CNH Industrial NV (CNHI) 2019 Q1 法說會逐字稿

Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial 2019 First Quarter Results Conference Call.

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

(Operator Instructions)

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

Please go ahead, sir.

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

We would like to welcome you to the CNH Industrial First Quarter 2019 Results Webcast Conference Call.

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

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

We're pleased to have here with us today CNH Industrial CEO, Hubertus Muhlhauser; and our CFO, Max Chiara, who will be hosting today's call.

They will use the material you may download from the CNH Industrial website.

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

As a final comment, please note that any forward-looking statement we might be making during today call are subject to the risk 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 filing with the U.S. Securities and Exchange Commission and the equivalent authorities in The Netherlands and in Italy.

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

Additional information including reconciliation to the most directly comparable GAAP financial measure is included in the presentation material.

As a reminder, please note that starting from Q1 2019 onwards, we have updated the geographical composition of our regional sales information as indicated in the supporting material of this earning release consistent with the new jack organization.

I will now turn the call over to our CEO, Hubertus.

Thank you, Federico.

And good morning and good afternoon to Europe, to everyone.

While many of us felt and clearly hoped that some of the uncertainties that are unfortunately impacting our markets globally would have subsided by now, in most cases they have not.

Regardless, we set a clear direction for ourselves at the beginning of the year and our relentless execution allowed us to print a record net income first quarter to start 2019 off on the right foot.

Before digging into the quarterly highlights, I'd like to thank our almost 65,000 employees, not only for their commitment and endurance in delivering a strong quarter, but also because many of them are in parallel actively contributing in the preparation of our new strategic business plan with the objective to transform our company from good to great.

Turning to the first quarter highlights, industrial activities net sales were up almost 2% in constant currencies and adjusted EBIT was up 7% with operating margin increasing by 50 bps.

We had a record first quarter in terms of adjusted net income at $248 million and adjusted diluted EPS up almost 30% to $0.18 per share.

Additionally, net industrial debt was at $1.5 billion, up $900 million from December 31 of 2018 due to normal seasonality in working capital as we start the year, but down $400 million from the same quarter a year ago.

Finally, on the back of our first quarter's good performance, we are reaffirming our financial targets for 2019, which I will go through towards the end of the prepared remarks.

Moving on to Slide 4, let me provide you with a high level industry update for Q1.

First, I'd like to highlight that in the AG segment, North America row crop sector continues to trend positively with good performance as customers replace dated equipment, especially in combines with the market in the first quarter up almost 30%.

EU tractor demand was up this quarter by 12% with combines down almost 20% due to the spillover impact from extremely dry weather conditions suffered in Central and Northern Europe during the last harvest season.

South America combines were also very strong, up almost 40%, driven by Brazil while Argentina was down year-over-year.

Before I touch on the construction segment, I'd like to point out that we have slightly changed the way we characterize this business.

While we historically broke it out by heavy and light, we believe it is more helpful to talk about the equipment based on their end user application.

Going forward, we will refer to them as compact and service equipment, which includes mainly the lighter, compact and service equipment like skid steer loaders and tractor loader backhoe, and general construction equipment, which includes crawler excavators and wheel loaders, and road building and site preparation which includes compaction, dozers and graders.

Generally speaking, construction end markets are developing in line with what we anticipated at the beginning of the year, but with North America on the lower end of the range.

The South American volumes have been slow in Q1, but we expect that financing incentives will continue to be available going forward and should support a strengthening market.

For trucks, the European truck market was up 8% year-over-year with light duty trucks up 11% while medium and heavy was up 4%.

However, our core markets, Italy and Spain, were down 13% and 2% respectively.

South America was up 17% with Brazil up 52% and Argentina down 52%.

As well, please remember that while the Brazil figures seems large, this is still coming off a significant downturn that started in 2014.

But we see promising future volumes as order intake is up 50% from last year.

For buses, the European market was relatively flat this quarter, but we were able to add 240 bps in our market share and we now represent almost a fifth of the market.

South America was quite strong for buses in the quarter and our backlog of orders, mainly mini-buses, is building as well.

Overall, while there have been some weaknesses during the last quarter in certain markets like European combines and South American construction equipment, the key markets for us were generally positive in the quarter.

We will go into this in more detail later in the call.

At this point, I'll now hand it over to Max for the financial overview of the presentation.

Max?

Thank you, Hubertus.

And good morning or afternoon to everyone and thank you for joining the call today.

As a general remark, despite the uncertain industry scenario in agriculture and the volatile and generally weak economic activity in certain high growth markets, we were able to achieve our expectations and close the quarter with an improved operating margin on the back of a sustained performance across our portfolio with continued focus to drive cost discipline in our operations.

Moving now to Slide 5 and the key figures for the first quarter.

Net sales in our industrial segment were down 5% reported and up nearly 2% in constant currency with currency translation impact primarily due to the weakening of the euro and the Brazilian real more than offsetting the strong price realization performance in excess in 3% in Agriculture and Construction, and sales volume improvements in commercial and specialty vehicles would increase the leverage in light duty trucks and in buses in Europe and Brazil.

Adjusted EBIT was up 7% in the quarter.

