CNH Industrial NV (CNHI) 2019 Q2 法說會逐字稿

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

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

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

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

Please go ahead, sir.

Thank you, Karen.

Good morning and afternoon, everyone.

We would like to welcome you to the CNH Industrial Second Quarter and First Half 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 are pleased to have here with us today, CNH Industrial CEO, Hubertus Mühlhäuser; 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 the 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 20-F and EU Annual Report as well as other periodic reports and filings with the U.S. Securities and Exchange Commission and the equivalent authorities in the Netherlands and Italy.

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

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

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

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

As we have reached the halfway point in our fiscal year, we continue to be faced with well-publicized issues ranging from trade disputes and tariffs to global weather uncertainties driven by climate changes.

If there is a silver lining here, it would be that our visibility into the effects of these headwinds are a bit clearer now than they were a quarter or 2 ago.

While farmers struggle with various complicated and difficult decision, the trade calculus has made a hard job even harder.

On a positive note, the U.S. farmers took advantage of recently higher soft commodity prices and sold off crop inventory and further certain subsidy programs delivered by the U.S. administration to relieve the American farmers, it would assist in these difficult times, but we're certainly mindful of their struggles as we continue throughout the year.

While agricultural end markets prove challenging, we are optimistic about the resilience of our customer base that will support continued replacement demand.

In Construction, infrastructure projects and low interest rates sustained demand, albeit on a slightly lower level than anticipated at the beginning of the year.

Finally, in Commercial Vehicles, even though the euro-area GDP continues at a tepid pace, we've seen probably through the years, the EU truck market is healthy, and the migration to alternative propulsion is real and will over proportionately benefit our IVECO and FPT brand as market leaders in alternative propulsion and gas.

Turning onto second quarter and first half highlights.

Q2 Industrial activities net sales were down 2% in constant currency, which drove the top line to be flat year-over-year for the first half.

Our performance in the second quarter, however, has demonstrated our margin resilience in the muted end-market environment in our off-highway business with gross margin for agriculture up 20 bps versus Q2 last year.

And the performance in our Commercial and Specialty Vehicles and Powertrain business continue their positive margin trajectory as well, delivering 50 bps and 40 bps of gross margin improvement, respectively.

Combined with the normalization of below the EBIT line items such as interest, foreign exchange rates and taxes, helps to improve the bottom line on a year-over-year period, with an increase in adjusted diluted EPS in Q1 and first half of 11% and 14%, respectively.

Moving onto Slide 4. Let me provide you with a high-level industry update for Q2.

First, I'd like to highlight that in the AG segment, the North America row crop market is largely weaker due to a pause in demand for combined harvesters being driven both by Canadian and U.S. end markets.

Despite this backdrop in the major row crop segment, the performance of the used equipment portfolio remains healthy with both demand and pricing stable.

The U.S. administration has released instruction to accept the 2019 farmers aid package debt together with the 2018 package and the disaster relief support contributed about $30 billion over the last 2 years period, helping to provide stability to U.S. farmers and supporting some of the replacement demand.

EU Tractor demand remained healthy in the quarter, up 9%, with combines down almost 22% due to the spillover impact from extremely dry weather conditions suffered in Central and Northern Europe during the last harvest season.

In South America, and Brazil particularly, farmers had a gap in funding between the early run-off of their 2018/'19 Moderfrota program and the new plan for 2019/'20 being announced at the end of June.

Interestingly, this program for the new season was confirmed with similar support levels to that of the prior one.

We would anticipate that there is demand that has been pushed out into Q3 that would have come during the second quarter in the absence of the early run-off.

In terms of construction end market, this is probably where we have seen the most shifting of demand trends, particularly in road building and site preparation, with expectations for a stronger market in the EU and slightly weaker in all other geographies.

The South American volumes have improved greatly across most market segments due to the anticipated financing incentives with the exception of infrastructure that still has not had the much-needed investment.

Finally, North American industry demand has been weaker than originally expected in the subsegments in which we compete.

For truck, the European truck market was up 17% year-over-year with light-duty trucks up 13%, primarily in the panel-van sub-segment, while medium and heavy were up 25%, which -- much of this strength is coming from new requirements around trucking driver activities, the so-called electronic tachograph and other safety measures.

