Good morning and afternoon, ladies and gentlemen. Welcome to today's CNH Industrial 2019 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. To ask a question, please press star and one on your telephone. If you wish to cancel your request, please press the hash key. At this time, I would like to turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir.
Thank you, Maria. Good morning and afternoon, everyone. We would like to welcome you to the webcast conference for CNH Industrial fourth quarter and full year 2019 results for the period 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 CEO, Hubertus Mühlhäuser, and our CFO, Max Chiara, who will be hosting today's call. They will use the material available for download from the CNH Industrial website. After their presentation, we will be holding a Q&A session.
As a final comment, please note that any forward-looking statement we might be making during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement, including the presentation material. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company 's most recent report 20-F and EU annual report, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission and the equivalent authorities in the Netherlands and Italy. The company presentation may include certain non-GAAP financial measures. Additional information, including reconciliation to the most directly comparable GAAP financial measure, is included in the presentation material. I will now turn the call over to Hubertus Mühlhäuser .
Thank you, Federico Donati. Good morning and good afternoon to everyone. 2019 was marked by several important milestones for CNH Industrial as we launched Transform to Win, our strategy focused on driving margin improvement, investing in long-term growth, and transforming our portfolio to create two leading and separate companies focused on our on- and off-highway businesses. The challenging macroeconomic conditions that we face, and which are reflected in today's results, further support our decision to launch this strategic roadmap. This roadmap will enable us to further improve margins while making targeted investments in technologies that will help us to grow sales long term. Given the trading conditions that we faced in 2019, we will step up our efforts on margin improvement initiatives in 2020. How did we perform in 2019 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 CE segments, offset somewhat by positive price realization. The Adjusted EBIT margin from industrial activities was 5.3%, down 40 basis points 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 is 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 in the second half of 2020. On a more positive note, we have achieved EPS of EUR 0.84 a share, up EUR 0.04 year-over-year or 5%, despite this challenging environment.
Net debt of industrial activities came in higher than our latest guide, as Max Chiara would explain later in the presentation. Important to note, our financial position remains robust with a strong balance sheet and excellent liquidity. Alongside the Transform to Win strategy that I just mentioned, we moved on selected strategic partnerships and acquisitions that 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 are firmly on track and will help to counter market headwinds. The planned separation of our on-highway business is also on track, with a target to complete the spin-off in January 2021, supported by specialist financial and business advisors.
The board of directors of CNH Industrial N.V. intends to recommend to the company shareholders an annual cash dividend of EUR 0.18 per common share, in line with our 2019 payout, and totaling approximately EUR 243 million or approximately $267 million. Subject to the approval of shareholders at the upcoming annual general meeting, due to take place on April 16, the ex-dividend date would be set at April 20th. Moving on to slide four, let me provide you a high-level industry update for Q4 industry volumes. First, let's look at the largest Ag segment. North America row crop markets were weaker, largely due to a 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 now have a China and U.S. phase one deal that has a large portion earmarked for agricultural products and producers, the details and path to adoption has left producers with many questions and hesitation around new product placement. Even if farmer sentiment has somewhat improved through January, soft commodity prices have been fairly muted so far, with soybeans even down 7% since the signing of the China trade deal. We see an uptick in soft commodity prices as a precondition for increased Ag machinery sales. In the EU, Ag machinery was generally soft, with combines being at the lowest level that we have seen in recent history due to the continued previous season's poor harvest in certain key geographies and dairy markets remaining range bound.
In South America, we continue to see lackluster end customer demand due to uncertainties in the macro and global industry environment due to trade, African swine fever, and lower demand 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 will continue to modernize its Ag fleets and increase efficiency in a market where we command 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 North and South America, but weakness in Europe and rest of the world. Generally, dealers continue to destock in North America and Europe, and while infrastructure projects continue in both regions, they are not leading to incremental contract demand.
Within the subsegments, compact and service equipment improved in South America as this market continues to recover from low levels, but weak in Europe from Brexit uncertainties and pockets of residential and infrastructure projects. For trucks, the European truck market was down 5% year-over-year in the fourth quarter, with light-duty trucks up 2%. Medium and heavy trucks were down 16%. As anticipated, we have now started to see in Q4 the slowing of the EU heavy truck market, which has been running at peak volumes for some time. That being said, the LNG market segment doubled, reaching the predicted 2% TIV market share in 2019. This will provide a partial hedge to us as we have a large portion of the LNG market. South America was flat overall for trucks, with Brazil up 13%, but Argentina down by 28%.
Buses continue to be a bright spot for our commercial vehicle business, with the European market up 2% for the quarter and the South American market up 11% led by Brazil, which was up 23%, partially offset by a down Argentinian market. In summary, you can see that market headwinds and sectoral trends impacted our performance in 2019. We expect these trading conditions to persist in 2020, but we are prepared for this tougher environment in which we will both manage the long-term transformation of our company and simultaneously utilize every lever in our control to strengthen our near-term performance. I will now hand it over to Max Chiara .
Thank you, Hubertus Mühlhäuser . Good morning or afternoon to everyone on the call. As we have seen, end markets deteriorated rapidly in the fourth quarter with increased uncertainties affecting end-user sentiment. We took decisive action starting in the second half of 2019 and continuing through Q4 to reduce our production, primarily in our off-highway segments, Ag and CE, to reduce our and our dealers' inventory. While we were able to make good progress in our agricultural segment, achieving a production performance for the full year mostly in line with retail. In construction, we finished the year with production outpacing retail by 5% globally, with a more acute outcome in our high-growth markets. This impacted our top line as well as our profitability as lower cost absorption persisted throughout the fourth quarter.
