CNH Industrial NV (CNHI) 2019 Q3 法說會逐字稿

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

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

(Operator Instructions)

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

Please go ahead, sir.

Thank you, Priscilla.

Good morning, and afternoon, everyone.

We would like to welcome you to the webcast conference for CNH Industrial Third Quarter 2019 Results for the period ending September 30.

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

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

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

They will use the material available for download from the CNH Industrial website.

After the presentation, we'll 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, including 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 equivalent authorities in Netherlands and Italy.

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

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

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

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

Our third quarter results reflect the progress in delivering on our Transform 2 Win strategy and successful execution across our segments in uncertain end market environments.

While our Commercial and Specialty Vehicle and Powertrain businesses are performing in line with our expectations, our AG and CE businesses are facing headwinds in the agriculture and construction end markets.

As we look to successfully navigate these different market segments and environments, it reinforces the strategic rationale behind our Transform 2 Win strategy presented at our September Capital Markets Day.

We are already benefiting from our self-help initiatives and have advanced on our streamlining and operational efficiency actions as well as a geographic footprint optimization.

These steps will better position our business segments to navigate current end market volatilities.

We are also continuing to invest in innovation, technology and new product introduction across all segments, with a strong focus on delivering solutions to address the megatrends we face.

These innovations will not only allow us to grow our share in more profitable end markets, but also help us to gain market share with our core markets and most profitable segments.

Finally, the vision we presented to create 2 independent global businesses purely focused on the off-highway and on-highway markets provides a detailed road map for further value creation.

And I'm very pleased to say that we are fully on track with our plans and work streams to achieve this transformation.

Turning to the third quarter and year-to-date highlights.

Q3 Industrial Activities net sales were down 3% in constant currency due to industrial demand deceleration and dealer destocking actions affecting Agriculture and Construction segments, while Commercial and Specialty Vehicles and Powertrain segments were flat.

For the year-to-date period, net sales of Industrial Activities were relatively flat year-over-year.

We are addressing the current inventory overhang front and center with production adjustments that have negatively impacted our Q3 performance, but in the expectation that we will be able to exit the year with our inventory rightsized and ready to move into 2020 with a cautiously optimistic view.

Industrial Activities adjusted EBIT margin was down 30 basis points for the quarter due to net price realization offsetting product cost increases with a negative volume mix impact, inclusive of fixed cost absorption due to production adjustments.

For the year-to-date period, despite the deteriorated macro industry environment, we were able to maintain the EBIT margin flat.

Below the line, lower interest expense and an improved adjusted effective tax rate led to a flat year-over-year adjusted net income and adjusted diluted EPS for the third quarter and is up more than 10% year-to-date.

I will go into further detail at the end of the call.

But for now, let me say that we have updated our guidance for full year 2019 slightly on the top line to reflect the deteriorated industry environment in Q3 while confirming the prior range guidance on adjusted diluted EPS, confident on what has been achieved year-to-date.

Net debt of Industrial Activities guidance was also adjusted to reflect the M&A activity we have announced since our Capital Markets Day.

Moving on to Slide 4, let me provide you with a high level industry update for Q3 industry volumes.

First, let's look at the AG segment.

North America row crop markets were largely weaker due to continued uncertainty as to when the trade issues that have hung over the market would be resolved and what a resolution would mean for government payments and increased exports.

Recent positive trends in commodity prices and the stability of used equipment pricing in high horsepower tractors and combines in North America give us some confidence that these early indicators, paired with government payments and a tentative Phase I U.S.-China trade deal, will lead to stability in the market going forward.

EU tractor demand remained positive in the quarter, up 2%, but combines continue to underperform more than we would have anticipated, down 13% due to partially the hangover of the challenging weather conditions during the previous harvest season.

In South America, and Brazil particularly, farmers had a gap in funding between the early runoff of the 2018/'19 Moderfrota program and the new plan for '19/'20 that was announced at the end of June.

Following the resumption of funding during August, we have seen lackluster end customer demand due to uncertainties in the macro and global industry environment.

In terms of construction end markets, we have seen a continuation of the trends outlined during the midyear call.

North America continues to grow, but at a slightly tepid pace due to uncertainty in many end markets, caused by a combination of macro and government-induced barriers.

Channel destocking is fairly widespread in anticipation that these challenges will be with the markets longer than initially hoped.

We have seen some strength in road building and infrastructure, but this is mostly paving and repair work financed by local governments, and doesn't require substantially new investments in equipment.

EU markets are more or less unchanged with the slowing in the major markets, including due to Brexit uncertainties.

South American volumes continued to improve due to supportive financing but, like trucks, this is off a very low level in the major market of Brazil.

For trucks, the European truck market was down 1% year-over-year in the quarter, with light-duty trucks up 11% ahead of the September 1 implementation of Euro VI Step C. Medium and heavy trucks were down 21%, due to the preregistration of vehicles in Q2 ahead of the new legislation related to tachographs and other safety equipment that were required starting June 15.

While economic growth has showed -- slowed a bit and elevated Brexit uncertainty is evident in the back half of the year, we continue to see the overall heavy-duty truck market as flat at high levels this year.

South America was up 20%, with Brazil up 32% and Argentina down 30% from already low levels achieved last year.

For buses, the European market decreased 4% this quarter, partially driven by Brexit-related demand weakness, but the South American market increased 14%, led by Brazil.

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 on the call.

I will take you through our financial performance in detail.

In a muted industry environment in agriculture and a less-vibrant-than-expected construction market, we have taken early on in the third quarter measures to adjust production to the revised end-user demand and dealer expectations with midteens production adjustment in Q3 versus our previous forecast, in order to maintain our production rate in line with the retail market.