South America was up 23%, with Brazil up 49% and Argentina down 46%.

For buses, the European market was up 4% this quarter, and the South American market was again quite strong with an increase of 54% with both geographies also demonstrating good order books.

In general, despite a muted end-market scenario, we continue to make progress in our trajectory, confirming our guidance for the full year, net of the realized negative FX impact on our net sales for industrial activities.

Further, we confirm our adjusted diluted EPS as well as our net debt guidance.

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

Max?

Thank you, Hubertus, and good morning or afternoon to everyone on the call.

In summary terms, we finished the quarter with solid earnings in spite of a very challenging market environment.

The AG market weakness we are experiencing is a combination of the current slowdown in North America row crop and effects from a dry and unfavorable 2018 European harvest, coupled with persistent challenging market conditions in Turkey and Australia.

In this environment, we have continued to push pricing and diligently managing our cost, and we have taken additional actions to accelerate the savings in the coming quarters.

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

Net sales of Industrial segments were down 7% on a reported basis and 2% in constant currency.

Adjusted EBIT was down 8% in the quarter and 3% year-to-date.

Second quarter adjusted net income of $430 million was up 8% from last year.

And for the first half, it was $678 million, up 13% from the same period in 2018.

Adjusted EPS, up $0.03 to $0.31 per share for the quarter and up $0.06 for the first half.

The adjusted tax rate for the quarter was 24%, relatively flat from last year, and we expect it to be 27% for full year 2019.

Not included on this slide, but worth noting, is the decrease in net interest expense when compared to the second quarter of last year as well as the improved foreign exchange results compared to last year due to the nonrepeat of FX losses in emerging markets, both contributing to the year-over-year increase at the bottom line level.

Net debt of industrial activities was flat in the quarter to $1.5 billion.

Free cash flow of industrial activities was $0.4 billion, offset by dividend payments of $275 million and a $45 million spend in our share buyback as we restarted our $700 million buyback program in the second quarter as well as negative FX translation effect of $60 million versus positive $230 million last year on our euro-denominated debt.

Available liquidity was $9.9 billion, down $0.2 billion compared to the end of March 2019 and up $0.9 billion compared to the end of December 2018.

Turning to Slide 6. Let's discuss the second quarter and first half performance in our industrial activities net sales, excluding now the impact of foreign exchange translation, which represents 4.4% in Q2 and 5.4% in H1 of our net sales percentage change year-over-year.

For the second quarter, net sales at constant currency of our industrial activities decreased 2%.

Agricultural equipment decreased a net 3% as a result of lower sales volume in the European and rest of world regions, partially offset by a 3% positive price realization performance across all geographies.

Construction equipment sales decreased 3%, whereby a 2% positive price realization was more than offset by lower volume in North America due to the continuation of the inventory destocking actions in our dealer network and the weaker end-user demand in certain key markets and rest of world, primarily in the Indian subcontinent.

Commercial and Specialty Vehicle sales decreased slightly, with lower truck and bus deliveries, offset by favorable volume in specialty vehicles, higher sales in services for maintenance and repair contracts and a positive price performance.

Powertrain sales were down 1% due to lower sales volume, primarily in the rest of world region.

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.

Industrial activities adjusted EBIT was $527 million, down 8% year-on-year, with a resilient performance in margin at 7.5% flat year-over-year, primarily due to the lower volume, mainly in AG Europe and in the rest of the world regions as well as higher product cost due to raw material and tariff headwinds and an increase in R&D investment, offset by a positive price realization across the portfolio.

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

All segments with the exception of CE delivered an increased gross margin.

Our gross margin was up 20 bps on the back of a strong price realization, more than offsetting lower volume or raw material headwinds.

For Commercial and Specialty Vehicles, gross margin increased 50 bps; and in Powertrain, 40 bps.

Industrial activities gross margin was up 20 bps to 18.6%.

Our adjusted EBITDA for the second quarter is down $75 million year-on-year due to the lower adjusted EBIT and a lower G&A, primarily due to negative FX translation.

The adjusted EBITDA margin was down slightly at 10.9% in Q2.

