Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial 2020 fourth quarter and full year results conference call. For your information, today's conference call is being recorded. After the speaker's remarks, there will be a question and answer session. If you wish to ask a question during this time, please press star one on your telephone keypad and wait for your name to be announced. At this time, I would like to turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir.
Thank you, Jody. Good morning and good afternoon, everyone. We would like to welcome you to the webcast and conference call for CNH Industrial fourth quarter and full year 2020 results for the year ending December 31st. This call is being broadcast live on our website and is copyrighted by CNH Industrial. Any other use, recording, or transmission of any portion of this broadcast without the express written consent of CNH Industrial is strictly forbidden. We are pleased to have here with us today our Chairperson, Suzanne Heywood, our CEO, Scott Wine, and our CFO, Oddone Incisa, who will be hosting today's call. They will use the material available for download from the CNH Industrial website. After their presentation, we will be holding a Q&A session.
Please note that any forward-looking statement 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 most recent report, 20-F and 20-F annual report, as well as other periodic reports and filings with the US Securities and Exchange Commission and equivalent authorities in the Netherlands and Italy. The company presentation may include certain non-GAAP financial measure. Additional information, including reconciliation to the most directly comparable GAAP financial measures, is included in the presentation material. One final remark. Once again, our team is connecting from different countries, so please forgive us if there are moments of silence during the call while we manage the transition between the speakers. I will now turn the call over to Scott Wine.
Thank you, Federico. I'm excited and honored to be part of this CNH Industrial team, I look forward to sharing our progress and plans today and for many quarters to come. Our fourth quarter results and the positive momentum we developed across the portfolio throughout the second half of 2020 reflect the capability and dedication of our team. Suzanne and the senior leadership team ably positioned the business for solid improvements heading into 2021, I am motivated by the challenge of accelerating our progress and realizing the potential of the CNH Industrial business and brands. It is now my pleasure to turn the call over to Suzanne, who will review our fourth quarter and 2020 results.
Thank you, Scott. I would like to start by welcoming you as well to this call and underlining your comment about the great potential that there is in the CNH Industrial businesses and brands. I know I'm echoing the views of the board, the senior leadership team, and colleagues across CNH Industrial when I say how much I'm looking forward to working with you to realize that potential in the coming years. We've defined this as a year of firsts for many different reasons. Facing the pandemic has been challenging for all of us. As you know from our previous calls, going into the crisis, we prioritized protecting the health and safety of our workforce, supporting our dealers and customers, and actively managing our supply chain.
While we are now guardedly optimistic about the impact of the vaccine rollout, the current global spike in COVID-19 cases means that we must continue to safeguard our employees and our businesses from the pandemic. CNH Industrial delivered solid results in Q4, ending 2020 with year-over-year profitability improvements across all industrial segments. The net financial position for our industrial activities at year end was $800 million. This is the first time that this figure has been positive in our company's history, and it demonstrates the effectiveness of our cost containment and cash preservation actions. Together with our significant reduction in working capital, this enabled us to deliver positive free cash flow of $1.9 billion for the full year. During 2020, we invested in new technologies, embraced new ways of working, and positioned the company for strong, profitable growth.
We are continuing the preparation work needed to spin the company into two parts, as we outlined in our 2019 Capital Markets Day. We are now entering 2021 in a strong position, ready to support our customers and dealers and deliver an increasingly profitable future under Scott's leadership. Turning to slide four, I would like to share with you some of the industry volumes that we saw in Q4, as these will help put our business results into context. As you can see here, the ag machinery industry has continued to do well. This strong performance has been due to a range of factors, including rising commodity prices, growing trade with China, and the replacement of aging agricultural machinery fleets. Tractor sales worldwide were up 27% overall and were strong in all geographies, especially North and South America.
For combines, the picture was a little more mixed, with the global market up 8%. As you can see, industry was particularly strong in Europe and South America, although this was partially offset by a flat market in North America. We feel confident that the agriculture segment will continue to perform strongly in 2021, given the order backlog that we are seeing in the first half of the year. We will discuss this order backlog further later in this call. I'll turn now to construction equipment. Here we have again seen strong growth in compact equipment driven by the continued strength in residential construction, offset somewhat by weaknesses in other parts of the industry. On a regional basis, North America and rest of world markets have been particularly strong. Compact equipment sales underpin the strength of the North American market, while rest of world is strong across all construction categories.
Within our truck segment, the European truck market was up 6% year-over-year in this quarter. Light-duty trucks were also up year-over-year for the quarter, which means that the segment overall was down only 7% for the full year, despite the negative performance that we saw in the first half of the year. Medium and heavy-duty trucks were flat in Q4, but were down by 27% over the full year. Finally, as you can see here, the bus market was still down in the fourth quarter compared to last year across all regions, with Europe down 4% and South America down 35%. This weakness has been driven by the effects of the pandemic on travel, as well as delayed spending by municipal and regional transportation authorities. Moving on to slide five.
Here we lay out data for our retail sales, the red bars, our wholesales, the deliveries to dealers, the black bars, and our production across our different divisions, the gray bars, for the fourth quarter of this year compared to the same period last year. I want to take a moment to describe our performance across the full year, but you can see from the quarterly bar graphs on this chart what was driving the underproduction and how it compares to the same cadence last year. For the full year 2020, worldwide tractors and combines underproduced relative to retail sales was 13% and 19% respectively, while in North America, row crop underproduction compared to retail was 17%. Our ag order book is now up triple digits in some regions compared to last year for both tractor and combines, and is particularly strong in North and South America.