The combination of these factors, together with the year-end spike in the euro rate, caused net debt to come in above the upper end of our guidance. We are accelerating certain of our Transform to Win profitability improvement initiatives, and we are also focusing on disciplined cost management while sustaining investments in our future growth. Moving now to the key figures for the fourth quarter and full year. Net sales in our industrial segments were down 6% reported and down 2% constant currency for the full year 2019. Adjusted EBIT of industrial activities was EUR 1.4 billion for the same period with a margin of 5.3%. This was down 40 basis points 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, continuous efforts have been taken to improve our below-the-line items with net interest expense reduced more than 20% year-over-year. Our adjusted ETR also decreased to 22% due to a favorable geographic mix of pre-tax earnings, as well as tax credits and incentives in multiple jurisdictions in which we operate. For 2020, the adjusted ETR is now expected to be modestly higher between 24% and 25%. Net income was EUR 1.5 billion for the full year 2019 and includes certain non-cash items which, for the purpose of our adjusted metrics, are excluded. A EUR 539 million non-cash tax benefit due to the release of valuation allowances on certain net deferred tax assets recognized in the third quarter. A pre-tax gain of EUR 119 million from the 2018 U.S. healthcare plan modification.
A $116 million pre-tax non-cash settlement charge resulting from the purchase of a group annuity contract to settle a portion of the U.S. pension obligations that we recognized in the fourth quarter. Net income was also negatively impacted by pre-tax restructuring and other asset optimization charges and write-offs of EUR 291 million, of which EUR 165 million related to asset optimization charges in our pre-owned truck business and EUR 109 million related to headcount reduction and footprint actions performed during the year. Finally, we also booked a pre-tax charge of EUR 27 million related to the repurchase of EUR 380 million in aggregate of certain outstanding bond.
Adjusted net income excluding these items was EUR 1.2 billion, compared to EUR 1.1 billion in 2018. Adjusted diluted EPS was EUR 0.84, up 5% compared to 2018. For the fourth quarter, adjusted net income was EUR 279 million, down EUR 15 million. Adjusted diluted EPS of EUR 0.20 was down 5%.
We finished the year with net debt of industrial activities of EUR 854 million, representing an improvement of EUR 1.5 billion compared to September end 2019, as a result of a very strong cash flow generation in the quarter, primarily from the inventory realignment in our agriculture and construction equipment segments. However, this was still not enough to achieve our year-end targets due to higher than expected inventory. Compared to 2018, net debt has increased by EUR 250 million. Turning to slide six, we focus now on industrial activities net sales, excluding foreign exchange translation, which represented a total negative impact of 2.6% in Q4 and about 4% for the full year. I will talk in detail about the full-year performance by segment.
Agricultural equipment and construction net sales decreased 3% and 6% respectively, primarily driven by lower industry volumes in North America and rest of world markets, coupled with actions to reduce dealer inventories in the second half of the year, partially offset by a favorable price realization performance across all geographies and sustained aftermarket activity. The fourth quarter change is negative 5% and 12% respectively for the segments, mostly reflecting the production adjustments we took to reduce inventories in the quarter. Commercial and specialty vehicles net sales were up 1%, driven by increased deliveries in bus and specialty vehicles, sustained aftermarket activity, and positive pricing. These positive factors were offset by reduced wholesale volumes in medium and heavy trucks in both Europe, where we are 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% due to lower sales volume with a more pronounced 13% reduction in Q4 due to a stronger customer engine stockpiling activity in 2018 in anticipation of the Stage V introduction. Turning to slide seven now with an overview of our operating results by driver. Adjusted EBIT for the full year at consolidated level was EUR 1.9 billion, with a margin of 6.7%. Big picture, the unfavorable volume and mix in our agriculture and construction segment was worth about EUR 250 million, including a negative industrial fixed cost absorption of about EUR 60 million. Secondly, the raw material headwinds and increased tariffs and duties totaling about EUR 200 million, together with certain additional costs in logistic and supply chain, new product launches, quality, and labor economics were more than offset by strong net price realization and by our continued cost discipline.
Our results also include a reduction in our short-term incentive compensation accrual as weak performance reduced variable pay. In the quarter, the production adjustment actions were more severe, while the raw material headwind was starting to fade as hard commodity prices softened from the middle of the year onwards. Turning now to slide eight. Worldwide unit deliveries in the fourth quarter were down 3% in tractors and 15% in combines. Worldwide production was down 16%, with production in the raw crop sector in North America down 30% year-over-year in the quarter, achieving an underproduction to retail at 25% plus, and leading to a large year-over-year decrease in total inventory for this specific subsegment. Tractors worldwide company unit inventories ended up 22% year-over-year, but down 21% versus Q3. Combines inventory was up 11% year-over-year, but down 25% versus Q3.