Turning now to the individual segment performance on Slide 9, starting with AG.

Worldwide unit deliveries were down 9% in tractors and down 15% in combines and worldwide production was down 2% versus last year in the second quarter.

While, the company's unit inventories ended up 33% in tractors, primarily lower HP tractors; and up 1% in combines, with North America unit inventory down 20% in high horsepower tractors and down 5% in combines.

Production performance was slightly above retail in Q2 in anticipation of the production summer shutdown.

Adjusted EBIT was $341 million in the second quarter of 2019 with adjusted EBIT margin at 11%.

Positive net price realization was more than offset by unfavorable volume and mix, higher product cost, primarily related to the increased raw material cost and tariff and increased product development spending, driven by investments in precision farming, including the preparation for the rollout of our top-of-the-line, highest power tractor later in the year and the introduction of Stage V engine applications.

While uncertainties in the agricultural end markets related to the trade tensions remain unresolved and negative weather events are impacting planting and harvesting patterns and market sentiments, we believe that cyclical replacement demand remained stable, with used equipment inventories at low levels, supporting new equipment sales in North America.

Order book remains lower than last year, with the exception of South America, where we see double-digit order pickup, both in tractors and combines.

With the exception of South America, on a consolidated basis, we have intervened and reduced our production program versus the previous cycle by 10% in Q3 to maintain our inventory balance for the second part of the year.

We reiterate that we currently expect to slightly underproduce retail in AG for the full year of 2019.

We expect to counter the production cap with, one, a resilient price performance; two, the continued execution of our cost efficiency program with a focus on G&A, labor cost reduction; and three, the positive-mix impact expected from new product launches, which starts ramping up deliveries in the second part of the year while we continue to stay firm on our investment and innovation.

Turning to Slide 10.

Construction worldwide unit deliveries were down 10%, with compact equipment down 9%, general construction down 7% and road and site down 21%.

Worldwide production was relatively flat versus last year, with compact equipment down 1%, general construction up 6% and road and site preparation down 9%.

Inventory in units were up 36% in preparation of a production summer shutdown.

Adjusted EBIT was $25 million in the second quarter of 2019, with adjusted EBIT margin of 3.3%.

Positive net price realization, including the steel tariff surcharge, mainly in North America, was more than offset by higher product costs, primarily related to increased raw material costs and tariff.

End-user demand in the construction industry in the U.S. remained stable, supported by spending for public and infrastructure investments.

Despite the strength, conditions in the construction industry are still challenged in the residential subsegment.

As a result, our order book is down in North America, while we have started to see some improved orders in the other regions, particularly in compact equipment and road building.

This mixed environment has convinced us to adjust our production to the low end of our estimates, and for the balance of the year, we expect production down year-over-year.

So that on a full year basis, we expect to achieve the production performance in balance with retail.

In the meantime, our 80-20 pilot initiatives in NAFTA is proceeding at pace, and we expect to see first results in the second part of the year.

On Slide 11 now with Commercial and Specialty Vehicles, trucks' worldwide production was down approximately 2% versus last year, primarily in medium and heavy trucks.

The company inventory units are relatively flat versus last year.

Light-duty truck deliveries were down 4%, while medium and heavy were down 10%.

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

Bus deliveries were down 7% in Europe due to a different calendarization versus previous year.

Our book of business in heavy bus is solid with production covered until the end of the year.

More specifically, the mix shift towards natural gas engines around the group continues, supported by solid demand across all geographies and tonnage classes in EU Trucks.

Natural gas penetration in Europe for the industry continues to grow towards the 2% of total industry volume in Q2 and is projected to increase further and elongate this strong replacement demand.

Even the German market, which has led this conversion has dramatically increased adoption, growing the natural gas market demand overall by over 9x year-on-year.

While new entrants are coming into the market, we remain the market leader with a market share above 55%.

Deliveries in natural gas-powered engine represent now 1 out of 5 trucks produced in our Madrid, Spain facility.

The market share for trucks in Europe was 10.3% flat versus Q1 2019 but still down year-over-year.

Trucks book to bill was at 0.91% in EU and 1.23% in South America, with order book in Brazil, up 48% from the second quarter of last year, starting from a very low base.

