Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial 2019 First Quarter Results Conference Call. There'll be a question and answer At this time, I would like to turn the call over to Federico Donati, Head of Investor Relations. Please go ahead sir.
Thank you, Jenny, and good morning, and afternoon, everyone. We would like to welcome you to the CNH Industrial First Quarter 2019 Results Webcast Conference Call. This call is being broadcasted live on our website and is copyrighted by CNH Industrial. Any other use recording or transmission of any portion of broadcast without the expressed written concept vaccination data is strictly forbidden. We are pleased to have here with today, CNH Industrial CEO, Bertus Milhoiser, and our CFO, Maskeara, who will be hosting today's call.
They will use the material you may download from the CNH Industrial Web site. After their presentation, we will 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 risks and uncertainties mentioned in the Safe Harbor statement, including the presentation material. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company most recent report 20 F and E-one report as well as other periodic reports and filing with the U. S.
Securities And Exchange Commission And Equivalent authorities in the Netherlands and in 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. As a reminder, please note that starting from Q1 2019 onwards, we have updated the geographical composition of our regional sales information as indicated in the supporting material of this earning release, consistent with the new Jack Organization. I will now turn the call over to our CEO, Beth.
Thank you, Federico, and good morning, and good afternoon to Europe to everyone. While many of us felt and clearly hope that some of the uncertainties that are unfortunately impacting our markets globally would have subsided by now, in most cases, they have not. Regardless, we set a clear direction for ourselves at the beginning of the year and our relentless execution allowed us to print a record net income first quarter to start 2019 off on the right foot. Before digging into the quarterly highlights, I'd like to thank our almost 65,000 employees not only for their commitment and endurance in delivering a strong quarter, but also because many of them are in parallel actively contributing in the preparation of our new strategic business plan with the objective to transform Turning to the first quarter highlights. Industrial Activities net sales were up almost 2% in constant currencies, and adjusted EBIT was up 7% with operating margin increasing by 50 bps.
We had a record first quarter in terms of adjusted net income at $248,000,000 and adjusted diluted EPS up almost 30% to $0.18 per share. Additionally, net industrial debt was at 1,500,000,000, up 900,000,000 from December 31 2018. Due to normal seasonality in working capital as we start the year, but down $400,000,000 from the same quarter a year ago. Finally, on the back of our first quarter's good performance, we are reaffirming our financial targets for 2019, which I will go through towards the end of the prepared remarks. Moving on to Slide 4.
Let me provide you with a high level industry update for Q1. First, I'd like to highlight that in the ag segment, North America row crop sector continues to trend positively with good performers as customers replace dated equipment, especially in Combines, with the market in the first quarter, up almost 30%. EU tractor demand was up this quarter extremely dry weather conditions suffered in Central And Northern Europe during the last harvest season. South America combines were also very strong, up almost 40%, driven by Brazil, while Argentina was down year over year. Before I touch on the construction segment, I'd like to point out that we have slightly changed the way we characterize this business.
While we historically broke it out by heavy and light, we believe it is more helpful to talk about the equipment based on their end user application. Going forward, we will refer to them as compact and service equipment, which includes mainly the lighter compact and service equipment by skid steer loaders and tractor loader backhoe and general construction equipment, which includes crawler excavators and wheel loaders, and road building and site preparation, which includes compaction, dozers and graders. Generally speaking, construction end market are developing in line with what we anticipated at the beginning of the year, but with North America on the lower end of the range. The South American volumes have been slow in Q1, but we expect that financing incentives will continue to be available going forward and should support a strengthening market. For trucks, the European truck market was up 8% year over year with light duty trucks up 11% while medium and heavy was up 4%.
However, our core markets, Italy and Spain were down 132% respectively. South America was up 17% with Brazil up 52% and Argentina down 52%. As well, please remember that while the Brazil figures seems large, this is still coming off a significant downturn that started in 2014, but we see promising future volumes as order intake is up 50% from last year. For buses, the European market was relatively flat this quarter, but we were able to add 240 bps in our market share, and we now represent almost the 5th of the market. South America was quite strong for buses in the quarter, and our backlog of orders, mainly mini buses is building as well.
Overall, while there have been some weaknesses during the last quarter in certain markets like European Combines and Southern working construction equipment, the key markets for us were generally positive in the quarter. We will go into this in more detail later in the call. At this point, I'll now hand it over to Max for the financial review of the presentation. Max?
Thanks, Hubertus, and good morning or afternoon to everyone. Thank you for joining the call today. As a general remark, despite the uncertain industry scenario in agriculture, and the volatile and generally weak economic activity in certain high growth markets, we were able to achieve our expectations and close the quarter with an improved operating margin on the back of a sustained performance across our portfolio. We continue to focus to drive cost discipline in our operations Moving now to Slide 5 and the key figures for the first quarter. Net sales in our industrial segment were down 5% and up nearly 2% in constant currency, with currency translation impact primarily due to the weakening of the euro and the Brazilian real, more than offsetting the strong to vehicles with increased deliveries in light duty trucks and in buses in Europe and Brazil.
