billion from previously $0.8 million to $1 billion.

This concludes our presentation, and we can now open up for questions, unless Derek has any conclusive remark to make.

Thanks, Max.

No further remarks from my side.

I think we can open for questions.

Go ahead.

Take the first question.

(Operator Instructions) We will take our first question from Mike Shlisky from Seaport Global.

Good morning, guys, and certainly my condolences.

So I want to quickly ask about the guidance.

First of all, it's certainly great that you've increased it, but if you look at the last 3 years, you've made above half, call it, 1/2 to 2/3 of your full year earnings in the second half of the year.

You've already put up, in the first half, about $0.43 of EPS the first 2 quarters and things seemed to be going quite well.

I know there's some caution, Derek, you said out there in certain select areas, but is there a reason why you're expressing a pretty significantly lower back half, or we won't get at least $0.45 in the back half, or is there a certain signal you're waiting for to kind of hear about what happened to maybe up the back half on the next quarter's conference call?

Mike, I mean, the -- first of all, thanks for your message.

I mean, essentially, the trade war is what's driving the prudent approach we have taken in the second half of the year.

As you know equally as well as I, it's changing by the hour and not even by the day.

So again, we understand in the last 72 hours, we have the $12 billion aid package.

We saw in the news last evening that the U.S., EU zero tariff trade platform approach seems to be positive.

But quite frankly, we need to unwind what those 2 factors are going to deliver more in terms of timing, rather than in terms of expectations as well.

So I mean, I can assure you the machine is running well and we are confident we can carry the performance that we saw in H1 followed into H2.

But really, we're taking a point of caution and being prudent on this forecast based on the uncertainty of the trade war, which we believe is a sensible approach from our side.

For sure, as we go through Q3, then we would hope that, that will unravel and become much clearer to us.

And then, obviously, we can give you a much clearer consensus or forecast for the full year.

Okay.

That's fair.

Perhaps, secondly, Derek, obviously you're not someone new at CNH, you've been around for a while, but you are new to being the CEO.

Could I get a sense, even though you're interim, are there anything you're kind of thinking about changing at the company?

Are there any quick payback, low-hanging fruit you can do from a cost structure perspective or maybe some small tweak to the product portfolio that might be on your current list of things to do here in the first couple of quarters?

Yes.

I mean, again, as I referred earlier, I mean we're confident we can drive the business forward in H2 as we have in H1.

Those include a number of different activities, cost containment, margin improvement, focused activities within specific models, products and specific marketplaces.

Again, it's business as usual, quite frankly, in the second half of the year compared to the first half.

I don't think there's any magic or dramatic factors come in; it's really the case of pushing hard on the things we've done well thus far into the second half of the year and make sure that we sustain a positive level of performance going after.

We will take our next question from Ann Duignan from JPMorgan.

And I would just echo everything you said.

When I initiated the coverage on CNH 15 years ago, I had an overweight rating.

And the piece is that I wouldn't bet against Sergio, so I think we all agree with your sentiment.

My question, I think we all appreciate what's going on with trade wars and I agree that visibility is limited, at best, out there in the Midwest right now.

Maybe you could address and talk about the fundamentals in Europe, in particularly what you're seeing in the dairy sector, the cereal sector, especially in light of recent weather and the expectations there for Stage V pre-buying versus the fundamentals?

Thanks, Ann.

I understand that I'm relatively new to this.

You've followed it for 15 years and you appreciate the distance the company has come over that period under the stewardship of our Chairman.

I mean, with specific -- specifically to answer your question, I mean EMEA is, not for the first time, a complicated environment.

I mean, we have a number of markets that are performing slightly better than expectation, unfortunately offset by a number of markets which we see softening.

I would say France starts to show some sign of recovery which, again, coming off a very low base from the last year is a positive sign, given the weight of France on the European market.

We see the northern hemisphere of Europe, again, remaining stable, solid across the sort of various sectors of the Agricultural business.

So again, I think net-net-net, we are forecasting the market to be flat or slightly up.

Again, I don't see us -- quite frankly, I don't see us returning to the heights of the peak and trough that we maybe experienced in the last decade.

I think what we see now is becoming more of the norm, and I think it will be a slow and steady growth and decrease that we see in EMEA.

I would say, however, positively I think we have reached the bottom of the cycle.

We are now in a steady growth in there as well.

I mean, specifically to your question on dairy prices, I mean as you've seen in the past quarters, and quite frankly over the past years, the EU support of AG is quite important.

And they've demonstrated that they'll protect the industry.

So farmers are also now quite unified in most regions and make their concerns heard on policy changes are being contemplated.