For construction as a whole, we have underproduced retail worldwide by 28%, with North America underproducing retail by 36% in the year. This has allowed us to keep reducing channel inventory. Our order books remain up year on year in most regions for construction equipment, driven by increases in demand in our North American compact equipment segment and in our South American construction business. For trucks, we underproduced retail sales worldwide by 8% in the full year, and we overproduced retail by 11% in Q4 while maintaining a strong order book. In Europe, we underproduced retail in light-duty trucks by 6%, while in medium and heavy trucks, we underproduced retail by 7% for the full year. Truck book to bill, in other words, the ratio of the orders that we've received to the orders that we've shipped and billed in the quarter, in the EU was at 0.96.
South America ended the quarter at 0.94. Market share in Europe for trucks was slightly down for the year, with medium and heavy up 220 basis points versus the previous year. LNG market share was at 55% higher than previous year, and market penetration for LNG trucks was around 3% increase from about 2% in 2019. Order book in Europe was up by almost 150% compared to the fourth quarter of 2019. In summary, the combination of this truck retail performance in the quarter and the very strong order books that we are seeing across segments gives us confidence in the strength of our end markets in the first half of 2021. On slide six, we summarize the channel inventories by segment. I won't go through them all, but it's worth noting that we've reduced inventories by double-digit percentages across all segments and subcategories compared to December 2019.
We have also kept our manufacturing inventory slightly higher than December 31st, 2019. This positions us well as we exit the year. We will continue to monitor our production levels and to monitor any supply chain challenges that might emerge in the coming weeks and months. Our effort in lowering both company and dealer inventories will support pricing in 2021 and has put us in a much stronger position than we were at the end of 2019. The substantial reduction in our company inventory levels has also contributed to our improved working capital and free cash flow, which Oddone will describe later. I will now turn the call over to Oddone to take you through some of the key financial details.
Thank you, Suzanne. Good morning and afternoon to everybody in the call. I'm now on slide seven, which summarize Q4 and the full year results. I think it is worth noting that this year has really been a tale of two halves, with a strong back half partially offsetting the very difficult first half, where pandemic containment measures halted production in our plants and demand stalled in most of our segments. For the top line, fourth quarter net sales were up 12% due to higher volumes and price realization, mainly in agricultural and Commercial and Specialty Vehicles. For the full year, net sales were down 7% due to high channel inventories at the start of the year and adverse COVID-19 impact in the first half. Moving down the P&L, Q4 adjusted EBIT increased by $219 million year-over-year, driven by strong performance across segments.
For the full year, adjusted EBIT was down 60% versus previous year, impacted by industry demand disruptions, negative absorption caused by de stocking actions and plant shutdowns in Q1, partially offset by cost containment measures. Q4 adjusted net income of EUR 432 million, or adjusted diluted earnings per share of EUR 0.30, was an increase of EUR 153 million compared to 2019. The EUR 0.10 per share improvement versus the first quarter 2019 is entirely due to operating performance of our industrial segments. The adjusted effective tax rate for the quarter was 14%, giving the adjusted ETR for the year up to 27% due to our improved profitability and a more favorable jurisdictional mix of pre-tax income during Q4, as well as net discrete tax benefits. I will talk later in the call about the strong free cash flow achieved this year, largely from a reduction in working capital.
This, in conjunction with numerous treasury activities, added to an already strong liquidity position, which covers the outstanding capital markets and bank debt. With a strong fourth quarter, we exit an otherwise challenging 2020 in a good place and set the stage for 2021 preliminary guidance Scott will go through shortly. On slide eight, we focus on industrial activities net sales, which were up $821 million or 11.4% on a constant currency basis. As you can see at the bottom of the slide, sales by region and product in the quarter-over-quarter comparisons were up across the board with only one exception. Foreign exchange translation had an impact of less than 1% in the third quarter. The net sales split by region was directionally in line with last year, with slightly greater share in rest of the world, like in previous quarters this year.
Agriculture net sales totaled $3.4 billion for the fourth quarter, up 19% on a constant currency basis versus prior year. Increase was mainly due to higher volumes in Europe, South America, and rest of the world, and favorable price realization of around 3.8% globally. Construction net sales were $752 million in the quarter, up 8% on a constant currency basis because of higher volume and positive price realization. Commercial and Specialty Vehicles net sales reached $3.3 billion in the quarter, up 7%, still on a constant currency basis year-over-year, primarily driven by favorable volume and mix and positive price realization in all regions. Powertrain net sales totaled $1.2 billion in the quarter, up 14%, driven by higher shipments across all regions, and sales to external customers accounted for 50% of total net sales.
Moving now to slide nine with a look at industrial activities adjusted EBIT by segment and driver. Volume and net pricing are the drivers for the increase across all segments in the quarter, year-over-year and sequentially. Pricing has been positive throughout the year for our agricultural and commercial and specialty vehicle segments, whereas in construction, the actions to reduce dealer inventory weigh heavily on pricing in the first nine months of the year. If we take a closer look at each segment, Q4 2020 adjusted EBIT for Ag was $379 million and adjusted EBIT margin was above 11%, driven by positive price realization, higher volumes and continued reduction of SGA expenses, despite higher variable compensation in the quarter compared with the previous year.
