Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial 2018 Full Year And Fourth quarter results conference call. For your information today's conference is being recorded. After the speakers' remarks, there will be a question and answer session. At this time, I'd like to turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir.
Thank you, Emma. Good morning and afternoon, everyone. We would like to welcome you to the CNH Industrial Fourth Quarter and full year 2018 results webcast conference call. This call is being broadcast live on our website and is copyrighted by CNH Industrial. Any other use recording or transmission of any portion of this broadcast without expressed written concept constant of CNH Industrial is strictly forbidden.
We are pleased to have here with us today CNH Industrial CEO, Hubertus Muilhoiser, and our CFO, Max Yarra, who will be hosting today's call. They will use the material you may 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 statements 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 as well as other periodic reports and filings with the U.
S. Securities And Exchange Commission and the equivalent authorities in 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 measures is included in the presentation material. Please also note that starting from Q1 2019 onwards, as a result of the new Jack Organization, We have consistently updated the geographical composition of our regional sales information as indicated in supporting materials of these earnings release.
I will now turn the call over to Bethus.
Thank you, Federico, and good morning and good afternoon to everybody on the call. The last time that we spoke, I stated that one of our top priorities that would guide us over the next quarters was the continuous profitability improvement And as you have seen from the press release, we have met or even exceeded our financial targets in 2018. Despite all the global uncertainties, we closed the year with strong Q4 results and have been able to exceed our own expectations. For the fourth quarter, industrial sales were up 3% in constant currency and adjusted EBIT for industrial activities was up more than 20% with adjusted diluted EPS more up 40% and both adjusted net income and adjusted EPS were up by over 70% to $1,100,000,000 or $0.80 per share and that marks an historical record for the company since its inception in 2013. On the back of margin improvement across all segments, we were able to achieve a consolidated adjusted EBIT margin of 7.1%, also a record high since company inception.
This was accomplished to our focus on disciplined cost management, targeted pricing strategies and operational synergies. Operating cash flow for the full industrial debt by 1 third to USD 600,000,000 and allowed us to move another step towards our long term goal of a net industrial debt free position. Additionally, also in the quarter Moody's investor service upgraded CNH Industrial to investment grade with a B AA3 rating and a stable outlook. With this, we are now finally investment grade by all 3 major rating agencies, which is a major milestone, our commitment to strengths in our rating position going forward and to close the funding cost gap with our major peers. Furthermore, due to the annual general meeting of our shareholders, a dividend of per common share, which is a sizeable increase of 30% versus prior year dividends.
This would translate into a total cash impact of approximately 1,000,000, approximately $278,000,000 at payout date. Lastly, as you probably have seen, CNH Industrial has been recognized by the Carbon Disclosure Project or CDP as a global leader in sustainable water management, naming it as 1 as of only 27 companies out of a total of 2000 companies under consideration. Included in the CTP water security A list and we scored an A- in the overall CDP climate change rankings. Our high trade leader in the Dow Jones Sustainability Industries World And Europe as well as FTSE for Good index series member confirms our commitment to ensuring continuous improvement and sustainability performance. Moving now on to Slide 4.
Let me provide you with a high level industry update for full year 2018 as well as some color on the last quarter. I won't go through line by line, but would like to highlight that in the ag segment, NAFTA row crop continues to trend positively with good performance as customers replace dated equipment, especially in Combines, with the market in the fourth quarter, up 5%. EMEA tractor demand was down 8% for the year, mainly driven by a slowdown in volumes during the fourth quarter, down 19% due to last year's pre buy effect ahead of the introduction of the Tractor Mother Regulation in Europe. Construction Equipment was positive in all regions as the global construction trends we have been seeing during the year continued and in some cases have gained strengths in the last quarter, up 15% in light and 7% in heavy on a worldwide basis. An example of the strengths would be general infrastructure and North Iran Residential in North America.
For commercial vehicles, the European truck market was up 8% year over year with light duty trucks up 11% and medium and heavy up 5%. In the last quarter, European markets for light duty trucks was up 12% and flat in medium and heavy. While the EU truck market remains generally at healthy levels, December was weaker than normal with medium and heavy volumes down double digits, This trend seems to be partially reversing in January, and we will monitor it closely going forward. LatAm was up 24% with Brazil up 46% and Argentina down 17%. Please remember that while the Brazil figure seems large and it is, This is still coming off a significant downturn that started in 2014.
Overall, while there have been some weaknesses during the last quarter in certain markets like EMEA AG and LATAMCE, the key markets for us were generally positive and we expect that to continue, but at a slower pace. I will go into this in more detail later in the call. At this point, I will now hand it over to Max for the financial overview of the presentation Max.
Thank you very much, Hubertus, and good morning, or good afternoon, everyone on the call. Moving now to Slide 5, the key figures for the fourth quarter and full year. In summary, we finished the quarter with strong earnings and improved operating profitability across all our segments after most end markets remain healthy during the quarter. Net sales in our industrial segments were up 3% in constant currency for the quarter and ended up 7% for the full year. Importantly, adjusted EBIT net income for the year of $1,100,000,000, up 72% from 2017.
EPS was up $0.34 to $0.80 per share for full year 2018. The tax rate for the year was 27% down from 38% in 2017, and we expect it to remain stable at this level during 2019. We were able to lower net industrial debt by 1 third to $600,000,000 by focusing on improving cash flow and reducing overall debt levels. Available liquidity was $8,900,000,000, down $400,000,000 compared to full year 2017. The liquidity to revenue ratio was maintained at 30% with a third party industrial debt to EBITDA ratio at two times, down from three times last year.