Bus market share in Europe was at 16.1%, book to bill was at 1.09 and 1.00 in South America.

More specifically, our order book in trucks is trending better in Europe as we are in the midst of the phase-in, phase-out of our daily LCV, and we have now plateaued with the truck buyback penetration contraction in medium and heavy, and we see a positive book building in our new products, X-Way and natural power lineup.

This is an encouraging signal at the start of the order writing cycle on the new S-Way lineup, which Hubertus will talk about in a few minutes.

The Commercial and Specialty Vehicle segment achieved an adjusted EBIT of $100 million in the second quarter of 2019, up $8 million compared to the second quarter of 2018, driven by positive net price realization and lower SG&A expenses, partially offset by higher product content cost, including launch cost associated with the recently upgraded truck lineup and unfavorable foreign exchange translation.

Adjusted EBIT margin increased 50 bps to 3.7% compared to the second quarter of last year.

European demand in the truck and bus industries continues to hold at a high level, supported by low interest rate environment and by the transition to lower emission vehicles, including full electric and hybrid buses and LNG and CNG-powered vehicles.

This is most evident in our order book for natural gas heavy trucks, up almost 70% versus last year in the quarter.

On Slide 12 now, Powertrain net sales decreased 7% in the second quarter compared to last year and were down 1% on a constant currency basis due to slightly lower sales volume, primarily in the rest of world region.

Sales to external customers accounted for 48% of total net sales, as we are winning new noncaptive customers.

Adjusted EBIT was $102 million in the second quarter, with manufacturing efficiencies more than offset by higher product development investments and negative foreign exchange translation.

Adjusted EBIT margin was 9% in the second quarter of 2019, slightly up to last year.

Moving onto Slide 13, our Financial Services business.

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

Retail loan originations achieved $2.5 billion, relatively flat compared to last year.

The managed portfolio of almost $27 billion at quarter end was up $1.3 billion versus 1 year ago at constant currency, with the bulk of the increase in South America and Europe.

From a performance point of view, Q2 2019 net income was $91 million, a decrease of 11% compared to the same period last year, mainly due to pricing initiatives and the onetime impact of credit loss provision releases in 2018, partially offset by higher average portfolio in high-growth markets and improved income taxes.

This represents a return on assets of about 2%, in line with historical performance.

Importantly, credit quality performance remains healthy, with delinquencies tracking at 3.1%, down 20 bps versus 1 year ago.

This is a good sign that while sentiment may be negative, financial stability of the overall customer base is still adequate.

The Financial Services segment goal of supporting the sales of CNH Industrial, while other partly remunerating its own capital remains an underpinning of our portfolio strategy.

Moving onto Slide 14, I'd like to discuss our net debt and free cash flow of industrial activities performance and provide an update on the balance sheet.

Net debt of industrial activities at June end was $1.5 billion, flat from the end of March.

Free cash flow in industrial activities was at $0.4 billion, as already mentioned in my opening remarks, down almost $300 million versus same period last year.

Moving to the working capital dynamics during the quarter, the main driver of the cash usage was the buildup of inventories in the quarter, partially offset by trade payables and other.

As previously explained at this juncture of the year, the increase in inventories is primarily due to seasonal production in anticipation of the summer shutdown.

In summary, we expect that based on the most current production program, inventory, especially in our off-highway businesses would be greatly reduced in the second part of the year to finish imbalance with retail.

At the end of June, our available liquidity was $9.9 billion.

The strong level of available liquidity permits us to look at our capital allocation priorities with a diligent approach to, one, maintaining a solid balance sheet and protecting our credit rating; two, continuing to invest organically to foster future growth; three, being opportunistic in M&A growth initiatives; and four, protecting our dividend policy and delivering on our buyback program.

At the beginning of July, we have issued a 10-year Eurobond of EUR 500 million in principal amount with a coupon of 1.625%, due July 3, 2029.

This is the first time since inception that CNH Industrial is taping the European debt capital markets on such long duration.

Additionally, on July 2, 2019, Fitch Ratings improved the outlook of CNH Industrial N.V. to positive from stable.

Fitch has also confirmed CNH Industrial N.V. and CNH Industrial Capital LLC, long-term issuer default ratings at BBB-.