For construction, adjusted EBIT was $10 million, an increase of $7 million due to positive price realization, cost containment and favorable volume and mix, partially offset by costs associated with continued product improvement initiatives. Commercial vehicle and specialty vehicles adjusted EBIT was $110 million with adjusted EBIT margin of 3.3%, driven by favorable volumes and mix in Europe and South America and positive price realization on the back of stronger demand. Powertrain adjusted EBIT was $110 million, an increase of $26 million with adjusted EBIT margin of 9%, mainly due to favorable volume and mix and reduced spending for regulatory programs, partially offset by higher product cost. Moving now to slide 10 and our financial service business. Net income was $60 million, down $33 million compared to Q4 2019.
Primarily because of higher risk cost due to the expectation deteriorating credit conditions and a lower average portfolio in North America, partially offset by improved performance on used equipment sales. In the quarter, retail originations were $2.9 billion and the managed portfolio, including JVs at the end of the period was $26.6 billion. Delinquencies were down sequentially by 40 basis points and remain at a historically low level. Despite the continual low delinquency in the portfolio, financial services booked additional credit risk provisions in the year as economic consequence of the pandemic may have delayed impact on some of our customer ability to service debt. Next on slide 11, I'd like to discuss the net financial position and free cash flow performance of our industrial activities.
Net cash from industrial activities was $0.8 billion at December 31st, 2020, up approximately $2.3 billion from net debt position of $1.5 billion on September 30th, 2020. This is the result of positive free cash flow of $2.4 billion on the back of a strong reduction in working capital of $2 billion, driven by continuous inventory reduction and increase in payable as we ramped up production at the beginning of 2021. Capital expenditure were below 2019 levels due to board targeted investments in a year of many uncertainties and were at 2% of net sales for the full year. Going to the next slide with available liquidity and net maturity schedule.
The company ended the fourth quarter of 2020 with an available liquidity of $15.9 billion, up 21% versus September end 2020 with a robust liquidity to last 12 months revenue ratio of 61%. I won't go through them all individually here, but as you can see, we have done quite a few capital market transactions in the quarter in order to take advantage of very competitive rates and continue the reduction of our financing costs, including our first zero coupon Euro notes to 2034. Given our stronger cash flow performance in December, the company prepaid GBP 600 million commercial paper issued in April 2020 and maturing in 2021, as well as $300 million internal loans to 2021 and 2022. This concludes my prepared remarks on the financial part of the presentation, and I will now turn it over to Scott for his final remarks.
Thank you, Oddone. Despite the many distractions in 2020, we continued to develop our digital and precision farming offerings, structuring our solutions across three dimensions of field, fleet, and farm. Field is the classic precision farming area, focused on optimizing yield and input cost to maximize profitability for our growers. In the fourth quarter, we launched 23 new field features, including one which further defines in-field data collection. When integrated alongside our automated end-of-row turn and sequence automation, which is all controlled through our award-winning display and armrest, this innovation provides the ease of use and data accuracy that our customers demand. Fleet is focused on improving the productivity of customers' machines, and our connected fleet has more than doubled year-over-year. We added 11 new features in our fleet solution last quarter, and we'll add nearly 20 more in the coming months.
Farm helps farmers enhance their profitability by combining a range of agronomic information, including soil, weather, and crop data, to deliver seamless visualization and analysis of these data layers that facilitates better farm management decisions. Customization can be executed in the field utilizing cloud sharing directly to the machines. Lastly, we keep expanding our AGXTEND portfolio, which brings some of the newest and most innovative precision farming solutions to our customers. We've recently added six new offerings into this portfolio, and there will certainly be more to come. Our next-generation farming solution, co-designed by our customer and product teams, is improving the performance of precision farming features auto guidance, end-of-row turns, section control, and more, while greatly enhancing ease of use. Take rates for precision technology features on our large machines are close to 100%.
This offers significant potential as we deploy across machine platforms, including smaller tractors where current technology take rates are considerably lower. Our updated technology solutions are an excellent example of our customer-focused innovation, and importantly, a key driver of margin expansion. During the quarter, prototypes from our Nikola JV continued to be tested both on Arizona test tracks and at our own facility in Southern Germany. COVID travel restrictions made us split the validation work to secure efficient and effective progress, which actually accelerated our development work. As planned, we will proceed to road testing in the coming months once we complete validation of crucial systems. Our award-winning Iveco S-Way will be the backbone for both the battery electric Nikola Tre truck that is targeted to enter production in the last quarter of 2021, and the fuel cell trucks currently scheduled for production at the end of 2023.
One of the key things that attracted me to this role was Suzanne and the board's unwavering commitment to ESG, exemplified by CNH Industrial being confirmed as an industry leader in the Dow Jones Sustainability Indices for the 10th consecutive year. Out of the 86 companies invited to participate in the machinery and electric equipment category, only 13 were admitted, of which CNH Industrial was ranked first. Additionally, we were among the 273 companies making the prestigious A list for CDP Climate Change, comprising only 3% of the almost 10,000 disclosing companies. We also scored an A-minus in CDP's Water Security A List, attaining maximum scores in governance and integration in business strategy. Emissions reduction initiatives and reporting on emissions. We are also proud of the scores and recognition, but much more so of the progress we are making to be a better company for all of our stakeholders.
As we shift our focus to 2021, our opportunities to accelerate profitable growth are abundant, but we are cognizant of the significant headwinds we face and the hard work required to capitalize on our potential. We are committed to enhancing customer focus and maximizing shareholder value through the spin-off of our on-highway activities as soon as practical. Our team is working diligently to drive this forward. Our strong balance sheet signifies the rock-solid stability of the company. It also positions us for prudent investments that augment the key aspects of product, brand, and distribution to enhance our competitive positioning. With a healthy dealer network and bullish customers in most segments, we enter the year with robust order books, and CNH Industrial is poised to deliver a strong start to 2021.