Adjusted EBIT was up 7% in the quarter, We had a record 1st quarter adjusted net income of $248,000,000, up 22% from Q1 2018 as we continue to make the tax rate for the quarter was 26 percent, flat from Q1 twenty eighteen, and we expect it to be at 27% for the full year 2019. Net industrial debt increased to $1,500,000,000, up $900,000,000 versus year end as a result of normal seasonality and working capital in the first quarter as we ramp up our industrial machine in preparation of the spring season. Despite the higher net industrial debt, it is still $400,000,000 better than 1 year ago. Available liquidity was $10,000,000,000, up $1,100,000,000 compared to year end 2018, primarily as a result of the newer ball credit facility executed in the first quarter, which I will discuss later. The liquidity to revenue ratio further improved to 34% with 3rd party gross industrial debt to EBITDA ratio at 2 times, down from 2.4 times last year.
This performance coupled with increased liquidity buffer is a continuous and clear time that we remain fully committed to further improving our credit rating from the current levels as well as reiterating our goal of achieving a net Turning to Slide 6, let's discuss the first quarter performance in our industrial activities net sales, excluding now the impact of foreign exchange translation. As said, for the quarter, net sales and constant currency in our industrial activities increased $170,000,000 or 1.9% agriculture equipment contributed $45,000,000 as a result of price realization performance achieved across all regions, offset by volume and mix. Construction Equipment sales decreased a net of $16,000,000 or 2 toward destocking actions in our North American dealer network, partially offset by a strong price realization of more than 10%. Commercial and Specialty Vehicles sales increased $134,000,000 or 5 percent on higher industry volume and favorable product mix in light commercial vehicles and in bus in Europe. Powertrain was down $68,000,000 or 6 percent year over year due to lower sales volume as a result of the strong 2018 year end activity.
In terms of regional segment mix for the quarter, it was largely unchanged from last year. Turning to Slide 7 now with an overview of our operating results, by driver for the business as a whole. Industrial Activities adjusted EBIT improved on a year over year basis 50 bps in the quarter ore was up 6.5% on the back of increased deliveries in commercial and specialty vehicles and thanks to the pricing performance offsetting the cost headwinds coming primarily from the lagging effect of raw material cost increases in our procurement contracts. And the impact from the U. S.
Tariff enactment on Section 301 introduced in 2018. Discipline in our structural was maintained throughout the quarter, while product development spending towards the next generation equipment continued to increase as expected achieving now in aggregate a 4% plus figure over net sales with a focus on digital and connected vehicles and regulatory capital associated with the transition to stage 5 in Europe. In addition, financial services results were slightly down in the quarter as a result of lower interest spreads. From a consolidated view, EBIT closed with a margin of 6.3 margin and the EBIT contribution. All segments with the exception of, commercial and specialty vehicles, which was flat delivered an increased gross margin on the back of a solid performance with C and Powertrain highlighting an improvement of more than 200 bps Ag gross margin was up 40 bps on the back of a strong price realization, more than offsetting raw material headwinds.
Our adjusted EBITDA ended up slightly down year over year due to a lower and as a result of reduced penetration of truck sales with buyback commitment in commercial specialty vehicles realized during the last few quarters, consistency with the previously announced refocusing strategy to more profitable market segments and to alternative propulsion engines. The adjusted EBITDA margin was flat at 8.7 percent in Q1 twenty nineteen. Turning now to the individual segment performance on slide 9, agricultural equipment net sales at constant currency increased on the back strong price realization across all geographies. Sales volume improved from end user replacement demand in the North American row crop sector and from sustained demand in Brazil, but were offset by a general slowdown of activity in Turkey and by extremely dry weather affecting harvest conditions in Australia. Worldwide deliveries were down 2% in tractors and up 1% in Combines versus last year and production was down 4%.
Worldwide inventory in units was up 16% in tractors and down 5% in Combines. In the row crop sector in North America, the segment overproduced retail low double digits in the quarter to support the upcoming spring selling season. The segment closed the first quarter with an adjusted EBIT of 100 $68,000,000, down $18,000,000 from last year. In the quarter, the agricultural segment accelerated investment in precision farming platform and in the introduction of stage 5 emission requirement compliance engine applications, driving the segment product development spending up by 19% compared to the first quarter of 2018. Excluding the increase in R&D expenses, the segment performance improved as a result of the significant price realization achieved more than offsetting the anticipated raw material headwinds and the implications from the enactment of the U.
S. Tariffs with China. As a result, adjusted EBIT margin ended down 50 bps to 6.7% in the first quarter of 2019, while gross margin was up by 40 bps. Looking forward, farmers muted sentiment from trade tensions, coupled with a slow start to the spring planting season in North America due to wet and cold weather are delaying the seasonal restart of activity in the early part of the second quarter. Ultimately, this may reverse towards the end of the second quarter with a squeeze planting window.
Activity remains stable across the major European markets, while the run out of the Brazilian subsidized funding scheme total capacity, ahead of the new program announcement is causing volatility in retail demand. More recently at the Agree Show in Brazil, Brazilian authorities confirmed that the 2019, 2020 funding scheme will be officially announced in early June. For the current 2019 crop, additional funding funding was in the meantime allocated to motherfrother. This is positive news to the market and definitely a good support for our American operations during this transition period. For the second quarter in the Australian and Turkish agricultural markets as the comparison to prior year remains tough.