This performance is a clear sign that we remain fully committed to further improving our credit rating from the current levels as well as achieving a net industrial debt free position. Turning on to Slide 6, let's discuss the full year performance in our industrial activities net sales, excluding the impact of foreign exchange translation. For the full year, net sales increased 1,900,000,000, up over 7% with all businesses up year over year. Agricultural Equipment contributed $1,100,000,000 and was up 10.4% as a result of a favorable cash crops subsegment in North America, a recovery in the Brazilian market and strong pricing performance across the board. Construction equipment sales increased more than 500,000,000 or over 20% as a result of increased demand across all regions and commercial vehicle sales increased $140,000,000 or 1.3 percent, mainly as a result of positive pricing and favorable product mix.
Powertrain was up $60,000,000 or 1.4% year over year. For the 4th quarter, net sales were $7,700,000,000, roughly flat with last year, but up 3% on a constant currency basis, Looking at the quarterly performance, all segments were up except commercial vehicles, which was down 1% on a constant currency basis, mainly from lower sales volume in heavy duty trucks in Europe and other geographies, partially offset by an accelerating favorable pricing performance. In terms of regional segment mix on a full year basis, it was largely unchanged from 2017. Turning now to Slide 7 with an overview of our operating results at the industrial activities level for the full year and the 4th quarter compared to prior year. As you can see here, all segments delivered positive results, both for the quarter and the full year period, resulting in an adjusted EBIT margin improvement of 130 bps to $1,600,000,000 for the full year and 110 bps to $432,000,000 for the quarter.
This was driven by favorable volume, strong product mix and pricing, as well as our efficiency gained from our world class manufacturing program. Increased R and D spending on product development as well as raw material and other trade related cost increases partially offset these gains, 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 was $600,000,000 at this December, down more than 30% from last year. As you can see, our effort to reach a net industrial debt free position is intact and demonstrated by a continuous improvement on a year over year basis. Net industrial cash flow for the full $6,000,000 as a result of a solid Q4 performance of $1,400,000,000 coming primarily from a positive change in working capital.
For the full year, working capital was a net use of cash of about $500,000,000, mainly due to the inventory increase year over year. Some reasons for the increase include in NAFTA to support the stronger end markets and the solid order book and in Europe to mitigate the potential risk of Brexit and to prepare for the stage 5 transition in 2019. As a result of the consistent cash flow performance over the last few years, we have been able to reduce our 3rd party gross debt while maintaining a healthy buffer of liquidity. Performance of the company, which funded the dividend payment of $243,000,000 and allowed us to repurchase $156,000,000 of common stock corresponding to 12,500,000 shares. The current share buyback authorization allows us to repurchase up to $700,000,000.
Additionally, as we stated last quarter, we have started to increase our CapEx on new products and technologies and have increased the spending across the business segment with a 2018 spending of $550,000,000, which is up over 10% from 2017 and sits now at 2% of net sales. For 2019, we expect R and D and CapEx spending to increase to 4.0% and 2.5% of sales, respectively, with a growing portion of this spend to support development on key megatrends, digitalization, electrification and automation, and engine regulatory capital. Later in the presentation, we will provide an overview of some of our new product initiatives that will occur during 2019. Moving on to slide 10, our financial services business, 2018 net income was $385,000,000, an increase of 15 end compared to 2017 when adjusting prior year for the one time tax benefit of 118,000,000 related to the write down of deferred tax liabilities in connection with the enactment of the 2017 U. S.
Tax Cut and Jobs Act. For the full year, retail loan originations were $10,000,000,000, up $900,000,000 compared to last year with higher volume in all regions, paper. The managed portfolio of $26,300,000,000 at year end was up $700,000,000 at constant currency. Credit quality performance is improving on the back of a healthy environment in our primary end markets, with delinquencies tracking on average at 3.1% down 20 bps from 1 year ago. Turning now to the individual segment performance on Slide 11, agricultural equipment increase in net sales of 9% was primarily due to a sustained price realization performance coupled with favorable volume.
Worldwide deliveries were up 8% both in tractors and combines versus last year. Production was up 10% versus last year with NAFTA row crop up 24% year over year. Worldwide inventory in units equivalent was up 27% in tractors and up 4% in Combines. We closed the year with a solid order book in NAFTA row crop with coverage going well into Q2. It is also worth mentioning the favorable conditions in Brazil are driving a sustained demand with book of business up 30% year over year.
The fourth quarter of 2018, agricultural equipment net sales slightly increased compared to the fourth quarter of 2017, due to favorable volume and positive net price realization in North America, partially offset by a decrease in volume in other regions. We have been working successfully to improve our margins and were able to increase EBITDA margins to 11.5% and EBIT margins to 8.9 percent for the full year. The increase was mainly due to positive net price realization, favorable volume in all regions, favorable industrial absorption coming from the under production in 2017 to a more balanced production performance in retail to retail in 2018, partially offset by the increase in product development spending, up 11% related primarily to precision farming and compliance with stage 5 emission requirements. In the fourth quarter of 2018, adjusted EBIT margin was 8.2 up 50 bps. All in all, the segment realized a good operating leverage in 2018 with 25% of incremental margin year over year.
