Q4 2019 Earnings Call
Good morning, and that's the known ladies and gentlemen, I'm simply saying I welcome to todays CNH industrial because that's a 19 fourth quarter on full year to show to school, but it's called for your information today Scott.
But in school is being recorded after the speaker's remarks, there will be a question and I sufficient to ask a question. Please press star one independent from if you wish to construct your Douglas it's best to have ski at this time I would like to turn the call although to a facility going out the head of Investor Relations. Please go ahead Sir.
Thank you want to yeah, good morning, and often that they want we would like to Alco yield to the webcast conference foreseen agent. That's helpful color and 40 at 2019 results for the PEO ending December 31st.
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We're pleased to happen here with us today, our CEO, but it was more <unk> and our CFO mosquito would be all seem to date.
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Looking at Q and <unk> session.
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Hi, John major including the presentation material well now turn the call it all but two but thank you frederico and good morning, and good afternoon everyone.
90 was marked by several important milestones will see energy industrial.
Launch transformed to win our strategy focused on driving margin improvement investing in long term.
On growth and transforming our portfolio to create two leading and separate companies focused now on and off highway businesses.
Challenging macroeconomic conditions that'd be face and which are reflected in today's results further support our decision to launch just strategic roadmap.
That's roadmap would enable us to.
Further improve margins, while making targeted investments in technologies that will help us to go with sales of long term.
Given the trading conditions that we faced in 2019, we will step up our efforts on margin improvement initiatives in Twentytwenty.
So how do we perform and 29 gene.
Versus our expectations.
Net sales of industrial activities came in below guidance due to lower sales volumes from weak industry demand and dealer inventory actions in our AG and see segments offset somewhat by positive price realization.
The adjusted EBIT margin from industry activities was 5.3.
Down 40, bips versus last year.
This was mainly due to unfavorable volume and mix and raw material headwinds, which more than offset positive pricing and a very disciplined cost management.
Clearly the construction equipment turnaround in behind expectations.
We have taken decisive actions.
Made leadership changes and have the new management team fully focused on margin improvement, which we expect to show results into second top 2020.
On a more positive note we have achieved keep yes, oh I just send out a four cents a share up four cents year over year old 5%. Despite this challenging environment.
Net debt of industrial activities came in higher than our latest guide as Max will explain later in the presentation.
Important to note our financial position remains robust with a strong balance sheet and excellent liquidity.
Alongside the transformed to win strategy that just mentioned, we moved on selected strategic partnerships and acquisitions.
They were implemented during the year and will drive long term growth.
Our profitability and margin improvement initiatives outlined back at our September capital markets day firmly on track and will help to counter market headwinds.
But planned separation of all on highway business is also on track with.
The target to complete the spin up in January 21, supported by especially this financial and business advisors.
The board of directors of CNH industrial envy intends to recommend to the company shareholders and annual cash dividend of 18 Euro cents per common share in line with our 2019 payout.
And totaling approximately 243 million euro or approximately $267 million.
Subject to the approval of shareholders at the upcoming annual General meeting do today based on April 16, ex dividend date would be said that April trends here.
Well.
Just like for let me provide you a high level industry update for Q4 industry Williams first let's look at the largest ECS segment.
North America row crop markets were weaker largely due to continued uncertainty around the resolution of trade disputes and how quickly any solution would translate to an.
Increase in export demand or commodity prices.
Although we have now have a China and U.S. phase one deal that has a large portion earmarked for agricultural products and produce as the details and Pos to adoption has left producers with many questions and hesitation around new product placement.
Even if I'm a sentiment has somewhat improved to generate soft commodity prices have been fairly muted so far with soybeans, even down 7% since the signing of the China trade deals.
We see an uptick in soft commodity prices as a precondition for increased AG machinery sales.
Indeed, you.
I'd machine here was generally soft with combines being at the lowest level that we have seen in recent history due to the continued previous seasons pool harvest in certain key regions geography and day remark is remaining range bound.
In South America, we continued to see lackluster and cost of demand due to.
Given the macro and global industry environment due to trade African swine fever, and know what a lot for soybeans.
This being said, we still feel this market will continue to expand on the back of historically strong harvests over the long run and we'll continue to modernize its actually it's an increase efficiency in a.
But where we come on a very strong position.
In terms of construction end markets they were flat to down in totality worldwide. During the fourth quarter with pockets of growth in Northern South America, but weakness in Europe and rest of the world.
Generally units continue to be stuck in North America, and Europe and why.
Infrastructure projects continue in both regions, they are not leading to incremental contract demand.
Within the sub segments compact and serve as equipment improved in South America is this market continues to recover from low levels, but weekend Europe from Brexit, uncertainties and pockets of residential and infrastructure projects.
For.
Sucks, the European truck market was down 5% year over here in the fourth quarter with light duty trucks up 2% medium and heavy trucks were down 16.
Anticipated, we have now starting to see in Q4, the slowing over you heavy truck market, which has been running at peak volumes for sometime.
That being said.
Said.
Energy market segment doubled reaching the predictable 2% you got to the market share in 2019.
We'll provide a partially hedged to us as we have a large portion of the LNG markets.
South America was flat overall for trucks with Brazil up 13, but a junior.
And by 28%.
Yes, it's continued to be a bright spot for a commercial vehicle business, where the European market up 2% for the quarter end of South American market up 11% that by Brazil, which was up 23, partially offset by a down Argentinian markets.
In summary, you can see that market headwinds and sector.
Trends impacted outperform as in 2019.
We expect these trading conditions to persist and twentytwenty, but we have prepared for this tough environment in which we were both managed or long term transformation of our company and simultaneously utilize every lever in our control to strengthen our near term.
And then.
Ill now hand, it over to Max.
Thank you you Burgess and good morning, or afternoon to everyone on the call.
As we have seen and markets and Judy rate could rapidly into fourth quarter would increase uncertainties affecting and user sentiment and we took decisive actions starting in the second half of.
29 team and continuing through Q4 to reduce our production primarily in our off highway segment, AWG and see to reduce our and our dealer inventory.
Why did we were able to make good progress in our agriculture segment, achieving it production performance for the full year, mostly in line with return.
In construction, we finished the year with production outpacing return by 5% globally with a more acute outcome in our high growth markets.