The top line impact has flown through to P&L, inclusive of a negative fixed cost absorption, but thanks to continued price realization and a disciplined approach to our cost structure we have mitigated those impacts into our quarter results.

When we look at the 9-month period, the persistence of a weaker industry environment and the uncertainty of the macro environment in most of the geographies where we compete have not limited our ability to deliver on our margin journey.

And while we are holding flat on EBIT margin despite increased R&D spend year-to-date and decreasing unit deliveries, we have been able to generate an uptick in our gross margin on a year-over-year basis.

Moving now to Slide 5 and the key figures for the third quarter and year-to-date.

Net sales in our Industrial segment were down 6% on a reported basis, and down 3% in constant currency.

Adjusted EBIT was down 12% in the quarter and 6% year-to-date.

Net income was $643 million for the third quarter of 2019.

As discussed in recent regulatory filings and anticipated during the Capital Markets Day held on September 3, net income includes a $539 million noncash tax benefit due to the release of valuation allowances on certain net deferred tax assets as a result of a sustained period of commodity pretax earnings, coupled with projections of future income before taxes in the related jurisdiction as a result of actions included in the Transform 2 Win strategic business plan.

Net income was also negatively impacted by pretax restructuring and other asset optimization charges of $177 million due to actions included in the Transform 2 Win strategy, and namely, $42 million in restructuring associated with our organizational and footprint optimization programs and $135 million in asset optimization in our truck business to align residual values of preowned trucks to the targeted remarketing plan our commercial organization has recently put in place.

We reported a third quarter adjusted net income of $221 million, basically flat from Q3 2018, while year-to-date achieved $900 million.

Adjusted EPS was $0.16 in the quarter and $0.64 per share for the year-to-date period, up 10% on a year-over-year basis.

The adjusted tax rate for the quarter was 28%, down from Q3 last year, and we expect it to be 27% for full year 2019.

Net debt of Industrial Activities in the quarter was $2.4 billion, up $0.9 billion from the end of Q2.

Free cash flow of Industrial Activities in the quarter was a usage of $1.1 billion due to an increase in net working capital primarily related to a lower trade payable balance and higher inventory resulting from the typical seasonality in the third quarter, further exacerbated by production adjustments due to a deceleration in industry demand versus our initial expectations.

Available liquidity was $9.4 billion, down $0.4 billion compared to June 30 and up $0.5 billion compared to the end of December 2018.

Turning to Slide 6. Let's discuss the third quarter and year-to-date performance in our Industrial Activities net sales, excluding now the impact of foreign exchange translation, which represent 2.5% and 4.5% in Q3 and year-to-date, respectively, of our net sales percentage change year-over-year.

In the quarter, net sales at constant currency for Industrial Activities decreased 3%.

Agricultural Equipment decreased 6% as a result of industry volume deceleration paired with unfavorable mix, primarily North America, and a general industry weakness in most of -- rest of the world geographies where we compete, partially offset by a sustained price realization performance of more than 2 percentage points and by sustained aftermarket activity.

The resulting company inventory unit overhang, which is primarily related to low horsepower tractors in rest of world, is for the most part a function of deliveries planned for Q4.

For Construction Equipment, sales decreased 8%, mainly due to lower sales volume in North America as a result of the channel inventory rebalancing actions and in certain rest of world markets as a result of a weaker industry.

These were partially offset by positive price realization in the quarter.

Commercial and Specialty Vehicle sales were substantially flat as a result of decreased volume in truck and bus primarily related to the non-repeat of fleet transactions in medium-duty trucks in Europe and extremely low industry demand in Argentina, offset by increased deliveries in specialty vehicles and a sustained activity in aftermarket.

Finally, Powertrain sales were substantially flat versus Q3 last year.

Turning to Slide 7 now with an overview of our operating results by driver.

Adjusted EBIT was $401 million, with a margin over net sales of 6.3%, down 10% year-over-year, primarily due to the lower volume, mainly in ag, as well as higher product costs due to raw material and tariff headwinds, higher content and inflationary cost increases.

This was offset by a positive pricing across the portfolio.

Turning now to the individual segment performance, starting with Ag on Slide 8. Worldwide unit deliveries were down 9% in tractors and down 10% in combines, and worldwide production was down 3% versus last year in the third quarter, with production in the row crop sector in North America down between 25% and 30% year-on-year depending on product -- on the various product categories in the quarter, achieving an underproduction to retail at around mid teens.

Worldwide company unit inventories ended up 43% in tractors, mainly in low horsepower in rest of world, and 4% in combines.

In terms of profitability, adjusted EBIT was $152 million in the third quarter of 2019, with adjusted EBIT margin at 6.2%.

Net price realization and sustained aftermarket activity were more than offset by the unfavorable volume and mix impact, lower fixed cost absorption from the said production adjustments as well as higher product costs as a result of increased raw material and tariffs and higher product content.

While uncertainty remains in the agriculture end market related to the trade tension and to negative weather events which are impacting market sentiment and harvesting patterns, we believe the cyclical replacement demand remains in place with used equipment inventories at low levels, supporting new equipment sales in North America.

The order book globally generally remains lower than last year, with the exception of North America tractors, which are relatively flat, while rest of world combines are up sharply, mainly due to low comps.

In most geographies we have intervened, starting in late Q2, and reduced our production program versus the previous cycle by mid-teens in Q3 and will continue in Q4 as a similar rate to maintain our inventory balance for the second part of the year.

We reiterate that we currently expect to produce in line with retail in ag for full year 2019.

Turning to the next slide.

Construction worldwide unit deliveries were down 16%, with compact down 19%, general construction down 5% and road prep down 15%.

In terms of production on a worldwide basis, it was down 11% versus last year, with compact equipment down 15%, and the other markets more or less flat.