Turning to slide 12, construction equipment net sales increased 19%, primarily due to increased demand in all regions. Worldwide deliveries were up 14% in light and 20% in heavy with production up 18% versus last year, resulting in a slight overproduction versus retail with dealer channel inventory levels in line with the favorable industry trend. Inventory was up 4% with order books flat in heavy across our geographies, but NAFTA which was down 10% as a result of the realigned dealer channel inventory. In the fourth quarter of 2018, net sales increased more than 7% compared to the same period in 2017, driven by sustained end user demand across most regions. In addition, we were able to grow profitably with margins up 310 bps for EBITDA now at above $150,000,000 for the full year and up 360 bps for EBIT closing with a 17 to a profit of $91,000,000 EBIT in 2018.
We would like to note that this is prior to applying any benefits related to our eightytwenty initiative which we assume will start to contribute positive results in 2019 beyond. We will report more about this in the course of 2019. The year over year improvement and positive net price realization more than offsetting raw material cost increases. In the 4th quarter, adjusted EBIT was $32,000,000 with an adjusted EBIT margin of 3.9 percent, up 310 bps from the same period last year. On slide 13, commercial vehicles net sales increased almost 4% for full year 2018 compared to 2017 as a result of positive pricing and favorable product mix, primarily in Europe.
Total deliveries for 2018 were down 5% year over year as increased volume in light commercial vehicles as a result of increased end user demand in Europe and Brazil were more than offset by the impact of lower volumes in heavy duty vehicles. The decline in heavy vehicle sales is attributable to the previously announced strategy shift, which focuses sales on a more profitable product portfolio including LNG and CNG vehicles. We are expecting a mix shift toward natural gas engines and a continued demand growth in that sub segment going forward. As a result of the strong order book in LNG and CNG, up almost 50% at the end of the year, partially offsetting the general weakness in the diesel order book down 11% in truck EMEA. In Q4 of 2018, net sales decreased 4% compared to last December and to the continuation of the strategy shift to a more profitable product portfolio, partially offset by favorable pricing.
As with the other segment, it is important to know that we focused on profitable growth, which can be seen in the increased margins for the year, with EBITDA margin up 110 bps and EBIT margin up 90 bps to 2.7% of sales. The increase was mainly due to a strong positive product mix in light duty trucks and buses and to the shift to alternative propulsion solutions in heavy duty trucks as well as positive pricing and manufacturing efficiencies. R and D spending was up 9%. For Q4 2018, adjusted EBIT was 90,000,000 with an adjusted EBIT margin of 2.9 percent, up 100 bps over year. The market share for trucks in Europe was 11.6% down versus last year, mostly in heavy, as we anticipated when we announced the new customer refocusing sales program, inclusive of the reduction in sales with buyback commitment, which was down approximately 40% for the full year in terms of lower originations.
Trucks book to bill was 0.98 in EMEA and 1.07 in LatAm. Pass order book is solidly up 70% in Europe. Turning to Slide 14. Powertrain net sales increased 5% for full year 2018 due to higher sales volume in engine applications. Sales to external customers accounted for 50% of total net sales.
For Q4, net sales increased 3% compared to the fourth quarter of 2017. 4th quarter adjusted EBITDA was 5 $6,000,000, up $50,000,000 compared to full year 2017, with a margin of 11.7%, up 50 bps. Adjusted EBIT was $406,000,000, up $46,000,000 from full year 2017. Adjusted EBIT margin increased to 8.9 mainly due to favorable product mix and manufacturing efficiencies, partially offset by higher production development spending, which was up almost 20% year over year. Adjusted EBIT margin was 10.2 percent, up 150 bps compared to the fourth quarter of 2017 obviously in fourth quarter of 2018.
This is a record margin for FPT, representing a milestone achievement for the segment. I have concluded my section of before opening it up for
to do with become effective starting from Q1 of 2019. At a high level, we have changed NAFTA and Latin regional naming to North America and South America, respectively. EMEA will change to Europe now excluding from the region, Middle Eastern Africa. Rest of World will include all others Asia, Australia, Africa, and Middle East. We have put the old regional split in the appendix of the deck if you are interested in seeing our 2019 industry outlook as it would have been under the previous format.
When we turn to the market outlook for the full year of 2019, we need to understand that continued trade and geopolitical issues make it hard to forecast precisely what will happen this year. As you know very well, 2018 has been a period of great market volatility and political uncertainty that has yet to abate in many ways. While we have done a very good job in offsetting most of the incremental cost inflation, this gets somewhat more challenging as we move into 2019 as the trade dispute and other issues which are beyond our control persist. Some of our key customers have been struggling We expect to get more clarity and see resolution to the core issues as we progress through the year, but not being able to predict when this may happen has caused us to build in some caution when putting together the 2019 outlook and estimates particularly in the 1st part of the 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 in the 1st 2 quarters of 2019 are challenging.
I would say that while ag sentiment has softened during the back half of 2018. This has not translated into slowing replacement demand as commodities have stabilized and government support in North America has shifted conversation more to yield improvements and put precision ag front and center in many of the customer and dealer conversations. This is mainly why we're looking for a fairly flat to slightly upmarket in North America. In terms of construction equipment, we are looking for 5% to 10% up on light and 10% up on heavy as end markets in North America continue to demonstrate growth driven by solid economic footing and state and local investments in infrastructure. In South America and Brazil, in particular, we are calling for flat to slightly up generally as the current geopolitical environment is conducive to recovery.