So it's something we continue to monitor closely.

So again, we are not envisaging any major changes in the business direction than we've reported in the past.

I hope that answers your question, Ann.

Yes.

And my follow-up then would be, of the revision to your guidance, how much of that revision is actually the tax rate going from 30% to 28%?

Yes.

So this Max, Ann, speaking.

Basically, half of the improvement comes from the tax rate and half comes from the improved performance, but with the caution of the sensible approach.

So that's why, also, we have reopened up the range a little bit from $0.67 to $0.71.

So if you look at the upper end of the guidance, obviously, there is more upside to come from the businesses than from the tax rate.

We will now take our next question from Steven Fisher, UBS.

Thanks very much and offer my sincere condolences as well.

It seems like your guidance does suggest some margin pressure in the second half of the year.

How much of that is the price versus cost dynamic versus R&D step-up versus maybe just other things or just keeping the top line flat because you are trying to be conservative out there given the environment?

Stephen, maybe I'll ask Max just to walk you through some of the key highlights or the key metrics within there.

Yes.

I mean, it's a very simple answer.

At the end, what we anticipate is to continue to improve our performance in the 2 business that are particularly under watch for turnaround and recovery, so CE and CV.

As we said during the presentation, we expect Powertrain to continue to deliver those levels.

So the big question mark is around the unknown and the end market and the turn of the farmer sentiment vis-à-vis the AG business.

So at the end, the twist in our number for the second half is going to be sitting in the AG performance.

And I would only add to that -- I'm sorry, I would only add to that.

I mean, we have a couple of businesses that, let's say, haven't been performing in line with our expectation.

I know we've reported on previous calls that we've taken some remedial action to address the improvement of those business, and we start to see those businesses turn around and contributing to the overall performance as well.

So again, it's something we'll continue to push forward.

It's something we're confident will continue to grow the overall performance of the business.

Great.

And then can you just maybe give us a sense of your AG order book by region year-over-year?

I mean, what's the extent of the visibility that you do have to 2019 at this point and have you seen any real change in farmer sentiment in recent weeks?

Any kind of changes in the order patterns or anything like that?

Yes.

I mean, specifically to answer your question on the order book, I would say that from a consolidated -- in the agricultural business, our consolidated level, we're tracking slightly ahead of last year.

But I think the key sentiment, the key positive factor within that is if I look at our high horsepower tractor and combine order book and NAFTA and the row crop segment, we are particularly positive year-over-year.

So again, we are very I'd say -- no, we're very hopeful we can continue that trend going, but the NAFTA order book is indeed very positive year-over-year.

The others are tracking plus or minus a few percentage points.

Again, some of them are relatively good base.

So again, expectation to have increases year-over-year weren't necessarily the case.

Again, I go back to the trade war from what that ultimately will mean for us at the end of the day, I mean, it's a strange situation.

I mean, if we look at the order book, it suggests end-user sentiment is negative, is what may be out there.

But when we typically talk to the end-users themselves, there's an element of wait-and-see, an element of caution in there as well.

So as we said earlier in the presentation, we think that will likely slow down a little going forward until there's more clarity of what this trade restriction actually means going forward.

But I think you summarized in the question, we are actually quite comfortable and positive on our order book as it is today.

We will now take our next question from Rob Wertheimer from Melius Research.

It's Rob Wertheimer from Melius.

And just to add, I mean, the portfolio of companies sort of overseen by Sergio have all been remarkably impressive, so it's a testament to all of you and to him, really impressive.

So my question is on trucks.

What actions have you taken that have yet to sort of show up in the margin and what structural actions do you think you have left to take to -- the business is at high cycle in the major market, obviously not in Brazil, I mean what's left to improve on there, please?

Thanks.

Thanks for your kind words, Rob.

So I mean the -- I'll split (inaudible).

So from an industry perspective, as we alluded to earlier, we are still managing within a very high industry in the region European region which, again, is very good for us and we're taking full advantage of.

Light and medium businesses have typically been good businesses.

There, again, we continue to grow margin, we continue to grow share and continue to grow profitability in the back off.

Again, I think it was explained in detail in the last quarterly call that we took an approach to focus on more profitable portfolio on the heavy truck segment instead of chasing volume.

We also are complementing now with, again, new products that we're launching in this period for the heavy truck and those products include alternative propulsion vehicles which, again, gives us an advantage in the marketplace as well.

We're starting to see the dividends of that in the results.

You saw in the numbers that Max presented earlier.

We're, by no means, at the end of the road, but we are confident that the strategy we have in place is sustainable for the medium- to long-term future.

