Good morning and afternoon, ladies and gentlemen, 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 the express written consent of CNH Industrial is strictly forbidden. We are pleased to have here with us today CNH Industrial CEO, Hubertus Mühlhäuser, and our CFO, Max Chiara, 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&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 in the company's most recent Report 20F and EU Annual Report, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission and the equivalent authorities in 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 GEC organization, we have consistently updated the geographical composition of our regional sales information as indicated in supporting material of this earnings release. I will now turn the call over to Hubertus.
Thank you, Federico, 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. 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, adjusted EBIT for industrial activities was up more than 20%, with adjusted diluted EPS up more than 60%. For the full year, industrial net sales were up 7%, with adjusted EBIT up 40%, and both adjusted net income and adjusted EPS were up by over 70% to $1.1 billion, or $0.80 per share.
That marks a 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 through our focus on disciplined cost management, targeted pricing strategies, and operational synergies. Operating cash flow for the full year was also strong at $1.2 billion, which contributed to reducing our net industrial debt by one-third to $600 million 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 Investors Service upgraded CNH Industrial to investment grade with a Baa3 rating and a stable outlook.
With this, we are now finally investment grade by all three major rating agencies, which is a major milestone in our commitment to strengthen our rating position going forward and to close the funding cost gap with our major peers. Furthermore, due to the strong results and the solid cash position at year-end, the board of directors is recommending at the next annual general meeting of our shareholders a dividend of EUR 0.18 per common share, which is a sizable increase of 30% versus prior year dividends. This would translate into a total cash impact of approximately EUR 244 million, approximately $278 million at the 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 one of only 27 companies out of a total of 2,000 companies under consideration included in the CDP Water Security A-List, and we scored an A- in the overall CDP Climate Change rankings. Our high score in the climate change program reflects our significant progress in this area. The recognition, together with being named the industry leader in the Dow Jones Sustainability Indices World and Europe, as well as FTSE4Good Index Series member, confirms our commitment to ensuring continuous improvement in sustainability performance. Moving now on to slide four. 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, 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 strength in the last quarter, up 15% in light and 7% in heavy on a worldwide basis. An example of this strength would be general infrastructure and non-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.
While there have been some weaknesses during the last quarter in certain markets like EMEA AG and LATAM CE, 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, Bertus, and good morning or good afternoon, everyone on the call. Moving now to slide five, 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 remained healthy during the quarter. Net sales in our industrial segments were up 3% in cost and currency for the quarter and ended up 7% for the full year. Importantly, adjusted EBIT was up 24% in the quarter and 40% for the full year, leading to an adjusted net income for the year of $1.1 billion, 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. We expect it to remain stable at this level during 2019.
We were able to lower net industrial debt by 1/3 to $0.6 billion by focusing on improving cash flow and reducing overall debt levels. Available liquidity was $8.9 billion, down $0.4 billion 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 six, 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 $1.9 billion, up over 7%, with all businesses up year-over-year.
Agricultural equipment contributed $1.1 billion and was up 10.4% as a result of a favorable cash crop sub-segment in North America, a recovery in the Brazilian market and strong pricing performance across the board. Construction equipment sales increased more than $500 million or over 20% as a result of increased demand across all regions. Commercial Vehicle Sales increased $140 million or 1.3%, mainly as a result of positive pricing and favorable product mix. FPT Industrial was up $60 million or 1.4% year-over-year. For the fourth quarter, net sales were $7.7 billion, 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 seven with an overview of our operating results at the industrial activities level for the full year and the fourth quarter compared to prior year. As you can see here, all segments deliver positive results both for the quarter and the full year period, resulting in an adjusted EBIT margin improvement of 130 basis points to $1.6 billion for the full year and 110 basis points to $432 million 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&D spending on product development as well as raw material and other trade-related cost increases partially offset these gains, especially in the back half of the year.
Moving on to slide eight, 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 million at the end of 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 year was $556 million as a result of a solid Q4 performance of $1.4 billion coming primarily from a positive change in working capital.
For the full year, working capital was a net use of cash of about $500 million, mainly due to the inventory increase year-over-year. Some reasons for the increase include in NAFTA to support the stronger end market and the solid order book, and in Europe to mitigate the potential risk of Brexit and to prepare for the Stage V transition in 2019. As a result of the consistent cash flow performance over the last few years, we have been able to reduce our third-party gross debt to about $5 billion, half the amount of 2013 when we started our journey, while maintaining a healthy buffer of liquidity.