This action is consistent with our stated goal of further improving our current credit rating to close the gap with our peers.

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 16.

When we turn to the market outlook for the full year 2019, many of the uncertainties we had touched on last quarter are still evident today, but our understanding of how the moving parts affect our business has become clearer.

Additionally, weather condition in many geographies continue to trend unfavorably for much of the second quarter with the end results for machinery demand and crop yield still somewhat in question.

That being said, we are still cautiously optimistic that some of these macroeconomic headwinds will be resolved in the near term and at least strengthen sentiment in the latter part of the year.

I won't run through all the segments by region here, but as I said earlier, we believe that cyclical-replacement demand in agriculture remained stable, reduced equipment inventories at low levels and supporting new equipment sales in North America with reference to South America demand will remain optimistic for the second part of the year.

In terms of Construction Equipment, we have raised expectations on the compact and service subsegment for South America and rest of the world.

On the road building and site prep, we have lowered many of the industry volume expectations.

While globally we see the CE market is steady, there are pockets of weakness in Asia, that's for the industry are sometimes more significant than for our specific demand.

The truck market in Europe for heavy is expected to be flat to slightly down.

And in light, it's anticipated to be up with positive trends in natural gas for both segments, as previously anticipated.

In the South American market, and particularly Brazil, demand recovery should continue, driven by attractive borrowing rates, old fleet renewals and increased freight demand, and hence, we are expecting at least a 15% growth rate.

On Slide 17, we highlight our guidance for the full year of 2019.

As a result of the updated end-market outlook and as mentioned in my opening remarks, our 2019 targets are as follows: revised reported net sales of industrial activities between $27 billion and $27.5 billion, with sales expected up year-over-year 1% to 2% at constant currency versus 2% previously.

Confirmed adjusted diluted EPS up year-over-year between 5% to 10% at a range of $0.84 and $0.88 per share.

Confirmed net debt of industrial activities at the end of 2019 to improve to between minus $400 million to $200 million.

In addition, we are highlighting the following: increased investment in organic growth with CapEx of more than 2%, and R&D at 4% of sales, respectively.

Operating cash flow now seen as higher or equal than 2018 level.

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

Now I would like to discuss a few quarterly highlights in terms of product development, key product launches for full year 2019, and then I will conclude with a few additional final remarks.

Turning to Slide 19.

I would like to take a few moments to highlight the new IVECO S-WAY, the successor of the IVECO Stralis and the heavy range.

This new truck is a game-changer in many aspects for our Commercial Vehicle segment.

First, we substantially upgraded the cab of new features while lowering our cost, hence, improving our margin in a segment where we have been historically weak.

Second, the S-WAY is 100% connected via our advanced connectivity box, which collects, processes and exchanges real-time data and keeps owners and drivers continuously connected.

Third, it unlocks a new model offer of premium personalized services, including professional fuel advising, fleet management and maintenance to optimize the fleet performance and efficiency.

Fourth, it's a game-changer for logistics operations, wishing to run a green fleet as the IVECO S-WAY natural power remains the only LNG truck offering a range of up to 1,600 kilometers or about 1,000 miles for long-haul emissions with 460 horsepower.

With this vehicle, the customer will benefit from all the advantages of natural gas, the only immediately available low-emission alternative to diesel in the heavy segment.

Finally, the new truck and its commercial launch was centered around the driver with features that would attract him or her as the technical buyer of the product.

This is needed to attract and keep highly skilled professional drivers in a world, wherein the foreseeable future, they are a scarce resource.

Feedback from drivers, fleet owners, dealers as well as European media was extremely positive, and we're seeing order book built up with margin improvements expected to come to fruition starting from latter part of the year or beginning of next year.

This will be an incremental positive on top of the successful launch of the new daily earlier this year.

Moving to Slide 20.

You can see that we had another great quarter in terms of awards and achievements.

And our bus division, where we are the market leader, our earliest bus brand won a major order for electric patents from the Paris public transport operator.

This order signed in May is worth EUR 133 million and represents the largest electric bus order received to date.

Over the next 2 years, we will deliver these units, which will contribute to Paris goal of converting the entire city bus fleet to electric by 2025.

