Good morning, and afternoon, ladies and gentlemen, and thank you and welcome to today's CNA Industrial 2019 4th Quarter and Full Year Results Conference Call. For your information, today's conference call is being recorded. After the speakers' remarks, there will be a question and answer session. 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 Volipio ending December 31. 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 these broadcast without expressed written concepts of CNH Industrial is strictly forbidden.
We are pleased to have here with us today, our CEO, Virtus Muhoiser and our CFO, Masquera, who will be hosting today's call. They will use the material available for download from the CNH Industrial website. After their presentation, we'll be holding a Q and 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 risk 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 au 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 including the presentation I will now turn the call over to Hubertus.
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 2 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 would 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. So how did we perform 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 percent, down 40 bps 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 focus on margin improvement, which we expect to show results in the second half of twenty twenty. On a more positive note, we have achieved EPS of 0 point 8 $4 a share, up 0 point 0 4 dollars year over year or 5% despite this challenging environment.
Net debt of industrial activities came in higher than our latest guide, as Max will explain later in the presentation. Important to note, our financial position remains robust with a strong balance sheet and excellent liquidity. Alongside the 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 NV intends to recommend to the company's shareholders an annual cash dividend of per common share in line with our 2019 payout and totaling approximately 1,000,000 $267,000,000. Subject to the approval of shareholders at the upcoming annual general meeting, due to the place on April 16, the ex dividend date would be set at April 20th. Moving on to Slide 4. 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 Phase 1 deal that has a large portion earmarked for agricultural products and producers, the details and paths to adoption has left producers with many questions and hesitation around new product placement. Even if farmer sentiment has somewhat improved through January soft modachi 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 seasons for harvest in certain key region geographies and day remodel's remaining range bound. In South America, we continue to see lackluster and 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 the world.
Continue in both regions, they are not leading to incremental contract demand. Within the sub segments, compact and service equipment improved in South America as market continues to recover from low levels, but weakened Europe from Brexit uncertainties and pockets of residential and infrastructure projects. For trucks, the European truck market was down 5% year over year in 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% TRV market share in 2019. This will provide a partial hedge to us as we have a 13, but Argentina down by 28%. Buses continue to be a bright spot for our commercial vehicle business, 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 the long term transformation of our company and simultaneously utilize every lever in our control to strengthen our near term performance. Will now hand it over to Max.
As we have seen end markets deteriorated rapidly in the fourth quarter with increased uncertainties affecting end user sentiment and we took decisive actions starting in the second half of twenty nineteen 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 agriculture 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 discipline cost management while sustaining investments in our future growth.
Moving now to the key figures 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 $1,400,000,000 for the same period with a margin of 5.3%. This was down 40 bps 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 pretax 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% 25%. Net income was $1,500,000,000 for the full year 2019 and includes certain noncash items which for the purpose of our adjusted metrics are excluded. A $539,000,000 noncash tax benefit due to the release of valuation allowances on certain net deferred tax assets recognized in the third quarter, a pretax gain of 119,000,000 from the 2018 U. S. Healthcare plan modification, a $116,000,000 pretax 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 4th quarter. Net income was also negatively impacted by pretax restructuring and other asset optimization charges and write offs of 291,000,000 of which $165,000,000 related to asset optimization charges in our pre owned truck business. And $109,000,000 related to headcount reduction and footprint actions performed during the year. Finally, we also booked a pretax charge of $27,000,000 related to the repurchase of euro $380,000,000 in aggregate of certain outstanding bond.
Adjusted net income excluding these items was $1,200,000,000 compared to $1,100,000,000 in 2018, adjusted diluted EPS was 0.84, up 5% compared to 2018. For the fourth quarter, adjusted net income was $279,000,000, down $15,000,000, adjusted diluted EPS of 0.2 was down 5%. We finished the year with net debt of industrial activities of 854,000,000 representing an improvement of $1,500,000,000 compared to September 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 $250,000,000.
Turning to Slide 6, 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% 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 4th quarter change is negative 5% and 12%, respectively, for the segments, mostly reflecting the production adjustments we took reduce inventories in the quarter. Commercial and Specialty Vehicles net sales were up 1%, driven by increased deliveries in bus and Specialty Vehicles, sustain aftermarket activity and positive pricing.