Our dealers are eager for growth, and those that I've met with are enthusiastic about their opportunities to gain market share with our expanding and improving product and service offerings. We see strengthening industries and rebounding economies in many of the geographies where we compete. There is solid demand opportunity as global markets continue to reopen. We expect the ag industry recovery we saw in most regions in the latter part of 2020 to continue. At this point, we see notable strength in the northern hemisphere for combines and high horsepower tractors with flat to slightly up markets in the rest of our regions. Farmer sentiment continues to track well, driven by higher commodity prices when we look at the WASDE stock-to-use data, as well as surging Chinese soy and corn demand.
Higher used equipment prices across the segment should also drive new retail sales and dealer inventory replenishment. For construction equipment, we have simplified our reporting segments into just two parts, as we feel this is more consistent with how the industry views the market. We see industry demand continuing to recover, with heavy equipment finally beginning to contribute. Dealers and customers are cautiously optimistic, and we believe that global demand will be up in 2021, driven by South America as well as pockets in the EU and other regions. With the Democratic Party in charge of all three branches of government in the United States, there is conjecture regarding the possibility of an infrastructure bill, but it is too soon to count on anything, especially given their slender majority.
Demand for trucks and buses is where we see our most significant industry upside for 2021, with heavy and medium trucks in the EU increasing 20%-25%, albeit not entirely returning to the 2019 levels. Truck orders have started an upcycle since the third quarter of 2020. That trend has accelerated in the past couple of months. We expect that positive momentum to continue contingent upon the resurgence of the main economies in Europe. While we anticipate production up double digits on an absolute basis versus 2020, most of this increase is planned for the first half of this year. This will lead to difficult sequential comps for the second half, so it is worth noting that we see 2021 as a return to our historical production seasonality profile.
Our intent is to produce closely in line with retail for the full year now and going forward, with some slight overproduction for buffer inventory should markets recover faster than expected. The financial expression of these markets and our execution is consistent with our long-term focus on profitable growth. For 2021, we expect net sales and industrial activities to be up between 8% and 12% year-over-year, including the effects of currency translation. SGA is expected to be equal to or lower than 7.5% of sales. R&D is expected to be around 4.5% of sales, and we anticipate positive free cash flow for the year from industrial activities to be between $0.4 billion and $0.8 billion. CapEx is projected to be in excess of 2.5% of sales.
With these results, the board of directors intends to recommend to the company shareholders an annual cash dividend of EUR 0.11 per common share, totaling EUR 150 million or approximately $180 million, subject to the approval of shareholders at the AGM. Please note that this guidance assumes no further significant disruptions due to lockdown policies or substantial supply chain disruptions. With only one month in this role, I am facing a steep learning curve to help flatten it. I am spending a lot of time talking to employees at all levels of the company. Their insights and perspectives have been invaluable, and one, in particular, drove home to me the importance of what we do.
I was told that while in my previous role we used to build cool stuff, now I was part of an enterprise that was honored and proud to serve a noble customer base responsible for feeding the world. That nobility equally applies to the drivers and workers who, alongside the farmers, define our business. Our legacy is largely built on great products and brands, and we will endeavor to improve those areas while putting our dealers and customers at the center of everything we do. Targeting our investments with that in mind will mean accelerating innovation, especially with digital, alternative propulsion, and sustainability. We have made tremendous progress in these areas, but we'll double down to enhance our competitiveness and drive growth. Profitable growth will be a primary goal, and expediting gross margin expansion will be a company-wide priority.
World-Class Manufacturing is the CNH Industrial vernacular for lean, and these efforts, alongside our quality and profitability focus, will be encapsulated within our World-Class Enterprise efforts. Our company reaches to all parts of the world, and wherever we are, our commitment to operating safely and ethically remains steadfast. Consistently executing these fundamentals and delivering to our customers will result in strong cash flow and consistent quality earnings. I am keenly aware of the notable challenges we must overcome to achieve a higher level of performance, but I am equally confident that this CNH Industrial team is up for the task. Our energy and efforts will demonstrate a constancy of purpose to define and realize a very bright future. This concludes our prepared remarks, and I will now turn the call over to Jody to open the line for questions.
Thank you very much, sir. Ladies and gentlemen, today's question and answer session will be conducted electronically.Please press star one if you wish to ask a question. We will take our first question today from Ann Duignan from JP Morgan. Please go ahead.
Hi, good morning. It's Ann Duignan, and welcome, Scott.
Thank you, Ann.
You touched on only being there a short period of time and talking to customers and employees, maybe if we take a step back, what do you consider your top priorities to be as you move forward? There's certainly a lot to bite off at CNH Industrial, I'd be interested to hear your perspective.
Yeah. Well, first of all, it's great to be here and join a team with a lot of momentum, certainly what they accomplished in 2020 puts a foundation in place that's a great place for me to start. My first priority is really to learn the business and at the exact same time, get to work for our dealers and customers and stakeholders. There's no time for me to learn and for us to not make progress that we've done. That's a big challenge and one that I'm really looking forward to. I'm a big believer in personal accountability, for me, establishing a say-do ratio that means delivering on our commitments. I've got to work on setting the right goals and priorities. I'll tell you just how I prioritize, I went over this with the board of directors last week.