Turning to slide nine, operating cash flow was $1.2 billion in the year as a result of the strong operating performance of the company, which funded the dividend payment of $243 million and allowed us to repurchase 156 million of common stock, corresponding to 12.5 million shares. The current share buyback authorization allows us to repurchase up to $700 million. 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 million, which is up over 10% from 2017 and sits now at 2% of net sales. For 2019, we expect R&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 mega trends, 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 million, an increase of 15% compared to 2017 when adjusting prior year for the one-time tax benefit of $118 million related to the write-down of deferred tax liabilities in connection with the enactment of the 2017 U.S. Tax Cuts and Jobs Act. For the full year, retail loan originations were $10 billion, up $0.9 billion compared to last year, with higher volume in all regions except APAC. The managed portfolio of $26.3 billion at year-end was up $0.7 billion 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 basis points from one 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 industry conditions in Brazil are driving a sustained demand with book of business up 30% year-over-year.
In 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 we are able to increase EBITDA margins to 11.5% and EBIT margins to 8.9% 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 underproduction in 2017 to a more balanced production performance 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 basis points.
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 and 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 basis points for EBITDA, now at above $150 million for the full year, and up 360 basis points for EBIT closing with a margin of 3% to sales. We are proud that in 2018 the business turned from a loss of $16 million in 2017 to a profit of $91 million EBIT in 2018. We would like to note that this is prior to applying any benefit related to our 80-20 initiative, which we assume will start to contribute positive results in 2019 and beyond. We will report more about this in the course of 2019.
The year-over-year improvement was primarily due to operating efficiencies, higher sales volume, favorable mix, and positive net price realization, more than offsetting raw material cost increases. In the fourth quarter, adjusted EBIT was $32 million with an adjusted EBIT margin of 3.9%, up 310 basis points 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 year as a result of lower volume, primarily in heavy vehicle trucks in EMEA, attributable to an unfavorable industry trend, particularly in 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 basis points and EBIT margin up 90 basis points 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&D spending was up 9%. For Q4 2018, adjusted EBIT was $90 million, with an adjusted EBIT margin of 2.9%, up 100 basis points year-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. Bus 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. Fourth quarter adjusted EBITDA was $536 million, up $50 million compared to full year 2017, with a margin of 11.7%, up 50 basis points. Adjusted EBIT was $406 million, up $46 million 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%, up 150 basis points compared to the fourth quarter of 2017, obviously in the fourth quarter of 2018. This is a record margin for FPT, representing a milestone achievement for the segment. I have concluded my section of the presentation and will turn it back over to Hubertus for the outlook and his final remarks before opening it up for the Q&A session.
Thanks, Max. Please join me now on slide 16. Let me first point out an administrative item here, which has to do with the regions and how we will be referring to them going forward. In line with the announcement of our new organizational structure, we have amended the composition of our regions that will become effective starting from Q1 of 2019. At a high level, we have changed NAFTA and LATAM regional naming to North America and South America respectively. EMEA will change to Europe, now excluding from the region Middle East and 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 a trade dispute and other issues which are beyond our control persist. Some of our key customers have been struggling to figure out this volatility, and hence the optimism that we sensed at the beginning of last year has gradually faded. We expect to get more clarity and see a resolution to the core issues as we progress through the year.
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 first 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 first two 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 the 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%-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 the 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 fleets 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. Despite a softer geopolitical and macroeconomic environment in some regions, CNH Industrial 2019 guidance is as follows. Net sales of industrial activities at approximately $28 billion, 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 and $0.88 per share, with a growth of between 5%-10% year-over-year.
Net industrial debt at the end of 2019 between $ 200 million and $ 400 million, moving us closer to a net industrial debt-free position. In order to facilitate your projections on our full year 2019 guidance, we would also provide an indication of the following items. Increased investments in organic growth with CapEx and R&D up year-over-year, reaching 2.5% and 4% of sales respectively. Operating cash flow will be about $ 200 million 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. I would 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 agriculture, 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 customers solutions that offer greater control of their machine and agronomic data, and the ability to apply this information in numerous ways to significantly decrease operating costs and drive higher profitability through greater yield and a far better use of their resources. Also noteworthy is an initiative we started in Europe under the header of AGXTEND. We have partnered with promising startup companies that focus on innovative and unique aftermarket solutions and services in the agricultural industry, from an innovative soil sensing technology to IoT environmental sensors, 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. We anticipate rolling out these products and services to 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 their potential for our dealers and end customers alike. Separately, I would like to discuss a 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 Iveco will be Shell, DISA, and Nordsol to form the so-called BioLNG EuroNet, which covers the building of a pan-European network of 39 fueling stations covering three trucking routes every 400 km from Southern Spain to Eastern Poland, as well as the building of a large biomethane 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 NP 460 won Sustainable Truck of the Year 2019, and the Case IH Maxxum 145 Multicontroller has won Tractor of the Year 2019.