These positive factors were offset by reduced wholesale volumes in medium and heavy trucks in both Europe we are transitioning to a new commercial policy and refreshed product offering in 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 5 introduction. Turning to Slide 7 now with an overview of our operating results by driver. Adjusted EBIT for the full year at consolidated level was 1,900,000,000 with a margin of 6.7%. Big picture, the unfavorable volume and mix in our Agriculture And Construction segment was worth about 250,000,000 including a negative industrial fixed cost absorption of about $60,000,000.
Secondly, the raw material headwinds and increased tariffs and duties totaling about $200,000,000 together with certain additional costs in logistics and supply chain, new product launches, quality and labor economics, were more than offset by strong 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 8. Worldwide unit deliveries in the 4th quarter were down 3% in tractors and 15% in Combines. Worldwide production was down 16% with production in the row crop sector in North America, down 30% year over year in the quarter, achieving and under production to retail at 25 percent plus and leading to a large year over year decrease in total inventory for this specific sub segment.
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 $900,000,000, a $140,000,000 decrease compared to 2018. Net price realization of more than 2.5 percent, discipline cost management initiatives, industrial efficiencies and a reduction in short term incentive compensation expense were among the positive contributors. Lower wholesale volume and favorable market and product mix including 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 costs and tariffs more than offset the positive factors adjusted EBIT margin decreased 70 bps to 8.2%.
In the fourth quarter of 2019, adjusted EBIT was $236,000,000, 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 markets, 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 under produce retail demand by about 10% across our geographies for the full year, with the majority of the correction taking place in the 1st 2 quarters of the 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 1 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 4th quarters in the 4th 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 versus Q3.
Full year adjusted EBIT was $51,000,000 with an adjusted EBIT margin of 1.8%. Positive pricing was more primarily related to increased raw material costs and tariffs as well as costs associated with our product quality excellence initiative. In the fourth quarter of 2019, adjusted EBIT was breakeven. 4th 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 under produce 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 1st part of the year where we expect the production decline with the corresponding periods 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 Vehicles segment full year adjusted EBIT was $224,000,000 and includes a $50,000,000 gain realized in the quarter from granting Nickel access to certain Evoqua technology. Adjusted EBIT was negatively impacted by higher product cost primarily labor and other inflationary cost increases, launch costs related to new products and unfavorable foreign exchange transaction impact and a $70,000,000 one time re measurement 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 $40,000,000, 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 re measurement of certain provisions discussed above and by unfavorable effects. 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 had contribute to EU Fleet Economy Standards. We believe local governments will continue to subsidize this subsegment going forward in effort to include to influence buying behavior of logistic operators to decarbonize their fleets of trucks. Our market share for trucks in Europe in Q4 was 11.5%, up 50 bps, with a 100 bps increase coming from the medium and heavy, which achieved a 7.6 market share in the 4th 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 up more than 20% compared to last year. Our strategic repositioning of the Veco heavy duty brand is starting to pay off and we expect to gain market share at incremental profit margin bus market share in Europe was almost 20% and book to bill remained 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 full year adjusted EBIT was EUR 363,000,000, a EUR 43,000,000 decrease compared to 2018 due to unfavorable volume and mix and higher product development investment geared towards the transformed 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 $84,000,000 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. Worldwide to note, delinquencies continue to improve and reach another historic all time low for CNH k.
How are
we now, Beth? Okay. Starting back again and I apologize for the line cut from 3 high repeat, Slide 12. Moving on to Slide 12 and our financials. Moving on to Slide 12 and our Financial Services business.
The segment has continue to perform well for the full year, and as you can see on the table. Worldwide and all, delinquencies continue to improve and reach another historical time low for CNH Industrial 2.5% in the 4th quarter as past due stats 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 $850,000,000, thanks to a strong cash performance in Q4. The cash generation of $1,500,000,000, mainly coming working capital conversion was the 2nd highest achieved in the quarter in our 7 years of history.
At the end of 2019, our available liquidity was at $11,200,000,000, of which $5,800,000,000 in cash and $5,500,000,000 in undrawn committed facility. The strong liquidity allows us to maintain a solid balance sheet consistent with our investment grade credit rating This supports our investment plan linked to the growing initiatives in our transformed to Win Strategy and enables us to return cash to shareholders in line with our dividend policy and through opportunistic buybacks, maintaining a strong liquidity position bodes well with implementation of the spin off of our own 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 $750,000,000, of which $450,000,000 was in finished goods inventory and $200,000,000 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 fields during 2019 with year over year lower production front loaded into Q1 percent of net sales and makes up the majority of the spend with 60% of the allocation.