I don't know, Max, is there anything you would add or...

If I could just put a little bit of caution into Q3.

We're probably going to face a little bit more of pressure from a volume standpoint as we are building up into this strategy.

Obviously, on the other side, you're going to have the full realization of the pricing actions that we have put in place.

And at the end, it will depend upon the execution on the mix change that Derek mentioned, moving away from the, let me say, the diesel propulsions into the alternative propulsion, primarily LNG for heavy-duty trucks, right, and CNG for light and medium, as we see the penetration of those applications growing fast as we move along our strategy.

And our next question is from Monica Bosio from Banca IMI.

First of all, before starting with the question, let me express my sympathy on the loss of Sergio.

I join the sentiment of the company.

And then speaking about business, I would like to ask about the outlook in NAFTA for high horsepower.

The company had a 9% -- the market was up by 9% in the first quarter for high horsepower, but I see that the industry outlook for the full year has remained unchanged.

Is this due to your point of cautious or for other reasons?

And the second question is on the -- if you can comment a little bit more on the net debt trend evolution in the second quarter because, actually, I was expecting a bit of a cash burn from working capital due to the ramp-up in production; maybe I lost something.

And the third question is if you can give us a rough indication of the financial charges by year-end and of the CapEx?

Thank you, Monica.

I mean, I'll take the first question, and then I'll ask Max to do your second and third.

I mean, the answer is yes.

The -- and again, I would break it into sub-answers on the high horsepower.

There is a market up to date as represented in an order book, so there is end-user demand.

There's clearly a need for farmers to trade out their used equipment.

Commodity prices are relatively depressed so the farmers are looking for new equipment to be more efficient to ensure that their operations in the farm are manageable and profitable for them.

And again, everyone is waiting and seeing, from the farmer to the dealer to ourselves, just to try and understand how this whole trade war fiasco is going to pan out in terms of what the end picture and end position is -- is 100% tariff, is a 30% tariff, and what is their exact effect.

There's no doubt that the aid package that was communicated by USDA was -- will be a positive factor.

But again, from the data we've gathered thus far, we understand there'll be 3 programs that will take effect in September.

But we really need to get through the next weeks and unravel exactly what that means in terms of support to the farmers themselves.

So again, it's a point of caution.

We don't envisage any major fundamental weakness in the business itself.

We don't envisage any lack of need for the products themselves.

It really is just to get clarity of this trade war fiasco that we kind of find ourselves embroiled in.

Max, to answer the other 2 questions, please?

Yes.

Thank you, Derek.

And then thank you, Monica, for your sympathy from myself as well.

So let me start with the financial charges, first.

So basically, what -- the number you see right now is our current run rate.

And that speaks for a year-over-year improvement on the financial -- of the interest expense of about $55 million to $60 million, which is what we committed to at the beginning of the year.

Speaking about that, obviously, we continue to look opportunistically at the capital markets to see if we can identify with the right timing opportunities to further extend the duration of our debt and lower our cost of capital as we now enter into a full investment grade area.

Moving to the net debt and the components of it.

We typically tend to generate cash in the second quarter and in the fourth quarter, with the fourth quarter being the highest performance of the year normally.

So we are entering the second half of the year where we expect to generate cash.

We are basically, let me say, almost flat in the first 6 months.

But the expectation is for a cash-generation number that is not to the tune of last year, where we basically made $1.4 billion in the second half.

And there are 2 main reasons for that.

One, obviously, as we have been mentioning now for some time, we expect CapEx to start to ramp up and moving towards 2% of sales down the road.

It's going to take some time, probably, to unfold those new initiatives that hit R&D last year and this year into the CapEx number with the new tooling, but at a certain point is going to come.

The second item that will be negative to last year, as you clearly mentioned in your question, is the working capital.

And there are a few reasons for that.

One is inconsistency with a cautious approach that we are taking vis-à-vis the end market, particularly in Agricultural Equipment.

We are also trying to make sure that we don't get stranded on the supply chain.

We are kind of holding some safety stock.

And that safety stock is going to, obviously, continue through the balance of the year and eventually grow to make sure that we don't get surprised by swings in the working -- in the supply chain.

And at the same time also, it's important to recognize that at the end of the year there will be the first introduction of the Stage V engine application, so some stockpiling actions also happening over there that will consume cash, at least for the balance of the year.

So with those 2 items in mind and with a cautious approach, we would like to basically confirm our guidance for the full year with a positive cash flow generation in the second half, which will obviously drive a number for the full year in line with our expectations.