There is impacted our topline as well as our profitability as lower cost absorption persisted throughout the fourth quarter. The combination of this factors together with a yearend spike.
In the euro rate caused a net debt to come in above the upper end of our guidance.
We are accelerating certain of our transformed to win profitability improvement initiatives and we're also focusing on dishes disciplined cost management, while sustaining investments in our future growth.
Moving now to the keys figures for the.
Fourth quarter and 40, a net sales in our industry segments was down 6% to reported and down 2% constant currency for the full year 2019.
Adjusted EBITDA of industrial activities was 1.4 billion for the same period with the margin of 5.3%. This was down 40 bips compared to 2018.
Mainly due to unfavorable volume and mix as well as raw material headwinds, which more than offset positive pricing and cost management actions.
Furthermore continues exports have been taken to improve our below the line items, but net interest expense to produce more than 20% you everybody.
Our adjusted DTR also.
Decreased to 22% due to a favorable geographic mix of pretax earnings as well as tax credits and incentives in multiple jurisdictions in which we operate.
For Twentytwenty. The adjusted TTR is now expected to be modestly higher between 20, 425%.
Net income was 1.5 billion for the full year 2019 and includes certain non cash items, which for the purpose of our adjusted metrics out excluded.
At age 500 until 39 million noncash tax benefit due to the release of valuation allowances on certain that net deferred tax assets.
Recognizing that took quarter it pretax gain of 119 million from the 2018 U.S. has kept blend modification.
A 160 million pretax noncash settlement charge, resulting from the purchase of a group annuity contract resets on a portion of the U.S. pension obligations that.
We recognized into fourth quarter.
Net income was also negatively impacted by pre tax restructuring and other asset optimization and charges and write offs of 291 million of which 165 million related to asset optimization I'm trying to just you know pre owned truck business and one under the.
And maybe unrelated to head count reduction and footprint footprint actions performed during the year.
Finally, we also booked a pretax charge of 27 million related to the repurchase of a euro three under an 80 million in aggregate of certain outstanding.
Bond.
Adjusted net income excluding these items was 1.2 billion compared to 1.1 billion in 2018 adjusted diluted EPS was point 84 cents.
Up 5% compared to 2018.
For the fourth quarter adjusted net income was to 79 million down.
50 million adjusted diluted EPS of.
Point too.
I was down 5%.
We finished the year with net debt to index activities are five or 854 million, representing an improvement of 1.5 billion compared to September and 2019.
As result of a very strong cash flow generation during the quarter, primarily from the inventory realignment in our agriculture and construction equipment segments.
However, this was still not enough to achieve our yearend targets due to higher than expected inventory compared to 2018 that that has increased by 200.
Around 50 million.
Turning to slide six we focus now on industrial activities nuts seeds, excluding foreign exchange translation, which represented a total negative impact of 2.6% in Q4 and about 4% for the full year I want to talk in detail about the full year performance by segment.
Gotcha and equipment, then construction, let's say.
Days decreased 3% and 6%, respectively, primarily driven by lower industry volumes in North America, and rest award markets, coupled with actions to reduce dealer inventories in the second half of the year, partially offset by a favorite aboard price realization performance across all geographies and sustain aftermarket activity.
The fourth quarter changes negative, 5% and 12% respectively for the segments, mostly reflecting the production adjustments, we took two and use inventories in the quarter.
I'm not trying to specialty vehicles net sales were up 1% driven by increased deliveries in Boston specialty vehicles sustain aftermarket activity and.
The pricing this positive factors were offset by reduced wholesale volumes in medium and heavy trucks in both Europe, where do we got to transitioning to a new commercial policy and refreshed product offering and South America, primarily due to low industry volume in Argentina.
Finally, powertrain sales were down 5% to due to lower.
Since volume with the more pronounced 13% reduction in Q4 due to a stronger customer engine stockpiling of de between 2018 in anticipation of the stage five introduction.
Turning to slide seven now with an overview of our operating results by driver adjusted EBIT for the full you had a consolidated level was.
1.9 billion, we the margin of 6.7% Big picture, the unfavorable volume and mix and not are going to catch up in construction segments was worth about 250 million, including a negative industry fixed cost absorption of about 60 million secondly, there all material headwinds and increase tariffs and duties totaling.
About 200 million together with certain additional cost in logistics and supply chain, you put out of launches quality and LIBOR economics, where more than offset by strong net price realization and by our continued cost discipline. Our results also include the reduction in our short term incentive compensation accrual.
As weak performance reduce divided would pay.
In the quarter put into production adjustment auctions, where most of the you why they're all material headwind was talking to fade as hot commodity prices soften from the middle of the onwards.
Turning now to slide eight worldwide, you any delivered us into fourth quarter were down 3%.
Tractors, and 15% incumbents worldwide production was down 16% with production in their old crop sector in North America down 30% year over year during the quarter, achieving an under production to instead of 25% glass and leading to allow them to be able but he has decreased in total inventory for this specific sub segment.
Fructose worldwide company owned inventories ended up 22%, everybody here, but down 21% versus Q3 combines inventory was up 11% utility yet, but down 25% versus Q3.
In terms of profitability for the full year 2019, adjusted EBIT was 900 million a 100.
It and 40 million because he is compared to 2018 net price realization of more than 2.5% disciplined cost management initiatives, and that's sort of efficiencies and reduction in short term incentive compensation expense, what among the positive contributors lower wholesale volume on favorable markets and product mix.
Losing of negative indefinite absorption from reduced production, mainly in Q4 with a 16% production declining over here as well as higher protocols as result of increased raw material cost antibodies more than offset the positive fructose adjusted EBIT margin decreased seven two beeps to 8.2%.
In the fourth quarter.
Sort of 2019, adjusted EBIT was 236 million down versus the fourth quarter sort of putting team primarily due to unfavorable volume and mix, partially offset by positive price realization in the fourth quarter of 2019 adjusted EBIT margin was 8.1%. This was the picture for Pago.
In terms of our financials.
Now continuing with the commentary while uncertainty remains endeavor to catch up on end markets related to trade tensions and to negative weather events, we have confidence into positive longer term industry fundamentals, which will be supported by the need for renewal.
Have walked ease and aging fleets in major markets.