Our first priority, as Suzanne and the team led last year, we are going to focus on keeping our employees safe through this pandemic until we get to the other side. Really pleased with the work we've done in doing that, but it's not done, and we'll continue to make that a priority until we're on the other side of it. Secondly, we're going to execute the spin for sure, or an alternative transaction, but we're going to create two customer-focused businesses that allow us to reward shareholders, but more importantly, reward our customers. I'm going to try to drive a mindset shift within the company to really put the dealers and customers at the center of what we do.
We're a really, really good product and brand company. A lot of times, we don't have that customer centricity that I think can really unlock much more potential in the company. Work to execute that through a more lean org model so we can be more efficient as we do that. Next, we want to drive profitable growth. It's much more enjoyable to be part of a company that can drive growth. Certainly doing it without profitability is what I call almost worthless exercise. We'll try to drive profitable growth going forward with a key focus on gross margin expansion. The opportunity for us, whether it's material productivity, driving quality improvements, improving pricing actions, those are all opportunities. Certainly there's an opportunity for us to significantly improve gross margin over the next several years.
Part of the way we'll do that is through innovation, both inorganic and organic, building on what we've done with Precision Ag, driving faster and more with our digital efforts, and then ultimately, leveraging alternative powertrain technologies to make sure that we're a leader there in the off-road segment, just like we have been with the on-road segment. Finally, just continuing to drive sustainability and leading with ESG. It's a great foundation for us as a company, but one that I think we can never rest on and we must continue to drive. Those are the priorities. It's a lot of hard work, but I feel good about the team that I'm tackling it with and excited about what we can do in 2021.
Okay. I appreciate that color. Just as a quick follow-up, you said on the truck side, the spin or alternative transactions, does that mean that you're open to something like an outright sale and/or something like a SPAC type spinoff?
I think what we're committed to the spin, I think it's a great transaction for us, and I do think that we're primarily focused on creating two customer-centric organizations and maximizing shareholder value. I think if there's an alternative transaction out there that would be better for customers and shareholders, we would certainly pursue that. I don't believe there would be much consideration for a SPAC. The quality of our businesses is too good. We can handle the due diligence of a roadshow, and I don't believe we would need to go down that or ever consider going down that avenue.
Okay. That's good to know, actually. I appreciate that. I'll get back in line in the interest of time. Thank you.
Thank you very much. Our next question is from Steven Fisher from UBS. Please go ahead.
Great, thanks, and welcome, Scott. Just a follow-up on Ann's question there about priorities and your goals. Just anything that stands out initially as really kind of low-hanging fruit to address in, say, the first six months in terms of either margin improvements or any of your priorities and a sense of what maybe is really underappreciated versus what expectations are and what you've found so far?
Well, Steven, thanks for the question. I really don't think there's any low-hanging fruit. The work that Suzanne and the senior leadership team did last year to basically take advantage of all of those opportunities to deliver the cash flow they did and the improving results throughout the year. That doesn't mean there's not significant opportunity here, but I don't think it's low-hanging fruit. There's a lot of work to be done. I think there's a general underappreciation for the strength of the brands and the commitment of this team to win. I'm spending a lot of time talking to people at all levels of the organization all over the world, and consistently the pride they have and the willingness they have to do more.
I do think if there are opportunities, there really is this idea of recognizing our dealers as partners and our customers as the ones that drive our innovation does offer us an opportunity. It's not low-hanging fruit, but it's a mindset shift that we will make, and I think ultimately we can be better for all of our stakeholders as we drive towards that. I'm used to a lean organization, and I think there's an opportunity for us to be a little bit more efficient from an organization standpoint as we work to serve customers. The gross margin stuff, really the most largest opportunity because of the spend is in material productivity, and I'm very confident we can get after that. It's just going to take a little while to do. It's not quick wins. It's got to be a sustainable move.
We'll drive that and quality improvements and ultimately drive a commitment to long-term, consistent gross profit improvement.
Great. Thanks. Just for a follow-up, Suzanne, you mentioned having good confidence in the first half of the year. How uncertain would you say the second half?
Of the year is? How far out does your order book extend? What do you see as the biggest uncertainties for that second half?
Thank you very much. As I mentioned, I think the first half is looking strong. We've got a very good order book across the different segments. Of course, we're coming into this year in a much stronger position in terms of inventory levels. Second half of the year is harder to predict. As many of you well know, we tend to have stronger sales in a normal year. We have stronger sales in the first half of the year than we do in the second half of the year. That's kind of normal pattern that we would see. Obviously, that was reversed last year because of the pandemic. I think we're expecting to see this year go back to a more normal curve through the year. It is quite hard to predict because, of course, as we all know, we still have the pandemic sadly going on.
A lot of other factors will play into this, but certainly the first half of the year is looking strong just based on the order book that we're already seeing.
Okay. I'll turn it over. Thank you.
We will take our next question from David Raso from Evercore. Please go ahead.
Hi. Thank you, and welcome, Scott.
Thanks, David.
Following up on that question about the second half, first half, just to be clear, the second half, are you more just concerned or just hedging, let's see what happens in the second half of the year on fundamentals? Or is there also a supply chain issue to be thoughtful about on our part on your ability to meet demand? Just given the order book strength, the age of the fleet, the pricing power, and just how much you underproduced retail last year to set up the easy comp on production for 2021. Then I have a quick price cost question as a follow-up.