Given the current scenario and considering a year over year order book lower comparatively with high order figures in the second quarter of 2018. The segment activity is expected to remain challenging for Q2 with a possible shift in mix toward the lower end of the product as sentiments remains on hold. Turning to slide 10, construction equipment and sales decreased 2% on a constant currency basis. Mainly due to selective inventory destocking actions in our North American dealer network, while activity was basically flat year over year in the other geographies and was partially offset by the strong price realization of 3% plus. Worldwide deliveries were down 9% with compact equipment down 11%, general constructions up 1% and rodent sites down 8%.
Worldwide production was flat versus last year with compact equipment down 8% general construction up 37% and road and site down 10%. Inventory was up 22%. This is again a normal trend in the segment with action restart in the first quarter replenishing low year end inventory levels. Adjusted EBIT was $13,000,000 in Q1, with an adjusted EBIT margin of 2%. The 200 bps increase in the profit performance was the result of net price realization across the product portfolio and production efficiencies more than offsetting raw material and tariff headwinds.
The construction segment is accelerating on its eightytwenty program effort. And after having identified years of focus around product line simplification and SKU reduction on one end, and customer line simplification geared at streamlining and strengthening its distribution network on the other end is now moving into execution mode with early results expected to start rolling out in the second part of 2019. Later in the presentation, Hubertus will provide more of a general frame on how we intend to roll out the initiative across our major businesses. In summary, the segment activity remains healthy across the board although slightly below our initial expectations in North America and with a good order coverage for the second quarter. On slide 11 now with commercial and specialty vehicles.
Net sales were up 5% on a constant currency basis, benefiting from higher industry volume favorable product mix in light commercial vehicles and in buses in Europe. Trucks worldwide production was down 10% versus last year, primarily medium and heavy trucks with company inventory units down 9%. Light duty trucks deliveries were up 9 and buses were up 13% in Europe, while medium and heavy instead were down 27%. The decline in heavy vehicle delivers in Europe is attributable to the previously announced strategy shift, which focuses sales on a more profitable product portfolio, including LNG and CNG vehicles. Specifically for the natural gas initiative, the mix shift towards natural gas engines throughout the group continues, supported by solid demand in this sub segment.
As predicted gas penetration within Europe for the industry grew towards the 2% of total industry volume in Q1, and is projected to increase further. Our year over year run rate order book for medium and heavy LNG CNG duty trucks in Europe was up around 60% and our market share in Europe is stabilizing to about 60% as new entrants are coming into the market. As a result, gas penetration for Evoquo vehicles is now at 15% of its total retail performance and growing. The market share for trucks in Europe was 10 point percent, down 1.2 percentage point, in part driven by the decline of the market in Italy and Spain, countries where notably we retain a leadership position. Trucks book to bill was at 1.19 in Europe and 0.93 in South America, with order book in Brazil up 50% from last year.
Starting from a very low base. Buses market share in Europe was 18.5%, up 240 bps versus last year, Book to bill was at 1.24 in Europe and 1 in South America. Adjusted EBIT was $51,000,000 in Q1, slightly up $39,000,000 in the first quarter of 2018. Positive volume in light trucks and buses, favorable product mix and positive underlying price performance were almost offset by negative foreign exchange transaction and year over year hedge impact, higher production costs, including negative absorb from lower volume in our medium and heavy duty operations and increased product development spending. Adjusted EBIT margin was 2.1% in the first quarter of 2019, The cumulative reduction in units sold under buyback commitment since the start of the strategy shift at the beginning of last year is proceeding in line with with light duty trucks holding well at high levels and medium and heavy down double digit by design in diesel applications and up more than 60% in natural gas applications.
On slide 12 now, our trade net sales decreased 6% on a constant currency basis versus last year due lower sales volumes as a result of the strong 2018 year end activity. Sales to external customers accounted for 47% of total net sales. Segment activity remains strong with volume expected to increase in the second quarter sequentially up 10% from Q1. Adjusted EBIT was 96,000,000 this quarter, with favorable product mix and manufacturing efficiencies offset by increased selling expense to support the segment marketing activity to develop spending. Adjusted EBIT margin increased 130 bps to 9.3% in the quarter, which represents an historical 1st quarter record for sectors.
Moving on to slide 13 and our Financial Services business. The Financial Services segment has performed at healthy levels in the quarter. Rickel loan originations achieved $2,200,000,000, flat compared to last year at incurred rate and up $100,000,000 at constant currency, primarily in North America. The managed portfolio of more than $26,000,000,000 at quarter end was up $1,200,000,000 versus 1 year ago at constant currency with the bulk of the increase in South America and the rest of the world. Overall penetration is relatively flat on a year over year basis with strength in our North American Europe, offset by the ramp up of our new India captive business in the high growth market.