In terms of profitability for the full year 2019, Adjusted EBIT was EUR 900 million, a EUR 140 million decrease compared to 2018. Net price realization of more than 2.5%, disciplined cost management initiatives, industrial efficiencies, and a reduction in short-term incentive compensation expense were among the positive contributors. Lower wholesale volume, unfavorable market and product mix, inclusive of negative industrial absorption from reduced production, mainly in Q4 with a 16% production decline year-over-year, as well as higher product cost as a result of increased raw material cost and tariffs, more than offset the positive factors. Adjusted EBIT margin decreased 70 basis points to 8.2%. In the fourth quarter of 2019, Adjusted EBIT was EUR 236 million down versus the fourth quarter of 2018, 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 Ag in terms of our financials. Now, continuing with the commentary. While uncertainty remains in the agricultural end market related to trade tensions and to negative weather events, we have confidence in the positive longer-term industry fundamentals, which will be supported by the need for renewal of what is an aging fleet in major markets. We are 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 year. In terms of the current order book, conditions are stable. North America is flat to slightly up and in general is slightly better than what we have experienced each quarter from one year ago. South America is up strongly in tractors and down in combine.
Europe is slightly down, with rest of world about flat in tractors and significantly up in combines, although from very small numbers. Turning to the next slide, construction worldwide unit deliveries in the fourth quarter were down 12% across the different product lines. Worldwide production was down 17% with a more pronounced decline in general construction as we address the reduction in dealer inventories, which will continue during the most part of 2020. Company inventory units were up 42% year-over-year, mainly North America and the rest of world, and down 15% versus Q3. Full year Adjusted EBIT was EUR 51 million with an Adjusted EBIT margin of 1.8%.
Positive pricing was more than offset by unfavorable volume and mix in North America and rest of world market, including negative industrial absorption and higher product costs primarily related to increased raw material cost and tariffs, as well as costs associated with our product quality excellence initiative. In the fourth quarter of 2019, Adjusted EBIT was breakeven. Fourth quarter results were primarily impacted by unfavorable volume and mix due to weaker market conditions, a deteriorated pricing environment and higher product cost. End user demand in the construction industry in the U.S. has flattened out. While used equipment pricing continues to hold up well, dealers have been cautious and seeking to further destock inventory levels, and we would anticipate this to continue through a good part of 2020. As a result, our order book is down in North America.
South America, on 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 expect to underproduce retail in North America by double digits for the full year 2020 to curb inventories and better align with our dealers. Also here, the majority of the adjustment will be performed in the first part of the year, where we expect a production decline with the corresponding period in 2019 of about 10% in each of the first two quarters. On slide 10 now. Trucks worldwide production in the fourth 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 demand for alternative propulsion buses continue to increase both in the city bus and intercity product segments. The commercial and specialty vehicle segment full year Adjusted EBIT was EUR 224 million and includes a EUR 50 million gain realized in the third quarter from granting Nikola access to certain IVECO technology. Adjusted EBIT was negatively impacted by higher product cost, primarily labor and other inflationary cost increases, launch costs related to new products, an unfavorable foreign exchange transaction impact, and a EUR 70 million one-time remeasurement of certain provisions, primarily in the maintenance and repair contract book, completed in the fourth quarter.
Favorable volume and mix, primarily in the bus and specialty vehicle sub-segments, positive price realization of approximately EUR 40 million primarily geared towards the recovery of the foreign exchange losses, and the 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 one-time remeasurement of certain provisions discussed above and by unfavorable FX. In terms of our alternative propulsion initiative, LNG, CNG demand grew almost 100% year-on-year, finishing the year with a total penetration of 2% to total TIV, and we were able to preserve a strong market share as planned. We reiterate our positive stance on this segment as one of the best answers currently available in the transportation market to reduce emissions and help contribute to EU fleet economy standards.
We believe local governments will continue to subsidize this sub-segment going forward in effort to influence buying behavior of logistic operators to decarbonize their fleet of trucks. Our market share for trucks in Europe in Q4 was 11.5%, up 50 basis points, with a 100 basis points increase coming from the medium and heavy, which achieved a 7.6% market share in the fourth quarter. Trucks book-to-bill was at 0.95 in Europe, higher than in Q3, and 1 in South America, with order intake 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 IVECO heavy-duty brand is starting to pay off, and we expect to gain market share at incremental profit margin for each truck sold as we go through the new year. Bus market share in Europe was almost 20%, and book-to-bill remains strong at 0.82 in Europe and 0.91 in South America. If we move to the next slide, powertrain continues to demonstrate solid results in light of a challenging end market environment. Net sales decreased 5% for full year on a constant currency basis and sales to external customers accounted for 51%. The book of business is growing as a consequence of new third-party contract acquisition.
Full year Adjusted EBIT was EUR 363 million, a EUR 43 million decrease compared to 2018. Due to unfavorable volume and mix and higher product 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 2019, Adjusted EBIT was EUR 84 million as a result of unfavorable volume and mix due to customers' engine stockpiling activity in 2018, offset by positive pricing. Adjusted EBIT margin was 8.3%. Moving on to slide 12 and our financial services business. The segment has continued to perform well for full year, as you can see on the slide. Worthwhile to note, delinquencies continued to improve and reached another historic all-time low for CNH Industrial.
Starting back again. I apologize for the line cut. I repeat slide 12. Moving on to slide 12 in our financial services business, the segment has continued to perform well for the full year, and as you can see on the table. Worthwhile to note, delinquencies continued to improve and reached another historic all-time low for CNH Industrial at 2.5% in the fourth quarter, as past due stacks in South America and EU continued to improve. Moving on to slide 13, I'd like 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 end was at EUR 850 million, thanks to a strong cash performance in 2018 Q4.