Yeah. I'll address this seasonality question first. No, I think, as Suzanne mentioned, the order books are very strong covering the first half of the year. The second half, we do get into more difficult compares. Really, it's, I think, about us being prudent what's going on in the global economies and wanting to make sure that we worked hard in 2020 to get our dealer inventory levels to a very good point, and we want to make sure that we're consistent. Really, our goal is really to produce to retail throughout the year. If we see retail acceleration in the second half, I'm very confident that our supply chain and our plans will be able to deliver that. Really, it's just not feeling overly confident in the demand in the second half at this point.
Certainly, we're going to position ourselves to be able to fulfill that. The supply chain constraints are more, I would say, in the near term now, and the team's doing an excellent job of working through those. We don't expect things to deteriorate from a supply chain perspective throughout the year. We actually expect them to improve. Donnie, I'll turn it over to you for the cost and pricing question.
Yeah. Oddone, just so you know, the idea is obviously right now the price is doing very well versus the production cost that you've outlined in the waterfall charts. Can you help us a little bit, how do we think about the full-year price cost? Sort of related to that, the R&D now going to 4.5% of revenue. Should we think of that as now more of a run rate for the company going forward versus the historical less than 4% of revenue?
Yeah, let's start from the R&D. Of course, as you know, we have curtailed some of the R&D this year, so 2020, also because some of our facilities were closed to the pandemic. We have restarted in Q4, and you've seen that Q4 is higher than what we had in the previous year, and we plan to have higher R&D into 2021. As Scott was saying before, we have a number of initiatives of activities where we need to invest more. In terms of price cost, we're very happy with what we did in pricing this year, particularly in 2020 in ag. We want to continue into that trajectory. On the cost side, we know that there's going to be some headwinds in 2021 due to raw materials and some bottlenecks we may have in supply chain.
We have seen that in Q4, and we will continue probably seeing in Q1. With pricing, we want to face most of it.
Long story short, that the price cost is probably a drag on margin, right? Even if it's equal price cost, it's a drag on margin, or it might even be negative. You have the volume ramped, and it sounds like it's in some of the higher margin businesses like North America, high horsepower, ag. Can you help us a little bit with the margin color? I know you give SG&A and R&D, but I'll leave it here with that last question about any sense on the gross margins for the year, or if you want to speak to EBIT margins, just so we can level set how you're thinking about the operating leverage. Thank you.
Yeah, I think it's probably early to go there. Definitely we will have incremental margin to 2020. I would look at 2019 as a more normalized year and EBIT margins at that level.
Sounds good. Thank you so much.
You're welcome.
Thank you. We will take our next question from Ross Gilardi from Bank of America. Please go ahead.
Yeah. Good morning. Good afternoon, everybody. Yes, my welcome to you as well, Scott.
Thank you.
I just wanted to follow up on the off-highway separation. There have obviously been a number of press articles about approaches for Iveco. Are you at least willing to say if you're leaning more heavily towards a sale over a spin versus your initial thought process at your 2019 capital markets day? If you were to sell the business, are there any tax leakage considerations to take into account?
Well, thanks for the question. As both Suzanne and I said in our prepared remarks, we are very committed to the spin and separating the businesses, which we think we're confident will unlock value for both segments. We're not going to comment on speculation in the press. There has been, and we communicated it, at least engagement with one interested party. I would say it's far at this point from saying that we prefer a sale versus a spin in any way. We are still committed to separating the businesses and ultimately we'll find a way that has the best transaction. We clearly aren't going to speculate on tax implications or anything else for something that we're not going to comment on. Recognize that our commitment to and our efforts to execute the separation are rock solid.
Suzanne, anything you want to add color to what I didn't say?
No, I think that summarizes it very well. Thank you, Scott.
Okay. Thank you. Scott, you mentioned a couple of times the opportunity on gross margin to expedite the progress for the company. Can you say what you're baking in for 2021 and can you comment on what the aspirational view would be on gross margin?
I think Oddone did a nice job of avoiding answering the gross margin question a second ago. I'll be consistent with that. I do think obviously mix is going to be a big benefit for us this year to a certain extent offset by, we talked about commodity pressures. Commodities drive higher demand, but they also drive higher cost. We'll work through to try to make sure we take advantage of that where we can. Again, most of the gross margin opportunities are more long-term in nature. Driving quality isn't something you flip a switch on, but it's design, it's supplier quality, and ultimately addressing things in the field faster. We'll get that, and that'll ultimately be better for our customers. The more we drive innovation and technology and quality, the more pricing opportunities we have.
I really feel good about the long-term gross margin. I don't yet have the work done to define the potential of that opportunity, but I would say it falls into the material category for sure.
Okay. Just as last follow-up on the R&D expense of 4.5%, what would that figure look like for the RemainCo off-highway business if you split out on-highway?
Oddone, have you done that math yet?
We will follow up on this, if you don't mind.
Got it. Okay. Thank you very much.
Thank you.
Our next question comes from Martino De Ambroggi from Equita. Please go ahead.
Thank you. Good afternoon, good morning, everybody. A follow-up on the spin-off. Based on the improved performance and improved market visibility, could spin-off be a second half event? Still on the perimeter, the Construction Equipment , and I know this question was already asked in the past, and maybe it's too early for you, Scott, just arrived to ask you. Once the spin-off is executed, the Construction would be a core asset in which you maybe look for acquisitions, mergers, or you believe you, Scott, you, Suzanne, you still believe to stay with or to find an exit strategy for Construction?