From a performance point of view, q11 2019 net income was $95,000,000, a decrease of 8% compared to the same period last year, primarily due to reduced interest spreads, partially offset by improved cost of risk in operating these performance as well as higher average portfolio in South America and rest of the world region. On a profit before tax basis, this represents a return on assets of about 2% in line with historical performance. Importantly, credit quality performance remained healthy with delinquencies tracking at 3.4%, down 20 bps versus 1 year ago. In closing, the Financial Services segment goal of supporting the sales of CNH Industrial, while adequately remunerating its own capital remains an underpinning of our portfolio strategy. Moving on to slide 14, I'd like to discuss our net industrial debt and net industrial cash flow performance and provide an update on the balance sheet.
Net industrial debt of $1,500,000,000 at the end of March 2019 by $900,000,000 from December 31, 2018, as a result of typical seasonality in working capital in the first quarter. Let's discuss this working capital change in more detail. Main driver of the cash usage was the buildup of inventories of about $1,000,000,000 in the quarter, of which about $400,000,000 related to the restart of the industrial plant machine after the year end shutdown and about $600,000,000 in finished goods in our different businesses. Culture in anticipation of the spring selling season in the Northern Hemisphere, and in construction and commercial vehicles as a restart from the very low level at year end. An inventory buffer primarily in finished goods to mitigate the potential risks associated with a no deal Brexit scenario completed of a new Euro 4,000,000,000 committed revolving credit facility, replacing the existing 1.75 billion euro facility at improved terms.
The New Credit facility has a 5 year tenure with 2 extension options of 1 year each, improved pricing and other conditions in light of our 3 investment grade ratings and expanded the number of participating banks. The successful execution of this deal puts us in a much better liquidity position in light of our credit rating targets. In addition, in March, our European hybrid vehicle issued 1,000,000, up 1.75% notes due 2027, guaranteed by CNH Industrial MB. The strong level of available liquidity permits us to look at our capital allocation priorities with a diligent approach to maintaining a solid balance sheet continuing to invest in our organic growth as well as being opportunistic in inorganic growth initiatives while protecting our dividend policy. With regards to our dividend, shareholders at the Annual General Meeting held on April 12, approve a dividend of euro 0.18 per common share, up 30% versus last year's dividend, which was paid on May 2, 2019.
Before concluding on slide 15, I would like to provide an update on our investment program in CapEx and development. As previously anticipated, we have been accelerating our pro development program with spending up, achieving 4% plus of net sales in the quarter, while CapEx activities ramping up 26% year over year, representing 1.3% of sales in Q1, whereby we're coupling new product spending with investment to upgrade our factories and improve their productivity. When looking at the spending in new products, the spending associated with the key megatrends impacting across our industries digitalization, electrification, autonomous and telematics, was up 34% versus last year, with solid double digit increases across each category, representing now 50% of our total a quarter of total spending in new applications. While we remain focused on price and cost discipline, we are encouraged by the positive year over year performance of this first quarter. Which sets us on track the outlook on his final remarks before opening for the Q And A session.
Thank you, Max. Please join me now on Slide 17. When we turn to the market outlook for the full year 2019, we need to understand that continued trade and geopolitical issues make it very challenging to precisely predict what will happen this year. While many of us had hoped some of these issues would have been resolved by now, or at least have some more progress, they continue to linger without a near term resolution. This creates a scenario where upside potential is getting harder to find as we move further through the year.
That being said, we are still cautiously optimistic that some of those trade issues will be resolved sentiment in the latter part of this year. I won't run through all the segments by region here, but while the outlook for AG is based largely on the current steady state market conditions, comparables as previously stated in the 1st 2 quarters of 2019 are challenging. General sentiment of the agricultural end markets in which we compete remains muted as a result of the uncertainties related to the trade tensions that are still unresolved. The spill over implications of negative weather events in Australia and Northern Europe and the potential for delayed planting in and macroeconomic uncertainties in Turkey and Argentina. On the positive side, reduced levels of used equipment continue to support new sales and Precision Act solutions continue to drive adoption of high horsepower equipment for farmers who aim equipment, we have lowered our outlook from 5 to 10 to 5% in general construction and road building equipment.
End markets in North America continue to demonstrate growth, driven by solid economic footing and state and local investments in infrastructure. We are calling compact equipment in North America as flat based on sluggish housing starts and other mixed indicators that continue to be range bound. South America and Brazil, in particular, we are calling for flat to slightly up generally as the current geopolitical environment is conducive to recovery although financing is less attractive than the AC equipment sector. The truck market in Europe for heavy is expected to be flat to slightly down and in light, it is anticipated to be slightly up with positive trends and growing LNG and CNG demand as previously predicted. And the South American market and particular Brazil here again, demand recovery should continue, driven by attractive borrowing rates old fleet renewals and increased ag freight.
And hence, we are expecting at least 10% growth rate. On slide 18, we highlight our guidance for the full year of 2019. We are on track with our profitable growth trajectory and are therefore reaffirming our 2019 guidance as follows. Net sales of industrial activities at approximately $28,000,000,000, modestly up year over year, with favorable pricing across segments offsetting raw material headwinds and positive operating margin leverage. Adjusted diluted EPS between $0.84 $0.88 U.