The cash generation of EUR 1.5 billion, mainly coming from working capital conversion, was the second highest achieved in the quarter in our seven years of history. At the end of 2019, our available liquidity was at EUR 11.2 billion, of which EUR 5.8 billion in cash and EUR 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 grow initiatives in our Transform to Win strategy and enables us to return cash to shareholders in line with our dividend policy and through opportunistic buybacks. Maintaining a strong liquidity position bodes well with the implementation of the spin-off of our on-highway business. Turning to slide 14, we look at the operating cash flow for the full year and how capital was allocated.
While our ability to generate cash from EBITDA, net of interest and taxes, remained strong, our operating cash flow was impacted in the year by a net investment in working capital of about EUR 750 million, of which EUR 450 million was in finished goods inventory and EUR 200 million in payables due to the production cuts performed in 2019, mostly in Q4. Obviously, lower payables. With the budget that we have prepared for 2020, we expect to be able to liquidate the majority of the inventory built during 2019, with year-over-year lower production front-loaded into Q1 and Q2. Shifting to the capital allocation discussion, organic CapEx represent now 2.4% of net sales and makes up the majority of the spend, with 60% of the allocation.
Important to note, our efforts in sustainable investments, under which we regroup our investment in digitalization, alternative propulsion, and autonomy, are continuing to expand, and they now represent a share of 32% of CapEx in new products and initiatives. In addition, we invested a cash total of about EUR 85 million in several M&A transactions during the year in our agriculture, commercial vehicles, and powertrain segments, net of certain minor divestitures. Finally, let me remind you that in April, we funded our annual dividend payment, and during the year, we repurchased more than 6 million shares under our buyback program for a total consideration of almost EUR 60 million. This underlines our commitment to supporting shareholder value. I will turn it back over to you, Hubertus Mühlhäuser .
Thanks, Max Chiara . Moving to slide 16, I would like to give you an update on the implementation progress of selected initiatives of our Transform to Win strategy that we announced at our capital markets day back in September. As you recall, our strategy has three essential pillars. First, top-line growth through organic and inorganic investments into product services around the themes of digital, alternative propulsion, and automation. Second, profitability and margin improvements driven by a set of strategic initiatives that simplify products and processes, as well as optimize our footprint and asset base. Thirdly, the separation of our on- and off-highway businesses to create two global leaders in their respective fields. Moving to slide 17. The focus of our inorganic growth and on-highway was all centered around alternative propulsion technologies. Most prominent was the partnership with Nikola.
With the presentation of our first joint truck, the Nikola Tre in December, as well as the announcement of our European joint venture structure in Germany just yesterday, we will be amongst the first OEMs globally to deliver a battery-heavy truck in 2023. This partnership is a significant step for IVECO and FPT, 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 Ulm, Germany. Important to note is that this specific region in Germany has been known to become the leading fuel cell cluster of Germany, heavily supported by the regional and German government, with substantial investments already committed.
Along the same theme of electrification, FPT signed a memorandum of understanding with Microvast, the U.S. Chinese market leader in battery power systems, to enable FPT Industrial to design and assemble battery packs in-house at our own facilities. Those battery systems will increase FPT's 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 our IVECO S-Way heavy-duty trucks is the cornerstone of the IVECO heavy-duty turnaround, a sub-segment that has been the soft spot in our commercial vehicle segment for many years.
As Max Chiara has 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 2020, specifically with large fleet customers that we targeted to win back. Needless to say that the S-Way is also available in LNG configurations, allowing IVECO to defend its leadership position in the rapidly growing LNG segment. Finally, it's the same S-Way platform that will be the base of the aforementioned Nikola Tre electric trucks too. Switching to FPT, our organic growth focus is to grow the non-captive business, which has led to an increase of contracts awarded in 2019 with an annual revenue potential of EUR 150 million, starting to benefit our FPT segment from 2021. In summary, our on-highway segment has excelled in 2019 to prepare for superior growth in the years to come.
These initiatives have a common goal to drive incremental revenues and securing solid market share gain. Let's switch gears now and look at the progress on growth initiatives of our 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 technologies, driving new services while also increasing our aftermarket share. Secondly, being an industry front-runner on alternative propulsion in Ag and CE. Thirdly, be a consolidator in off-highway with an initial focus on agricultural. With the acquisition of AgDNA, we now have a state-of-the-art farm management system that our customers have waited for and that will help us increase services, revenue, and share. Along the lines of digital and precision technologies, we have further added technology startups to our AGXTEND incubator.
The technology portfolio now covers a wide spectrum, always with the objective to reduce input costs and improve productivity for our end customers. As the AGXTEND 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 precision farming and automation solutions, and ultimately share. Switching to the progress on our key organic growth initiatives in 2019, the focus was on introducing alternative propulsion machines into the off-highway segment. The New Holland methane tractor is creating a new market segment for biomethane-powered machines. There is a strong end customer demand to also reduce CO2 in farming practices, and this machine will be able to use the biomethane produced in biodigesters on the farm, helping the farmer to become energy independent and CO2 neutral.