Inventory units were up 42%, mainly in compact segment in North America.

Adjusted EBIT was $10 million in the third quarter of 2019, with adjusted EBIT margin of 1.5%.

The decrease was mainly due to higher raw material costs and tariff and an acceleration of the spending related to our quality excellence initiative as announced at the Capital Market Day and some logistic costs in efficiency due to the later production adjustments.

This was partially offset by positive pricing.

End-user demand in the construction industry in the U.S. has flattened somewhat.

And while there are pockets of strength in energy and infrastructure markets, they are not broad-based, and in areas of equipment where we don't have large market share.

While used pricing continues to hold up well, dealers have been cautious and are trying to further decrease inventory levels through the end of the year.

As a result our order book is down in North America.

South America, on the other hand, continues to experience growth, especially in Brazil, where compact equipment orders are up sharply and where we have superior brand recognition.

Some of the much-needed infrastructure spend in Brazil has started to flow.

In some cases, dictated by the increased need to have better routes to transport ag commodities from the fields to the ports.

On Slide 10 now with Commercial and Specialty Vehicles.

Trucks worldwide production was down

approximately 2% versus last year, primarily in light commercial vehicles, with company inventory units up 10% versus last year.

As a result of the transition from the old model year '14 to the new model year '19 daily lineup and the ramp-up of the new heavy S-Way, light truck deliveries were down 7%, while medium and heavy were down 13%.

Bus deliveries were up 4% in Europe, as demand for alternative propulsion buses continued to increase both in the city bus and intercity product segments.

The Commercial and Specialty Vehicle segment adjusted EBIT was $70 million in the third quarter, slightly up compared to last year.

This includes a $50 million pretax gain realized from granting Nikola access to certain Iveco technologies as part of the previously announced $150 million in kind contribution as consideration for the initial interest in Nikola.

Absent the Nikola gain, adjusted EBIT would have been $20 million, a reduction of $48 million compared to the previous year, primarily due to higher production costs mainly related to inflationary cost increases and supply chain inefficiencies in our truck and bus businesses due to the production transition from old to new models, mainly in our light and heavy product lineup, and higher commercial expenses related to the launch of the new S-Way heavy-duty truck.

Adjusted EBIT margin including the Nikola gain was 3% in the third quarter, and was 0.9% excluding the Nikola transaction.

As the importance of alternative propulsion and digital technologies to the commercial vehicle industry and our other industrial segment grows, transactions such as Nikola may become more common in the future, if not necessarily routine.

In terms of our alternative propulsion initiative, LNG/CNG demand came in below expectations during the third quarter as a result of the current subsidy scheme in certain new countries being transitioned into the new fiscal year budget.

At this point we would expect an acceleration of this demand to return in the fourth quarter.

For the 9-month period to September 30, natural gas penetration within Europe for the industry continues to grow towards the 2% of total industry volume and is projected to increase further and elongate the strong replacement demand cycle for those OEMs that have competitive solutions.

The market share for trucks in Europe was 11.4%, flat versus last year.

Trucks book-to-bill was 0.9 in EU and 1.4 in South America, with order intake in Brazil up 57% from this time last year, but starting from a low base.

Order intake for heavy trucks have improved substantially due to the phaseout of older models and the ramping up of the new S-Way.

This was offset by lower orders in mid

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So Max, can I ask you to continue updating us on the financials.

Thank you.

Thank you, Bertus.

So I'm on Slide 10.

And I was just finishing the commentary about the EBIT of special -- Commercial and Specialty Vehicles.

In terms of our alternative propulsion initiative, LNG/CNG demand came in below expectations during the third quarter as a result of the current subsidy scheme in certain new countries being transitioned into the new fiscal year budget.

At this point we would expect an acceleration of this demand to return in the fourth quarter.

For the 9-month period to September 30, natural gas penetration within Europe for the industry continues to grow towards the 2% of total industry volume and is projected to increase further and elongate the strong replacement demand cycle for those OEMs that have competitive solutions.

The market share for trucks in Europe was 11.4%, flat versus last year.

Trucks book-to-bill was 0.9% in EU and 1.4 in South America, with order intake in Brazil up 57% from this time last year, but starting from a low base.

Order intake for heavy trucks have improved substantially due to the phaseout of older models and the ramping up of the new S-Way.

This was offset by lower orders in medium and light due to alignment of dealer inventory.

Bus market share in Europe was 19%, and book-to-bill was 1 both in EU and South America.

EU orders remain strong overall as public funds were made available throughout the continent for fleet renewal.

If we move to the next slide, Powertrain continues to demonstrate solid results in light of a challenging end market environment.

Net sales decreased 3% in the third quarter of 2019, but flat on a constant currency basis due to unfavorable mix of engines.

Sales to external customers accounted for 51% of total net sales, similar to last year.

Adjusted EBIT was $81 million in the third quarter of 2019, where product cost efficiencies were partially offset by an unfavorable mix of engine sales, increased product development activity and selling expenses related to the development of the third-party business portfolio.

It is worth noting that although these were some elevated expenses in the quarter, the new contracts associated with this will have a run rate revenue potential in excess of $150 million annually, ramping in 2020 with the full amount run rate for 2021 onward.

Adjusted EBIT margin was 8.6% in the third quarter, up 20 bps compared to last year.

Moving on to Slide 12 and our Financial Services business.

The segment has continued to perform well in the quarter with retail loan originations of $2.4 billion, flat compared to last year.

The managed portfolio of $25.5 billion at quarter end was up $0.8 billion versus 1 year ago at constant currency, with the bulk of the increase in South America and Europe.