S. Dollars per share, with a growth of between 5% to 10% year over year. Net industrial debt at the end of 2019 between $200,000,000 $400,000,000, moving us closer to a net industrial debt free position. As outlined in February, during the 2018 year end results, I'd like to reiterate the following items. Increased investments in organic growth with CapEx and R and D up year over year reaching 2.5% and 4% respectively of sales.
Operating cash flow will be about $200,000,000 higher than in 2018, helping to fund incremental CapEx and dividend versus prior year. And finally an effective tax rate flat from last year at 27%. Now I'd like to discuss a few quarterly highlights in terms of product developments, key product launches for full year 2019, and then I will conclude with a few additional final remarks. On slide 20, you can see that we had another great quarter in terms of awards and initiatives. In the area of Precision Agriculture, we signed a partner agreement to bring state of the art connectivity to Brazilian agricultural.
The company has participated in the creation of Konnectar Agro a consortium of 8 partners from cultural regions of Brazil. Additionally, a memo of understanding for the development of bio methane in the transport sector in Italy was signed in mid April by FPT Industrial, New Holland Agriculture and Deveco, and contracted Gautora, the general confederation of Italian Agriculture, CIB, the Italian biogas consortium, and others to truly enable the Circular Economy in all the settlements we operate in. In terms of awards at the Sima Ag Show in Paris, we were proud to see our case IH and New Holland teams win 4 machine of the year awards to recognize our investments in innovation. Finally, Iveco Manufacturing Facility in Valladolid, Spain, has achieved the gold status in our world class manufacturing program, becoming the 2nd site after the Madrid plan to do so. Moving to Slide 21, I'd like to talk about our new products and concepts in this first quarter of the year.
As you can see, we have the international launch of the new Iveco daily van, which will be manufactured at the gold medal Valladry plant. The new daily sets new standards in onboard living and driving experience and makes important strides towards autonomous driving and enhanced safety features. During the quarter, we launched 24 new products throughout the group, including the new daily minibus that takes connectivity to a new level unlocking a world of highly personalized services precisely tailored to the drivers we'll use of the vehicle and provide a complete transport solution that would change the way to transport passengers. The new daily 4x4 that was introduced last year combines the leading product lineup with new off road and go anywhere capability and some other important new introductions in each of our industrial segments. On the digitization front, I'm excited to report that we have a strengthening fleet of connected trucks and we are targeting to get more than 20,000 vehicles connected with the introduction of the model year 2019.
This not only allows us to better assist grow with our customers, but feeds real time data so that we can see the relative trends in our various markets and better forecast where things stand at a given point in the cycle. In Agriculture, a case IH unveiled new AFS Connect Magnum series tractors, giving producers a new way to run their business. With the freedom to adjust, manage, monitor, and transfer data the way they want. In construction equipment, we unveiled our methane powered wheel loader concept project Tetra at Bauma and its vision for the future of sustainable construction. This project shows how professional construction operators could help spearhead the move away from fossil fuel powered vehicles towards renewable resources by playing a fundamental role in the Circular economy in which methane powered wheel loaders help produce the gas from waste products and renewable sources, which then ultimately powers them.
This concept follows the methane powered concept tractor already mentioned in our full year earnings release that was recognized for its reimagined design features and its pioneering alternative fuel technology. These two products as well as the ones already available in the market further demonstrates the depth of our portfolio and alternative propulsion and our dedication to fitting the right solution to the appropriate application and not a one size fits all approach. When looking at when looking at the CO2 statistics in terms of well to wheel bio methane, has more impressive CO2 emission reduction than electric as it results in more than a 100% reduction of emissions contributing in the end in cleaning the environment. We are the leader in LNG, CNG, and bio methane propulsion for on highway applications, and see a clear path for adoption for off highway usage in the future as well. Before moving to the next slide, let me remind you that on April 24th, we published a companion guide to our 2018 sustainability report.
A sustainable year 2018 edition highlights the company's ongoing commitment to sustainability and offers an engaging and highly visual insight into some of our major achievements within our environmental social and governance programs during the past year. I would suggest all of you to take a moment of your time and visit our website to have a look at it. Moving now to Slide 22. Some of the strategic initiatives we have briefly referred to in the past are progressing as expected. Started in January, but continuing throughout the year is a rollout of our new organizational structure.
Not only are we looking at increasing the span of control, but also expect to reduce organizational layers to achieve a best in class and talented organization that fully shares our objective to become more customer centric, lean and agile. The world class manufacturing program continues to deliver year over year productivity improvements with associated cost savings at almost 5% in the first quarter. On the back of the success of WCM, We are now applying the same principles in other areas, namely logistics, engineering, and finance. Our goal is to achieve similar productivity and quality benefits as we did in manufacturing. Our organization is fully embracing the eightytwenty methodology.
After having started a eightytwenty with the pilot in construction equipment in North America, we will now implement in a first step reduction of configurations of 46% starting in Q2. Positive results in construction will be visible in the second half of the year. In parallel, we have started the analysis in the agricultural segment and aftermarket segment for both segments in North America, and we are currently defining the actions principles to other geographic areas and segments. Finally, we are analyzing our global manufacturing footprint with early findings expected to be unveiled into with our strategic plan presentation at our upcoming Capital Markets Day. Moving on to Slide 23, We have now defined the date for our Capital Markets Day event.