Obviously, this is a prime example of the so-called circular economy, and demand for this type of machine is substantial. This tractor is not only one Tractor of the Year last year at Agritechnica, but it is also available for purchase at dealers later this year. Furthermore, on alternative propulsion, also in Q4, STEYR has created an electric hybrid concept, which shows our vision for our future STEYR machine offering. As communicated at the Capital Markets Day, we are repositioning STEYR as a premium tractor short liner in our overall brand strategy with a clear objective to gain market share in the European premium tractor segment. Similar to our agricultural alternative propulsion strategy, we are moving construction as well. I encourage everyone going out to CONEXPO next month to stop by our booth 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 selected strategic initiatives of our Transform to Win strategy to improve margins in our business segments. Our simplification initiatives around the principles of 80/20s are well underway, and they are now covering all our industrial segments, and by mid-year 2020, all regions. We continue to reduce product complexity and SKU 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 2020. We are also progressing well in the North American Ag business with a reduction of SKUs 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 2020 and beyond, we will start to see cost improvements from 80/20 in our product cost as well as in reduced 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 target. The footprint rationalization is also well underway, and we finalized circa a third of the target reduction with several public announcements in Q4. Also, the asset optimization we announced in September and updated you on last quarter remains on track as planned. You will start to see benefits from both of these initiatives in 2020 as well.
In summary, our profitability projects are the levers that we can control best in more uncertain market environments, and we are firmly committed to continuing to deliver on them. Turning to slide 20. As stated earlier, over the past four months, we made very good progress in our 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 along core work streams with a dedicated governance structure to secure minimum business disruption while ensuring an effective spin-off execution and smooth startup of the two new companies less than a year from now. On slide 22, I will now turn to our 2020 industry outlook.
In agricultural, we expect farmer sentiment to gradually stabilize during 2020, 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 generally flat. In construction, in light of the fact that most of the markets look down to flat and inventories remain elevated, particularly in North America as we will continue to underproduce retail 15% for the full year and 10% globally overall. In our trucks business, we anticipate softening marketing demand, particularly in the medium and heavy industries in Europe, where we see these markets down 10%-15%.
We believe, however, that the penetration of LNG vehicles in Europe will continue to grow by 50% during 2020 and will account for approximately 3% of the total market by the end of the year. We generally see flat to muted end markets for 2020 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 growth initiatives. Let's turn to slide 23, where we highlight our guidance for the full year 2020. In light of the aforementioned industry headwinds and the company's initiatives planned for 2020, CNH Industrial is issuing the following 2020 guidance. Net sales of industrial activities flat to slightly down versus prior year at constant currency. Adjusted diluted EPS between EUR 0.78 and EUR 0.86 per share.
Free cash flow of industrial activity expected between $400 million and $600 million. We have decided to provide guidance on free cash flow instead of on industrial net debt in order to focus on our ability to generate cash, and which, to be honest, is also more aligned with best practice in our industry. As we explained at the Capital Markets Day, the investments in both R&D spending and CapEx are based on market projections of our current pipeline of product launches and in 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 2020 are expected to be slightly up year-over-year, with investments in sustainability programs now accounting for approximately 40% of total.
With the fourth quarter results and the expected market environment for 2020 laid out in front of us, I would now like to take you through the key inputs of our adjusted 2020 EPS guidance of EUR 0.78 to EUR 0.86 for share and how this bridge with the initial adjusted EPS target of EUR 0.95 to EUR 1.00, given at our capital market date back on September 3rd, 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 in construction. However, countered thirdly by better execution of our profitability initiatives. First, the largest impact comes from the more challenging end-user demand expectation in two of our most important agricultural markets versus our own expectations back in September. The differences are substantial.
The North American row crop sector, where we now see a 5% decline in Q4 and a further 5% decline in 2020, so some 10% below our previous expectations, primarily as a result of the prolonged uncertainties related to the trade disputes and associated market dislocations and the South American markets, where we see Q4 2019 and 2020 outlook cumulatively 20% lower than originally anticipated. We have not yet seen a conversion into increased equipment purchases of the higher Brazilian grain export sales and it's still too early to predict any significant improvements in the environment in 2020. It is worth mentioning that our current 2020 industry outlook sees the Ag industry in these two markets significantly below mid-cycle.
The impact that we are showing here for 2020 also includes the general inventory adjustments, the negative fixed cost absorption from the lower production, and the lower engine sourcing associated with a reduced Ag 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 2020 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 2020 segment performance contribution to our guidance, we expect margin accretion in our Ag segment for the full year, primarily driven by the accelerated roadmap on our self-help initiatives after a 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. In FPT, we see margins slightly down, mainly on the back of lower volume due to the tail end of the customer engine stockpiling activity.
Finally, for construction, 2020 will present a transition year with a new management team and a 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 underproduction in Q1, our budget in 2020 is second half loaded. Therefore, we expect the Adjusted EPS decline in the first quarter in the range of 40%-50% year-over-year. In summary, we remain very confident in our Transform 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, we remain fully on track in preparing for the planned business separation, which will unlock the potential value of our on-highway and off-highway assets.
As a result, we remain 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 hiccup. I hope you could hear us throughout, and I will now hand it back to Federico Donati for the question and answer.
Thank you very much, Hubertus Mühlhäuser . This concludes our prepared remarks for the fourth quarter and full year 2019 results. We can now open up for question. Operator, over to you.
Ladies and gentlemen, today's question and answer session will be conducted electronically. We will take our first question from Steven Fisher from UBS. Please go ahead.