We're taking a very conservative stance to 2020 and expect to Underproduce retail demand by about 10% across our geographies for the full year with the majority of the correction taking place in the first two quarters of the.
In terms of the quota.
Current order book conditions have stable North America is flat to slightly up and in general is likely better than what we have experienced each quarter from one year ago, South America is up strongly and track person down and combine Europe is likely down with rest of world about flat instructors and significantly opting combines.
We'll go from very small numbers.
Turning to the next slide construction worldwide unique delivered us into fourth quarters in the fourth quarter was down 12% across the different product lines.
Worldwide production was down 17% with a more pronounced decline in general construction as we addressed that reduction and dealer inventories, which will continue doing.
The most part of 2020.
But even 20 units were up 42% everybody else, mainly north American rest of world and down 15% versus Q3.
What do you have adjusted EBIT was 51 million within adjusted EBIT margin of 1.8% positive pricing was more than offset by unfavorable volume and mix in.
The amedica and rest of world markets, including negative Indesit absorption and higher protocols, primarily relate that to increase or multi their cost antibiotics as well as cost associated with our product quality Excellence initiative.
In the fourth quarter of 2019, adjusted EBIT was breakeven fourth quarter results.
Corporate emitted impacted by unfavorable volume and mix due to weaker market conditions deteriorate that pricing environment and higher protocols.
End user demand into construction industry. The U.S. has flattened out why used equipment pricing continues to hold up with dealers have been cautious and seeking to further de stocking inventory.
Those and we would anticipate this to continue through a good part of Twentytwenty as a result, our order book is down in North America, South America, and the other hand continues to experience growth in Brazil, and on a sequential basis in Argentina as well generally speaking the European market is fairly flat.
With this view in mind we.
Back to under produce retail in North America by double digits for the full year 2022, Kirby inventories in bed that align with our dealers or so here. The majority of the adjustment would be performed in the first part of the year, where we expected production declined with the corresponding periods in 29 team of about 10% in each of the.
First two quarters.
On slide 10, now trucks worldwide production into full quarter was down approximately 13% with company inventory units down 6% light duty truck deliveries were down 15%, while medium and heavy were down 8% bus deliveries on the other hand were up 6% in Europe as the.
I'm sort of Donati propulsion buses continue to increase both in the city boss and to see part of the segments.
The commercial and specialty vehicle segments full year adjusted EBIT was 224 million and includes a 50 million gain realized in the took quarter from granting equal access to sort of any that could technology.
Adjusted EBIT was negatively impacted by higher protocols.
But immediately labor and other inflationary cost increases launch costs related to new products and I'm favorable foreign exchange transaction impact and a 17 million onetime remeasurement of certain provisions permitted in the meant anaesthetic Pittcon took book.
Completed in the fourth quarter favorable volume and mix.
By mailing the boss and specialty vehicles sub segments positive price realization of approximately 40 million primarily geared towards the recovery of the foreign exchange losses, and a reduction in short term incentive compensation expense were among the offset.
Adjusted EBIT margin was 2.1%.
In the fourth quarter adjusted EBIT was breakeven the decrease was primarily driven by the onetime remeasurement of certain provisions discussed above and by unfavorable effects.
In terms of out of Trinity proportional initiative LNG CNG demand grew almost 100%.
San Antonia, finishing the yet with the toward penetration of 2% dose of T.D. and we were able to preserve a strong market share as planned with eight today, they're positive styles from this segment as one of the best answer is currently available into transportation market to reduce emissions and had contribute to you fleet economies kind of.
We believe local governments will continue to subsidize the sub segment going forward in an effort to include do influence buying behavior of logistic operators to decarbonize their fleets of trucks.
Our market share for trucks in Europe in Q4 was 11.5% up 50 Bips with.
A 100 bps increase coming from the medium and heavy which achieved a 7.6 market share in the fourth quarter.
Trucks book to Bill was that point 90, fives in Europe higher than in Q3 and one.
In South America with ordering take in Brazil up 51% from last year.
We are pleased to see the strong demand for our new S way heavy platform with orders in Europe for heavy duty trucks up more than 20% compared to last year, our strategic repositioning of the vehicle or the new to brand is starting to pay off and we expect to gain market share an incremental profit margin for each trucks sold as.
We go through the new you.
Boss market share in Europe was almost 20% and book to be to remain strong at point 82 in Europe and point I do want in South America.
If we moved to the next slide powertrain continues to demonstrate solid results in light of a challenging end market then vitamin net sales decreased 5% for full year.
On a constant currency basis, and and sage to extend our customers accounted for 51%. The book of business is growing as a consequence of new third party contract acquisition.
40 out adjusted EBIT was 363 million at 43 million decrease compared to 2018 due to unfavorable volume and mix and.
Hi are probably the development investment geared towards the transform to win initiatives, partially offset by positive pricing and product cost efficiencies adjusted EBIT margin was 8.8%.
In the fourth quarter of 29 team adjusted EBIT was 84 million as result of unfavorable volume and mix due to customers.
In stockpiling of TV team to any team offset by positive pricing adjusted EBIT margin was 8.3.
Moving onto slide 12, and our financial services business. The segment has continued to perform well for full year. Because you can see on this slide worldwide to note delinquencies continue to improve and reached another story.
All time low foresee an agent.
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Like 12, and our financial services business. The segment has continued to perform well for the full year and as you can see on the table.
Worldwide can all delinquencies continuous improvement, which then other starting with them local CNH industrial at 2.5% into fourth quarter as Pascal staffs in South America, and you continue as Andrew.
Moving onto slide 13 I'd.
To discuss the net debt and free cash flow performance of our industrial activities and provide an update on the balance sheet.
Net debt of industrial activities at December and that was at 850 million. Thanks to a strong cash performance in Q4.
Generation, a 1.5 billion, mainly coming from working capital.
Was the second highest achieved in the quarter in our seven years of history.
At the end of 2019 are available liquidity was at 11.2 billion of which 5.8 billion cash and 5.5 billion in Undrawn committed facility.
The strong liquidity allows us to maintain a solid balance sheet.
Consistent with our investment grade credit rating. This supports our investment plan linked to the growing initiatives in our transformed to win strategy and enables us to return cash to shareholders inline with our dividend policy and through opportunistic buyback.
Painting, a strong liquidity position both wells with.