On September 3rd, we will be presenting our new strategic business plan that we are currently developing under the new leadership structure. The event will take place in New York City at the New York Stock Exchange. On this day, you will not only see our current and future technology displayed, but you will have the chance to meet with the global executive team of CNH Industrial. As part of the Capital Markets Day, we will share with you margin targets strategic initiatives that will get and to discuss our medium to long term view towards the portfolio of our businesses. I'm sure it will be a defining moment in our roadmap to be become one of the greatest capital goods companies on the planet.
I have now completed my presentation and turn it back to Federico.
Thank you very much, Hubertus. This concludes our prepared remarks for the first quarter results, and we can now open up for questions. Jenny, over to you.
Thank you very much. We'll now take our first question from Evercore from the line of David Raso.
I appreciate what the trade tensions, it's really challenging to forecast the year for agriculture. But I'm just trying to kind of balance the comments on the second quarter sound a little more cautious on ag, but then you look at your industry outlooks for ag and sum up some down, some maintain. So I guess what I'm really trying to figure out is, have you really made any changes to your thoughts on 2019 given the trade tensions have dragged on and, obviously, this week, maybe they took another step backwards. And at the same time, if you haven't, is there a certain point, be it early order programs midsummer when you'd have to really address, if there is no trade resolution, there's a step function change in how you view targeted ending inventories for the year in agriculture. I'm just trying to square it up with all the different commentary near term more cautious, but no real change in your industry outlook an aggregate for ag?
Yes. Well, I start with the sentiment and then Max takes the inventory question. I think, I mean, sentiment I said is still muted. Honestly, we don't really know what to take from the Tweets over the weekend by the president, but we're still cautiously optimistic that there is going to be a trade deal with China despite, all the posturing in the last, in the last days. That being said, it's it's it's also weather right now that is, that is of a concern, which in agriculture, of course, has an influence, but still putting all together, we, we don't want to change yet the industry outlook, for for the year as that outlook was based kind of, on on this scenario of uncertainty.
So that's the reason why we're still kind of confident that we can deliver, you know, those those numbers that we have predicted. And on the inventory side, perhaps you want to say something, Max?
Sure. So, as we started last year, we are continuing to look at docking inventory in hay and forage in North America, also at a milder pace this year. Net net, we expect production for the full year to be flat year over year 2019 versus 2018 in general. The slight overproduction, which was just about 10 percent in the crop sector for Q1 was expected and is in line with the the pickup in activity seasonally, Q1 to Q2. For the full year, we expect to be flat, slightly down in terms of production to retail.
Yes. And I think one thing also needs to be noted. I mean, the disastrous, the the tariff discussions are for North America right now and for the world economy. Obviously, South America is benefiting from that. And if you basically look at our 0 business.
I mean, that's up and thriving. I mean, order books are up. Business is up. And then, as we said continuously, the Brazilian farmers are right now eating the American farmer's lunch. And, and that's, again, not not in their interest, but, but for us, it's a it's a hedge that we have there.
And could you help us by quantifying the Ag order book trends year over year?
I would say that the comparison is not fair because last year, we were ramping up in of sentiment, Q1 to Q2. So, there was an expectation of significant pickup in activity So when I look at year over year, they are down, but they are still at a very healthy levels. And again, the used inventory in the field is continued to be reduced and that is a good support to demand of new equipment and actually pricing on used is also holding up pretty well.
And one last quick one on construction, the year over year inventory gain, I wasn't sure. The inventory year over year, is that more in construction than it was year over year in fourth quarter?
We reduced dealer inventory in North America by about 700 units, which is $30,000,000 more or less take it or leave it on compact equipment. Of revenue. We increased company inventory in the balance of the business. And again, this is, to to take off the activities from the very low levels that we normally achieve at year end. When the activity shuts down for the year end.
We'll now take our next question from JP Morgan from the line of Ann Duignan
Yes. Good morning, everybody. I'm just going to continue on David's question and ask you, you know, if sales don't materialize in the ag sector in Q2. Is it your intent to cut production in the back half of the year and end up with lower inventories, or are you going to just sit on higher levels of inventory through the course of the whole year and hope that the market comes back next year?
This is my speaking. I'll take this, this question. So for Q2, we expect to be down in production slightly down year over year. Low mid single digit. And, so we expect to start rebalancing that inventory early on in the year and not wait until the last quarter.
Okay. I appreciate that. And then on construction equipment, can you comment a little bit more on the weakness in your compact equipment, yes, I appreciate that that might be leveraged to residential construction, but Can you talk about maybe how much of that business goes to rental versus through sales and just just a little bit more color so we understand what exactly is happening in that business?
Yeah. I would say, besides the sluggish, residential demand in North America, there is also an ag component. As you know, compact equipment goes into ag. And, livestock and hay and forage is coming from 2 years of lows So we don't see a lot of pickup activity over there as well. And that's why we continue to look very conservatively at the inventory Yeah.