Additionally, IVECO bus officially delivered the first 15 hybrid-electric urban buses to the Brussels Intercommunal Transport Company.

This delivery follows the agreement for the supply of 141 vehicles, which should be completed by 2020.

In terms of

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leading to a 13% reduction of direct customer account.

The first benefit will be seen in Q3 and Q4 of this year.

Additionally, we have to find initial action for agriculture in North America and a specific parameter of operations with 60% reduction of consideration, the first benefit to be visible in the latter part of this year as well.

Finally, following the rollout in the North America, we have now started the activities around the 80-20 business simplification process activities in our AG and CE, in these segments in Europe, with expected positive impacts from 2020 onwards.

Moving onto Slide 22, I want to give a bit more detail as we turn the corner halfway through 2019 and start to look at the remainder of the year.

In the second half, we see a mixed equation of end-market sentiment with continued uncertainties in many AG end markets due to geopolitical client-related risks offset, however, somewhat by an EU truck market that continues to show resilience at high levels.

With this, as a general environmental backdrop, we will take the necessary production adjustments where needed.

Throughout the year, we have been updating the market on the organizational transformation.

So in this process, we have increased span of control for our managers, creating more attractive roles, reducing hierarchical layers as well as addressing underperformance, resulting in the first stream of efficiency of about 5% of labor cost savings in our G&A structure identified and under execution.

This will provide an annualized saving of about $100 million, of which approximately 1/4 will be achieved during 2019.

Additionally, we are encouraged with the rollout of our new products in CV and the launch of our next-generation, high-horsepower tractors in the second half of this year.

These new products are demonstrating our innovation potential in connectivity and precision farming, alternative propulsion as well as automation.

Finally, we remain optimistic for the agricultural markets going into 2020, given, first, U.S. farmers took advantage of recently improved commodity prices; second, lower commodity stock levels expected at the end of 2019; thirdly, sustained U.S. pharma cash flows as a result of the various relief packages; fourthly, use of CapEx depreciation tax incentives; and finally, the apparent needs to replace older equipment to improve yields, all of which we anticipate will stimulate equipment demand in the latter part of 2019 and, of course, going into 2020.

Before I turn it back to Federico for the Q&A, I wanted to remind those listening to the call that the Capital Markets Day will be held on September 3 at the New York Stock Exchange in Downtown, Manhattan.

And if you not have yet RSVP, please do so.

If you have not received an invitation and would like to attend, please send a note to our IR team, investor.relations@cnhind.com.

And they, for sure, will get one out to you.

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

Thank you very much, Hubertus.

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

Karen, over to you.

(Operator Instructions) We will now take our first question from Ann Duignan from J.P. Morgan.

It's Ann Duignan.

My first one maybe one on Commercial Vehicles.

If you could explain the strategic rationale for reentering the heavy-duty markets.

Why does the market need another S-WAY truck?

And can you talk a little bit about the number of new competitors entering the natural gas environment, please?

Well, interesting question.

First of all, we are a significant player in that segment in Europe, obviously.

Secondly, I think if you look at the lineup of our Commercial Vehicle, we had profitability issues in the heavy segment, which we have now solved with the new S-WAY, which actually has a far better cab.

It was received very, very well.

And at the same time, it take costs out hence improving our margin.

So it's no question that we will continue to producing and also providing to the market heavy-duty trucks.

And what I said is really a bit of a game-changer for our business.

This truck was received very, very, very positively by really all stakeholders.

And then thirdly, it goes without saying that our distribution network in Europe, of course, depends on a full lineup of Commercial Vehicles from light to medium to heavy.

And so all in all, we are very, very pleased with this truck as it will allow us, we believe, to increase our market share to go back to historical levels.

And on top of that, of course, given that we are the leader with 55% market share in the LNG so liquefied natural gas segment for the heavy and that this segment, as predicted, has nearly doubled already year-to-date to 2% coming from 1% last year and continues to grow.

We see this growing, as we have said, to the low double digits perhaps in the near future.

And given that we are the leader there with our heavy-duty LNG trucks, I think these are all reasons that speak very much for us staying in that segment and, of course, staying in the Commercial Vehicle business.