From a performance standpoint, Q3 2019 net income was $82 million, a slight decrease compared to the same period last year, mainly due to differences in risk cost accruals period to period and an acceleration of aged used equipment liquidation.

Delinquencies continued to improve and reached an all-time low of CNH Industrial -- for CNH Industrial of 2.8% in the third quarter of 2019 as a result of credit conditions stabilization in all markets.

This is a good sign that while sentiment may be negative, financial stability of our overall customer base continues to be manageable.

To put this in context a bit, although net farm income in the U.S. has dropped by 30% over the past 6 years from the record set in 2012, it is slightly above the last 6-year average expected for 2019 as a result of the multiple [arrays] of stimulus the U.S. administration is delivering in the current year to counter trade and weather imbalances, while fundamentals remain positive for the long term.

Moving on to Slide 13, 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 the end of September, as I said, was $2.4 billion, down 0.9% from the end of Q2.

Free cash flow from Industrial Activities was a usage of $1.1 billion, as mentioned in my opening remarks.

Moving to the working capital dynamics during the quarter.

The main driver was a lower trade payable balance compared to June end of about $700 million resulting from the normal seasonality and as a result of recent production adjustments due to industry demand deceleration and to higher inventory.

At the end of Q3, our available liquidity was $9.4 billion.

As detailed in the Capital Market Day in September, the strong level of liquidity permits us to look at our capital allocation priorities with a diligent approach to: first, maintaining a solid balance sheet and protecting our credit rating; second, accelerate investment into our Transform 2 Win organic initiatives to foster future growth; third, identify and execute on opportunistic value-enhancing M&A initiatives, as recently announced; and fourth, protecting our dividend policy and delivering on our buyback program.

Speaking of the buybacks, during the course of 2019, we executed on the current program for a total amount of shares bought of more than 6 million units for a total consideration of almost $60 million, bringing the total of the purchases to date to $264 million.

I have concluded my presentation and will turn it back over to Hubertus for the outlook and his final remarks.

Thank you, Max.

And please join me now on Slide 15 for an updated industry outlook.

In the third quarter, industry conditions in the main agricultural markets have further deteriorated due to market uncertainties and negative farmer sentiment particularly affected by poor yield conditions in various regions.

However, we continue to remain cautiously optimistic for the balance of the year, as recent developments in U.S.-China trade negotiations and the related potential implications for commodity prices could have a positive impact on sentiment, and accordingly revive some equipment purchases in the U.S. and Canada towards the end of the year.

We also continue to have a slightly positive stance on demand in South America, although we have not seen the increased penetration of Brazil into the grain export market reflected into incremental equipment purchases as of yet, as a result of the slow start of the new subsidy scheme into the new harvesting season 2019 and '20.

Additionally, during Q4, we will be exhibiting at Agritechnica in Germany, which should provide a positive stimulus, as this is the largest ag show globally and historically has been a show where especially European customers place orders.

The construction equipment market remained in positive territory during the third quarter, but elevated inventory level across the industry require a careful review of production levels, especially in the North American market during the upcoming quarter.

European demand for heavy trucks has been affected by the electronic tachograph introduction at the end of June, with a pre-buy effect in the second quarter.

In addition, negative sentiment in some of the major European markets has dampened demand for fleet replacement at a time when our commercial vehicle business is changing to new vehicle families, both in the light and the heavy segment.

CNH Industrial expects to demand -- the demand to remain soft during the fourth quarter of 2019 while it continues to ramp up production on the recently launched vehicles on the back of a good start of its order book, with current orders for the new S-Way up 15% when compared to the same year-to-date period in 2018, and to complete the phasing out of the older models from the dealer network.

As far as the LNG and CNG subsegment, we expect pent-up demand to return in Q4 and going forward, while maintaining our leading market share.

With this in mind, Ag and CE worldwide production is projected down double digits in Q4 compared to prior year to realign full year production and retail.

In Commercial and Specialty Vehicles, production will be realigned in European truck and bus as we're phasing in the new heavy-duty S-Way, among other products.

Regardless of the current market volatility, we're remaining cautiously optimistic on strong industry fundamentals and our technological leadership in the areas of digitalization, automation and alternative propulsion.

On Slide 16, we highlight our guidance for the full year of 2019.

As a result of the updated end market outlook, we have updated our full year 2019 guidance as follows: net sales of Industrial Activities revised down by $0.5 billion, now seen between USD 26.5 billion and USD 27 billion; adjusted diluted EPS confirmed up year-over-year between 5% and 10% at a range of $0.84 to $0.88 per share; and finally, net debt of Industrial Activities at the end of 2019 revised to USD 0.6 billion to USD 0.4 billion, reflecting now the announced M&A activity since our Capital Markets Day.

Moving to Slide 18, I would like to give an update

on the implementation of our Transform 2 Win strategy that we announced at our Capital Markets Day in September.

As you might remember, we clustered our strategic initiatives into the 3 categories of Grow, Perform and Simplify, and Optimize in order to increase long-term EPS and ROIC.

We would like to share updates on some selected initiatives in these 3 categories.

Finally, I will conclude with the status of our spinoff.

Turning to Slide 19.

As a key growth initiative in our Commercial Vehicle segment, I would like to take a moment to highlight some details around the strategic partnership with Nikola that we announced on September 3 and some near-term market next steps.

As you may know, we have taken $250 million strategic stake in Nikola as a lead Series D investor, comprising of $100 million cash and $150 million in kind, such as licensing of intellectual property, product development, manufacturing, engineering services and other technical assistance, as well as supply of certain key components to accelerate the production time line.

The product range will comprise: the Nikola ONE, a U.S. Class 8 sleeper cab truck; the Nikola TWO, a U.S. Class 8 day-cab truck; and the Nikola TRE, a European cab-over heavy-duty truck.