We had a record first quarter adjusted net income of $248 million, up 22% from Q1 2018 as we continue to make improvements in our interest and tax expense lines and resulted in an adjusted EPS up $0.04 to $0.18 per share.

The adjusted tax rate for the quarter was 26%, flat from Q1 2018, and we expect it to be at 27% for the full year 2019.

Net industrial debt increased to $1.5 billion, up $900 million versus year-end as a result of normal seasonality and working capital in the first quarter as we ramp up our industrial machine in preparation of the spring season.

Despite the higher net industrial debt, this is $400 million is better than one year ago.

Available liquidity was $10 billion, up $1.1 billion compared to year-end 2018 primarily as a result of the new revolving credit facility executed in the first quarter, which I will discuss later.

The liquidity to revenue ratio further improved to 34% with third party gross industrial debt to EBITDA ration at 2x, down from 2.4x last year.

This performance coupled with the increased liquidity buffer is a continuous and clear sign that we remain fully committed to further improving our credit rating from the current levels as well as reiterating our goal of achieving a net industrial debt free position.

Turning to Slide 6, let's discuss the first quarter performance in our industrial activities net sales excluding now the impact of foreign exchange translation.

As said for the quarter, net sales in constant currency in our Industrial Activities increased $170 million or 1.9%.

Agriculture Equipment contributed $45 million as a result of price realization performance achieved across all regions offset by volume and mix.

Construction Equipment sales decreased a net of $16 million or 2% primarily due to selective inventory destocking actions in our North American dealer network partially offset by strong price realization of more than 10%.

Commercial and Specialty Vehicles sales increased $134 million or 5% on higher industry volume and favorable product mix in light commercial vehicles and in buses in Europe.

Powertrain was down $68 million or 6% year-over-year due to lower sales volume as a result of the strong 2018 year-end activity.

In terms of regional segment mix for the quarter, it was largely unchanged from last year.

Turning to Slide 7 now with an overview of our operating results by driver for the business as a whole.

Industrial activities adjusted EBIT improved on a year-over-year basis 50 bps in the quarter or was up 6.5% on the back of increased deliveries in Commercial and Specialty Vehicles and thanks to the pricing performance offsetting the cost headwinds coming primarily from the lagging effect of raw material cost increases in our procurement contracts.

And the impact from the U.S. tariff enactment on section 301 introduced in 2018.

Discipline in our structural cost was maintained throughout the quarter while product development spending towards the next generation equipment continue to increase as expected, achieving now in aggregate as 4% plus figure over net sales with a focus on digital and connect vehicles and regulatory capital associated with the transition to stage 5 in Europe.

In addition, financial services results were slightly down in the quarter as a result of lower interest spread.

From a consolidated view, EBIT closed with a margin of 6.3%, up 30 bps year-over-year.

On Slide 8 now with the view by segment of the gross margin and EBIT contribution.

All segment with the exception of Commercial and Specially Vehicles, which was flat, delivered an increased gross margin on the back of a solid performance with CE and Powertrain highlighting an improvement of more than 200 bps.

AG gross margin was up 40 bps on the back of a strong price realization more than offsetting raw material headwinds.

Our adjusted EBITDA ended up slightly down year-over-year due to a lower D&A primarily due to negative effects impact and as a result of reduced penetration of truck sales with buyback commitment in Commercial and Specialty Vehicles realized during the last few quarters in consistency with the previously announced refocusing strategy to more profitable market segments and to alternative propulsion engines.

The adjusted EBITDA margin was flat at 8.7% in Q1 2019.

Turning now to the individual segment performance on Slide 9, Agricultural Equipment net sales of constant currency increased on the back of strong price realization across all geographies.

Sales volume improved from end user replacement demand in the North American row crop sector and from sustained demand in Brazil, but were offset by a general slowdown of activity in Turkey and by extremely dry weather affecting harvest conditions in Australia.

Worldwide deliveries were down 2% in tractors and up 1% in combines versus last year and production was down 4%.

Worldwide inventory in units was up 16% in tractors and down 5% in combines.

In the row crop sector in North America, the segment overproduced retail low double-digits in the quarter to support the upcoming spring selling season.

The segment closed the first quarter with an adjusted EBIT of $168 million, down $18 million from last year.

In the quarter, the agricultural segment accelerated investment in its precision farming platform and in the introduction of Stage V emission requirement compliant engine applications driving the segment product development spending up by 19% compared to the first quarter of 2018.

Excluding the increase in R&D expenses, the segment performance improved as a result of the significant price realization achieved more than offsetting the anticipated raw material headwind and the implications from the enactment of the U.S. tariffs with China.

As a result, adjusted EBIT margin ended down 50 bps to 6.7% in the first quarter of 2019 while gross margin was up by 40 bps.

Looking forward, farmer muted sentiment from trade tensions coupled with a slow start to the spring planting season in North America due to wet and cold weather are delaying the seasonal restart of activity in the early part of the second quarter.

Ultimately this may reverse towards the end of the second quarter with a squeezed planting window.

Activity remains stable across the major European markets while the run out of the Brazilian subsidized funding scheme total capacity ahead of the new program announcement is causing volatility and retail demand.

More recently at the Agri show in Brazil, Brazilian authorities confirmed that the 2019-2020 funding scheme will be officially announced in early June.

For the current 2019 crop, additional funding was in the meantime allocated to [Moderfrota].