Limitation of the spin off of our on highway business.
Turning to slide 14, we looked at the operating cash flow for the full yet it how capital was allocation.
Our ability to generate cash from EBITDA net interest and taxes remained strong our operating cash flow was impacting the year fire net investment in working capital.
All of about 750 million of which 450 million was in finished goods inventory and 200 million in payables due to the production costs performed in 2019, mostly in Q4, obviously lower basis.
With the budget that we had to prepare for 2020, we expect to be.
Able to liquidate the majority of the inventory field during training team with year over year lower production front loaded into Q1 and Q.
Shifting to the capital allocation discussion organic capex, representing 2.4% of net safe and makes up the majority of the spend with 60% of the location.
Important to note our efforts and sustainable investments under which we the group our investment in digitalization after electric propulsion and autonomy, a continuing to expand and they now represent a share of 32% of capex and new products and initiatives.
Mission, we invested a cash don't tell of about 85 million seven of M&A.
It's actions during the year in our agriculture commercial vehicle since I would think segment net of certain minus divestitures. Finally, let me remind you that in April we funded our annual dividend payments and during the year, we repurchased more than 6 million shares under our buyback program for a total consideration almost.
$60 million is underlines our commitment to supporting shareholder value.
I will turn it back over thanks, Nice moving to slide 16, I would like to give you an update on the implementation program selected initiatives about transform to win strategy that we announced that our capital markets day back in September as you recall.
Our strategy is three essential hit us first topline growth through organic and inorganic investments into product services around the seems update sure I'll turn it over 500 and automation second.
For the better the margin improvements driven by a several strategic initiatives that 75 products and processes as well and optimize our footprint.
Thats, a base and thirdly, the separation of our all in all five businesses to create two global leaders in their respective fields.
Moving to slide 17.
The focus of our inorganic growth and on highway as a small all centered around alternative filtration technologies most prominent.
Partnership with Nicola where the presentation of our first joined truck the Nicola Trey in December as one of the announcement of a European joint venture structure in Germany, just yesterday, we will be amongst the first Oems globally to deliver battery heavy truck into it.
Great.
This partnership is a significant step for EUV Echo and SPT since it not only allows us to gain market share as a first mover in the electrification of heavy trucks in Europe, and the U.S., but it also increases utilization of our commercial vehicles facility in Germany.
Important to note is that.
This specific region in Germany has been known to become the leading fuel cell class to off Germany heavily supported by the regional and German government with substantial investments already committed.
Along the same theme of electrification efficacy signed a memorandum of understanding with micro bus the U.S. Chinese market need and battery power systems.
To enable FTT industrial to design and assemble battery packs in house at our own facilities. Those battery systems will increase efficacy is offering and the solutions will be sold to captive and non captive customers alike.
Next to those inorganic growth initiatives, which will drive market share gains. We also have made progress on.
The organic growth initiatives the launch of always echo as way heavy duty trucks is the cornerstone of the Vecchi iveco heavy duty turnaround as sub segment that has been the soft spot in our commercial vehicle segment for many years.
As Mark stated order books at the end of January were up 20% versus prior year in weaker.
End markets and will allow us to regain market share in twentytwenty, specifically with large fleet customers that we targeted to win back.
Needless to say that the as way is also available on LNG considerations, allowing a vehicle to defend its leadership position in the rapidly growing energy segment and finally.
It's the same as way platform that will be the base of the aforementioned nicolette tray electric trucks to.
Switching to ask P.T., our organic growth focus is to grow the non captive business, which has led to an increase of contracts awarded in 29, T. with an annual revenue potential up 150 million starting to benefit our 50 segment from.
Into one in summary, our on highway segment has excelled in 2019 to prepare for superior grows in the years to come and these initiatives have a common goal to drive incremental revenues and securing solid market share gain.
Let's switch gears now and took a look at the progress on gross initiatives of our on off highway business.
Moving now to slide 18, you may recall, the key growth initiatives in our off highway segments are focused on first investments into our digital and precision technology is driving new services, while also increasing our aftermarket share secondly, being an industry front Renault and alternative propulsion in AG and CE thirdly be a consolidator in off highway.
Highway with initial focus on agriculture.
With the acquisition of equity in a we now have a state of the odd fund management system that our customers have waited for and that would help us increase services revenue and share.
Along the lines of digital and precision technologies. We are further edit technology startup so I can extend into beta to technology portfolio.
For your now covers a wide spectrum always with the objective to reduce input cost and improve productivity for end customers.
And as the AG extend products and service will help grow our aftermarket business short term. We will also integrate technology that we see fit into our core machinery offering to drive position to farming and automation solutions and.
Some of these share.
Switching to the progress on our key organic growth initiatives in 2019, the focus was on introducing alternative for pipes from machines into the off highway segment.
The new harness the same tractor is creating a new market segment for buying the same powered machines. There is a strong end customer demand to also.
As you see or two in farming practices and this machine will be able to use the biomethane produced and by the justice on the phone helping to pharma to become energy independent NCR to neutral. Obviously this is a prime example of the so called circular economy and demand for this type of machine is substantial distract us.
As most not only one tractor over the year last year that could technica, but it is also available for purchase at dealers later this year.
Furthermore, on alternative for parts and also in Q4 style has created an electric hybrid concept, which shows our vision for a future style machine offering as communicated at the capital markets say, we're repositioning.
<unk> as a premium tractor short line up in our overall brand strategy with a clear objective to gain market share in the European premium tractor segment.
Seminar to a record cultural alternative approaches strategy were moving construction as well I encourage everyone going out to cone Expo next month to stop by our boost and take a look in person.
On further innovations that we present in Las Vegas.
Moving now to slide 19, you'll find an update of selective strategic initiatives of out transform to inside the GE to improve margins in our business segments.
Our simplification initiative around the principles of 80, Twentys are well underway and they're now covering all our industrial.
Plants and by mid year Twentytwenty, all regions, we continue to reduce product complexity and sq count in our North American construction business and have successfully achieved the target of 60% with further reductions anticipated this year.
During the fourth quarter, we expanded the program to Europe and expect both of these markets to contribute.
Positively during twentytwenty.
We're also progressing well in the North American business with a reduction of SK use of 60% achieved and we're now expanding it to get an additional reduction of 50% from this lower base level.