Initial product launch targets include the industrialization of a Nikola TRE battery electric vehicle European-style truck ready for 2021 and the Nikola TWO fuel cell power Class 8 truck for the U.S. market, with testing to begin in the second half of 2021.

In addition, a European 50-50 joint venture is envisioned and agreed covering both electric vehicles and fuel cell electric vehicles.

I'm happy to announce that we will be holding a joint press conference in Turin, Italy, with Nikola leadership on December 3 to provide the market with a full view on the European alliance as well as the global product plans.

We anticipate that for investors interested in participating, there will be a live webcast of the event posted to our website.

With this partnership, we are once again the front-runner with an alternative propulsion system and we'll be accelerating the industry transformation towards a mission neutrality of Class 8 heavy-duty trucks in North America and Europe through the adoption of battery and fuel cell technology.

On Slide 20, we provide an update of recent acquisitions in our Agricultural segment.

Building on the already announced acquisition of AgDNA in September, we recently announced the acquisition of K-Line Ag, the Australian tillage and crop implement manufacturer.

This acquisition will enable us to further grow share in our profitable crop production segment globally.

Secondly, just yesterday we announced the acquisition of ATI, a global manufacturer of rubber track systems for high horsepower tractors and combine harvesters, in an effort to confirm and strengthen our leadership position in these important product categories and to further gain market share.

All 3 acquisitions position CNH Industrial as a driver of industry consolidation in the agricultural market.

We anticipate the 2 new acquisitions to close during the fourth quarter of 2019.

The aggregate value of these 3 transactions will be approximately USD 85 million.

Moving now to Slide 21.

You can see an update on selected Grow initiatives across our segments.

We have had another great quarter in terms of new products and awards, demonstrating our innovation capabilities and helping us gain market share.

Touching first on Ag, our Case IH brand has announced the launch of the 150 Series Axial-Flow combine range, 250 Series Axial-Flow updates and header upgrades with upgraded engines that meet Stage V emission regulations.

For Steyr, the Expert CVT extends the Steyr tractor range in the 100- to 130-horsepower performance segment.

Steyr has chosen the Expert CVT as the launch pad in the 100-plus horsepower segments for its proven S-Control CVT transmission and S-Tronic system.

It is a perfect proposition for operators looking for a high-performance tractor in a very compact format, and it reflects Steyr's brand positioning and ambition to become a pure-play tractor technology leader.

Rounding out our Ag brands, at the SITEVI Innovation Awards, the world's largest exhibition of wine, olive and fruit vegetable production, New Holland Agriculture received the recognition of the jury panel, who awarded the Gold medal for its new [self-propelled] grape harvester and straddle tractor units.

New Holland, as you know, is a global leader in this market segment, and has pioneered the mechanization of the vineyard, working alongside our customers to help them achieve consistently a high-quality harvest, improve their productivity and facilitate their work.

With these new award-winning solutions, we take a step further in providing a solution for every job throughout the year, from soil preparation, crop protection, crop management all the way to harvest.

In terms of awards and contracts, Iveco Bus won a record order to supply more than 400 urban natural-powered buses to the Parisian Transport Authority, and for Iveco Defence, over 1,000 multirole protected vehicles will be delivered to the Dutch Ministry of Defense over the coming years.

Moving now to Slide 22, you'll find an update of selected strategic initiatives in the Perform & Simplify and Optimize categories.

In terms of 80/20, we continue to reduce product complexity and SKU count in our North American construction business and are targeting 60% with benefits already in Q4 2019.

We are also progressing well in the North American Ag business, with a reduction of SKUs of 60% identified for execution in 2020.

EU initiatives in Ag and CV were started already during the third quarter, with overall benefits ramping in Q4 of this year and on an annualized basis going forward.

Next, let's review our organization optimization initiative that is taking shape through a widening span of control and a reduction of organization layers.

This initiative has led to a reduction in headcount to date of more than 500 white collar employees showing benefits starting from Q4 of this year.

Additionally, in terms of world class manufacturing, we are on track to achieve the 4% annual saving target.

And during the past quarter, I'm proud to say that the Iveco manufacturing facility in Sete Lagoas, Brazil, has obtained silver status in the program.

The footprint rationalization and asset optimization we spoke about in September are also well underway.

We announced the closure of our Pregnana, Italy plant.

And additionally, we are in the process of seizing production at San Mauro, Italy, Construction Equipment manufacturing facility and converting this location into a parts depot.

We will start to realize the benefits from these initiatives starting in 2020.

In terms of asset optimization, we have taken a charge of $135 million in the remarketing of used truck inventories to (inaudible), where their residual value is aligned with the market demand.

These inventories will be reduced in the next weeks, adding to our year-end cash flows.

As you may have seen from the other press release this morning, we have 2 senior management changes to discuss.

First, I'd like to welcome Jay Iyengar, who's joining CNH Industrial as our new Chief Technology Officer.

She comes with an impressive technology background, having worked for prestigious companies along the megatrends of electrification and automation.

On top of that, she will provide a valuable global perspective, having lived and worked in both India and the U.S.

Let me thank Alan Berger for his services and we wish him the best for his future endeavors.

I would also like to congratulate Stefano Pampalone for becoming the new President of our Construction Equipment segment.

Stefano has done an outstanding job in the APAC/EMEA region, where he has achieved top line and profitability growth, and he will continue to oversee that region.

His leadership in CE is instrumental for this segment as we are moving from strategy to implementation, being in the midst of its turnaround to earn its right to grow.

Once we see more sustainable profitability, we can start to make the first consolidation moves in the Construction segment as well.

Let me also take the moment to thank Carl Gustaf for getting Construction to this point, and we wish him well for his future career.