Thanks. Good morning. Good afternoon. On the guidance, the bridge you gave there from the investor day to 2020 is very helpful. I'm curious about a bridge from 2019 to 2020, EUR 0.84 to EUR 0.82 at the midpoint. With 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. I'm wondering, what are some of the other bridge items that might push the EPS lower in a flat industrial sales environment? Is it a particular headwind in the FinCo or are you just sort of baking in a measure of conservatism?
This is Max Chiara speaking, Steven Fisher . Obviously, the revenue were disappointing in the fourth quarter. They came in below guidance that we adjusted down the quarter before by about EUR 400 million. Definitely also, when you look into the granularity of the results segment by segment, you see that we took this one-time remeasurement in the Commercial Vehicle segment, which also had a toll on our EBIT.
I think to also answer your question, the bridge from 2019 to 2020 and the guidance range, you see that we have widened the range. We widened it to the lower end. We feel comfortable right now, given market uncertainties, that we are kind of covering the potential outcomes that we see right now for 2020.
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 EPS. Is that what you're kind of messaging?
That is what the upper end of the guidance for 2020 would say. Yes.
Okay.
Correct.
There's no particular FinCo additional headwind that would be outside of that industrial?
No.
No, not that we see right now. Okay?
Okay.
I'll leave it there.
Yeah. By the way, please keep it -- because we've got a lot of people on the line, and we have been a very long script here, so keep it to one question, please, per analyst.
Thank you.
We will take now the next question from Larry De Maria from William Blair. Please go ahead.
Hey, thanks. Good morning, everybody. Hubertus Mühlhäuser , you mentioned the AgDNA FMIS and the ability to generate service revenue. Can you just, A, parse that out a little bit more, how you're going to generate the service revenue? Secondly, just discuss your AI and machine learning strategy, which is obviously a hot topic in the industry right now. Thanks.
On the AgDNA integration, what we do is we've acquired this software company, which we are now fully integrating with our AFS and PLM platforms for Case and New Holland, respectively. That will provide telematic service and a full connectivity of our product around a complete software service. We see already that we have launched on the back of AgDNA purchase, that we have launched 20 new service packages alone in 2020, which will come to the market, which will drive aftermarket revenue. You've seen some of the aftermarket revenue uptick already in 2019. Relative to wholesales, we have improved that by 1%. We are 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 telematics services for our equipment. The second question on artificial intelligence.
I didn't want to go too much into detail on AGXTEND, but I think it is very noteworthy that we have several artificial intelligence algorithm companies in that portfolio. We are driving artificial intelligence. We take that data with these startup companies, and we are integrating those algorithms as we basically implement our new strategy for precision farmers of our Ag machinery. We have already introduced sensor technologies, obviously on our cash crop tractors, but also on the vineyard side. We've also integrated artificial intelligence on our vineyard tractors and our sensor tractors for cash crops. I do believe that we are moving firmly ahead on this one. We have somehow a different approach to John Deere, that we work with partners in an open innovation platform rather than acquiring just one company.
Rather than having one company which we acquired, we have several companies that contribute positively to our overall R&D development in the Ag machinery space. I hope that answers the question.
Yeah, very good. Thanks and good luck this year.
Thanks.
We will take now our next question from the line of Ann Duignan from JPMorgan. Please go ahead.
Hi, good morning.
Hi, Ann.
Yeah. Hubertus Mühlhäuser , can you talk about your outlook for flat to down slightly revenue for 2020? Given that coming into Q4, we had expected flat revenue, we were down six. Flat, given all of the underproduction and the lack of visibility in each of your end markets, looks aggressive or optimistic. Why didn't 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 call the market down 5%. We are also preparing our production for that by underproduction versus retail over 10%. We feel that we are appropriately conservative in South America right now. Everybody, as you know, was expecting this market already up last year. We're projecting it flat. We're currently seeing, you know, a good order intake, at least from the tractor side. 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.
Europe flat is, we can say flat to slightly down, but Europe is perhaps the most promising and optimistic right now, where we basically see perhaps more downward risk, but it's honestly too early in the year to really say that. Overall, with that guidance that we have there for Ag flat to slightly down, we feel, given that we are really in many markets at the bottom of the cycle, we feel that this is appropriately conservative. Again, we do not want to repeat what we have done in 2019, where we have not cut enough of the production and where we basically based our production plan too much on hope. I think we're far more conservative going into 2020. Of course, you have the pricing, which holds very nicely in Ag, which is a positive. I hope that answers your question, Ann Duignan .
It does. Just a quick follow-up or clarification on your guide for further residual value reductions on the truck side. How much have you baked in for 2020 in the guidance you've given?
Max Chiara ?
Right now, as you know, where IVECO sits on the food chain is not a price maker, is a price taker. We have seen that deterioration in the last part of the year, in the last quarter. We had to adjust our book for what we see as a price deterioration going into 2020.
How much have you baked in for 2020?
Right now, the book should be in line with the deteriorated pricing conditions. Again, we need to see quarter after quarter where the deals are traded on the used market.
Okay, I appreciate it. I'll get back in line. Thank you.
We have taken the best shot, given the information that we had available to us in Q4.
Okay. Got you
We would assume that we are appropriately reserved for 2020. Yes. Next question.
Thank you.
We take in now our next question from the line of Rob Wertheimer from Melius Research. Please go ahead.
Hello, everyone. Thank you for taking it. Hubertus Mühlhäuser , could you talk a bit about the pace of savings in 80/20? You've obviously got a lot underway with 60% of SKUs I think you said identified in North American Ag, for example. Should we expect full savings to come through on that in 2021? This is a quick clarification. You've identified 60%, and you'll get 50% or almost all of that in 2020, or is there more on the table? I'm not sure I understood your script versus the slide. Thank you.