Does that answer the question?

Half of it.

The competitors in LNG, how many are new?

Who are your competitors and how many new competitors are entering the market as we speak?

Ann, you're very difficult to hear.

Can you repeat it.

I think you said competitors on the LNG side entering that segment?

Is that what you said?

Yes.

Who is entering is very obvious, Scania is really the second player in the market here being a bit late to the party.

They are gaining share, obviously, as you would expect; however, we still keep the majority of the market.

And the third player in that is Volvo.

But the majority of the shares, as said, 55% are with us, and we basically believe firmly that with an improved cab and truck, the S-WAY truck, the LNG, we can definitely maintain that share or even increase that share.

Max, do you want to add something?

No, I just want to add that we have this record in terms of autonomy of 1,600 kilometers that is unsurpassed in the industry right now.

Absolutely.

So if you look at...

Where the less-developed infrastructure is key to push demand forward.

Yes.

And on the infrastructure, by the way, also, that has improved dramatically.

And I think the increase of nearly tenfolds of the penetration in Germany speaks for the sustainability of that trend and the resilience and the adaptation of LNG as a solution in the truck industry that's going to stay there.

Okay.

I appreciate that.

And I look forward to 80-20 in the PowerPoint presentation, Hubertus.

Pardon?

I look forward to you applying 80-20 to the PowerPoint presentation on earnings day.

Okay, good.

Very good.

Interesting comment.

Thanks, Ann.

Next question.

And please make sure that you ask one question per person, please.

Thank you.

Thanks, Ann

Next question comes from the line of Joe O'Dea from Vertical Research.

There were a number of the things that you touched on at the end of your comments around some of the things that give you optimism on AG heading into 2020 are arguably things that could also help the back half of the year.

And so just a question around what you think keeps that demand on hold in the back half versus the recent taking advantage of better commodity prices.

We're seeing some of the aid payments flow through this month, why that's not translating into better demand in the back half?

Well, I think the finances, as such, have benefited from the higher commodity prices and have reduced their stock of crops in the last months, which is a positive.

But I think they're hanging in there right now and waiting now for the harvest.

They want to see whether there is frost.

And we believe that we're going to see then the demand pattern coming up in Q4, beginning of October.

So that's right now what is holding it up.

They're waiting in there.

The way you want to see what they're going to have in the bins end how the yields are.

They want to see how the weather comes.

And then, also, they want to basically use the positive effects of capex, depreciation and tax incentives, as I've said.

We are cautiously optimistic that in Q4, demand will pick up, and we are still confirmed and also optimistic for 2020.

But make no mistake, it's not an easy time right now for the U.S. farmers because, as we said, other people stepped into the supply chains of soft commodities.

We're seeing that in South America right now, there is the reason why our order book is significantly up for AG, specifically in Brazil.

And these are kind of competitors that the U.S. farmers then have to deal with because of these uncertainties that have been created around the trade dispute.

So that in all, is kind of the reason why, I guess, demand right now is a bit muted.

But why we are cautiously optimistic for the latter part of the year Q4 mainly and then going into 2020, but it won't be easy for them.

Your next question comes from the line of Larry De Maria from William Blair.

I understand your cautiously optimistic sentiment around the fourth quarter and into next year curious, curious -- and I apologize if you discussed this earlier and I missed it, but curious about how you're thinking about second half production and the usual fourth quarter true-up in the AG markets in North America, specifically, if you think you're -- at what point do you think you need to maybe make a call on production and compare that to where your inventory you think is and where the industry inventory is, please?

I'll give that -- question to Max.

We have made calls on our production.

I think we said something about second half.

Perhaps, Max, you're trying to say there out there.

Yes.

So we actually took the call right now for the balance of the year, and we are expecting to -- production to be down 10% in Q3, Q4, there will be a positive trend.

The expectation is for a positive trend in retail, as typically happens at the end of the year.

And with our production program right now, we expect to underproduce retail significantly in Q4 to close the year in balance production to retail for the full year.

And how would you characterize -- thank you for that, characterize inventory in the industry, Vis-à-vis you guys were stressing the inventory into next year?