Interest rates are low and elections last year have resulted in a pro growth administration, reducing some of the uncertainty around infrastructure and other projects. The commercial vehicle market in Europe for heavy and light is expected to be flat to slightly down with a negativity more skewed towards heavy, with some positive trends in Eastern Europe and growing LNG and CNG demand in Western Europe. The South American market and particularly Brazil demand recovery should continue, driven by attractive borrowing rates, old feeds, renewals and increased ag freight and hence, we're expecting a 10% growth rate. On Slide 17, we highlight our guidance for the full year of 2019. The performance achieved in 2018 demonstrates that the company is on track with a profitable growth trajectory And despite a softer geopolitical and macroeconomic environment in some region, CNH Industrial 2019 guidance is as follows: Net sales of industrial activities at approximately $28,000,000,000 modestly up year over year with favorable pricing across segments of setting raw material headwinds and positive operating margin leverage.
Adjusted diluted EPS between $0.84 88 per share with a growth of between 5 percent to 10 percent year over year. Net industrial debt at the end of 2019 between 200,000,000 1,000,000, moving us closer to a net industrial debt free position. In order to facilitate your projections on your on our full year 2019 guidance, we would also provide percent and 4% of sales, respectively. Operating cash flow will be about $200,000,000 higher than in 2018, helping to fund incremental CapEx and dividend versus prior year. Net industrial cash flow will be slightly up year over year.
Now I'd like to discuss a few quarterly highlights in terms of product developments, key product launches for 2019, and then I will conclude with my final remarks. On Slide 19, you can see that we had another great quarter in terms of product introductions and awards. In the area of precision riculture, we are now firmly moving into the agronomy space with the recent announcement of a commercial agreement with Farmers Edge. This agreement will give our customer solutions that offer greater control of their machine and economic data and the ability to apply this information in numerous ways to significantly decrease operating costs and drive higher profitability through greater yields and a far better use of their resources. Also noteworthy is an initiative we started in Europe under promising startup companies that focus on innovative and unique aftermarket solutions and services in the agricultural industry.
From an innovative or solid sensing technology to IoT environmental senses to a device that kills weeds electrically without any chemicals. We have opened our dealer network to these startup companies to jointly grow our aftermarket business, while providing our end customers the latest technologies that allow them to be at the experimental so called forefront of farming. AGXTEND is also a good example of how our open partnership approach that we started with our digital platform also applies to products and services from innovative startup companies. Other regions in the near future. You will hear more as we move through the year on the evolution of these products and services, but for now, let me say I'm very excited about promising new consortium developed to ensure the long term success and mass scale adoption of LNG as an alternative fuel for heavy duty trucks in Europe.
Partnering with AVECO will be Shell, DISA, and Nordso to form the so called Bio LNG consortium, which covers the building of a pan European network of 39 fueling stations covering pre trucking routes every 400 kilometers from Southern Spain to Eastern Poland. As well as the building of a large bio methane plant. We have been at the forefront of this movement and we lead a market which is growing rapidly. On top of this, we will finance the establish of several mobile LNG stations at strategic endpoints in Germany to support our customer fleets in a country where the LNG infrastructure is still underdeveloped. These investments will help speed up the adoption rate of LNG Technology in Europe.
In terms of awards, the Stralis NP460 won sustainable controller has won tractor of the year 2019. Additionally, the methane powered concept tractor was recognized for his reimagined design feature and its pioneering alternative fuel technology. The good design award recognizes the most innovative and cutting edge products from around the world and we also believe you will see more LNG CNC adoption in the off highway marketplace. Moving now Slide 20. From a product launch perspective, 2019 is going to be a very busy and exciting year for CNH Industrial with over 100 new products and upgrades in the 3 main themes of alternative drivelines, automation and digitization.
I want to emphasize just a few highlights to further improve our offering and commercial vehicles, we are launching new electric versions of our 12 and 18 meter city bus and new and improved LNG and CNG truck offerings. We will also roll out on and off road products that include best in class advanced diesel engines that are stage 5 in Europe, 4 Step D compliant. These products will offer improved total cost of ownership by simultaneously lowering emissions. In addition, we are launching new combines and tillage products as first steps towards autonomous operation. The combines automatically make many of the adjustments on the fly that a farmer previously had to do manually, ensuring high productivity and grain quality.
In addition, we will expand our construction equipment machine control offerings. In the digitization space, we're investing in high horsepower machinery, mostly tractors, and solution that will assist farmers in making more informed decisions based on next generation connectivity and precision solutions that will cut costs while leading to a better overall yields. We also will launch a new telematics solution for our commercial vehicles, while refreshing the construction equipment telematics offering. Let's also briefly talk about our organizational changes that we announced on January 14th and that are highlighted on Slide 21. During the first quarter, we have started to implement a new organizational structure with the objective to remove the group's complexities streamline operations, delegate decisions to the frontline and put us on a quicker and more profitable growth trajectory.
The 5 operating segments will now be fully responsible for the global profitable growth and performance of their respective businesses, increasing customer focus and accountability. The global functions will leverage synergies between the segments and will help the company to focus on the megatrends that transform our industries. In this new and leaner structure, we have appointed 2 new global executive company members to strengthen our global leadership team. Garrett Marks will lead our combine commercial and specialty vehicle segment. He has held various leadership positions at Daimler Trucks and Volkswagen and will help us to reposition our tobacco businesses and to continue to drive Andrea's Weisha was brought on board to lead the combined group functions of strategy, digital and talent and to support us in our transformation journey over the next years.
Andreas has proven to be very effective in similar positions at ATCO Corporation and well built in its prior professional life. We firmly believe that this new organization and leadership team will have an increased customer focus fostering entrepreneurship and agility at the segment level combined with greater leverage of our global supply chain and innovation efforts around our highlighted mega trends. Moving on to Slide 22, You have probably seen that we have recently published a corporate calendar for 2019. At our Capital Markets Day event, during the course of 2019, we will be presenting our new strategy business plan and that we're currently developing under the new leadership structure. As a final remark on Slide 23, let me convey our main priorities that will guide us, over the next quarters.