As we move into Twentytwenty end beyond we will start to see cost improvements from 80 20.
And our product cost as well as an IND reduce inventory levels.
Next let's review our organization simplification initiative the focus in 2019 was to widen the span of control and to reduce organization layers to become more agile and customer focused the project has led to a reduction in headcount to date of approximately.
900, white collar employees above our initial targets.
The footprint rationalization is also well underway and we finalized circuit third of the Socgen reduction with several public announcements in Q4.
Also the asset optimization, we announced in September an updated you on last quarter remains on track.
As planned.
I would start to see benefits from both of these initiatives in Twentytwenty as well.
In summary, our profitability projects are believers that we can control best in more uncertain market environments, and we are firmly committed to continuing to deliver on them.
Thing to slide 20, as stated earlier over the past four months, we made very good progress and no spin preparations in line with our original schedule.
We remain fully on track to separate our off highway and our on highway businesses by January 2021.
The work has been organized in detail on core work streams with a dedicated governance.
I tried to secure a minimum business disruption, while ensuring an effective spin of execution and smooth startup of the two new companies less than a year from now.
On slide 22 I.
Ill now turn to our Twentytwenty industry outlook.
And agricultural we expect farmer sentiment to gradually.
Yeah, I realized during twentytwenty, despite a muted industry environment in the major end markets in which we compete where soft commodity prices remain under pressure.
We expect North American high horsepower tractors and combines to be down 5% and the remainder of the world's generally flat.
In construction.
In light of the fact that most of the markets look down to flat and inventories remain elevated, particularly north Americas, we will continue to underpin Jews retail, 15% for the full year and 10% globally overall.
And our trucks business, we anticipate softening marketing demand, particularly in the medium and heavy industries in.
Where we see these markets down 10% to 15%.
We believe however that the penetration of LNG when he goes in euros will continue to grow by 50% during Twentytwenty and will account for approximately 3% of the total market by the end of the yet.
We generally see flat to muted end.
For twentytwenty across our various segments industries, but expect to somewhat offset this by growing market share in the segments and sub segments, where we have launched new products and where we are implementing our gross initiatives.
Let's turn to slide 23, where we highlight our guidance for the full year Twentytwenty.
In light of.
The aforementioned industry headwinds and the company's initiatives planned for Twentytwenty CNH industrial is issuing the following twentytwenty guidance.
Net sales of industrial activities flat to slightly down versus prior year at constant currency.
Adjusted diluted EPS between 78 and 86.
Cents per share.
Free cash flow of industrial activity expected between four and 600 million us dollars.
We have decided to provide guidance on free cash flow instead of an industrial net debt in order to focus on our ability to generate cash and which will be honest is also more aligned with best practice in our.
Our industry.
As we explained at the capital markets day, the investments in both R&D spending and Capex up based on market projections of our current pipeline of product launches ending committed capital included in the plan.
Depending on how end markets will develop especially in the earlier part of the year. These investments will flex.
Up or down across the portfolio and by segment, the Capex and R&D for Twentytwenty I expected to be slightly up year over year with investments in sustainability programs now accounting for approximately 40% of total.
With a fourth quarter results and the expected market environment for Twentytwenty laid.
Out in front of US I would now like to take take you through the key inputs of adjusted Twentytwenty EPS guidance of 78 to 86 cents for share and how this pitch with the initial adjusted EPS target of 95 cents to one dollar given that our capital markets day back on September Thirtyth and you can see that on slide 24.
In summary, the difference is due to three main areas first market deterioration in agricultural second unsatisfactory execution and construction. However, Cowen said thirdly by better execution of our profitability initiatives.
First the largest impact comes from the more challenging end user demand.
And in two of our most important agricultural markets versus our own expectations back in September the differences substantial.
The North American row crop sector, where we now see a 5% decline in Q4, and a further 5% decline and twentytwenty. So some 10% below our previous expectations primarily.
Only as a result of the prolongation uncertainties related to the trade disputes and associated market dislocations in the South American markets, where we see Q4, 2019, and Twentytwenty outlook cumulatively, 20% lower than originally anticipated.
We have not yet seen a conversion into increased equipment purchases of the.
You are presented in grain export sales and it's still too early to predict any significant improvements in the environment in twentytwenty.
It is worth mentioning that our current twentytwenty industry outlook CZ AG industry in these two markets significantly below mid cycle.
The impact that we are showing here for twentytwenty.
It also includes the channel inventory adjustments the negative fixed cost absorption from the lower production and the lower engine sourcing associated with a reduced at industry assumption.
Secondly, the impact from the unsatisfactory and delayed execution of the construction equipment turnaround coupled with a challenging industry environment.
Lately.
This requires more profound inventory correction actions in the channel, particularly in North America, which is reflected in our twentytwenty guidance.
Against this backdrop, we have been able to accelerate profitability initiatives, which are helping to partially mitigate some of the negative impact.
To.
Provide more granularity on our Twentytwenty segment performance contribution to our guidance, we expect margin accretion in our AG segment for the full year, primarily driven by the accelerated roadmap. When I was self help initiatives. After the first quarter that will be significantly affected by the production adjustment.
That we discussed earlier today.
In commercial vehicles, we also expect margin improvement as we realize the full benefits of the new product launch cadence in heavy and light duty trucks and with bus maintaining a positive trajectory.
NFP G., we see margin slightly it.
Down mainly on the back of lower volume due to the tail end of the custom engine stockpiling activity and finally for construction Twentytwenty will present, a transition year with a new management team and the first part focused on cost actions and production curtailments and the second part with improved results ending in a flat margin.
Performance for the full year.
In light of the under production in Q1, our budget in Twentytwenty, if second half loaded. Therefore, we expect the adjusted EPS decline in the first quarter in the range of 40% to 50% year over year.
In.
On rates remain very confident in our transformed to win strategy in the past year, we have stepped up our profitability initiatives that are already helping us to counter more difficult end markets.
At the same time remain fully on track in preparing for the plan business separation, which will unlock the potential value of our on highway and off highway assets.
As a result remained firmly committed to our long term financial targets generating results to our shareholders and securing a successful future for all our valued stakeholders. This concludes now my prepared remarks, I'm sorry for the technological hip ups I hope you could see us throughout and I will now handed back to Federico for the.