Right now, for our perspective on inventory and total channel between company inventory and dealer inventory, on our end, we see 2 areas where there is some work that needs to be done, particularly, obviously, the situation in the combine market in Europe is not helping.

Hence, there is a potential risk of some inventory speaking out, therefore, longer than anticipated.

And then the second area, obviously, is we continue to keep a very close eye on North America row crop, which is under control.

While we expect low-horsepower tractors also to be washed out during the balance of the year.

Your next question comes from line of Chad Dillard from Deutsche Bank.

So just had a question on North America.

Just trying to think through, just like what your expectations are for the market facilitation program.

To what extent is that cash flow built into your back-end outlook for agriculture.

And do you think that could actually leave farmers to either pay more debt back or buy more equipment?

Okay, Max, why don't you take that.

I think the question is about cash flow on the farmer side.

We expect -- right?

Yes, the market facilitation program, just the impact and what you're kind of baking in terms of growth there.

So I think between waiting for the harvesting results and allowing the farmers to cash in on the subsidy programs, we expect demand to move forward in the latter part of the year, starting in October, and which is what Hubertus said during the call.

And also, there will be a tweaking on intention to purchase equipment based upon farmer's level of profit to optimize the tax environment.

And then over to South America.

What activity levels have you seen since the tsunami funding was replenished?

Are you starting to see a snapback?

And to what extent is that assumption of pent-up demand baked into the back end of the year.

So basically, what happened in South America, the funding that was appropriated to the BNDES, the bank of development in Brazil, run out at the end of April.

And so at end at mid of May, so basically, this has been a halt on the retail market for a 1.5 month.

At the beginning of June, the government -- the Brazilian government has announced the new Moderfrota program for -- before the harvesting year 2019/2020, which starts at the 1st of July of the year at more or less similar conditions.

So slightly higher interest rate but actually more funding available.

And so the expectation is that the demand that halted in the second quarter would be catched up in -- caught up in Q3.

And together with the expectation of a strong harvesting season and the potential increase in arable land, in particular in Brazil, we expect demand to improve significantly in the second part of the year after a negative first half.

And to add on that, despite the negative first half, we have gained share in South America and Brazil, specifically, by mid-single digits.

And we basically, of course, want to continue to attack and want to increase our shares there now on a better market in the second half.

So we're really positive about Brazil.

We will now take our final question.

Your next question comes from the line of Gungun Verma from Goldman Sachs.

I had one question on precision AG.

Obviously, you're investing increasingly in the development of this technology.

Can you remind us how material is the contribution from precision AG in overall sales and EBIT in AG?

Well, I don't think that we disclose the individual sales, and I also want to keep our powder a bit dry for the Capital Markets Day, I think you've going to hear a lot about precision AG there.

And I think we'll disclose there what the sales are and for, most importantly, what our projections are.

But at this point in time, we don't want to disclose, but we will say a lot more about that on the Capital Markets Day.

So stay tuned, and please be there.

Sure, can I then ask a follow-up question, please?

Just one on Commercial Vehicles, your competitors are talking a lot about aftermarket and services segment.

I'm not sure if you have disclosed this in the past, but can you comment on how big the aftermarket businesses is for IVECO?

Same thing there.

We basically -- Max is going to -- are we disclosing that?

I mean what we basically -- what you're going to see is, and I've said that with the new truck, which is completely connected right now, we will significantly increase the aftermarket by offering services that we have not yet provided so far.

We're working there in partnership with world-class companies, such as Amazon and Microsoft.

And I said same thing here, this is going to be part of the Capital Markets Day, where we basically going to give a trajectory, how this so-called trend around servitization, driven by digitalization, is going to affect positively our business and is, of course, improving the mix dramatically because the margins, of course, on those services are significantly better than on the whole goods business.

Max, do you want to add anything?

Not at this time.

He does not.

Okay.

Thank you very much.

That concludes our 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, Karen, and thank you, everybody, and have a nice day.

And I think we wish everybody a nice summer, right?

Ferragosto Absolutely.

Stay tuned and see on September 3. Bye, bye.

Thank you.

Ladies and gentlemen.

That does conclude our conference for today.

Thank you for participating.

You may now all disconnect.