Additionally, the methane-powered concept tractor was recognized for its reimagined design features 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/CNG adoption in the off-highway marketplace. Moving now to 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 three main themes of alternative drivelines, automation, and digitization. I want to emphasize just a few highlights.
To further improve our offering in commercial vehicles, we are launching new electric versions of our 12 m and 18 m 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 and Euro VI 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 digitalization space, we're investing in high horsepower machinery, mostly tractors, and solutions that will assist farmers in making more informed decisions based on next-generation connectivity and precision solutions that will cut costs while leading to 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 front line, and put us on a quicker and more profitable growth trajectory. The five 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 mega trends that transform our industries. In this new and leaner structure, we have appointed two new Global Executive Committee members to strengthen our global leadership team. Gerrit Marx will lead our combined Commercial and Specialty Vehicles segment. He has held various leadership positions at Daimler Truck and Volkswagen and will help us to reposition our Iveco businesses and to continue to drive the turnaround of our CV segment. Andreas Weisser was brought on board to lead the combined group functions of strategy, digital, and talent, and to support us on our transformation journey over the next years. Andreas has proven to be very effective in similar positions at AGCO Corporation and Welbilt in his 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 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 one 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. Our group-wide 80-20 initiative will be showing results starting later this year. Further, our new organizational structure will allow us to rethink and resize the organization and to look at our manufacturing footprint to support our growth strategies, as well as the continued turnaround of our commercial vehicles and construction businesses. The priority number two will be to conclude our strategic business plan. Our industry is experiencing an ever-accelerating rate and growing magnitude of change, fueled by the mega trends such as digitalization, automation, electrification, and servitization. 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 mega trends 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. 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 highlighted before, 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, which will help close the gap with our higher-rated peers. With this and other aspects in mind, we are committed 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 for 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 turn it back to Federico.
Thank you very much, Hubertus. This concludes our prepared remarks for the full-year results. We can now open up for questions. Operator, over to you.
Thank you. Ladies and gentlemen, today's question and answer session will be conducted electronically. We will take our first question from Steven Fisher from UBS. Please go ahead.
Thanks. 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. The answer is yes, we maintain a very cautious approach in ag. As you know, the resolution on the trade disputes is still up in the air, which doesn't allow us to make any particular confident statement about the back half of the year. I would say that we continue to maintain cautious throughout the year for now.
As we said, this is Alberto, between flat up five. Obviously, if the trade issues are resolved earlier, this can go higher. For the time being, to everybody that we're talking right now, this seems to be the reality that we are living in right now in 2019.
Okay. A status quo in your mind would still support enough of a replacement demand market to support your outlook down the line.
Yes. Currently, that demand is driven by replacement demand that is there. Commodity prices 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. 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, in the absence of a resolution, we are living through replacement demand right now, which would give us flat to 5%.
Okay, great. Then, on construction, I think you said your order book on heavy construction was flat, but you're 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? Is your North American order book actually up, and how much?
The order book is reflecting a much healthier position at the dealers in terms of having restocked their inventories to support the larger demand. I think now that the inventory positions at the dealers is line up with the new industry, we are seeing an adjustment to the order book for the first part of the year. This is a comment that is valid for NAFTA. In the rest of the geographies, we see solid order books in line with previous years.
Just how are you thinking about the first half versus the second?
I said we are hopeful that we're going to have a huge infrastructure bill in NAFTA that can drive even higher numbers. We 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 good. If it doesn't come through, it's going to be what we have said. That's the cautiousness in our guidance right now.
Got it. Thanks a lot.
Thanks.
Thank you. 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? 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 or things of that nature we should also expect to hear at the meeting.
Well, as you've seen, we have made quite some significant changes to our organizational structure and taking complexity out. 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. That's what we're going to 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 mega trends.
However, we also have a lot of synergies between the different divisions. 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.
While you are stepping-
Rest assured, we are-
Oh, please go ahead.
Pardon? Yes.