Let me now conclude with Slide 23 and an update on the spin-off of our on-highway business.

We are moving with great pace and all the work streams of this important portfolio transformation that we announced during our September Capital Markets Day are on track.

On this slide, you'll find some of the key dates to keep in mind as we move through the next 12 to 14 months of this project, with a view to trade as 2 independent companies by the beginning of January 2021.

I've completed my prepared remarks and now I'll turn it back to Federico.

Thank you very much, Hubertus.

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

Operator, over to you.

(Operator Instructions) We will take our first question from Ann Duignan from JPMorgan.

Okay.

Okay.

Good.

First, let me ask you about your outlook for North America Agriculture.

The USDA recently issued their preliminary outlook for next year's planting and for corn and bean prices.

Corn prices are estimated to be $3.40 next year on the back of a significant increase in planting.

And corn is not impacted by trade or tariffs or anything, it's more impacted by the strong dollar.

So Hubertus, could you square that with your comments about North America ag being better next year or stable, when in fact it could take another step down on the corn side, which is more important than beans.

Well, Ann, 2 comments first.

First, we don't want to guide on this call to 2020.

So we're going to give the outlook for 2020 in our next call, as you know, and the outlook that we provided was for the end of the year, where we basically think there will be some purchase happening in November and December, on the back of the positive news of a trade deal and on the back of the tax incentives and stabilizing commodity prices.

Looking into 2020, and even though we don't want to give an outlook, we remain cautiously optimistic, and I would like to keep it like that right now.

We do believe that this trade deal that the U.S. and China are going to sign hopefully very soon in Iowa, as we heard right now, is going to be very, very important.

It is going to provide a stimulus for North American ag.

So our outlook remains positive for ag in 2020.

Max, do you want to add something to that?

No, no.

Okay, okay.

My follow-up is probably another one you're not going to answer, but your competitors have guided a significant decline in European truck going into 2020.

Maybe a way to ask the question is, how does your order book look?

I know you're introducing new products; would you expect to outperform an end market that's down as much as 20% year-over-year?

Actually, I start and then Max chimes in, we're actually fairly positive for the truck business for next year, given that we come with brand-new product on the light and on the heavy side and the S-Way has been received extremely well by our customers, with order books up 15% right now.

And you might remember that we walked away a little bit from market share in this segment because we didn't have a competitive product.

We now have it.

And if you follow social media and you follow the strong reception of that product, I think we're going to be well positioned in the truck market -- in the heavy-duty truck market for next year.

On top of that, we do see that the LNG story continues to have traction.

As you know, that segment is up 100% versus last year, and we also see further increases in demand there, albeit the demand was a little bit postponed from Q3 to Q4 and into next year given that a lot of the European countries have moved the fiscal incentives for purchasing those equipment into their 2020 budgets.

But if you also listen to the rhetoric, and if you read the trade press, it is very obvious that this is the only available short-term solution to significantly reduce CO2 and NOX.

And I think it is also very important to note that not only Traton with Scania is now firmly in the market with the product, but also Volvo has fully committed to that.

And yes, it's right, there are a couple of competitors that are still sitting on the sidelines, and it might be that they won't have a product, but those OEMs that have a profitable and competitive product will see gains in market share there.

And this would, of course, also help in a slightly muted truck environment for 2020.

Max?

Nothing to add.

Okay, okay.

Can you talk about the $135 million charge for inventory reduction?

That seems quite large.

And is it one and done?

How should we think about that?

Or is there any risk on residual values going forward?

And just explain what that $135 million was a little bit more.

Good question.

Max will take it.

So obviously, we have -- we look at this reserve on a regular basis.

The new piece of information this quarter is that the commercial organization set up a program to, let me say, expand sales of preowned trucks into areas that were previously not covered.

And so we had to adjust the realizability of the value to market values that are achievable in those areas.

And we thought that this way is a good decision for our book of used business as we continue to manage inflows and outflows from the virtual portfolio of the buyback.

As you know, we have been reducing penetration of buyback in the last 1.5 years significantly, which is very visible, obviously, in our market share performance in the recent history.

But we think that with this action in place, we will be well positioned to manage the inflow and outflow of the buyback going forward.

And the next question comes from the line of Steven Fisher from UBS.

Your price/cost relationship was overall less favorable in the quarter.

It seems like some of it was product development costs, but also raw materials.

I would have expected the raw materials to start turning positive.

So can you just maybe give us a sense for where you see that price/cost dynamic headed in the next couple of quarters?

Sure.

This is Max.

It is, as you said -- I mean, we also see in the incoming purchases a deceleration of the inflation right now, which potentially may turn to a positive stance in the following quarters.

The issue is that as we book our inventory at FIFO, we have to kind of flow through the inventory, the purchase of raw material, before we can see the benefit into the cost of goods sold.

And so as we churn the inventory in the next couple of quarters, we will be able to start seeing the benefit popping up in the early part of 2020.

Okay, that's helpful.

And then just related to the content, can I ask a follow-up?

Absolutely.

So just related to the Construction Equipment segment, what do you sense -- what sense do you get from the dealer channel about how much of an inventory correction might be needed, how long this could go on, and whether they have any retail indications for 2020 yet?

Again, we don't want to guide to 2020.

But as we have said in our prepared remarks, we're cutting back on production, specifically in North America, there is an inventory overhang, and we're solving that.

And our expectation for 2020 is to produce in line with retail.

And the market environment is a little bit muted.

It's not completely down.

It's kind of a flattish market environment that we're seeing right now.

And the next question comes from the line of Ross Gilardi from Bank of America.

Yes.

I want to ask, is the $50 million Nikola gain included in your $284 million of adjusted EBIT this quarter?