Important to note, our efforts and sustainable investments under which with a group of 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 $85,000,000 in several M and 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 6,000,000 shares under our buyback program for a total consideration of almost $60,000,000. This underlines our commitment to supporting shareholder value. I would turn it back over to you.
Thanks Max. Moving to slide 16, I would like to give you an update on the implementation progress of selected initiatives of our phone to Win Strategy that we announced at our Capital Markets Day back in September. As you recall, our strategy has 3 essential pillars: 1st, top line growth through organic and inorganic investments into product services around the seams of digital alternative propulsion and automation. 2nd, 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 And thirdly, the separation of our on and off hire businesses to create 2 global leaders in their respective fields. Moving to Slide 17.
The focus of our inorganic growth in on highway as overall centered around alternative propulsion technologies most prominent was a partnership with Nicola. With the presentation of our first joint truck, the Nicola trade, 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 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 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 FPT side in memorandum of understanding with microbus, the U.
S. Chinese market data and battery power systems to enable FPT industrial to design and assemble battery packs in house at our own facilities. Those battery systems will increase 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 Sway heavy duty trucks is the cornerstone of the Iveco heavy duty turnaround. At some segment that has been the soft spot in our commercial vehicle segment for many years.
As Max 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 defend its leadership position in the rapidly growing LNG segment. And finally, it's the same trucks awarded in 2019 with an annual revenue potential of 1,000,000, 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. And these initiatives have a common goal to drive incremental revenues and securing solid market share gain.
Let's switch gears now and take a look at the progress on growth initiatives of our on off highway business. Moving now to Slide 18. You may recall the key growth initiatives in our off highway segments are focused on 1st investments into our digital position 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 initial focus on agriculture.
With the acquisition of AgDNA, we now have a state of the art farm management system that our customers have waited for and that would help us increase services revenue and share. Along the lines of digital and precision technologies, we have further added technology startups to our AGXTAN incubator. The technology portfolio now covers a wide spectrum always with the objective to reduce input costs and improve productivity for our end customers. And as the ag extend products in service will help grow our aftermarket business short term, we will also integrate technology that we see fit into our core machinery offering to drive position to farming and Automation Solutions and 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 buying the same 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 bio methane produced in bio gesters 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 Acute Technica, but it is also available for purchase at dealers later this year. Furthermore, on alternative propulsion also in Q4, Styer has created an electric hybrid concept, which shows our vision for our future Styer machine offering.
Communicated at the Capital Markets Day, we are repositioning Shire 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 Turnure for Pension Strategy, we are moving construction as well. I encourage everyone going out to core NextFlo 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 eightytwenty's are well underway and they are now covering all our industrial segments and by midyear 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 standard 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 eightytwenty in our product cost as well as an reduced inventory levels. Next, let's review our organization simplification initiative.
Band of control and to reduce organization layers to become more agile and customer focused. The project has led to a reduction headcount to date of approximately 900 white color employees above our initial target. The footprint rationalization is also well underway and we finalized circa 3rd 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 test 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 As stated earlier, over the past 4 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 a minimum business disruption, while ensuring an effective spin off execution and smooth startup of the 2 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 under produce 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% to 15%. We believe, however, that the penetration of LNG vehicles in euros 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 EBS between $0.78 $0.86 per share.
Free cash flow of industrial activity is expected between $400,000,000 $600,000,000. We have to to provide guidance on free 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 and 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 up or down across the portfolio and by segment. The CapEx in R And 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 take you through the key inputs of our adjusted 2020 EPS guidance of $0.78 to $0.86 per share and how this bridge with the initial adjusted EPS target of $0.95 to $1 given at our Capital Market Day back on September 3rd. And you can see that on Slide 24. In summary, the difference is due to 3 main areas: 1st, market deterioration in agricultural 2nd, 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 2 of our most important agricultural markets versus our own expectations back in September. Op 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 prolongated uncertainties related to trade disputes and associated market dislocations and the South American markets where we see Q4 twenty nineteen and twenty twenty outlook cumulatively 20% lower than originally anticipated. We have not any equipment 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 in the channel inventory adjustments, the negative fixed cost absorption from the lower production and the lower engine sourcing associated with the 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.
And 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 under expect the adjusted EPS decline in the first quarter in the range of 40% to 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 I'm sorry for the technological hiccups. I hope you could hear us throughout. And I will now hand it back to Federico for the question and answer. Thank you
very much, Hubertus. This concludes our prepared remarks for the fourth quarter full year 2019 results and week at We can now open
We will take our first question from Steven Fisher from USB. Please go ahead.