Yes and answer.
Thank you. Thank you very much Ventas. This concludes our prepared remarks for the fourth quarter and fully it doesn't a 19 results and weak. It we can now open up for questions operator over to you.
Ladies and gentleman today's question and answer session living conducted electronically fluids sake.
Our first question from Stephens share from you SB. Please go ahead.
Thanks. Good morning, good afternoon, just on the guidance. The other bridge you gave there from an investor day to day.
The 2020 is very helpful. I'm, just curious about a bridge from.
2019 to 2000 2084 cents to 82 cents at the midpoint within industrial sales that are really just kind of flattish or.
Only down slightly given that you have all those initiatives on cost savings I'm surprised that the.
EPS would be down and not up so I'm just wondering.
What are some of the other bridge items that might push Cps lower and applied industrial sales environment is it.
A particular headwind in the Finco or you just sort of baking in a measure of conservatism.
So this is Mike speaking, Steve So obviously the revenue were disappointing.
In the fourth quarter they came in below guidance.
We adjusted down the quarter before by about a 400 million, but definitely also when you look into the good onrad each of the results segment by segment.
We'll see that we took these onetime another measure.
Moment in a in this commercial vehicle segment, which also had the told on our EBIT.
And I think to also answer your question the bridge from 2019, Twentytwenty and the guidance range you see that we have widened the range.
We widened to the to the to the lower end.
And and we feel comfortable right now.
Given our market uncertainties that we are kind of covering the potential outcomes that we see right now.
For Twentytwenty.
So in other words in the event that you do come in with industrial activities flat.
You could still be with your cost savings initiatives still be up for you PS is that.
What you're kind of messaging.
That is walk to the upper end of the guidance for 2020 would say, yes, okay. So there's no particular finco.
Additional headwinds that would be outside of that industrial.
No no not every seat right now.
Okay. Okay. So you so I'll leave it there.
Yeah and by the way please keep it because they've got a lot of people on the line and we have been a very long stripped script here. So keep it to one question. Please and thank you. Thanks.
We will take now the next question from Larry de Maria from William Blair. Please go ahead.
Hey, thanks.
Good morning, everybody.
However, I mentioned the.
Hey, Chris you mentioned, the AG DNA SMS and the ability to generate service revenue can you just a parse that out a little bit more he's going to generate service revenue and secondly, just discuss your AI and machine learning strategy, which is obviously a hot topic in the industry right now thanks.
On the AG DNA and integration what we do as we have acquired this software company, which were now fully integrating with our A.S.S. and PLM platforms for case, and you Holland, respectively, and that will provides and telematics service and a full connectivity of our product.
Around a complete software service so we see already.
We have launched on the back of I'm actually affect DNA purchase that we have launched 20 new service packages.
In Twentytwenty, which would come to the market, which will drive aftermarket revenue and you've seen some of the aftermarket revenue uptick already in 2019 relative to hold says we have improved by 1%.
So we're very confident that with that platform now that's far easier to use far more intuitive for the end customer that we will be able to drive you know telematics services for our equipment.
And the second question on artificial intelligence.
I Didnt want to go too much into detailed on on act on that can extend but I think it's very noteworthy.
We have several artificial intelligence algorithm companies in that portfolio. So we are driving artificial intelligence, we take that data with the startup companies and we are integrating those algorithms as we basically implement our new strategy for precision promise of our AG machinery. So we have already.
Ready introduced several.
Technologies.
I see on our cash crop tractors, but also on the vignettes side. We've also integrated artificial intelligence on a when you ought to tractors and dollar sensor tractors for cash crops. So I do believe that we are moving firmly ahead on this one we have somehow a different approach and joined yet that we work with.
Hotness in an open innovation platform rather than acquiring just one company so rather than having one company, which we acquired we have several companies that contribute positively to our overall R&D development in the accuracy and risk base I hope that answers the question.
Yes, very good thanks, and good luck to share thanks.
Well, we think now our net.
With Samsung the language and taken on Sunday to Morgan. Please go ahead.
Hi, good morning, I and I can give I guess can you talk about your outlets for flat to down slightly revenue for 2020, M. given that coming into Q4, we had expected flat revenue them or Dan. Thanks, So you don't flat.
All of the under production and lack of visibility in each of your end market Lux aggressive or optimistic you know why Didnt you guide more conservatively on the revenue side. Thank you.
Well I think we mentioned that in the script I think we have changed our view on North America that where.
We now called the market down, 5% and and and we also preparing our production for that by by you know underproduction versus retail over 10%. We feel that were appropriately conservative in South America right now everybody. As you know was expecting this market already up last year, we're projecting it to flat we currently seeing.
You know a good good order intake of at least from the tractor side and and I think it's also noteworthy that we have significantly increased our share in South America on the weakness of one of our competitors on the tractor side, specifically and Europe flats is Oh, you can say flat to slightly down.
Yes, I was Europe is perhaps you know the most promising an optimistic right now.
Where we basically see see perhaps more downward risk, but it's honestly too early in the year to really say that but overall with that with that guidance that we have there for access to slightly down.
We feel.
And that we are really in many markets at the bottom of cycle.
We feel that this is appropriately conservative and again.
We do not want to repeat what we have done in 29 team, but we have not cut enough of the production and where we basically based on production plan too much on hope I think were far more conservative going into Twentytwenty.
Of course, you have the pricing, which which holds.
The nicely in act, which is which is a positive I hope that answers. Your question then.
It Doesnt lend just a quick follow up our clarification on your guide for their residual value reductions on the side much of the baked in for 2020 at.
Guidance, you've given us.
Max.
So right now.
As you know if they call where do they go seats on the food on the food chain is not to price maker is a price takers. So we're seeing that deterioration in the last part of their into last quarter. So we had to adjust our book for.
For what we see as a price deterioration going into 2020.
But how much have you baked in for Twentytwenty.
Right now the book should be in line with a with the deteriorated pricing conditions, but.
Again, we need to see quarter after quarter, where whether the deals have traded on the use the on the used to market.
Okay I appreciate that I'll get back and so we've taken the best shot given information that we had available to us in Q4 so.
Okay, we would assume as we appropriately reserved for trended.
Yes next question. Thank you.