And some of it is a bit self inflicted, so I think we can do better. And we had a a nice discussion with our teams. So so I think you're going to see an increased performance going forward there. By the way, I think to be fair to the others, we should really limit it to like 1 to 2 question for analysts because we have a pretty full line, and we only have 50 minutes left. I I hope that's okay, Ann.
Right?
That's fine. No problem. Thank you.
Thank you.
Thank you very much. We'll now take our next question from Equita from the line of Martino De Ambroj and your line is now open.
Thank you. Good morning. Good afternoon, everybody. Two questions. The first is on pricing.
I saw Aga and C still with a positive price effect in your EBIT bridge. Should we expect a similar trend going forward? Even if the visibility and the market environment is not particularly favorable, and still focusing on the pricing, what happened to the CV, which was down after several quarters in a row with a positive mix, price effect. And, the second question is the competitive scenario in the gas LNG engine, in the truck business, because in your remarks, Max, you talked about new entries. I was wondering if you could elaborate on what's happening in the competitive environment for this potential megatrend.
And if this generated price pressure, which could reduce the profitability of this segment. Thank you.
Okay. Let me start and then chimes in. So on on pricing for, construction on ag, we pricing is holding. We're we're also pricing for the for the tariffs and raw material headwinds that we're seeing. And we see this holding throughout the year.
On top of that, we do believe that we have pricing possibility also in construction equipment because as you know, the eightytwenty methodology looks, of course, and, you know, A and B products and A and B customers. And, and that allows you to price, for, for your B customers and for your B product So so you're going to see some positivity there despite all the uncertainty around. Max is going to talk about the commercial vehicle in a second. Let me also comment on your second questions on LNG. I mean, as we predicted, we had 70% share there and the second competitor that has a solution had 30 we've now balanced it out a little bit.
We are 60. They got 40%. But, it is with healthy margins, and and we also don't have to lower our prices We looked a little bit at our MRA, contracts and our buyback amounts and have adjusted those slightly a little bit more to reality and to come a little bit more customer friendly, but it is a very, very successful and profitable segment for us, which is growing high 2 digits. And, And as you know, we have said by the end of the year, we think that LNG is going to compose 2.5% of the European heavy duty truck market. And that number can go significantly higher, in the, in the, you know, quarters and years to come, given that LNG is really the only short term solution to reduce CO2 emissions, so particulate matters and NOx.
And then Max, you want to say something on pricing for CV?
So as I said in my prepared remarks, the underlying branching performance in CV is still positive and is primarily a light duty application performance. But, in our walk, we show a net pricing, which is netting out, the underlying pricing from the transaction shown FX and the year over year hedge impacts on our currency hedging portfolio. Which actually were higher than the price increase that we achieved in the quarter. That's why you see a negative number.
So going forward, should remain positive for the rest of the year?
Yes, the pricing function before Forex is supposed to stay positive on CV as well.
Thank you.
We'll now take our next question from Vertical Research from the line of
talked a little bit now that you're, kind of giving us a little bit more detail on the construction business, could you just talk about the revenue breakdown across compacts, general, road building and then mix opportunities there. I mean, maybe if we liken it to trucks and some of you're doing on the light duty side and sort of driving out growth and margins up there. What are the opportunities that you have with construction and where you can put a different emphasis on different parts of that business?
Yeah, what I I don't know how much detail we really wanna provide by product line now, but I think, we basically have in our strategy a stronger focus on customer end segments and trying to, create leadership in those in those subsegment and that strategy proves to be fairly successful. And on the back of that, obviously, we're improving profitability. And then if we switch to the commercial vehicle sites, obviously, we are one of the leaders in light vehicles. And with the new daily launch right now with the new platform, we are extremely excited about that. And we see, a lot positive market reaction and perception in that.
So we think that we can grow sales there throughout the year. And then when it comes to the heavy, apart from our leadership in LNG, which going to drive sales and replace diesel units. We're also launching a complete new 2019 heavy duty platform which is also going to help the profitability on the diesel side and will then concurrently drive diesel LNG sales. You want to add something to that, Max? Okay.
Thanks Joe.
We'll now take our next question from Bank of America from the line of Ross Gilardi.
Yeah. Good afternoon. Thanks, everybody. Hi, Hubert. I was just wondering, I mean, given you're seeing on new equipment demands, and in agriculture for row crop, I mean, just given the near term headwinds what's your best explanation for how the used market is staying so well balanced it's tight and how pricing is holding up?
So well. I mean, is it inevitable that that market is going to build some slack over the rest of the year? And can you do you think the 3 and more importantly, CNH can sustain that without having to cut production on new more aggressively.
Max, you want to say something to that, kick it off, and then I chime in.
So, I mean, when we transition from tier 4 a to tier 4 b, the productivity enhancements were not the sizes. So I would say the recent model year used equipment is pretty well performing. And hence in a period where net farm income is not on the upswing, but farmers still need to dated equipment, they probably look first into what is available on the recent model they are used. And it And that, that is mainly the reason why pricing is holding up so well over there. But obviously, when that recent model year used is depleted, there is only one place to purchase the new equipment.
And that's why as well the demand of new equipment, although not growing, is holding up wealth. Let's remind all of us that we are still 20% below the 20 year average in terms of for hydro power tractors and combines in North America.