But it remains to be seen how much of that uncertainty will unfold in the market to see how the number may flex down the road.

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

Our thoughts certainly with all of you on the call and your colleagues worldwide during this difficult time.

I wanted to circle back on trucks and just some of your comments around alternative powertrains just to understand where penetration is in Europe right now on CNG/LNG, how that compares to where it was a couple of years ago and then how you see that playing out over the next couple of years, just to understand that growth opportunity.

Thanks, Joe.

I mean, we're not going to disclose any numbers.

What I would offer to you is that we see it as a growing segment in the marketplace.

I would tell you that we have taken full advantage of that with the product lineup that we have available to us.

And I will also tell you that we continue to invest on that product line.

And as this segment continues to grow, which is our expectation, then we expect to take full advantage of that going forward.

I hope that's enough to answer your question, Joe.

Yes.

Maybe something we can follow up on.

Yes.

The -- also, just with respect to today's announcement on the agreement with IBM, and you talked about some of the supply chain and manufacturing kind of issues that will be addressed there.

Can you put in context what that means from a margin opportunity side of things?

What that means from a working capital management side of things and more cash that you can free up?

Yes.

As Max heads our ICT operations in CNH Industrial, I'll give him the stage to tell us exactly what he's doing.

Thank you, Derek.

Good point, Joe.

Actually, this is an important step into our transformation journey in ICT, as we continue to invest into renewing and extending our platform partnership with larger IT vendors.

Fundamentally, there is a hard saving that we expect to achieve on a yearly basis that has some relevance, but it's definitely not a material number.

Plus, obviously, once those technologies are being introduced into the business functions, there is another potential to take out cost or minimize cannibalization or loss of sales as new digital technologies are being introduced in the marketplace, as for example, e-commerce platforms and so on.

So in summary, there are hard savings that we're starting to, let me say, book going forward pretty soon, and there are further potentials to be generated once those technology are fully invested into the business.

And then just one last one on the back half of the year guide, thinking that what you have in the order books at this point and the equipment that you would be delivering into harvest season, thinking being that 3Q might be a little bit more secure and that the caution might be a little bit more weighted toward 4Q uncertainty.

I'm just looking to see whether or not that's accurate.

I think for the Agricultural business that would be an accurate assumption, again, with a slightly different blend by region.

I mean as we know, EMEA typically has a prolonged break in the period after -- until after the harvest.

But for sure in NAFTA, I think that would be a fair assumption, Joe.

And our next question is from David Raso from Evercore ISI.

I had a question about the order book for NAFTA.

I was encouraged by the comments you had about the positive order book development for 3Q.

Then, obviously, you also spoke about some uncertainty.

The orders that you have now, just so I'm clear, the orders -- these are second quarter orders you took for 2018 deliveries.

Has there been any early indication about '19 and what you've been seeing maybe more recently?

The -- sorry, Dave.

Yes.

The answer is yes.

So the orders that we have in hand we collected in Q2 for delivery in the balance of the year.

We will be going out fairly soon to -- for the order writing program for the balance of the year, typically for delivery in Q4.

We are not collecting orders at this point for 2019.

That would be something that we would be in a position to share with you when we have the Q3 call together.

Okay.

That's helpful.

And also on the price cost and manufacturing efficiencies in the second quarter for AG were very impressive that it all netted out to the -- basically where all pricing fell through to the bottom line.

And again, I know it's hard to know exactly, but the way you bucket volume separately, somewhat regardless to volume to some degree, how should we think about the rest of the year on price versus raw material and including the efficiencies?

And it just -- it was an impressive performance on the efficiencies and I'm just trying to understand.

Can we hope that can continue for the back half of the year or raw material is going to be getting a little too aggressive on their increase to offset from the efficiencies?

Let me take -- Derek, let me take the technical part of the question and leave it to you for -- to explain the efficiency program.

So David, it's important to keep in mind, obviously, we are running right now with raw material headwinds that are starting to bite, but some of those headwinds, due to our standard cost methodology, right, that has an inventory, and they're not going to basically come to fruition into the P&L until we sell those units.

So there is a little bit of holdback on the headwinds that will manifest themselves in the second half.

So that's why you tend to price ahead to be able to basically, once they come to fruition, have the pricing running to be able to offset some of that issue.

As far as the manufacturing efficiency programs, I leave it to Derek.

Yes.

I mean, as we said earlier, I mean, we have the pricing actions in place that we believe will accommodate for the raw material headwinds in the second half of the year.

That may not be exclusively and we have some other judgments, but I think they will be minor rather than major.

With that in mind, then that should allow the manufacturing efficiency to drop to the bottom line.