We taken now our next question from that angle shelf weigh them, they're familiar Street research. Please go ahead.
Hello, everyone. Thank you for taking that you brightness could you talk a bit about the case of savings maybe 20, you've obviously got a lot underway with 60%.
As he is I think you said identified knows the denied for example, yes, we expect full savings to come through on that in 2021, and this is a quick clarification, you've identified 60% and you'll get a 50% or almost all that in 2020 or is there more on the table I'm not sure I understood your script versus the slight thank you.
No I mean as you know we.
We're not basically detailing the individual savings for initiative and and if you look at 80 20. The first impact that you have from from from the income tax of your product and putting it into a and b product because of pricing effect and you see that positively in both construction and in AG and the second the second effect that you haven't this is what I referred to in.
Twentytwenty, where now of course seeing the less complex complex that are basically wind it out or would it out and product.
Lined up to basically have impacts positive impacts on the supply chain so less inventory.
Better purchasing prices I'm less as can use in the line. So now we're going to see on that.
Back of the pricing now he's going to see the supply chain impacts, but again, we're not detailing how much in percent that is because in the end thought could it be basically give you one number of saving it has to fall down the bottom line and what we're saying isn't going to see that positive impact already reflected in our AG margins for Twentytwenty, where we basically.
Anticipating a slight increase in the margin Max.
I just wanted to clarify that the supply chain savings will have a longer time to realize as we need to obviously make modifications through the elimination of a individual five numbers and that's why.
The second part of the savings is.
To give towards a the longer than the midterm, which means and of 20 early 21 debt and as you know we have they have not started to do it to roll. It out everywhere. We first started with CE. We then went over to act then by the end of 2019, we went over to CV and powertrain and by 2020 by so mid by this year, we're gonna have.
All segments in all regions covered.
The first savings that you see is on the pricing side with that that contribute positively and then you have the supply chain impacts okay.
Okay. Thank you Tony.
Okay.
We have taken now then his question from that angle for us glad to be.
From Bank of America. Please go ahead.
Hey, good morning, good afternoon, everybody Hey, Ross.
I just wanted to clarify the comments on the inventory for AG equipment around the world.
From your opening remarks, so in this slide you say worldwide inventory is up 22% and.
Factors and up.
11% in combines but your north American row crop inventory is down 16% year on year.
Does that mean all of your excess inventory is concentrated primary predominantly in Europe, and South America, and North America small AG. If so why are the production cuts.
Concentrated in North America row crop if your inventories were already down 16%. So I just got confused with all the moving pieces.
Okay. Good question. So first of all as you know we have the is spread out business into various geography. So.
From a numerical standpoint.
The.
Yeah, Hi, your inventories sits in a areas outside of the U.S.. What we are doing in the U.S. were taking a very conservative stance and we are changing their seasonality of our production with more pronounced cuts in Q1 and Q2 in a row crop to.
To kind of front load that inventory development during the year and avoid to find ourselves in case of the market ends up down 5% in a similar situation as 2019. So that's why we're frontloading the and they are with cuts in.
You know production and Underproducing retailing and row crop in North America as we discussed.
So just to fit but how are you on that.
Yes, I think some extra just a follow up outside of the you asked is that it sounded like you bear to start the European market was fairly stable in the most promising is the excess.
Therefore, a concentrated in in Brazil, and any any sense its development.
He is Brazil in Brazil, we have a little bit of X the excess inventory and combines but I think that's the result of the unexpected market dynamics. So as the market, let me say flatten.
Out we should be able to correct. This issue in the first part of a of Twentytwenty.
In terms of truck to assist primarily that's toward this always at 3000 units, but again, it's in a market that is more than a million so and just to be very clear Ross.
Completely opposite.
That Europe, and we think that North America, South America wrecked best of the World. We are appropriately conservative in our market outlook Europe is a bit of a question Mark we had an internal debate, whether we should do it flat or to minus five we settled now with flat, but I think going into twentytwenty that there might be a bit more and more risks so.
If you think about conservativism, we're conservative any other markets Europe, we might be a bit too over optimistic but again.
We wait how the markets will develop and and were very conservative on our production.
Okay. Okay. Thanks, thanks very much.
Who is take now our next question from Cat dealer.
From the tobacco. Please go ahead.
Hi, good morning, good afternoon guys.
So just want to spend some time on price cost solar and pretty positive in the fourth quarter.
Just want to understand how are you guys are thinking about that dynamic as we hear that go into 2020.
Separately just wanted to clarify.
Whether if there's anything related to to nickel or any benefit and embedded in the 2020 guys.
So first question I take the first one price to cost, yes, I mean, the price to cost performance in 2019 was affected by a they're all material headwinds on the cost.
Side, which we were able to more than a covered in pricing.
As you know a we put pricing out at the specific point in time during the year, primarily when we launch new model years. So the reason embedded carryover pricing into Twentytwenty already class a we expect.
We'll take individual actions as we launch new products during the year.
Before we reassess the situation of economics set a region by region. During the course of 2020 on the positive side, we expect to now.
No material to flatten out, especially into in the first part of the year so that.
Should should be a positive contributor.
In the early part of the yet and then in terms of Nicola Yes, we have reflected the cost in the twentytwenty budget for commercial vehicles.
As you know we have a part of in kind contribution and to step up that we gonna do in in engineering is gonna be covered for this.
So there will be across charging with with Nicola for these additional costs the revenue for the for the truck.
The Nicola Trey you're going to see then popping up in Twentytwenty, one and obviously, if you're going to give more color on the on the road show them for on highway business, because I think the market is still not understand the potential.
Of this joint venture and that partnership with any color, which is really substantial.
That's helpful. And then just start really quickly on the LNG market can you just talk about your peers in terms of market share.
End market growth and how you're thinking about that in 2020.
Yeah wasn't market has developed as predicted Ben basically.
Doubled to 2% T. Ivy, we have a conservative view, 50% up this year and and we have set that we want to defend our 50% market share. We ended the year with 53%. Obviously you have now to new players competing with us.
That is Volvo coming in late and Scania, However, our pro.
That given that we had been by far the first introducing LNG trucks is still far more competitive has a far longer range, which is on the long haul business of course, a key competitive advantage. So we assume that we're going to maintain our 50% plus market share in the market that I would say conservatively would grow 50% and if you basically follow the Ukraine deal.