And that's, that's the replacement demand that Max was talking about. And then, I mean, to to be clear, I mean, what what the US administration is doing right now with the tariff discussion is really, really not helping the US farmer And again, if we can't find a trade solution with China and Europe soon, it will have a very negative effect to U. S. Farmers and also to equipment However, we do believe that in this case, then we're going to see a lot of support given. And support is already given, as you know, for, for soybeans for example.
However, the support that the, the farmers receive right now from the administration is kept, it's kept at pretty low values, like 150,000 soybeans, for example, we do believe that, that those caps have to be lifted up significantly. And, and as a matter of fact, we will be, I mean, we'll be in Washington tomorrow and we're gonna talk exactly about that because we do believe that to help U. S. Farmers, the U. S.
Administration has to basically lift up those caps. To more reasonable levels because right now, the large scale farms, which are very important in the row crop sector for our, for our case customers, are limited to a 150,000. So they are leaving 100 of 1000 of dollars on the table, and that's not justifiable. So we we do believe that in this uncertain environment, we're gonna see also some measures to support those farmers if those trade discussions linger on.
Okay, got it. And then the increase in R and D spending for for Ag in the quarter, what's the question that you flagged, but how much of that is for the stage 5 emissions is precision farming and any way to quantify that for the rest of the year? What we expect that margin headwind to persist for the balance of of 2019? Yes.
I mean, Ross, your question was really not very well. Acoustically, we couldn't hear it. I I I think you're asking for the margin performance in in Ag. And, and and we were referring to the Magnum track which is actually an entirely new cash drop, platform that we are developing. And that's the reason for the significantly higher R and D spend in the first quarter.
Needless to say we're launching this product this year and, with the launch there, the the R and D headwind is going to abate a little bit. So we kind of have front loaded R and D budget there. So we think that margins are going to hold. And as you've seen on the gross margin side, we've improved that nicely by, by, by 40, you know, how many bps, 40 bps, exactly. And, and we think we got more room for improvement there.
So we're we're fairly positive on the margin side for Ag. And again, the drag in on the EBIT margin was really with the front loaded R and D for the, for the significant investments that we do in Precision Agriculture on our new tractor platform, which actually is going to be a game changer in the cash crop sector for us.
Thank you. And our final question comes from Melius from the line of Robert Wertheimer. And your line is open. Please go ahead.
Thank you and hello everybody. Hey, how's it going? Good. Thanks. My question is really on LNG and the ramp.
I'm curious if you have any thoughts on the current fueling infrastructure that your current sales base sort of uses and then how far the sales base can expand with current infrastructure? Does there need to be any step function change in order for the sales growth to continue
No. Investments, investments happened as we speak. And, and this is not a, a, a showstopper for the rollout of LNG. As we discussed numerous times, Germany is behind has been behind, but we're gonna have an infrastructure of 30 to 40 LNG stations by by by mid to end of this year. And this is sufficiently to run your large fleet.
So what we're seeing right now is that talking about those large fleets, they never, you know, buy a couple of hundreds at the same time. They basically buy a couple of, of, you know, a couple of handful pieces of equipment, LNG to try it out. And once they basically work, they then and they do work, of course, then they basically increase, the quantity. So we are very, very firmly in that right now. All the large fees are right now in test of LNG equipment.
We do have the infrastructure available throughout Europe and also in Germany. And that's the reason why we're very, very confident that these high 2 digit, if not 3 digit increases of LNG, participation are going to continue well into the next years.
And the current market is in fact, you know, freight hauling or is it more local local trucks that you're selling to? And I'll stop there. No.
No. No. It's it's it's long haul. It's long haul. LNG is long haul.
Because, it's really where where you need the distance and where you need the weight. And, and as we have said, our record right now stands from one trip with one filling from London to Madrid. So 1700 kilometers, so a bit more than 1000 miles. So this is clearly a long haul application. If you think about, medium and short haul hauling, so the light commercial vehicles and the medium trucks, there you talk about CNG, which is compressed natural gas, So the same engine, it's just a different tank system, which is significantly cheaper because CNG is just compressed whereas LNG is, is liquid and is frozen down to minus 170 Degrees Celsius.
I don't know what the Fahrenheit of that is. I should know that, but I'm still thinking you're being here. And then the other one, which we mentioned is, and this is also for urban applications, is really methane because the CNG can be replaced by methane, bio methane. And this really comes from waste incineration. It comes from, from biogas.
And if you basically put them biogas, So bio methane into those CNG engines, then you're actually cleaning the environment. And this is the reason why we think politicians should be mindful of that because This is significantly better than electrification because you are really cleaning the CO2, the environment firmware, the CO2 because you go down to 1 -160 to -180 CO2 reduction, which is far better than any battery powered or fuel cell powered equipment can do. And that's something that people need to understand. And as you know, being the leader on the on highway side on that one, We're now pushing for that equipment, specifically in urban areas. It's actually based on, we are creating the market there because we are kind of the only competitor in the off highway side that has a competitive offering there.
So
Thank you very much. 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. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.
You may now disconnect. Speakers, please standby.