And is it included in your adjusted EPS range of $0.84 to $0.88?

If you take that out, it feels like you've cut the outlook by $0.02 to $0.04 depending on the tax effect, but want to make sure I have that right.

The answer is yes.

And it's worth $0.03 in the quarter and rounded to $0.02 for the year-to-date period, the impact of the Nikola gain.

Okay.

And Hubertus, you say you don't want to guide on to 2020, but I mean, I thought you did at your Investor Day in early September.

And I thought you said that you gave a preliminary expectation, I think it was somewhere in the low to mid $0.90 range for 2020.

I mean, are you walking away from that right now?

Or how should we think about that commentary that you made?

No.

We definitely don't walk away from that.

That EPS guidance was given for 2020 to have 1 goalpost in the short term, and we are moving firmly into that.

And you're going to see that in our full guidance 2020.

What I said, we don't want to give guidance for net sales yet, for cash and the other items that we're usually guiding to, because that we're going to do in the beginning of next year.

But the $0.95 to $1 that we basically put out there, the Capital Markets Day, they stand there.

And we are firmly committed to basically -- and don't forget, our strategic plan that we presented had a lot of self-help initiatives in the first years of the plan, and then had outgrowth in the second half of the plan.

And as we have said here, we are moving very, very firmly on all our perform, simplify and optimize activities.

We've only given here a selected overview of the initiatives that we're right now driving and we feel very good about the positive EPS impacts that those will have in the short term.

Hope that was clear.

Well, I mean, it just seems like you're conceding that the demand outlook has gotten more difficult, even though the self-help is front-end loaded in the forecast period.

So...

But we were -- honestly, we were right in the midst of the budget period.

We basically see the market in 2020 as we have predicted in our strategic business plan.

So there's kind of not a big change there.

But again, the detailed outlook as to the top line we're going to give soon, but there are no surprises right now in that market that we see.

And the next question comes from the line of Martino De Ambroggi from Equita.

Yes, Martino De Ambroggi.

One more follow-up on the 2020 EPS guidance.

As you mentioned, Nikola has a positive contribution in this year's guidance.

Is it also a portion of Nikola included in the EUR 0.95 or EUR 1 guidance for next year?

Well, again, let's not push on 2020 right now.

As we have said, we're going to see more of those Nikola deals going forward.

We have $150 million in kind.

You will see this flowing through to our P&L.

We said this continuously.

And again, the guidance on EPS that we give for 2020 stands, the rest will come at the appropriate point in time, which is in the beginning of the year.

I hope you understand that.

Yes, I understand.

And sorry if I ask you 1 more.

The impact for the full year of Nikola for this year is how much?

Well, we [covered] that already.

I lost it...

The $50 million that we booked in Q3?

Yes.

No, yes, but you also mentioned something for the full year, expected in your...

No, that is -- no, no, no, Max was --, it's the $50 million that you're going to see, and Max mentioned the impact on EPS for the full year.

Okay, but something more will come in Q4, probably?

We got some activity there ramping up on the technical assistance, but it's not going to be a material amount.

No.

Okay.

And the second question is on the M&A...

I think, honestly, that said, that you had your 1 question and your follow up, even though we got your name pretty wrong.

But we've got still 7 more people in the line.

And given that we had this interruption, so let's move on now with Dave Raso from Evercore, I would say.

Okay, I will ask 1 more.

The next question comes from the line of David Raso from Evercore ISI.

The inventory management this quarter and what you see for the rest of the year.

How'd it play out versus your expectations a few months ago?

I have to admit I thought the inventory would come down a little bit more, sequentially for the company or even within the channel.

Can you just walk us through how the inventory played out versus your expectations?

Yes.

So they played out more or less in line.

Obviously, we need to remind ourselves we are affected by several uncertainties, including Brexit, and we have managed some buffer of inventory to protect against the Brexit situation, and the continued deferral on the Brexit deadline obviously is impacting also our stance.

The other piece that obviously is impacting inventory this year that was not there last year is the engine stockpiling, with the full impact this year until those engines are consumed as we navigate the transition to Stage 5 in Europe.

So net-net, we're probably, I would say, a couple of hundred million behind.

It's a number that is -- can be achieved, is manageable for the fourth quarter.

Historically, we have been able to generate cash from inventory in excess of $1 billion in the fourth quarter.

So let's see how that plays out.

But again, we have updated the guidance to mainly reflect the M&A activity, between the $50 million that we pulled into Nikola as well as the $85 million that we are flagging now on the ag acquisitions.

And then we'll see at the end of the year how the quarter plays out.

And I'm just not clear about the acquisition impact.

The implied fourth quarter revenues are up 1% year-over-year.

How much acquisition revenue is in that number?

Very little.

So I guess I heard the production comments for the fourth quarter that were understandably down.

What's driving the sales then to roughly be flat to up a little bit despite the production cuts?

There's just a lot of selling out of inventory, I guess, partly the trucks that you mentioned going to a new market for used truck sales.

I would say that, net-net, when you sit yourself in the middle of the new range of revenue, I would say for the quarter, Q4, I would say that revenues are flattish.

We don't assume a significant change in FX right now, which is kind of where we have been for the 9 months.

So yes, we have certain production cuts assumed into particularly the [ag and C] business.

We also have this, let me say, you -- pre-owned trucks liquidation that will contribute, plus as you know, year-end activity of tenders tend to be higher.

So net-net, we expect to be in that range.

And the next question comes from the line of Chad Dillard from Deutsche Bank.

Just wanted to actually continue on David's question.

So just trying to understand some of the moving parts of 4Q revenues.

How should we think about that from just the individual segment level?

And then also, just on the North American order book, I think you mentioned it was flat exiting the year.