This is positive news to the market and definitely a good support for our South American operations during this transition period.

Limited improvements from the low level of activity still in Q1 are expected for the second quarter in the Australian and Turkish agricultural markets as the comparison to prior year remains tough.

Given the current scenario and considering the year-over-year order book lower comparatively with high order figures in the second quarter of 2018, the segment activity is expected to remain challenging for Q2 with a possible shift in mix toward the lower end of the product range as sentiment remains on hold.

Turning to Slide 10.

Construction Equipment net sales decreased 2% on a constant currency basis mainly due to selective inventory destocking actions in our North American dealer network while activity was basically flat year-over-year in the other geographies and was partially offset by the strong price realization of 3% plus.

Worldwide deliveries were down 9% with compact equipment down 11%, general constructions up 1% and road and site down 8%.

Worldwide production was flat versus last year with compact equipment down 8%, general construction up 37% and road and sites down 10%.

Inventory was up 22%.

This is again a normal trend in this segment with production restart in the first quarter replenishing low year-end inventory levels.

Adjusted EBIT was $13 million in Q1 with an adjusted EBIT margin of 2%.

The 200 bps increase in the profit performance was a result of net price realization across the product portfolio and production efficiencies more than offsetting raw material and tariff headwinds.

The construction segment is accelerating on its 80:20 program effort and after having identified the areas of focus around product line simplification and SKU reduction on one hand and customer line simplification geared at streamlining and strengthening its distribution network on the other hand is now moving into execution mode with early results expected to start rolling out in the second part of 2019.

Later in the presentation, Hubertus will provide more of a general framework on how we tend to rollout the initiative across our major businesses.

In summary, the segment activity remains healthy across the board, although slightly below our initial expectations in North America and with a good order coverage for the second quarter.

On Slide 11 now with Commercial and Specialty Vehicles.

Net sales were up 5% on a constant currency basis benefiting from higher industry volume and favorable product mix in light commercial vehicles and in buses in Europe.

Trucks worldwide production was down 10% versus last year, primarily medium and heavy trucks, with company inventory unit down 9%.

Light duty truck deliveries were up 9% and buses were up 13% in Europe while medium and heavy instead were down 27%.

The decline in heavy vehicle deliveries in Europe is attributable to the previously announced strategy shift, which focuses sales on a more profitable product portfolio including LNG and CNG vehicles.

Specifically for the natural gas initiative, the mix shift towards natural gas engines throughout the group continues supported by solid demand in the sub-segment.

As predicted, gas penetration within Europe for the industry grew towards the 2% of total industry volume in Q1 and is projected to increase further.

Our year-over-year run rate order book for medium and heavy LNG, CNG duty trucks in Europe was up around 60% and our market share in Europe is stabilizing to about 60% as new entrants are coming into the market.

As a result, gas penetration for Iveco vehicles is now at 15% of its total retail performance and growing.

The market share for trucks in Europe was 10.4%, down 1.2 percentage point in part driven by the decline of the market in Italy and Spain, countries where notably we retain a leadership position.

Trucks book-to-bill was at 1.19% in Europe and 0.93% in South America with order book in Brazil up 50% from last year starting from a very low base.

Buses market share in Europe was 18.5%, up 240 bps versus last year.

Book-to-bill was at 1.24% in Europe and 1% in South America.

Adjusted EBIT was $51 million in Q1, slightly up compared to $49 million in the first quarter of 2018.

Positive volume in light trucks and buses, favorable product mix and positive underlying price performance were almost offset by negative foreign exchange transaction and year-over-year hedge impacts, higher production cost, including negative absorption from lower volume in our medium and heavy duty operations and increased product development spending.

Adjusted EBIT margin was 2.1% in the first quarter of 2019.

The cumulative reduction in units sold under buyback commitment, since the start of the strategy shift at the beginning of last year, is proceeding in line with our plan.

Although we expect the seasonal pick up in business activity in Q2 versus Q1, order books in Europe are mixed with light duty trucks holding well at high levels, and medium and heavy down double-digit by design in diesel applications and up more than 60% in natural gas applications.

On Slide 12 now, Powertrain net sales decreased 6% on a constant currency basis versus last year due to lower sales volume as a result of the strong 2018 year-end activity.

Sales to external customers accounted for 47% of total net sales.

Segment activity remains strong with volume expected to increase in the second quarter sequentially, up 10% from Q1.

Adjusted EBIT was $96 million this quarter with favorable product mix and manufacturing efficiencies offset by increased selling expense to support the segment marketing activity to develop third party business and higher product development spending.

Adjusted EBIT margin increased a 130 bps to 9.3% in the quarter, which represents a historical first quarter record for the segment.

Moving on to Slide 13 and our financial services business.

The Financial Services segment has performed at healthy levels in quarter.

Retail loan originations achieved $2.2 billion, flat compared to last year at incurred rate and up $100 million at constant currency, primarily North America.

The managed portfolio of more than $26 billion at quarter end was up $1.2 billion versus 1 year ago at constant currency with the bulk of the increase in South America and the rest of the world.

Overall penetration is relatively flat on a year-over-year basis with strengths in our established markets, North America and Europe, offset by the ramp up of our new (inaudible) business in the high growth market.