No, as you know, we're not basically detailing the individual savings per initiative. If you look at 80/20, the first impact that you have from the de-complexing of your product and putting it into A and B product is a pricing effect. You see that positively in both construction and in Ag. The second effect that you have, and this is what I refer to in 2020, we're now, of course, seeing the less complex, or basically winded out or weeded out product line up to basically have positive impacts on the supply chain. Less inventories.
better purchasing prices, less SKUs in the line. Now, we're going to see, on the back of the pricing now, we're going to see the supply chain impact. Again, we're not detailing how much in percent that is, because in the end, it's not good if it basically gives you one number of saving. It has to fall down the bottom line. What we're saying is, we're going to see that positive impact already reflected in our Ag margins for 2020, where we're basically anticipating a slight increase in the margin. Max Chiara ?
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 individual part numbers. That's why the second part of the savings is more geared towards the midterm.
Yeah.
Which means end of 2020, early 2021.
As you know, we have not started to do it, to roll it out everywhere. We first started with CE, we then went over to Ag, then by the end of 2019, we went over to CV and Powertrain. By 2020, so mid by this year, we're going to have all segments and all regions covered. The first savings that you see is on the pricing side, that contribute positively, and then you have the supply chain impact, okay?
Okay. Thank you .
We're taking now the next question from the line of Ross Gilardi from Bank of America. Please go ahead.
Hey, good morning, good afternoon, everybody.
Hey, Ross Gilardi.
I just wanted to clarify the comments on the inventory for Ag equipment around the world from your opening remarks. In the slides you say worldwide inventory is up 22% in tractors 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 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%? I just got confused with all the moving pieces.
Okay, good question. First of all, as you know, we have a spread out business in the various geographies. From a numerical standpoint, the higher inventory sits in areas outside of the U.S. What we are doing in the U.S., we are taking a very conservative stance, and we are changing the seasonality of our production with more pronounced cuts in Q1 and Q2 in Ag, row crop, to kind of front load that inventory development during the year and avoid to find ourself, in case of the market ends up down 5%, in a similar situation as 2019. That's why we are front loading the year with cuts in our production and under-producing retail and row crop in North America, as we discussed.
Just to quick follow up on that.
Does that answer your question?
Yeah, I think so, Max Chiara . Just to follow up, outside of the U.S., it sounded like Hubertus Mühlhäuser thought the European market was fairly stable and the most promising. Is the excess inventory therefore concentrated in Brazil? In any sense as to what's really going on?
No. In Brazil, we have a little bit of excess inventory in combines, but I think that's the result of the unexpected market dynamics. As the market, let me say, flatten out, we should be able to correct this issue in the first part of 2020. In terms of tractors, it's primarily rest of world, so it's 3,000 units. Again, it's in a market that is more than a million.
Just to be very clear, Ross Gilardi, I said completely opposite. We think that North America, South America, rest 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 -5%. We settled now with flat, but I think going into 2020, there might be a bit more risk. If you think about conservativism, we are conservative in the other markets. Europe, we might be a bit too over-optimistic. Again, we wait how the markets will develop, and we are very conservative on our production. Okay?
Okay. Thanks very much.
We will take now our next question from Chad Dillard from Deutsche Bank. Please go ahead.
Hi, good morning. Good afternoon, guys.
Hey there.
I just wanted to spend some time on price cost. It still remained pretty positive in the fourth quarter. I just want to understand how you guys are thinking about that dynamic as we go into 2020. Separately, I just wanted to clarify whether if there was anything related to Nikola or any benefit embedded in the 2020 guide.
First question, I take the first one. Price to cost. Yes, I mean the price to cost performance in 2019 was affected by the raw material headwinds on the cost side, which we were able to more than recover in pricing. As you know, we put pricing out at specific point in time during the year, primarily when we launch new model years. There is an embedded carryover pricing into 2020 already, plus we expect to take individual actions as we launch new products during the year, or we reassess the situation of the economics region by region during the course of 2020. On the positive side, we expect now raw material to flatten out, especially in the first part of the year. That should be a positive contributor in the early part of the year.
Then in terms of Nikola, yes, we have reflected the cost in the 2020 budget for commercial vehicles. As you know, we have a part of in-kind contribution and the step-up that we're going to do in engineering is going to be covered for there. There will be a cross-charging with Nikola for these additional costs. The revenue for the truck, the Nikola Tre, you're going to see then popping up in 2021. Obviously, we're going to give more color on the roadshow then for our on-highway business, because I think the market does still not understand the potential of this joint venture and that partnership with Nikola, which is really substantial.
That's helpful. Just really quickly on the LNG market, can you just talk about your views in terms of market share, in-market growth, and how you're thinking about that in 2020?
Yeah. Well, the market has developed as predicted. It went basically a double to 2% TIV. We have a conservative view, 50% up this year. We have said that we want to defend our 50% market share. We ended the year with 53%. Obviously, you have now two new players competing with us. That is Volvo coming in late and Scania. However, our product, 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. We assume that we're going to maintain our 50% plus market share in the market that I would say conservatively will grow 50%.