Sorry. Please go ahead.
Yeah, but-
With the step-up in CapEx and R&D.
Yeah.
Sorry for the delay on the phone. Go ahead.
No, it's okay. Ask your question. It's fine. It's your time.
Well, I was curious, the meeting and the strategic assessment, I know we want both revenue growth and margin expansion. Just trying to think through the step-up in CapEx, the step-up in R&D. If we're trying to digest a, I don't want to 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 over growth, 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, is the tone change of how to think about 2024 and forward?
We got to look at our business from an operational lens and from a strategic lens. Needless to say, the operational lens, a lot of the different items are already in play. We're rolling out 80/20. We are de-complexing the organization. We're driving continuous improvement with World Class Manufacturing. We just basically have to put everything on the table and then see where that leads us operationally. Then we're also going to take a strategic lens, where do we want to bring those business? Just evolution is not going to be enough. We're going to look where can we grow, and in other areas, perhaps beyond our classical equipment business. As the ag scene, for example, is changing dramatically and so is the construction equipment, we will look also into other segments where we can basically find pockets of growth and that might lead to M&A activity.
Let's not jump to conclusions 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 will share all that with the investor community later in the year.
That's helpful. One last quick question. The 2019 sales guide of essentially flat, can you help us with which segments you expect to be up and which ones down to net to the flat? Thank you.
Well, we said flat to modestly up. I guess you can assume that construction is going to be continued to grow, so will ag. Max, anything to add on that?
Just I would like to add a comment that the segment that is going to be seeing a little bit of headwinds next 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 a much milder pace, is going to affect the engines below 56 kW. 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.
Hi, good morning, guys.
Hello, Ann.
My first question is around the whole notion of flat or slightly up demand in ag and turf for next year or agriculture, versus the buildup of inventory. Why were we overproducing this year, particularly tractors up 27%, combines up, 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 push on the Q4 earnings, Ann. This is Max speaking. The 27% number for the tractors in unit equivalent is 4,000 tractors in total on a worldwide basis and is evenly split among the regions. We are actually producing to bring the inventory up to the level that is required by the slightly sustained demand that we have seen vis-a-vis historical comparable periods. In general terms for tractors, there was a step up in inventory to support demand. For combines, the inventory is actually almost flat. We have recovered the underproduction that we went through in 2017 on row crop NAFTA in 2018, and now we expect to produce in line with retail going forward.
For combines and tractors?
Yes.
Okay. 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 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 was basically a reduction of market share by design. This has been mostly compensated by an increase in LNG and CNG-driven vehicles. We see this trend to continue, but it's 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 competitive diesel 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, therefore, the LNG is a credible alternative.
That would, of course, help us also to fill our factory, specifically in Madrid. I think that's going to be good, and it's going to help absorption. Yeah. On the infrastructure, I think that's also noteworthy, Ann, because I think you have been at last year at the IAA in Hanover, Germany is lagging a good infrastructure. I think we are making a mega push this year with that consortium and also with our mobile LNG stations that by latest mid-year, I would say, we have a grid that is supportive of large truck fleets. As you know, the autonomy on LNG is fairly remarkable. You drive from London to Madrid with one fill. It's around 1,600 to 1,700 with one fill-ups, which is really good in terms of autonomy and independence. Plus all the other economic benefits that you have.
Okay. Just finally, any idea around when the capital markets day might take place? You gave us a calendar for 2019, it's conspicuously absent.
It will not be at Christmas, okay? It will be before. It will not be a spring event. It's got to be middle of the year.
Okay, thank you for that.
It's got to be middle of the year when.
Oh, I hope my
try to find a very nice place to host you guys, okay?
Appreciate that. I'll turn it over. Thank you.
Thank you, Ann.
Thank you. Our next question today comes from Rob Wertheimer from Melius Research. Please go ahead.
Hi, good morning, everyone. 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 mega trends that you highlight 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. Do you have any comment on whether partnering is adequate or whether you need to be doing more internally?
No, actually, I think I said this last time. The more I get to know the company, the more positive surprises we see. Sometimes we had been shy talking about what we really do. If you take the digital revolution in ag, I don't think that we're that bad. I think if you look at the roll-outs that we have done last year and this year, we're absolutely competitive with our digital ag offering. Our objective is not to catch up with some of our competitors, it's to leapfrog them. I think if you look at our moves into agronomy space, I think that is actually setting the pace here in ag. If we drive now jointly with Farmers Edge, these agronomy solutions further, I think we're going to be in a very competitive spot in ag. The same goes for the truck market.