From a performance point of view, Q1 2019 net income was $95 million, a decrease of 8% compared to the same period last year, primarily due to reduced interest spread, partially offset by improved cost of risk and operating lease performance as well as higher average portfolio in South America and rest of the world region.

On a profit-before-tax basis, this represent a return on assets of about 2%, in line with historical performance.

Importantly, credit quality performance remain healthy with delinquencies tracking at 3.4%, down 20 bps versus 1 year ago.

In closing, the financial services segment goal of supporting the sales of CNH Industrial, while adequately remunerating its own capital, remains an underpinning of our portfolio strategy.

Moving on to Slide 14.

I'd like to discuss our net industrial debt and net industrial cash flow performance and provide an update on the balance sheet.

Net industrial debt of $1.5 billion at the end of March 2019 increased by $900 million from December 31, 2018 as a result of typical seasonality and working capital in the first quarter.

Let's discuss this working capital change in more detail.

Main driver of the cash usage was the build-up of inventories of about $1 billion in the quarter, of which about $400 million related to the restart of the industrial plant machine after the year-end shutdown, and about $600 million in finished goods in our different businesses.

The main reasons for the increase in finished goods include a normal build-up in inventory, primarily in Agriculture in anticipation of the spring selling season in the northern hemisphere, and in construction and commercial vehicles as a restart from the very low level at year-end.

An inventory buffer primarily in finished goods to mitigate the potential risk associated with a no-deal Brexit scenario completed the impact.

From a balance sheet standpoint, we delivered another important milestone this quarter with the successful execution in March of a new EUR 4 billion committed revolving credit facility replacing the existing EUR 1.75 billion facility at improved terms.

The new credit facility has a 5-year tenure with 2 extension options of 1 year each, improved pricing and other conditions in light of our 3 investment grade ratings, and expanded the number of participating banks.

The successful execution of this deal puts us in a much better liquidity position in light of our credit rating targets.

In addition, in March, our European tractor vehicle issued EUR 600 million of 1.75% notes due 2027 and guaranteed by CNH Industrial N.V. The strong level of available liquidity permits us to look at our capital allocation priorities with a diligent approach to maintaining a solid balance sheet, continuing to invest in organic growth as well as being opportunistic in inorganic growth initiatives while protecting our dividend policy.

With regard to our dividend, shareholders at the Annual General Meeting held on April 12, approved a dividend of EUR 0.18 per common share, up 30% versus last year's dividend, which was paid on May 2, 2019.

Before concluding on Slide 15, I would like to provide an update on our investment program in CapEx and product development.

As previously anticipated, we have been accelerating our product development program with spending up, achieving 4% plus of net sales in the quarter, while CapEx activities ramping up 26% year-over-year, representing 1.3% of sales in Q1 whereby we're coupling new product spending with investment to upgrade our factories and improve their productivity.

When looking at the spending in new products, the spending associated with the key megatrends impacting across our industries, digitalization, electrification, autonomous and telematics, was up 34% versus last year with solid double-digit increases across each category, representing now 50% of our total spending in new product and growing.

Stage V and other regulatory program spending accounts for about a quarter of total spending in new applications.

While we remain focused on price and cost discipline, we are encouraged by the positive year-over-year performance of this first quarter, which sets us on track with our financial targets for the year.

I have concluded my presentation and will turn it back over to Hubertus for the outlook and his final remarks before opening for the Q&A session.

Thank you, Max.

Please join me now on Slide 17.

When we turn to the market outlook for the full year 2019, we need to understand that continued trade and geopolitical issues make it very challenging to precisely predict what will happen this year.

While many of us had hoped some of these issues would have been resolved by now or at least have some more progress, they continue to linger without a near-term resolution.

This creates a scenario where upside potential is getting harder to find as we move further through the year.

That being said, we are still cautiously optimistic that some of those trade issues will be resolved in the short term and would at least strengthen sentiment in the latter part of this year.

I won't run through all the segments by region here, but while the outlook for AG is based largely on the current steady state market conditions, comparables as previously stated in the first 2 quarters of 2019 are challenging.

General sentiment of the agricultural end markets in which we compete remains muted as a result of the uncertainties related to the trade tensions that are still unresolved, the spillover implications of negative weather events in Australia and Northern Europe and the potential for the late planting in North America due to extreme wet conditions as well as continued geopolitical and macroeconomic uncertainties in Turkey and Argentina.

On the positive side, reduced levels of used equipment continue to support new sales and Precision AG Solutions continue to drive adoption of high horsepower equipment for farmers who aim to offset lower commodity prices with higher yield and better sequential farm incomes.

In terms of Construction Equipment, we have lowered our outlook from 5% to 10% to 5% in general construction and road building equipment.

End markets in North America continue to demonstrate growth driven by solid economic footing in state and local investments in infrastructure.

We are calling compact equipment in North America as flat based on sluggish housing starts and other mixed indicators that continue to be range bound.

In South America and Brazil in particular, we're calling for flat to slightly up generally, as the current geopolitical environment is conducive to recovery, although financing is less attractive than the AG equipment sector.

The truck market in Europe for heavy is expected to be flat to slightly down and in light, it is anticipated to be slightly up with positive trends and growing LNG and CNG demand as previously predicted.