Thanks. Good morning. Good afternoon. Just on the guidance, the bridge you gave there from the Investor Day to to 2020 is very helpful. I'm just curious about a bridge from 2019 to $2,028.04 to $0.82 at the midpoint.
With industrial sales that are really just kind of flattish or flat only down slightly, given that you have all those initiatives on cost savings, I'm surprised that the EPS would be down and not up. So I'm just wondering what are some of the other bridge items that might push the EPS lower in a flat industrial sales environment? Is it a particular headwind in the finco or you just baking in a measure of conservatism?
So this is Max speaking, Steve. So obviously, the revenue were disappointing in the 4th quarter. They came in below guidance, that we adjusted down the quarter before by about $400,000,000. But definitely also when you look into the granularity of the results segment by segment, you see that we took this one time re measurement in the commercial vehicle segment, which also had a toll on our EBIT.
And I think to also answer your question, the bridge from 2019, 2020 and the guidance range. You see that we have widened the range. We widened it to the lower end. And we feel comfortable right now. Given market uncertainties that we are kind of covering the potential outcomes that we see right now, for 2020.
So in other words, in the event that you do come in with industrial activities flat that 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.
There's no particular finco, additional headwinds that would be outside of that industrial?
No, no, not received right now. Okay.
Okay. So you'll I'll leave it there.
Yes. And 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 year. So keep it to one question, please, for analysts.
Thank you.
We will take now the next question from Larry De Maria from William Blair. Please go ahead.
Ubertus, you mentioned the AgD and A FMIS and the ability to generate service revenue. Can you just a parse out a little bit more how you're going to generate the service revenue? And secondly, just discuss your AI and machine learning strategy, which is obviously a hot topic in the industry right now. Thanks.
On the AgDNA integration, what we do is we have acquired this software company, which we are now fully integrating with our AFS and PLM platforms for case and New Holland, respectively. And that will provide telematics service and a full connectivity of our product around a complete software service. So we see already that we have launched on the back of AGD and A purchase that we have launched 20 new service packages, alone in 2020. Which will come to the market, which will drive aftermarket revenue. And you've seen some of the aftermarket revenue uptick already in 2019.
Relative to wholesale, we have improved that by 1%. So 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. And the second question on artificial intelligence, I didn't want to go too much into detail on, on that extent, but I think it is very noteworthy that we have several artificial intelligence algorithm companies in that portfolio. So 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 Farmins of our Ag Machinery.
So we have already, introduced, sensor technologies, obviously on our cash crop tractors, but also on the Vineyard side, we've also graded artificial intelligence on our vineyards tractors and our sensor tractors for cash crops. So 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. So rather than having one company which we acquired, we have several companies that contribute positively to our overall R and D development in the ag machinery space. I hope that on the question.
Yes, very good. Thanks and good luck to share.
Thanks.
We will take now our next question from the line of Ann Duignan from JPMorgan. Please go ahead.
Hi, good morning. Yeah, Hubertus, can you talk about your outlook for flat to down slightly revenue for 2020 given that coming into Q4, we had expected flat revenue and we were down 6. So flat given all of the production 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?
Well, I think we mentioned that in script, I think we have, changed our view on North America that where we now call the market down 5%. And we are also preparing our production for that by under production 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, a good good order intake, at least from the tractor side. And I think it's also noteworthy that we have significantly increased our share in South America the weakness of one of our competitors on the tractor side specifically. And Europe flats is, you know, we can say flat slightly down, but it is also Europe is perhaps, you know, the most promising and optimistic right now where we basically see, see perhaps more downward risk, but it's honestly too early in the year to really say that. But overall, with that guidance that we have there, for AG Flat to slightly down, we feel given that we are really in many at the bottom of the cycle. We feel that this is appropriately conservative.
And again, we do not want to repeat what we have done in 20 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. And of course, you have the pricing, which holds, very nicely in AG, which is a positive. I hope that answers your question then.
It does. And then just a quick follow-up, our clarification on your guide for further residual value reductions on the truck side. Much have you baked in for 2020, in the guidance you've given?
So right right now, as you know, Iveco, where Iveco sits on the food on the food chain is not a price maker. It's a price taker. So we have seen that deterioration in the last part of the year in the last quarter. So we had to adjust our book for what we see as a price deterioration going into 2020.