Priority number 1 is to continue to improve profitability. In 2019, we will continue to drive profitability improvements to expand our EBIT margin and returns on our invested capital. World class Manufacturing will drive annual productivity improvements in our group wide eightytwenty initiative will be showing results starting later this support our growth strategies as well as the continued turnaround of our commercial vehicles and construction businesses. The priority number 2 will be to conclude our strategic business plan. Our industry is experiencing an ever accelerating rate and growing magnitude of change.
Fueled by the megatrends such as digitization, automation, electrification and serverization. Companies need to adapt change and revitalize themselves continuously in order to meet these business challenges and successfully generate long term value. Our strategic business plan will embrace these megatrends and will build on our successful market positions to allow us to deliver industry leading products and services at a competitive profitability that will help us to generate long term value for all stakeholders. And we will position our business segments at the forefront of these trends. Our third priority is to maintain diligence in our capital allocation.
We have a solid balance sheet and as we highlight 4, we are getting closer to a net industrial debt free position. By continuing to increase our investments credit ratings, we can improve our funding cost and overall margins, in maximizing shareholder value through the identification of organic and inorganic growth opportunities to support our segments while maintaining our dividend policies. To sum it up, we are extremely happy with our strong results achieved in 2018. I'd like to thank all of my colleagues and our dealer partners their outstanding performance. We are cautiously optimistic for 2019 and are confident that we will continue to deliver value to our stakeholders.
I have completed my presentation and now I'll turn it back to Federico.
Thank you very much, Hubertus. This concludes our prepared remarks for the full year results and we can now open up for questions.
Session will be conducted electronically. We will take our first question from Steven Fisher from UBS.
Thanks. Good morning. Good afternoon. It sounds like you assume more or less the current conditions in ag, but maybe with a more challenged first half on tougher comps, could you just talk about what you assume for the second half And kind of what would the various trade scenario possibilities mean for your outlook?
Sure. This is Max. So the answer is, yes, we maintain a very cautious approach in ag. And as you know, I mean, the resolution on the trade disputes is, is still, up in the air and which doesn't allow us to, make any particular confident statement about the back half of the year. So I would say that we continue to maintain cautious throughout the year for now.
And as we said, it's between this is about us between flat, up 5. Obviously, if the trade issues are resolved earlier, this can go higher, but for the time being, everybody that we're talking right now. This seems to be the reality that we are living in right now in 2019.
Okay. But a status quo in your mind would still support enough of a replacement demand mark to, the replacement demand
is Yes. Currently, that demand is driven by, by replacement demand that is there. Commodity prices could could come a bit better. They're not really helping right now. They have stabilized, but they're still below what they have been last year.
So if we see a positive sign there, which we should if these trade issues abate, then it could go higher. In the absence of that and the absence of a resolution, we are living through replacement demand right now, which would give us flat to 5%.
Okay, great. And then on construction, I think you said your order book on heavy construction was flat but you are looking for 10% industry growth in North America, which is your largest segment, of course. Can you just talk about what you assume there for 2019 to drive some acceleration? Or is your North American order book actually up and how much?
Yes, the order book is reflecting a much healthier position at the dealers in terms of having restocked their inventories. To support the larger demand. So, I think we are kind of now that the inventory positions at the dealer is, is lineup with the new industry. We are seeing an adjustment to the order book for the 1st part of the year. And this is a comment that is valid for NAFTA.
In the rest of the geographies, we see a solid order books in line with previous years.
Yes, sorry, I said we are hopeful that we're going to have a huge infrastructure building after that can drive even higher numbers, but we have don't have that right now.
I was going to ask about how you're thinking about the first half versus the second half in construction overall and whether anything like that factors into how you might think about the second half in your guidance?
Same comment. That's an uncertainty. If it comes through, it's going to be very, very good. If it doesn't come it's going to be what we have said. That's the cautiousness in our guidance right now.
Thanks.
We will now take our next question from David Raso from Evercore ISI. Please go ahead.
Thank you. I was curious, the scope of what we should expect to hear at the Capital Markets Day. Should we expect business targets for each division? And maybe give us some sense of you obviously went through enough of a strategic review to change the organizational setup. Maybe just give us some sense of where we stand today versus sort of completing that strategic assessment if there's bigger portfolio decisions things of that nature, we should also expect to hear at the meeting?
Yes. Well, as you've seen, we have made quite some significant changes to our organizational structure and taking complexity out. And with that new announced team, we are in the midst of developing that strategic plan, which we will announce in the course of the year. That plan obviously is going to have margin targets per segment with the underlying strategic initiatives that will get us there over the next years. And that's what we're going share, with our investors.
We will also, of course, look at the portfolio. And as said, in earlier statements, We basically want to bring each of our business to a full potential and we have heavy investments into the megatrends. And, however, we also have a lot synergies between the different divisions and total investments minus synergies is then going to drive, the portfolio strategy, which of course we're going to share at that Capital Markets Day as well.
And with the step up in CapEx and R and D sorry for the delay on the phone, go ahead.
No, it's okay to ask you a question. It's fine. Your time.
I was curious the meeting and the strategic assessment. I know we want both revenue growth and margin expansion. I'm just trying to think through the step up in CapEx, the step up in R&D. If we're trying to digest a I'd say tone change, but really just trying to understand where you're looking to take the company. When we think of pruning any businesses, where we're looking to focus, would you argue this is more of margins overgrowth, if you had to say where we're trying to lean?