In the South American market and particular Brazil here again, demand recovery should continue driven by attractive borrowing rates, old fleet renewals and increased AG freight, and hence we are expecting at least 10% growth rate.

On Slide 18, we highlight our guidance for the full year of 2019.

We are on track with our profitable growth trajectory and are therefore reaffirming our 2019 guidance as follows.

Net sales of industrial activities at approximately $28 billion, modestly up year-over-year with favorable pricing across segments offsetting raw material headwinds and positive operating margin leverage.

Adjusted diluted EPS between $0.84 and $0.88 per share with a growth of between 5% to 10% year-over-year.

Net industrial debt at the end of 2019 between $200 million and $400 million, moving us closer to a net industrial debt free position.

As outlined in February during the 2018 year-end results, I'd like to reiterate the following items.

Increased investments in organic growth with CapEx and R&D up year-over-year reaching 2.5% and 4% respectively of sales.

Operating cash flow will be about $200 million higher than in 2018, helping to fund incremental CapEx and dividend versus prior year.

And finally an effective tax rate flat from last year at 27%.

Now I'd like to discuss a few quarterly highlights in terms of product developments, key product launches for full year 2019.

And then I will conclude with a few additional final remarks.

On Slide 20, you can see that we had another great quarter in terms of awards and initiatives.

In the area of precision agriculture, we signed a partnership agreement to bring state of the art connectivity to Brazilian agriculture.

The company has participated in the creation of ConectarAGRO, a consortium of 8 partners from the agribusiness and telecommunications sectors, whose aim is to bring open connectivity solutions to all the agricultural regions of Brazil.

Additionally, a memo of understanding for the development of bio-methane and the transport sector in Italy was signed in mid-April by FPT Industrial, New Holland Agriculture and Iveco and Confagricoltura, the General Confederation of Italian Agriculture, CIB, the Italian Biogas Consortium, and others to truly enable the circular economy in all the segments we operate in.

In terms of awards at the SIMA AG show in Paris, we were proud to see our Case IH and New Holland teams win 4 Machine of the Year awards to recognize our investments in innovation.

Finally, Iveco manufacturing facility in Valladolid, Spain has achieved the Gold status in our world class manufacturing program, becoming the second site after the Madrid plant to do so.

Moving to Slide 21.

I'd like to talk about our new products and concepts in this first quarter of the year.

As you can see, we had the international launch of the new Iveco daily van, which will be manufactured at the gold medal Valladolid plant.

The New Daily sets new standards at onboard living and driving experience and makes important strides towards autonomous driving and enhanced safety features.

During the quarter we launched 24 new products throughout the group, including the New Daily minibus that takes connectivity to a new level, unlocking a world of highly personalized services precisely tailored to the driver's real use of vehicle, and provide a complete transport solution that would change the way to transport passengers.

The New Daily 4x4 that was introduced last year combines the leading product lineup with new off-road and go-anywhere capabilities and some other important new introductions in each of our industrial segment.

On the digitization front, I'm excited to report that we have a strengthening fleet of connected trucks and we are targeting to get more than 20,000 vehicles connected with the introduction of the model year 2019.

This not only allows us to better assist and grow with our customers, but feeds real time data so that we can see the relative trends in our various markets and better forecast where things stand at a given point in the cycle.

In Agriculture, our Case IH unveiled new AFS Connect Magnum series tractors giving producers a new way to run their business with the freedom to adjust, manage, monitor and transfer data the way they want.

In Construction Equipment, we unveiled our methane-powered wheel loader concept, Project TETRA, at Bauma and its vision for the future of sustainable construction.

This project shows how professional construction operators could help spearhead the move away from fossil fuel powered vehicles towards renewable resources by playing a fundamental role in the circular economy in which methane-powered wheel loaders help produce the gas from waste products and renewable sources, which then ultimately powers them.

This concept follows the methan-powered Concept Tractor, already mentioned in our full year earnings release that was recognized for its reimagined design features and its pioneering alternative fuel technology.

These 2 products as well as the ones already available in the market further demonstrates the depth of our portfolio in alternative propulsion and our dedication to fitting the right solution to the appropriate application and not a one size fits all approach.

When looking at the CO2 statistics, in terms of well-to-wheel, bio-methane has more impressive CO2 emission reduction than electric as it results in more than a 100% reduction of emissions, contributing in the end in cleaning the environment.

We are the leader in LNG, CNG and bio-methane propulsion for on-highway applications and see a clear path for adoption for off-highway usage in the future as well.

Before moving to the next slide, let me remind you that on April 24, we published a companion guide to our 2018 sustainability report.

A sustainable year 2018 edition highlights the company's ongoing commitment to sustainability and offers an engaging and highly visual insight into some of our major achievements within our environmental, social and governance programs during the past year.

I would suggest all of you to take a moment of your time and visit our website to have a look at it.

Moving now to Slide 22.

Some of the strategic initiatives we have briefly referred to in the past are progressing as expected.

Started in January, but continuing throughout the year, is the rollout of our new organizational structure.

Not only are we looking at increasing the span of control, but also expect to reduce organizational layers to achieve a best in class and talented organization that fully shares our objective to become more customer-centric, lean and agile.

The World Class Manufacturing program continues to deliver year-over-year productivity improvements, with associated cost savings at almost 5% in the first quarter.