Well, let's start with construction and work our way back to the question I'm not going to give much clarity to. Stefano Pampalone has really done a good job of incredibly heavy lifting to bring stability to the CE business as exemplified by the improving fourth quarter results. There's still a lot of work to do there. I will tell you that we like the synergies between the construction business and our ag business. We think there's potential there. I don't necessarily think we've put our best foot forward with construction. We're going to continue the turnaround there, which I think has got a lot of legs. There are certainly some strategic aspects to that that we've got to figure out. Ultimately, we are in no way, shape, or form looking at exiting that business. We like it. We think there's potential there.
Ultimately, we'll continue to revisit it over time, but we like the trajectory that we're on, and we're going to look to drive further profitable growth in that category. The timing of the spin has always been said it would be early 2022 is I think the best we could shoot for, and there's a lot of work to be done to make that happen, but that's kind of what we're driving towards.
Okay, thank you. The second question is on the guidance. If I look at the incremental margin you recorded in the last quarter, 29% in Ag, more than 30 in CV. I understand that you do not provide any specific guidance on profitability for the current year, should we take maybe these are slightly lower incremental margin as a reference point for next year? On the free cash flow, just to have an idea, what's the underlying assumption on net working capital that probably there will be a reversal in the trend in the current year?
Oddone, I'm assuming you got that one?
Yeah. On the incremental margin, remember Q4 2019 was a relatively soft quarter for us, and Q4 2020, all things considered, is a strong quarter. I wouldn't go that far in projecting the same incremental margins for the remainder of the year. On the working capital for next year, of course, again, we will have a much better starting point this year. We are giving a guidance on free cash flow for the year. The working capital component of it will be modest, I would say.
Okay. Thank you.
You're welcome.
Our next question for today is from Rob Wertheimer, from Melius Research. Please go ahead.
Yes. Hello, everyone. Scott, you've come aboard on a time where there's just a tremendous amount of change and exciting things happening. With apologies, you're brand new. I'm going to ask a couple kind of big picture questions and see what your take is, if that's all right.
Sure.
The first is just on ag investment. Close to 100% or very high take rates on large ag is obviously indicative of a customer that wants to buy the product and that's exciting. What's your impression been of the investment to date? Has the company invested enough? Has it done it the right way, internal and external, and the balance? Just sort of maybe if you can talk about what potential you see there? The second one, I'll just ask them both at once, is your philosophy on operating systems and on how you saw the company when you came in on culture of engagement, continuous improvement, et cetera. I'm not 100% sure if I heard the words 80/20 in your prepared remarks, and I don't know where you want to take operations. Thank you.
Sure. Well, first of all, I'm really impressed, actually, with the progress we've made with Precision Ag and some of the tools. I think if you listen to the public conversation, it's like we're way behind, and we certainly are behind, but there's been a lot of work done. It's not like we're starting from zero. To very directly answer your question, if we had done enough or spent enough and invested enough, we wouldn't be playing from behind right now. That's just clear. There's an opportunity for us to do more. I think, the whole digital and technology thing is hard.
Ultimately, as I tried to say in my prepared remarks, we've actually got to just start with the customer, understand what the growers need, understand what the drivers and workers need, and build capability that enhances their profitability of what they're doing and ease of use. That's what we'll continue to do. Again, there's a lot of good progress ongoing. We just need to accelerate it, and I suspect that will be an area that will get additional investments going forward. As far as an operating system, obviously, everybody has a different philosophy on operating systems. I was really encouraged coming in to understand the approach with World-Class Manufacturing. Really, it's just a different word for lean, and they've really done a lot of work, specifically in the manufacturing plants to drive that.
What I like about whether you call it World-Class Enterprise or call it lean, is the concept says you start with the customer and then eliminate waste all through the system to add value there. I think there is an opportunity from an operating rhythm standpoint. Just the rigor that I've been beat into me over the years is really a rigorous accountability, starting with safety and quality and driving that on a regular monthly rhythm throughout the organization. We're doing that now, and I think we're going to get a lot of opportunity for us to deliver better results. Certainly the team is in a strong place, the fundamentals are in a strong place, and I feel like I'm entering at a time where we have a lot of opportunity, but much of it is within our own grasp to deliver.
That's super clear. Thank you. Suzanne, if it's fair to ask, I take it the board is supportive of a higher level of commitment to Agtech, Industrial Agtech, or whatever you want to call it, than maybe was the case several years ago. Everybody's fully on board, I assume.
I think everyone is very much on board with the fact that if we look forward into the future, digital farming is only going to become more and more important. One of the things that we did last year as we went through the pandemic is, although we were very thoughtful about where we could reduce cash outflow, we preserved a lot of our spending in this area. We consider it to be absolutely kind of fundamental to the future of the company, and I know the board feels that very strongly as well.
Thank you both.
Our next question is from Massimo Vecchio from UBI Banca. Please go ahead.
Good afternoon to everybody and welcome, Scott. My first question is on the commodity prices. I'm looking at the super cycle, the 2013 level.
Current commodity prices are not that far away. Still combined registrations in the U.S. are half the level they reached in 2013. My question is, am I looking in the right direction? Can we expect a meaningful rebound in U.S. combines in this year or next?
Oddone, you want to take that?
Yeah. I would say that it's probably too early to call. You've seen our forecast for the year, and we stick with that.
Okay. I have a follow-up. I saw your underproduction in Q4. I was wondering how much of that was deliberate and a deliberate choice, and if this drove some market share loss in some geographies or in some products.
No, I think the underproduction was predominantly driven by higher retail demand than we expected. Market share losses probably, our inventory is lower than it has been, but certainly, there's plenty of inventory in the field, so we don't think that was a driver of market share.