I do have to temper that and say that if we do have a softening in the volume, as we alluded to earlier, then obviously that would drive some unfavorable absorption of our plans.

Not material -- but again, we have a 365-day a year efficiency program that we continually drive in industrial operations.

So every day, we execute it when it comes to the bottom line.

I don't see any reason why that won't continue in the balance of the year.

Okay.

So some of the raw materials in the order book that ship in the third quarter will see that, but you've also taken price actions that you feel pretty comfortable with the price cost/efficiency relationship for the rest of the year?

Correct.

I mean, again -- sorry, it's a correct statement.

I mean, again, it's a bit of a moving target as well.

I mean, obviously, the tariffs have been affecting steel prices.

Okay.

We had news last evening the zero tariff trade approach from the U.S. and the EU suggests that we should have seen the worst of it.

But again, with it come -- the deviations we saw over the last 6 months, then I would like to understand exactly what that means before speaking knowledgeable to it.

So again, I think we have by and large covered in terms of pricing for raw material headwinds for the balance of the year.

We don't envisage that being a major issue.

All right.

Thank you for the time and my condolences to everybody at CNH.

Our final question comes from Ross Gilardi from Bank of America.

Let me just add my deepest condolences on Sergio's passing as well.

I'm sure it's a very hard time and my thoughts are with everybody at the company.

Obviously, a lot of conversations have been happening for years at CNH around future portfolio structure.

And I realized it may be a hard question to ask, but I'm just wondering, just directionally, does Rich's departure earlier in the year and now Sergio's passing, does it potentially delay the timing on any potential future transformation decisions to later in 2019 or 2020?

And obviously you've been kicking around a lot of ideas for many, many years.

I'm just asking more about just the timing of any decisions, if anything, do you think is impacted?

No.

I mean -- first of all, Ross, thanks for your condolences.

I mean, the -- for me, it's a never-ending cycle.

I mean, we -- every company, and we are no different from most, continue to look at the portfolio, the product, the business as part of, let's say, the functional operations of the business.

And we're no different, quite frankly.

The -- I mean, clearly, we're going to appoint a new CEO in the near future.

I think we should be cautious to comment until the new CEO is onboard because, I think, it's first for him or her to make the statement of what may or may not change in the future.

And again, with great respect, we've taken on a new chairperson since last Saturday.

So again, I think we need to give the time for the new chairperson to acquaint himself for the business season and address those questions.

So I don't think materially it's delaying anything.

Again, I think there's a robust solid team behind Mr. Tobin before, behind myself.

So the team -- and again, they're seasoned professionals on the team, so they're constantly looking at the cycle of opportunities and how we can grow the business -- organic, inorganic and so on, and so on.

So I don't think it's going to be a material delay of anything, if we did consider to do something in the future.

But I think we have to give caution to the appointed new CEO and the new chairperson onboard and give them the opportunity to give you more clarity in the future.

Ross, sorry, if I may add a comment to your question.

If you remember, the second part of the story that was being wired in the past was, in the meantime, until we get ready for whatever actions we may take in the future, obviously, we need to continue to address our quest for further improvement in the credit rating as we strongly believe that our sector pertains to a high investment grade rating structure, and we want to get there as quickly as possible.

And also, we are looking -- continue to look opportunistically into our capital structure to identify options for extension of the duration of our debt.

So while -- I mean, we have to pause for a second the company and the team is not staying still, we'll keep working on those 2 priorities.

And just, Derek, I realized maybe it's a somewhat awkward question for you to answer, but you did mention that the company is going to appoint a new CEO in the future.

What's being communicated internally about that?

And can you say -- do you expect to announce something by the end of 2018 and can you comment at all on whether the search is mostly internal or external?

The only thing I would say, Ross, is -- no, the only thing I would say is, I mean coherent with the press releases we saw the last days, the search is in progress.

I can confirm that's the case.

Again, in the meantime, myself and the management team are focused on bringing forward our commitment and delivering our guidance for the year.

So whether it be September, October, November, December, the machine and the management team will continue to drive the business on.

And once the decision is made, then the decision is made.

So you'll be first to hear.

And our last question comes from Mario Gabelli from GAMCO Investors.

In light of the time, let me echo the comments of the preceding.

I'll talk to you guys individually about what's going on in the truck market.

Okay.

Thanks, Mario.

That will conclude the question-and-answer session.

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

Thank you, Liza.

We would like to thank everyone for attending today's call with us.

Have a good evening.

That will conclude today's conference call.

Thank you for your participation.

Ladies and gentlemen, you may now disconnect.