On the back of the success of WCM, we are now applying the same principles in other areas; namely logistics, engineering and finance.

Our goal is to achieve similar productivity and quality benefits as we did in manufacturing.

Our organization is fully embracing the 80:20 methodology.

After having started 80:20 with the pilot in Construction Equipment in North America, we will now implement in the first step, a reduction of configurations of 46% starting in Q2.

Positive results in construction will be visible in the second half of the year.

In parallel, we have started the analysis in the Agricultural segment and aftermarket segment for both segments in North America.

And we are currently defining the actions for those businesses.

After having trained more than 300 people in the methodology, we're rolling out the principles to other geographic areas and segments.

Finally, we're analyzing our global manufacturing footprint with early findings expected to be unveiled in connection with our strategic plan presentation at our upcoming Capital Markets Day.

Moving on to Slide 23, we have now defined the date for our Capital Markets Day event.

On September 3, we will be presenting our new strategic business plan that we are currently developing under the new leadership structure.

The event will take place in New York City at the New York Stock Exchange.

On this day, you will not only see our current and future technology displayed, but you will have the chance to meet with the global executive team of CNH Industrial.

As part of the Capital Markets Day, we will share with you margin targets for our respective segments, and most importantly, the strategic initiatives that will get us to those targets over time.

In addition, we expect to provide the capital markets with an update of our capital allocation principles and to discuss our medium to long term view towards the portfolio of our businesses.

I'm sure it will be a defining moment in our roadmap to become one of the greatest capital goods companies on the planet.

I have now completed my presentation and turn it back to Federico.

Thank you very much, Hubertus.

This concludes our prepared remarks for the first quarter results and we can now open up for questions.

Jenny, over to you.

We'll now take our first question from Evercore from the line of David Raso.

I appreciate with the trade tension it's really challenging to forecast the year for Agriculture.

But I'm just trying to kind of balance the comments on the second quarter sound a little more cautious on AG.

But then you look at your industry outlooks for AG and some up, some down, some maintain.

So I guess I'm really trying to figure out is, have you really made any changes to your thoughts on '19 given the trade tensions have dragged on and obviously this week maybe they took another step backwards?

And at the same time, if you haven't, is there a certain point, be it early order programs, mid-summer, when you'd have to really address, if there is no trade resolution, there's a step function change and how you view targeted ending inventories for the year in agriculture?

I'm just trying to square it up with all the different commentary, near term more cautious, but no real change in your industry outlooks and aggregate for AG.

Yes.

Well, I'd start with the sentiment and then Max takes the inventory question.

I think I mean sentiment, as said, is still muted.

Honestly we don't really know what to take from the tweets over the weekend by the President.

But we're still cautiously optimistic that there is going to be a trade deal with China, despite all the posturing in the last days.

That being said, it's also weather right now that is of a concern which in agriculture of course has an influence.

But still, putting all together, we don't want to change yet the industry outlook for the year as that outlook was based kind of on this scenario of uncertainty.

So that's the reason why we're still kind of confident that we can deliver those numbers that we have predicted.

And on the inventory side, perhaps you want to say something, Max?

Sure.

So as we stated last year, we are continuing to look at destocking inventory in hay and forage in North America, although at a minor pace this year.

Net-net we expect production for the full year to be flat year-over-year 2019 versus 2018 in general.

The slight overproduction which was just above 10% in row crop sector for Q1 was expected and is in line with the pickup in activity seasonally Q1 to Q2.

For the full year, we expect to be flat, slightly down in terms of production to retail.

Yes.

And I think one thing also needs to be noted.

I mean the disastrous -- the tariff discussions are for North America right now and for the world economy.

Obviously South America is benefiting from that.

And if you basically look at our Brazil business, I mean, that's up and thriving.

I mean order books are up, business is up.

And as we said continuously, the Brazilian farmers are right now eating the American farmer's lunch and that's, again, not in their interest, but for us it's a hedge that we have here.

And could you help us by quantifying the AG order book trends year-over-year?

I would say that the comparison is not fair because last year we were ramping up in terms of sentiment Q1 to Q2.

So there was an expectation of significant pickup in activity.

So when I look at year-over-year, they are down, but they are still at very healthy levels.

And again, the used inventory in the field is, continue to being reduced and that is a good support to demand of new equipment.

And actually pricing on use is also holding up pretty well.

One last quick one, on construction the year-over-year inventory gain, I wasn't sure.

The inventory year-over-year is up more in construction than it was year-over-year in the fourth quarter.

We reduced dealer inventory in North America by about 700 units, which is $30 million more or less, take it or leave it, on compact equipment of revenue.

We increased company inventory in the balance of the business.

And again, this is to take off the activities from the very low levels that we normally achieve at year-end when the activity shuts down for the year-end.

We'll now take our next question from JPMorgan from the line of Ann Duignan.

I'm just going to continue on David's question and ask you if sales don't materialize in the AG sector in Q2, is it your intent to cut production in the back half of the year and end up with lower inventories?

Or are you going to just sit on higher levels of inventory through the course of the whole year and hope that the market comes back next year?

Ann, this is Max speaking.

I'll take this question.

So for Q2, we expect to be down in production, slightly down year-over-year, low mid-single digit.