But I just wanted to understand just like what the cadence was in terms of orders?

I mean, are you seeing any acceleration or deceleration or anything that will give you a little bit more confidence for 4Q?

And you are talking Ag right?

Correct.

So as I said, we see orders in -- slightly improving on factors in North America versus the recent trend.

The other markets are kind of the same of the last few quarters, with the exception of combines in rest of world.

But again, it's a low comp comparison to last year.

And I think it is noteworthy to say that we are gaining share right now on the combine side.

Because we have a very, very competitive product there.

So we have a 4 percentage point gain in the quarter in North America and also in Europe.

So I think that's also noteworthy that we have a good product there.

So if demand comes back, we should benefit over proportionately.

Got it.

Okay.

And then just on the Commercial Vehicle side, I think you mentioned that you saw some slowdown in the LNG side as just the regulatory issues needs to be sorted out.

To what extent are you seeing a rebound?

Or how much pent-up demand is there?

And then on the medium and heavy-duty side, do you have any line of sight in terms of seeing a rebound in end market share?

And what do you need to do to get that kicked off?

Well, I mean, I think I addressed that.

The LNG, I mean, you can say softened in the quarter.

However, this segment is up 100% versus last year.

We were around a 1% last year.

It's going to be around 2% this year.

We'd expected it to be 2.5%.

So it's 2% right now.

And that is really due to mainly Germany moving their fiscal incentives into the next year.

But if you follow the rhetoric of all politicians and the European Union, it's very, very clear that they will be very, very supportive of that technology.

So we will benefit from that.

And as you know, we have more than 50% market share in that segment, and as I've said, 2 of our main competitors are now firmly committed to LNG and have product which is competitive, however, not as competitive as ours, because we have been the first and the market maker, so to say, for many, many years on the LNG side.

So our -- we are kind of generation #3, where the others are starting with generation #1.

That is on LNG.

And then on the heavy-duty truck, I mean, it's on a very high level.

We don't see that falling off the cliff next year.

And as said, we have moved away from the market a little bit, so we have basically reduced our share with the fleet deals because we didn't have a competitive and profitable product for us.

And we're now moving back into the fleets, and that's going to allow us a couple of percent market share gain in next year's market.

So these 2 should be a positive stimulus in an overall kind of flattish overall truck environment next year.

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

Europe has historically been kind of a fairly stable market.

But the sentiment indicators and channel checks, et cetera, show more of a coordinated weakness heading into year-end and moving forward after a fairly positive time and some excess inventory.

Can you just discuss the outlook for Europe, kind of broadly, why it may be looking more like a sustained downturn or not?

Well, again, for 2020, I don't want to give yet an outlook.

And as we're going to see all of you guys next week at the Agritechnica Show, I think that's going to be a great moment to talk a little bit about industry sentiment.

And as you know, this lead agricultural technology show happens every second year.

And sentiment for the next year is usually created there, plus there is a short-term purchasing impetus derived from this show, as we said, because it is a retail show.

So I think we should take that question next week when we see each other physically at the Agritechnica.

I think that is better.

And again, I don't want to give yet a big outlook for ag sentiment 2020, okay?

Okay.

And then maybe secondly, obviously, as discussed, the cadence of your M&A in ags picked up.

Can you discuss maybe -- I know AgDNA is FMIS, but it looks like maybe more of an AI play.

Where does that fit in?

Are you guys moving to the AI space?

Or is that more of an enabler?

And at some point, should we be looking at maybe larger ag acquisitions?

Yes.

I think -- as we said, I mean, we're just putting the money where our mouth was in September.

We are firmly moving ahead with smaller buy and builds in all fronts.

AgDNA is really a farm management -- it's more a software than artificial intelligence.

As you know, we are very interested in the digital agronomy space.

So you want to see some more things there.

And as you also know, we have started our incubator, AGXTEND.

And by the way, also next week when we see each other, we're going to talk a lot about AGXTEND because you see a lot of technologies that we're incubating there and selling through our channels, some of them being in the software space, some of them being in our artificial intelligence space, and some of it just being great cool technologies that we're bringing to the market.

So yes, you're going to see more smaller buy and builds.

Larger acquisitions, we don't have right now on the horizon.

It's really a nice buy and build and probably more to come.

And the last question comes from the line of Gungun Verma from Goldman Sachs.

The first one, I want to come back to the production costs at the industrial level.

If I look at Slide 27 in the presentation, it seems like about $130 million headwind is coming from this item alone, which is about half of what you've seen in year-to-date.

Just trying to understand how do we think about that line item as we look through into fourth quarter and early 2020?

Max?

The expectation is for the full year price to offset the production cost headwinds.

The majority of those production cost headwinds are coming from raw material and tariff, I would say more than 50%.

And then another relative chunk, maybe 25% to 30% comes from higher content as we continue to revamp our new launches.

And then the balance in the quarter, which is about $20 million, comes from the quality spend in Construction as well as the extra cost, the inefficiency, related to the latest production adjustments both in Construction and in ag.

Right.

And then just on your net debt guidance.

So you've taken down guidance by $200 million.

I understand about $135 million is because of these acquisitions.

So just want to make sure that the mid-teen production cuts that you're targeting in ag for the fourth quarter, are they already baked in to your -- in your net debt guidance, the benefit on the inventory side from that?

Yes, everything is in, and the balance is a little bit of buffer.

We wanted to stay around that on the numbers.

Yes.

Thank you.

That does conclude the Q&A session.

Yes.

Thank you very much to everybody, and sorry for the little technical interruption, and we look forward to seeing many of you next week at the Agritechnica Show.

Thank you very much.

Take care.

Bye-bye.

Thank you.

That does conclude our conference for today.

Thank you for participating.

You may all disconnect.