Okay. Last question, very quick. Do you plan a capital market day anytime soon?
No.
Okay. All right. Thank you very much.
Our next question is from Larry De Maria from William Blair. Please go ahead.
Hi, good afternoon, and welcome, Scott.
Thanks, Larry.
Question. Hey, guys. Obviously, ramp in production in the first half, it's kind of the tale of two halves as of now. What I'm curious about is your ability to satisfy all the seasonal first half demand. In other words, are we kind of full now and now orders are getting pushed out? Maybe you can tell us also, when are you taking orders for some of the higher horsepower ag lines? How far out are those now?
Well, we're running the factories with demand and the backlog is high, as you know. We're doing well to fulfill demand. We're trying to get to the point where it's production and delivery to retail. There's a little bit of work to be done in the first half. I think we're generally feeling like we can do that. Really, the team's working very strong. There's a couple of pockets of specific parts that we're having to expedite, and certainly expedited logistics is one of the challenges that we're having to deal with. Overall, I think the team's done a nice job of putting us in a position to deliver in the first half what we need to deliver. The question is, what is going to be the demand, the take rate in the second half of the year?
We've been prudent, but I do think there's potential for that to continue to be strong given what you said about the commodity cycle.
I guess one thing I'm trying to understand, are we sold out in the first half at this point, or we can continue to ramp? Just my second question was, you talked about Precision Ag digitization, obviously you had a slide. When are we going to see some of the first AI-enabled technology? Obviously, your competitors come out with See & Spray. When's the CNH version? Thanks.
I don't think there's tremendous upside for production in the first half. The order books are strong, and we're going to fulfill that demand and get our inventories in a reasonable level, but probably not tremendous upside in the first half. I don't have timing of AI implementation schedules. I do know it's a core part of what our team is working on, but I don't have specific timing of that.
Okay, thanks and good luck, Scott.
Thank you.
Our next question is from Andrea Balloni from Mediobanca. Please go ahead.
Yes, good afternoon, everybody. Thanks for taking my question. Welcome, Scott, and congratulations for the strong result. A couple of questions left. My first one is about the heavy duty trucks. I remember during the Q3 release, you guys mentioned about some gain in market share in the heavy duty trucks. Can you give us an update about what you have seen in Q4? My second question is about Q1 production. Are you guys experiencing any shortage in semiconductor which could slow down your production activity in Q1?
We were encouraged by, as Oddone talked about in the prepared remarks, encouraged by the work that Gerrit Marx and the team are doing with the Iveco business and ultimately gaining share in the year was a couple points of market share was quite good. Lots of opportunity there going forward. The second question was, I'm sorry, was related to?
It's related to the potential shortage in the semiconductors. Some competitors have mentioned even this morning about potential slowdown in the production activity.
We're not immune from that. Certainly, that has been a challenge we're working through. Again, that's implied in our guidance, and we feel like the team's done a nice job of managing that right now. Certainly those are just the things that we work through. Again, there's a strong team in place to do that.
Okay. Thank you.
Thank you. Our final question for today comes from Courtney Yakavonis from Morgan Stanley. Please go ahead.
Hi. Great. Thanks for squeezing me in. Welcome, Scott. I guess you've kind of characterized some of your key goals, and obviously you mentioned that you're not planning any analyst day anytime soon, but when we look back at the 2019 analyst day, there were some 2022 targets that were laid out by segment. I guess I'd just be curious, when you look at those, obviously we've had some major disruptions, but which of those do you view at this point as being the most achievable versus least achievable? Just as we're thinking through the operational improvement of the different segments, and then I guess specifically on Construction Equipment, that's one where are you expecting to have positive margins next year in that segment, given that you're starting to see this recovery, or is that one that we could still see negative operating margins next year? Thanks.
The 2019 analyst day, they did a lot of really nice work, and I think obviously the big news out of that was the commitment to the spin, which I think is going to unlock tremendous value. The rest of the targets I think are very reasonable, but they were reasonable before the 2020 and then the whole COVID thing. I can't comment now. Actually, I'll admit, I have not done the work to see if the math still works to get from the targeted analyst day numbers to 2022, given what happened in 2020. Quite frankly, I want to make sure we're doing everything fundamentally right before we go back and hit numbers that, quite honestly, again, the numbers as when they were committed were very, very good, and I am fully bought into what they said they would do.
I just don't know if we can still get there with what happened in 2020. I do know that the work Stefano and they've done, there's a lot of potential that was realized in 2020, continued progress in 2021, and the ongoing profitability improvements in Construction I think is real, but there's a lot of really heavy lifting to be done still.
Okay, great. That's helpful. I know you've gotten a lot of questions about the margin outlook for 2021. I think originally you guys were talking about only about a third of the cost cuts this year flowing through to next year. Is that still the assumption? I know you've talked a little bit about the R&D step-up and given us some guidance on SG&A, just wanted to make sure when we think about some of those temporary costs flowing back in next year versus price cost, that that's the right way to be thinking about it.
Oddone, you got that?
Yeah. We gave this guidance on the level of SG&A that we expect to have on revenues, and actually also the level of R&D and CapEx. I think we demonstrated in 2020 that we were able to adjust for that. Of course, some of the costs that were taken out in 2020 will stay out, but other costs will come in and we want to leverage our business based on how the actual performance of, again, the right performance of sales and revenues is.
Okay. Understood. Thanks.
Thank you.