If you basically follow the European Green Deal, and you basically see legislation that is happening right now in all countries in Europe, they are actually all reconfirming the subsidies for LNG. Some countries even extending. We heard from Germany that they would like to extend the period of the subsidy even further. I think that market has really continued to poise to grow. As said in the script, that is for us a nice hedge in an overall more muted and down medium and heavy-duty truck market. This will help us to basically stay competitive in 2020 and also get the nice volumes. We're predicting right now that we're around 4,500, 5,000 trucks for 2020 on the LNG side.
Great. That's all for me. Thank you.
We will take now our next question from the line of David Raso from Evercore. Please go ahead.
Hi, thank you. To keep the question fairly straightforward and simple, using slide 24 as a guide of what's changed since the Capital Markets Day, how much revenue did you reduce from the Capital Markets Day to today for the Ag segment? Ideal, if you can tell me how much was that industry versus incremental inventory reduction.
David Raso, I don't have the split between the two pieces with me here, but it's a substantial amount.
Yeah. If you look at that bridge, it's really very clear to say that the difference between the Capital Markets Day, EUR 95 to EUR 1, to where we are right now with our guidance is really 100% based on significantly lower Ag end markets, where we all predicted an upswing in the markets well into 2020. The disappointment on the construction side, I think is kind of offset by the better news on the profitability and margin improvement initiatives. That, as I said, we have stepped up significantly in Q4 and going into 2020. Construction and the better performance on the initiatives is a wash, but the market we cannot compensate with initiatives. That's just the reality.
The percentage change, David Raso, is about mid-single digit, probably on the Ag revenue.
If I'm looking at the cut by 10% to North America and 20% to South America from the prior expectation, but I'm 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 10% and South America by 20%, that's almost EUR 600 million right there. I'm just trying to weave this into how much did you take out from an industry perspective, and then are you taking more inventory out in 2020 than the prior expectation of the Capital Markets Day?
First of all, I mean as I said, it's about a mid-single digit percent change versus what we had in the Capital Market Day at cost and currency, which is around about the number that you calculated. I would say that, just as a bit of caution, in the Capital Market Day number for 2020, we already had some dealer inventory reduction. It's not
Well, that's the spirit of the question.
a significant delta on that one, it's primarily industry.
Well, that sounds fair. Basically, there is no incremental inventory being taken out in your mind for 2020. It's just the industry sales got weaker. You still are underproducing retail materially. What you're saying is you always plan to underproduce retail in 2020. It's just the retail went down. Is that fair?
A little bit, yes.
That helps.
Yes.
All right. I appreciate that. Thank you.
Okay.
We are taking our next question from the line of Joe O'Dea from Vertical Research Partners . Please go ahead.
Hi, thanks for taking my question. Related to 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 that to be at the end of 2020? Same thing on the construction equipment side, all specific to North America.
Yeah, I don't 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 higher in small tractors, and there is where we have also to do some actions and which is what was already embedded in the 2020 capital market day number. In terms of construction equipment, we are definitely higher. I would say on average a month higher. We need to continue to obviously look at the cut over there to bring the number back in line.
Max Chiara , on the Ag side of things, talking about kind of small versus large then, you had already anticipated at the Capital Markets Day under production on the small side. Related to David Raso'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.
Our final question comes from Courtney Yakavonis from Morgan Stanley. Please go ahead.
Hi, thanks for the question. I just wanted to ask a little bit more about the construction equipment turnaround delay. I think originally when you rolled out, or I guess first off, did the rollout of the programs happen and it's just that the end markets were softer, or did you actually not start some of the programs? I just was a little confused about why we didn't reach some of the margin acceleration that you guys had originally forecasted when you first started talking about rolling out some of these programs.
To be brutally honest, I think all the initiatives that we laid out are holding and is exactly what we do. What we have underestimated were the issues that we have in the underlying manufacturing machine, mainly in North America. We had some significant gaps there when it came to product cost, specifically in our Wichita facility, coupled with some also system cutovers that happened in Q3. Basically that led to a miscalling of the market overproduction with too high costs, coupled with some quality issues. That's the reason why we basically in Q3 changed management, put in new leadership, which is basically now taking control. 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.
This is basically what you have to see and what you have to expect in the first half of 2020. The rest of the strategy is completely in line. The team knows exactly where to go. I'm very upbeat by our strong dealers and our sales team. I think they're doing a very good job in that environment. As I said, I encourage you to come by at CONEXPO and to basically see what the team is doing there. The turnaround strategy is exactly what we have said. It's just disappointing that it's going to happen a year later, so 2020 is a transition year. What we also said at the end of my prepared comments is that the targets that we laid out there, the margin targets for our individual segments, they are firmly holding.
This short-term market disappointment, end market disappointment, doesn't change our long-term outlook where these business segments have to be in terms of profitability.
Does that refer to the 2022 guidance at this point? You're basically assuming 2021.
No, the 2024. We basically gave 2024 guidance where we basically want to bring those businesses 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, the targets you'd mentioned in 2022 might be a little optimistic?
I said the long-term targets, we have communicated in the Capital Markets Day a 2024 target and strategy where we want to bring those individual segments in terms of margin performance, and those targets still hold.
Okay, thank you.
That will conclude the question and answer session. I would now like to turn the call back over to Federico Donati for any additional or closing remarks.
Thank you all, and have a nice day. Thank you.
Thank you and goodbye.
That we conclude today's conference call. Thank you for participating, ladies and gentlemen. You may now disconnect.