And so we expect to start rebalancing that inventory early on in the year and not wait until the last quarter.

Okay.

I appreciate that.

And then on Construction Equipment, can you comment a little bit more on the weakness in your compact equipment?

Yes, I appreciate that that might be leveraged to residential construction.

But can you talk about maybe how much of that business goes to rental versus through sales?

Just a little bit more color, so we understand what exactly is happening in that business?

Yes, I would say, besides the sluggish residential demand in North America, there is also an AG component.

As you know, compact equipment goes into AG and livestock and hay and forage is coming from 2 years of lows.

So we don't see a lot of pickup in activity over there as well.

And that's why we continue to look very conservatively at the inventory over there.

Yes.

And some of it is a bit self-inflictive.

So I think we can do better and we had a nice discussion with our team.

So I think you're going to see an increased performance going forward there.

(Operator Instructions)

We'll now take our next question from Equita from the line of Martino De Ambroggi.

Two questions.

The first is on pricing.

I saw AG and CE still with a positive price effect in your EBIT bridge.

Should we expect similar trend going forward even if the visibility and the market environment is not particularly favorable?

And still focusing on the pricing, what happened to the CV which was down after several quarters in a row with a positive mix in price effect?

And the second question is on the competitive scenario in the gas LNG engine in the truck business, because in your remarks, Max, you talked about new entries.

I was wondering if you could elaborate on what's happening in the competitive environment for these potential megatrends and if these generated price pressure which could reduce the profitability of this segment?

Okay.

Let me start and then Max chimes in.

So on pricing for construction on AG, pricing is holding.

We're also pricing for the tariffs and raw material headwinds that we're seeing and we see this holding throughout the year.

On top of that, we do believe that we have pricing possibility also in Construction Equipment because as you know, the 80:20 methodology looks of course at different A and B products and A and B customers, and that allows you to price for your B customers and for your B products.

So you're going to see some positivity there despite all the uncertainty around.

Max is going to talk about the commercial vehicle in a second.

Let me also comment on your second questions on LNG.

I mean as we predicted, we had 70% share there and the second competitor that has a solution had 30%.

We've now balanced that out a little bit, we are 60%, they got 40%.

But it is with healthy margins and we also don't have to lower our prices.

We looked a little bit at our MRA contracts and our buyback amounts and have adjusted those slightly little bit more to reality to become a little bit more customer friendly.

But it is a very, very successful and profitable segment for us, which is growing high 2 digits.

And as you know, we have said by the end of the year, we think that LNG is going to compose 2.5% of the European heavy-duty truck market.

And that number can go significantly higher in the quarters and years to come given that LNG is really the only short-term solution to reduce CO2 emissions, particulate matters and NOX.

And then, Max, you want to say something on pricing for CV?

Sure.

So as I said in my prepared remarks, the underlying price and performance in CV is still positive and is primarily a light-duty application performance.

But in our walk, we show a net pricing, which is netting out the underlying pricing from the transaction FX and year-over-year hedge impacts on our currency hedging portfolio, which actually were higher than the price increase that we achieved in the quarter.

That's why you see a negative number.

So going forward it should remain positive for the rest of the year?

We expect the price -- yes, the pricing function before ForEx is supposed to stay positive on CV as well.

[Operator Instruction] We'll now take our next question from Vertical Research from the line of Joe O'Dea.

Could you talk a little bit now that you're kind of giving us a little bit more detail on the construction business, could you just talk about the revenue breakdown across compacts, general, road building and then mix opportunities there?

May be if we liken it to trucks and some of what you're doing on the light duty side and sort of driving out growth and margins up there, what are the opportunities that you have with construction and where you can put a different emphasis on different parts of that business?

Yes, I don't know how much detail we really want to provide by product line now, but I think we basically have in our strategy a stronger focus on customer end segments and trying to create leadership in those sub-segment.

And that strategy proves to be fairly successful and on the back of that obviously we're improving profitability.

And then if we switch to the commercial vehicle side, obviously we are one of the leaders in light commercial vehicles and with a New Daily launch right now with the new platform, we are extremely excited about that and we see a lot of positive market reaction and perception in that.

So we think that we can grow sales there throughout the year.

And then when it comes to the heavy, apart from our leadership in LNG which is going to drive sales and replace diesel units, we are also launching a complete new 2019 heavy duty platform which is also going to help the profitability on the diesel side and will then concurrently drive diesel and LNG sales.

Do you want to add something to that, Max?

We'll now take our next question from Bank of America from the line of Ross Gilardi.

I was just wondering, given everything you are saying on new equipment demands and in agriculture for row crop, I mean just given the near-term headwinds, what's your best explanation for how the used market is staying so well balanced [outside] and how pricing is holding up so well.

This is inevitable, but that market is going to build some slack over the rest of the -- in a year and can you -- do you think the industry and more importantly CNH can sustain that without having to cut production on new more aggressively.

Max, you want to say something to that?

Kick it off and then I'll chime in.

So I mean, when we transition from tier 4A to tier 4B, the productivity enhancement were not decisive.

So I would say the recent model year used equipment is pretty well performing and hence in a period where net farm income is not on the upswing, but farmers still need to replace dated equipments, they'd probably look first into what is available on the recent model year used and that is mainly the reason why pricing is holding up so well over there.