And you basically see legislation that is happening right now in all countries in Europe, there actually all reconfirming the subsidies for LNG some countries, even extending we heard from Germany that they would like to extended period of the subsidy. Even further so I think that market is really continue to poised to grow and as set in the script I.
That is for us and nice hedge in an overall more muted and down met medium and heavy duty truck market. So this will help us to basically you know stay competitive in 2020 and also got the nice nice volumes and we're predicting right now there were around four to 5000 trucks them for Twentytwenty on the LNG side.
Great. That's all for me thank you.
We will take US now our next question from that angle, David Raso from either caller. Please go ahead.
Hi, Thank you to keep the question fairly straight forward and simple using slide 24, as a guide of what's changed since the capital markets day.
How much revenue do you reduce from the capital markets day to today for the AG segment.
And I deal. If you can tell me, how much was that industry versus incremental inventory reduction.
Dave Dave I don't have the split between the two pieces with me here, but.
Its a substantial amount.
Yeah.
And if they look at that bridge. If you look at that bridge to is really very clear to say that the difference between the capital markets day 95 to one dollar to where we are right now with our guidance is really 100%.
Based on significantly lower and markets, where we all predicted a an upswing in the markets well into twentytwenty and and the the disappointment on the construction side I think is kind of offset by the better news on the profitability in margin improvement initiatives.
That as I said.
We have stepped up significantly in Q4 and going into Twentytwenty, So construction and the better performance on the initiatives is a wash, but the market we cannot compensate with initiatives. So that's that's just a reality the percent of saying, Okay. David is about mid mid single digit probably.
On geography doing is if I'm looking at the cut by 10% to North America.
And 20% to South America from the prior expectations.
But backing out parts, so I'm not applying to the entire geographic revenues I'm appropriately pulling out parts.
If you drop North America by tenants.
South America by 20 that that's almost $600 million right there.
So I'm just trying to we this into how much did you take out from an industry perspective, and then are you taking more inventory out.
In 20 than the prior expectations the capital markets day.
First of all the main.
They said, it's about a mid single digit.
Sent to change versus what we had in the capital markets day at constant currency, which is around about the number that you calculated.
I would say that just as a bit to caution in that and indeed capital market. They.
But for Twentytwenty, we already had some de and dealer inventory.
Reduction.
So for US. This does not just a question needs are kind of data on that one is primarily industry well that's I'm sorry, so that base. So there is no incremental inventory being taken out in your mind for 20 it just the.
Industry sales got weaker, but you still are under producing retail materially. So what you're saying is you always plan to under produce retail in 20.
Just a retail went down is that fair a little bit, yes, a little bit yes, yes.
Right I appreciate that thank you okay.
We are taking.
Our next question from that angle, Joe Diaz from vertical research. Please go ahead.
Hi, Thanks for taking my question.
Related to two months of inventory at the dealers could you just talk about in North America, specifically for AG row crop, where you see.
Months of inventory at the end of 2019, where you expect to that to be at the end of 2020 and same thing on the construction equipment side, all all specific to North America.
Yeah, I do want to give you specific numbers, but in terms of trends.
We are not far off from the.
Industry average in row crop, we are probably how you're in small tractors and there is where we have also too to do some actions and which is what was already embedded into 2020.
Capital market day number.
In terms of construction equipment.
We are definitely higher I would say on average amount higher so we we need to continue to obviously look at the cats over there to bring that number back in line.
And then.
Next on on the AG side of things talking about kind of small versus large.
Research then you had already anticipated at the capital markets day under production on the small side and then kind of related to David's question on the large side. What's happening. There is more just about kind of end market is going to be softer than what you expected, maybe there's a little bit of incremental destock.
Yes.
Okay. Thanks, a lot.
I finally, our final question come from Kearney Jackup learnings from Morgan Stanley. Please go ahead.
Hi, Thanks to the question I, just wanted to little bit more about the construction equipment.
Around delaying it.
Originally when you rolled out or I mean, I guess first off the rollout of the program happen and it's just at the end markets were softer or did you actually not.
Start some of the program I, just a little confused.
About why.
Reached the margin acceleration that you guys had originally forecasted when it first started talking about known to be brutally honest I think all the initiatives that we laid out a holding and is exactly what we do what we have under estimated where the issues that we have in the underlying manufacturing machine mainly in North America.
We had we had some significant gaps there.
When it came to product cost specifically in our Wichita facility, coupled with some you know also system cut overs that happened in Q3, and so so basically that led to a miss calling open.
Market overproduction with two high costs, coupled with some some quality issues and that's the reason why would basically in Q3 changed management put in a.
New leadership.
Which is basically now taking control and that means in the short term.
Addressing those quality issues that we had.
Getting the industrial machine smoothly running again, but also cutting back production and this is basically what you have to see and what you have to expect into first half of Twentytwenty. The rest of the strategy is completely in line to team knows exactly where to go.
I'm very upbeat by our FFO was strong dealers and our sales team I think they're doing a very very.
Good job in that in that environment, and as I said I encourage you to come and come by at Conexpo into basically see what what the team is doing there. So the to turn on strategy is exactly what we what we have said, it's just disappointing that it's going to happen to you later, so Tucson 20, as a transition year and what we also said.
At the end of my prepared comments is that the targets that we laid out there the margin targets for individual segments sale, there firmly holding I mean does this short term.
Markets disappointment and market. This important doesn't change our long term outlook, where these business segments have to be in terms of profitability.
Correct.
And does that refer to the 2022 guidance at this point here basically assuming no that 24, we actually think editorial 24 guidance, where we basically want to bring went to bring those businesses and and I think those targets and I referred that those targets are still valid and they hold.
And we're working to achieving them.
Okay, but to the targets you'd mentioned in 2022.
Mike I set the long and so I don't know habits, we have communicated in the capital markets say, a twentytwenty for target and strategy, where we want to bring those individual segments in terms of margin.
Performance in those targets still hold.
Okay. Thank you.
Let me conclude that question and answer session I would now like turn the call back over to fanatical then assay for any additional Oakland seen remarks.
Thank you all and have a nice day. Thank you.
Thank you don't Goodbye.
So we come to today's confidence code. Thank you for participating ladies and internals two men disconnect.
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