But how much have you baked in for 2020?
Right now, the book should be in line with the deteriorate pricing conditions. But 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
the queue. But we've taken the best shot given the information that we had available to us in Q4. So Okay. We would assume that the appropriate reserve for 2020. Yes, next question.
From the line of Ralph Wiedermer from Melius Research. Please go ahead.
Hello, everyone. Thank you for taking it. Hubertus, could you talk a bit about the pace of savings in eightytwenty. You've obviously got a lot underway with 60% of SKUs. I think you should identify North American ag, for example.
Should we expect, full savings to come through on that in 2021? And this is a quick clarification. You've identified 60% and you'll get 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, I mean, as you know, we're not basically detailing the individual savings per initiative. And if you look at eightytwenty, the first impact that you have from the de complex your product and putting it into A and B product is a pricing effect. And you see that positively in both construction and in ag. And the second effect that you have and this is what I referred to in 2020. We're now of course seeing the less flex, complex or basically winded out or wooded out products lineup to basically have impacts, positive impacts on the supply chain.
So less inventories, better purchasing prices, less SKUs in the line. So now we're going to see on the back of the pricing now, we're gonna see the supply chain impacts. But again, we're not detailing how much in percent that is because in the end, it's not good if we basically give you one number saving. It has to fall down the bottom line. And 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?
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. And that's why the second part of the savings is more geared towards the longer the mid term, which means end of 2020, early 2021.
And 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. And by 2020, by submit by this year, we're going to have all segments in all regions covered.
And the first savings that you see is on the pricing side with that contribute positively and then you have the supply chain impacts, okay?
Okay. Thank you, gentlemen.
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.
I just wanted to clarify the comments on the inventory for ag equipment around the world, from your opening remarks. So in the slides, you say Worldwide inventory is up 22% and Tractors and up 11% in combine but your North American row crop inventory is down 16% year on year. Does that mean all of your excess inventory is concentrated primarily in Europe And South America And North America Small Ag. If so, why are the production cuts concentrated in North America row crop if your inventories were already down 16%. So I just got confused with all the moving pieces.
Okay. Good question. So first of all, as you know, we have a spread out business in the various geographies. So From a numerical standpoint, the higher inventory sits in areas outside of the U. S.
What we are, doing in the U. S, we're 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 ourselves in case of the market ends up down 5% in a similar situation as 2019. So that's why we are front loading the year with cuts in our production. And we're under producing retail and row crop in North America, as we discussed.
Yes, I think so, Max, just to follow-up outside of the U. S. Is that it sounded like Hubert just thought the European market was fairly stable and the most promising. Is the excess inventory therefore concentrated in Brazil? And any sense as to what's really going on
in Brazil? In Brazil, we have a little bit of inventory in combines, but I think that's the result of the unexpected market dynamics. So as the market, let me say, flatten out, we should be able to correct this issue in the 1st part of 2020. In terms of tractors, it's primarily award. So it's a 3000 units, but again, it's in a market that is more than 1,000,000.
So
And just to be very clear, Ross, I said, completely opposite. Europe, 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 minus 5. We settled now with flat. But I think going into 2020, there might be a bit more risk.
So if you think about conservativism, we are conservative in the other markets. Europe, we might be a bit too overoptimistic. But 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 Dilar from Deutsche Bank. Please go ahead.
Hi, good morning. Good afternoon, guys. So I just wanted to spend some time on price cost. It still remained pretty positive in the fourth quarter. Just want to understand how you guys are thinking about that dynamic as we go into 2020.
And then separately, I just wanted to clarify, whether if there was anything related to Nicola or any benefit embedded in the 2020 guide?
So 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 a specific point in time during the year, primarily when we launch new model years. So 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 1st part of the year. So that should be a positive contributor in the early part of the year.
And then in terms of Nicola, 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 engine it's going to be covered for there. So there will be a cross charging with Nicola for these additional costs. The revenue for the truck, the Nicola trade you're going to see then popping up in 2021. And obviously, we're going to give more color on the roadshow than for our on highway business.
Because I think the market is still not understand the potential of this joint venture and that partnership with Nicola, which is really substantial.
That's helpful. And then just really quickly on the LNG market. Can you just talk about your views in terms of market share, in market growth and how are you thinking about that in 2020?
Yes. Well, the market has developed, as predicted, it went basically a double to 2% TIV. We have a conservative view 50% up this year. And we have said that we want to defend our 50% market share. We ended the year with 53% of see you have now 2 new players, competing with us, that is Volvo coming in late in Skania.