Is it more of an operational improvement angle? Or would you say the step up in CapEx And R&D would argue it's very balanced trying to find acceleration of growth and margin? Just trying to get a sense of as the tone change
Well, we're going to look at our business from an operational lens and from a strategic lens. You just say the operational lens, a lot of the different items, are already in play. I mean, we're rolling out eightytwenty we are de complexing the organization. We're driving continuous improvement with world class manufacturing. We just basically have put everything on the table and then see where that leads us operationally.
And then we're also going to take a strategic lens, where do we want to ring those business? Just evolution is not going to be enough. So we're going to look where can we grow, in other areas, perhaps beyond our classical equipment business And as the ag, I'm seeing, for example, is changing dramatically. And so is the construction equipment, we will look also into other segments where we can basically find pockets grows and that might lead to M and A activity. But let's not jump to conclusion at this point in time.
It's just very clear we're going to have an operation and a strategic lens when driving our strategic plan and looking at our strategies, and we would share all that, with the investor community later in the year.
That's helpful. One last quick question. The 2018 sales guide sorry 2019 sales guide of essentially flat. Can you help us with which segments you expect to be up and which one's down to net to the flat? Thank you.
Well, we said flat to modestly to modestly up. I guess you can assume that is going to be continued to grow. So will, so will Ag. And, Max, anything to add on that?
Just I would like to add a comment that, the segment that is going to be kind of seeing a little bit of headwinds year on the top line is probably powertrain because of the stockpiling activity that went through in 2018. There's going to be some stockpiling going on next year, but at the much milder pace is going to affect engines below 56 kilowatt. Yeah.
That's helpful. Thank you.
Thank you. We will now go to our next question today from Ann Duignan from JP Morgan. Please go ahead.
Hello, Ann. My first question is around the whole notion of flattish to slightly up demand in ag and turf for next year or agriculture, versus the buildup of inventory. I mean, why were we overproducing this year Italy tractors up 27% combines up, I mean, was that just to boost Q4 profits and absorption or We now sit with 4% more inventory. Days on hand is
extraordinarily
high versus a year ago. And our outlook is for flat at best with no visibility?
There has been no particular portion on the Q4 earnings and this is Max speaking. The 27 percent number for the tractors in unit equivalents is 4000 tractors. In total on a worldwide basis and is evenly split among the regions. We are actually producing to kind of bring the inventory to the level that is required by the slightly sustained demand that we have seen visavis historical comparable periods. So I mean, in general terms for tractors, there was a step up in inventory to support demand.
For combines, the inventory is actually almost flat. And we have recovered the under production that we went through in 2017 on row crop now. In 2018. And now we expect to produce in line with retail going forward.
For combines and tractors,
Yes.
Okay. And then as a follow-up on the commercial vehicle business, The trade off between diesel products and the loss of market share in the heavy and medium duty diesel business versus, I mean, the ramp up of CNG, LNG and any alternative fuels is probably going to lag the decline in your current market share. Can you describe how bad could it get for margins in that business as we try to transition away from scale, heavy duty, medium duty diesel to alternative fuel vehicles, which could ramp slower.
Well, we're not going away from diesel completely. We've changed our commercial policies and reduced our buybacks, which which was basically a goal in reduction of market share by design. And this has been mostly compensated by an increase in LNG and CNG driven vehicles. And we see this trend to continue, but it's more less driven by us and more by the demand because, the business case for an LNG heavy truck is just so much better than for a diesel truck that despite us having a very, very competitive deal offering, our customers are moving and switching over to LNG because specifically in Europe, diesel has a lot of uncertainties these days. And now our customers fear that they are not allowed with their diesel trucks into the Metropolitan City areas.
And so therefore, the LNG is a credible alternative. And that would of course help us also to fill our factory, specifically in Madrid. So I think that's going to be good and it's going to help absorption. And on the infrastructure, I think that's also noteworthy, Ann, because I think you have been at last year at the IAA in Hanover, And Germany is lagging a good infrastructure. And I think we are making a mega push this year with that consortium and also with our mobile LNG stations that by latest midyear, I would say, we have a grid that is supportive of large truck fleets.
And as you know, the autonomy on LNG is fairly remarkable. I mean, you drive from London to Madrid with one fill. It's around 1600 to 1700 and with one fill up which is really good in terms of autonomy and independence plus all the other benefits that economic benefits that you have.
Okay. And just finally, any idea around when the Capital Markets Day might take place you gave us calendar for 2019 and it's conspicuously absent.
It will not be at Christmas, okay? It will be before. And it will not be a spring event. It's going to be middle of the it's going to be middle of the year. We're not trying to find a very nice place to host you guys, okay?
Thank you, Ann.
Thank you. Our next question today comes from Rob Wertheimer from Melius Research. Please go ahead.
Hi, good morning, everyone. So maybe this is a question you're going to defer, but I want to ask it anyway, is when you came in, Hubertus, and you looked at where you stood on some of the megatrends that you highlighted and that we've been talking about. Was it an obvious conclusion that you felt like you're behind. Maybe it's a multi year race and it's just getting started. And then do you have any comments on whether partnering is adequate or whether you need to be doing more internally?
No, actually, and I think I said this last time. I mean, the more I get to know the company, the more positive surprises we see. And sometimes we had been shy talking about what we really do. So if you take the digital revolution in ag, I don't think there were that bad think if you look at the rollouts that we have done last year and this year, we're absolutely competitive with our digital ag offering, but our objective is not to catch up with some of our competitors is to leapfrog them. And I think if you look at our moves into agronomy space, I think that is actually setting the pace here in AG.