But obviously when that recent model year used is depleted, there is only one place to purchase the new equipment and that's why as well the demand of new equipment, although not growing, is holding up well.

Let's remind all of us that we're still 20% below the 20-year average in terms of units for highest power tractors and combines in North America.

Yes, and that's the replacement demand that Max was talking about and then just to be clear, what the U.S. administration is doing right now with the tariff discussion is really, really not helping the U.S. farmers.

And again if we can't find a trade solution with China and Europe soon, it will have a very negative effect to U.S. farmers and also to equipment.

However, we do believe that in this case then we're going to see a lot of support given and support is already given, as you know, for soybeans for example.

However, the support that the farmers receive right now from the administration is kept, it's kept at pretty low values like $150,000 for soybeans for example.

We do believe that those caps have to be lifted up significantly and as a matter of fact we will be -- I mean, we'll be in Washington tomorrow and we're going to talk exactly about that because we do believe that to help U.S. farmers, the U.S. administration has to basically lift up those caps to more reasonable levels because right now the large scale farms, which are important in the row crop sector for our case customers, they are limited to $150,000.

So they are leaving hundreds of thousands of dollars on the table and that's not justifiable.

So we do believe that in this uncertain environment, we're going to see also some measures to support those farmers if those trade discussions linger on.

Okay.

Got it.

And with the increase with the R&D spending for AG in the quarter, what supports (inaudible) flag, but how much of that is for the Stage V emissions versus precision farming and anyway to quantify that for the rest of the year?

Do you expect that that margin headwind to persist for the balance of 2019?

Yes, I mean Ross, your question was really not very well -- acoustically we couldn't hear it out.

I think you're asking for the margin performance in AG and we were referring to the Magnum tractors, which is actually an entirely new cash crop platform that we are developing and that's the reason for the significantly higher R&D spend in the first quarter.

Needless to say, we're launching this product this year and with the launch, the R&D headwind is going to abate a little bit.

So we kind of have a frontloaded R&D budget there.

So we think that margins are going to hold.

And as you've seen on the gross margin side, we've improved that nicely by 40 -- no, how many bps?

40 bps.

40 bps exactly and we think we've got more room for improvement there.

So we're fairly positive on the margin side for AG and again the drag on the EBIT margin was really with the frontloaded R&D for the significant investments that we do in precision agriculture on our new tractor platform, which actually is going to be a game changer in the cash crop sector for us.

And our final question comes from Melius from the line of Robert Wertheimer.

My question is really on LNG and the ramp.

I'm curious if you have any thoughts on the current fueling infrastructure that your current sales base sort of uses and then how far the sales base can expand with current infrastructure.

Does there need to be any step function change in order for the sales growth to continue?

No, investments happened as we speak and this is not a showstopper for the rolled out of LNG.

As we discussed, numerous times, Germany is behind, has been behind, but we're going to have an infrastructure of 30 to 40 LNG stations by mid to end of this year and this is sufficiently to run your large fleet.

So what we're seeing right now is that talking about those large fleets, they never buy a couple of hundreds at the same time.

They basically buy a couple of handful pieces of equipment LNG to try it out and once they basically work, they then -- and they do work of course, then they basically increase the quantity.

So we are very, very firmly in that right now, all the large fleets are right now in test of LNG equipment.

We do have the infrastructure available throughout Europe and also in Germany and that's the reason why we're very, very confident that these high 2-digit if not 3-digit increases of LNG participation are going to continue well into the next years.

And the current market is in fact freight hauling or is it more local trucks that you are selling to?

And I'll stop there.

No, no, no, it's long haul.

LNG is long haul because it's really where you need the distance and where you need to wait.

And as we have said, our record right now stands from one trip with one filling from London to Madrid, so 1,700 kilometers, so a bit more than 1,000 miles.

So this is clearly a long-haul application.

If you think about medium and short hauling, so the light commercial vehicles and the medium trucks, there you talk about CNG which is compressed natural gas.

So the same engine, it's just a different tank system which is significantly cheaper because CNG is just compressed whereas LNG is liquid and is frozen down to minus 170 degree Celsius.

I don't know what the Fahrenheit of that is, I should know that, but I'm still thinking European here.

And then the other one which we mentioned is and this is also for urban application is methane because CNG can be replaced by methane, bio-methane and this really comes from waste incineration, it comes from biogas.

And if you basically put them biogas, so bio-methane into go CNG engines, then you're actually cleaning the environment and this is the reason why we think politicians should be mindful of that because this is significantly better that electrification because you are really cleaning the CO2 -- the environment with the CO2 because you go down to minus 160 to minus 180 CO2 reduction which is far better than any battery powered or fuel cell powered equipment can do.

And that's something that people need to understand.

And as you know, being the leader on the on-highway side on that one, we're now pushing for that in the off-road side.

So Agriculture, it's a no brainer with all the biogas that you have and of course also for Construction Equipment, specifically in urban areas.

It's actually very silent.

We're creating the market there because we're kind of the only competitor in the off-highway side that has a competitive offering there.

So good things to happen for us.

Thank you very much.

That will conclude the question and answer session.

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

Thank you everybody and have a nice day.

Thank you.

Bye-bye.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.