However, our product, given that we had been by far the 1st in reducing LNG trucks is still far more competitive has a far longer range, which is on the long haul business, of course, a key competitive advantage. So we assume that we're gonna maintain our 50% plus market share in the market that I would say conservative, we would grow 50%. And if you basically follow the Ukraine deal and you basically see legislation that is happening right now in all countries in Europe. 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 So I think that market has really continued to poised to grow.
And as said in the script, I mean, that is for us a nice head in an overall more muted and down medium and heavy duty truck market. So this will help us to basically, stay competitive in 2020 and also get the nice volumes. And we're predicting right now that we're around 4500, 5000 trucks for 2020 on the LNG side. We will now
Our next question from the line of David Raso from Evercore. Please go ahead.
Hi, thank you. To keep the question fairly straight support 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. And ideally, if you can tell me how much was that industry versus incremental inventory reduction?
Dave, I don't have the split between the two pieces with me here, but It's a substantial amount.
If you look at that bridge there, it is really very clear to say that the difference between the capital markets day $5 to $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. And the disappointment on the construct 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. So construction and the better performance on the initiatives is a wash but the market we cannot compensate with initiatives. So that's just the reality.
The percentage change, David, is about mid single digit probably on the aggression.
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 in South America by 20, that's almost $600,000,000 right there. So 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 percentage change versus what we had in the Capital Market Day at constant currency, which is around about the number that you calculated. I would say that, just as a bit of caution in the, in the Capital Market Day number for 2020, we already had some dealer inventory reductions. So Well, that's a specific delta on that one is primarily industry.
Well, that's unfair. So that basically, there is no incremental inventory being taken out in your mind for 20, it's just the industry sales got weaker, but you still are under producing retail materially. So what you're saying is you always plan to under produce retail in 20. It's just the retail went down. Is that fair?
A little bit. Yes. A little bit. Yes. Yes.
All right. I appreciate that. Thank you.
Okay.
We are taking our next question from the line of Joe Odia from Vertical Research. Please go ahead.
Hi, thanks for taking my question. Related to months of inventory at the dealers, could you just talk about in 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. And and same thing on the construction equipment side, all 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 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. So we need to continue to obviously look at the cuts over there to bring the number back in line.
And then, Max, 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. And then kind of related to David's question, on the large side, what's happening there is more just about kind of end market is going to be softer than what you expected. Maybe there's a little bit of incremental destock.
Yes. Okay. Thanks a lot. Our
final questions come from Courtney Jacquaronis 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 mean, I guess, first off, did the roll out of the program 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 because, about why, you know, we didn't reach some of the margin acceleration that, you guys had originally forecasted when you first started talking about going out in the 20s.
To be brutally honest, think all the initiatives that we laid out are holding and is exactly what we do. What we've underestimated where the issues that we have in the underlying manufacturing mainly in North America. We had some significant gaps there when it came to, product costs specifically in our Wichita facility, coupled with some, also system cutovers that happened in Q3. And so basically, that led to, a miscalling of the market overproduction with 2 high costs, coupled with some quality issues. And that's the reason why we basically, in Q3, changed management, put in new leadership which is basically now taking control.
And that means in the short term, addressing those quality issues that we had getting the industrial machine smoothly running again, but also cutting back production. And this is basically what you have see and what you have to expect in the first half of twenty twenty, 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, very good job in that environment.
And as I said, I encourage you to come and come buy it on export to basically see what the team is doing there. So the, the turnaround strategy is exactly what we have said. It's just disappointing that it's going to happen a year later. So Tristan 2020 is a transition year. And what we also said at the end of my prepared comments is that the targets that we laid out there, the margin targets for our individual segments, they are they're firmly holding.
I mean, this short term, you know, market disappointment and market disappointment doesn't change our long term outlook where these business segments have to be in terms of profitability.
And does that refer to the 2022 guidance at this point? So you're basically assuming No.
That's 2024. Basically, it gave 2024 guidance where we basically want to bring those businesses And, and I think those targets, and I referred that those targets are still valid and they hold, and we're working to achieving them.
Okay. But the the targets you'd mentioned in in 2022 might I said the long term target of 7.
We have communicated in the Capital Markets Day 2024 target and strategy where we want to bring those individual segments in terms of margin performance and those targets still hold 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 will conclude today's conference call. You for participating. Ladies and gentlemen, you may now disconnect.