And if we drive now jointly with Farmers Edge Disagronomy solutions further, I think we're going to be in a very, very competitive spot in AG. The same goes for the truck market. I mean, everybody is talking about electric but make no mistake electrification for heavy duty truck, battery power, that's going to be 8, 9 years out. And what do you do in the interim? And I think we have invested the last decades into the LNG and CNG Technologies.
And we are the market leader by far on that area. And I think investors need to understand that that we have really a very, very competitive advantage there. So we're not behind. We are ahead of the industry. And, and Daimler and Volkswagen would happy if they had a comparable LNG truck that we have with the same, with the same economic data.
So we are not that bad. If you look at the construction equipment, we have to make some investments. It's a smaller business for us, but I think, so we have absolutely competitive are we competing head on head with Caterpillar everywhere? No, we're not, but that's also not the intent. I mean, this is, I mean, this is for us in a nice by industry.
Jointly distributed with the AG side. So I think we're doing good there. And let me end with FPT, if you had powertrain, a remarkable business. Again, our competitors will be happy if they had a business, with those features. We are up to commence the 2nd largest independent engine producer for the regulated markets, we are the best.
I mean, there's nothing that we have to be shy of or be afraid of. I think we're actually pretty, very strong and good base to build on. And again, our objective is not to catch up. Our objective is to continue to lead the areas that we operate
Thank you. We'll move to our next question today from Joe O'Dea from Vertical Research Partners.
Hi, good morning. Can you talk about price cost assumptions for 2019? It's I didn't catch whether or not you're assuming of pure neutrality or whether you think that price can offset cost? I think based on what some peers have talked about with Ag pricing and some construction pricing, it could be a more favorable backdrop?
Sure. So as we said last quarter, the situation has not changed. We continue to see headwinds into raw material, particularly in the first half of the year, including also the impact from the tariff now that in absence of resolutions, remains an estimated impact of between $50,000,000 $100,000,000 for the full year 2019. All of those more than offset by pricing performance expected in 2019. Some of that pricing performance is already in the market.
Some of that has been is being announced and is going to be rolled out in the course of Q1. So we expect in the course of the year to be able to wash the 2 impact one with the other.
Okay. And then on commercial vehicles, your expectations for performance relative to the end markets and I guess primarily Europe. And as you talk about being more focused on more profitable product lines and clearly more proactive on the pricing front in the quarter. Do you think that translates into some underperformance or it doesn't look like in 4Q there was any apparent underperformance versus the end market, but I'm just wondering what you think that means in 2019?
So the game plan is obviously we are taking into the neck from a volume slash negative absorption point of view when we reduce our deliveries that are primarily associated with those buyback transactions. The expectation is that we recover that impact from a better pricing and a better product mix. And that is what has happened actually in the last two quarters. We expect to continue to be, let me say, in that race, particularly in the 1st part of the year when we're still going to have tough comps to compare against from a volume point of view. But as we move into the second part of the year, the expectation is that we should actually, have a tailwind on the and tailwind on the volumesabsorption as we continue to build our book on the LNG CNG applications.
Okay. Thanks very much.
Our next question comes from Chad Dillard from Deutsche Bank. Please go ahead.
Good morning. Good morning. So the guidance bakes in a healthy amount of margin expansion. So I was hoping you could actually unpack the drivers by segment and comment on whether you're seeing it as more of a first half or second half event?
Max, you want to So
we don't guide yet margin by segment, The expectation, as we said during the call, is there's going to be more tough comps in H1. Probably let me say the improvement the stronger improvement is backloaded, but the expectation from the management team is to continue to look at year over year margin progression as we move along the course of the year.
That's helpful. And then just going back to your comment about, building inventories across the business. Maybe you can help us think through, where inventory should should land as we exit 2019, by segment? Thanks.
So again, is going to be painful to go by segment on the inventory. Let me say that we expect inventory now that we have ramped up company inventory to be kind of in good shape from an end market point of view there are certain uncertainties, as an example, associated with the situation in the UK with Brexit, So we are kind of putting together countermeasures to protect our businesses in case of a no deal situation So we are kind of, affecting our inventory right now with some buffer to protect the market uncertainties. And, depending how those unfold, we may be able to release invent the inventory build up or not, but it remains to be seen.
Thank you. Our next question today comes from Ross Gilardi from Bank of America.
Yes, good morning. Good afternoon, everybody.
Hi there.
Hubert, if you guys are going to come out with margin targets across the different businesses, should we presume that you're going to really strive to hit those targets before you make any big portfolio changes?
Well, first of all, we don't put our targets that we don't want to hit And that's the first thing. And we're going to show you how we're going to hit it. So it's going to be not only fantasy, it's going to be very, very clear steps how we're going to get to those margin targets. And, and on the portfolio question, let's cross the bridge when we get there by midyear and we're going to answer the question then.
Do you have a view right now if we're at a peak in the European truck cycle?
I mean, we are, we are, yes, I think that, that is very clear. And the question was always, when is the industry going to, to go down a little bit I mean, and there was a fear in December that, that would happen because December was a bad month. It somehow abated, which was more positive in January, but we are we are trending at very, very high levels there. So the industry will not grow, significantly grow higher. At one point in time, it will base end the cycle and we go down.
When this is going to be, we will see, but as you see in our guidance on commercial vehicle, we had been minus 5 flattish. This is kind of where we see the industry trending this year.
And then just on Aveco, I'm not asking like what you're going to do with the business, but as you've gotten to know the assets, I mean, can the truck business in and of itself be, is it separable into different pieces? Is that even an option? I mean, can you separate any of the heavy versus medium duty versus light business because you seem to or you seem to have more of your strategic advantages more on the light and medium side versus heavy, where maybe you don't have the scale of some of the other players. Are there any other ways where you could the assets could be separated from one another just within truck? I'm just asking if it's feasible.
Yes. I mean, if you look at our and specialty vehicles, it's basically some of very different businesses. You have a very, very strong bus business with all order books skyrocketing, by the way, right now. And with a completely different footprint and distribution channel, then you have the firefighting business, which is completely different distribution business in the completely different footprint. And then within the truck segment, of course, there is also different assets around around medium, heavy and light.
And, and the distribution, however, is the same. But again, whether whether we are subcritical or not, let us do the analysis right now and let us really see what this revolution right now that's going on with a megatrend around alternative propulsion and LNG, what this is going to bring to our volumes because we are seeing, high 2 digits up to 3 digits growth in that segment. And currently, LNG is at a 1% only in Europe and in Germany. And that can go easily, easily to a 10%, 15% share of LNG in the truck market in Europe. And considering that we are the undisputed leader in that segment, that can be very healthy for our volumes.
But let's do the analysis now in the next months. And then we come back to you and we basically give us our give you our conclusions, okay?
Got you. Fair enough. I mean, on the CapEx and the R and D, I mean, are you viewing this right now as sort of a 1 year step up or Do you view this as potentially a new multi year run rate? Because clearly
We view this as a run rate. Run rate could go even higher on the R and D side. We would say. Again, we are putting a full potential plan out here. Our objective is to lead in the segments we operate in.
Okay. And that needs investment into R And D.
Is this new consortium with Shell and some of these other players on LNG at part of that CapEx increase at all. Can you just explain a little bit more about what your role in that project is? And is there going to be an ongoing capital commitment that you have to make to that?
Let's take that offline, Ross. That's a longer discussion. We take that offline. We give you a call later on and give you some details on that and how the funding mechanism okay.
Sounds great. Thank you.
Thank you. We will now take our final question today from Larry Demaria from William Blair. Please go ahead.
Bertes, with the Farmers Edge, with the Farmers Edge announcement within the past year, curious, what do you think about the commercial opportunities there and the potential for channel conflict?
No, we don't, we don't see general conflict there. It's it is a platform. It is an independent company. It has many positive effects for our end customers. It also has a lot of positive effects for us.
For example, the connectivity of our installed fleet because, we move our customers over into farmers edge We automatically connect thousands of machinery that are in the field right now and that are not connected. And obviously, the connectivity will then give the telematics aspects and FX positive for better usage of their assets for the farmer and also positive for us because we're going to increase our aftermarket business with that. So that's the reason why we're very positive around the Farmers Edge Development. And then if you look at agronomy, at large, and you look how agronomy is now digitizing. If you look at the Farmers Edge business model, which we like very much, we think it's a very, very strong and as you know, they're kind of exclusive with our dealers.
So I think we have a very, very good platform there, which is different to our main competitor. It's an open platform. So there's no conflict. If somebody wants to continue to basically go on Climate Corp, that is not a problem. If somebody wants to continue using other solution, that's not a problem.
We are, we're kind of having an Android approach here and, and we can basically interface to any existing infrastructure that is there in the farm. And by the way, we are also working in Max saying that we also we are working very well also with Climate Corp, and we give the freedom to our customer to work with either AgDNA in Australia, by the way, it's a smaller company in the agronomy space, or with Climate Corp, or with Farmers Edge. We just believe that the Farmers Edge solution right now is very, very competitive. We like the team there. We like the company and we're supporting them.
Okay. Thanks. And then your previous comment about being a leader in your industry, I guess agriculture is obviously the one you're closest to having a leadership position. The others are further behind. So I'm curious about how the uptick in R&D is skewed between the segments and if it's particularly skewed towards Ag and maybe not so much towards the other segments, which are much more difficult to get to that leader position.
Yes. I mean, the question is always how you define leader. Mean, obviously, that's why I was going to comment on construction. We're not a market share leader in construction equipment. So the question is, you know, in the in this prospective segments, you operate, you want to have leadership in technology.
And I think what also people have not yet realized is with the going down of diesel and the emergency of, you know, electronic drives or also gas drives. I also think that we're going to see in the off highway market a lot more LNG and CNG powered equipment. And that for me is then the leadership position that you would then have in that specific segment because that's going to be a competitive advantage going to be USP for us. So that's how I would define leadership. It's in the segments where you that you offer and needless to say our margins today are not where they should be.
I think they're very, very competitive in the powertrain segment. I mean, we are industry leading there. We are very, very competitive in AG, but we have enormous room for improvement in commercial vehicles and on the CE side. And I think we can do this despite having the scale of some of our larger competitors. And that's what we're going to analyze in the in our strategic business plan, how we can basically bring those markets up, how we can increase scale where needed or how we can refocus in areas where we do have competitive advantage and where we basically get that innovation premium that will drive the margins.
And talking about innovation premium, and we are not the largest CV manufacturer on the planet, clearly not. We're number 5 in Europe. However, in that niche, which has become a very, very prominent segment of LNG, we have a USP and we have a competitive advantage and also a margin advantage and people are paying for the innovation premium.
Got you. Okay. Thanks. Appreciate the purchase. And we'll message you down here at Napa.
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, Emma. I wish to thank you everybody to participate today at call and have a nice day. Bye bye.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.