Everybody's talking about electrification, but make no mistake, electrification for a heavy-duty truck, battery power, that's going to be eight, nine years out. What do you do in the interim? 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. I think investors need to understand that we have really a very competitive advantage there. We're not behind, we are ahead of the industry. Daimler and Volkswagen would be happy if they had a comparable LNG truck that we have with the same economic data. We are not that bad. If you look at construction equipment, we have to make some investments. It's a smaller business for us, but I think we are absolutely competitive. Are we competing head-on-head with Caterpillar everywhere? No, we're not.
That's also not the intent. This is for us a nice buy industry jointly distributed with the ag side. I think we're doing good there. Let me end with FPT, Fiat Powertrain, a remarkable business. Again, our competitors would be happy if they had a business with those features. We are, after Cummins, the second largest independent engine producer. For the regulated markets, we are the best. There's nothing that we have to be shy of or be afraid of. I think we're actually a pretty strong and good base to build on. Again, our objective is not to catch up. Our objective is to continue to lead in the areas that we operate in.
All right. Thanks, Hubertus.
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? I didn't catch whether or not you're assuming sort 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. 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 million and $100 million 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 is being announced and is going to be rolled out in the course of Q1. We expect in the course of the year to be able to wash the two impact one with the other.
On commercial vehicles, your expectations for performance relative to the end markets, and I guess primarily Europe. 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.
The game plan is obviously we are taking into the neck from a volume/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. 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 first part of the year, when we're still going to have tough comps to compare against from a volume point of view. As we move into the second part of the year, the expectation is that we should actually have a tailwind, potentially a tailwind on the volumes/absorption as we continue to build our book on the LNG, CNG applications.
Okay, thanks very much.
Thank you. Our next question comes from Chad Dillard from Deutsche Bank. Please go ahead.
Hi, good morning, good afternoon, everyone.
Morning.
Morning. The guidance bakes in a healthy amount of margin expansion. I was hoping you could potentially 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 take that?
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 stronger improvement is back-loaded, 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. Then just going back to your comment about building inventories across the business. Maybe you can help us think through where inventories should land as we exit 2019 by segment. Thanks.
Again, it's 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 in good shape from an end market point of view. There are certain uncertainties, as an example, associated with the situation in the U.K. with Brexit. We are putting together countermeasures to protect our businesses in case of a no-deal situation. We are affecting our inventory right now with some buffer to protect the market uncertainties. Depending how those unfold, we may be able to release the inventory build-up or not, but it remains to be seen.
Great. Thanks. I'll hop back in queue.
Thank you.
Thank you. Our next question today comes from Ross Gilardi from Bank of America.
Yeah, good morning, good afternoon, everybody.
Hi there.
Hubertus, 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 out targets that we don't want to hit. That's the first thing. We're going to show you how we're going to hit it. It's going to be not only fantasy, it's going to be very clear steps how we're going to get to those margin targets. On the portfolio question, let's cross the bridge when we get there by mid-year, 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?
Yes, I think that is very clear. The question was always, when is the industry going to go down a little bit? There was the fear in December that that would happen because December was a bad month. It somehow abated, was more positive in January. We are trending at very high levels there. The industry will not significantly grow higher. At one point in time, it will basically 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 vehicles, we had been -5 to flattish. This is kind of where we see the industry trending this year.
Just on Iveco. I'm not asking what you're going to do with the business, but as you've gotten to know the assets, can the truck business in and of itself, is it separable into different pieces? Is that even an option? Can you separate any of the heavy versus medium duty versus light business? Because 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 the assets could be separated from one another just within truck? I'm just asking if it's even feasible.
If you look at our Commercial and Specialty Vehicles, it's basically a sum of very different businesses. You have a very strong bus business. With all order books skyrocketing, by the way, right now, and with a completely different footprint, different distribution channel. You have the firefighting business, which is a completely different distribution business and a completely different footprint. Within the truck segment, of course, there is also different assets around medium, heavy, and light. The distribution, however, is the same. Again, 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 the mega trend around alternative propulsion and LNG, what this is going to bring to our volumes. Because we are seeing high single digits up to 2 digits growth in that segment.
Currently, LNG is at 1% only in Europe and in Germany, and this can go easily to a 10%-15% share of LNG in the truck market in Europe. Considering that we are the undisputed leader in that segment, that can be very healthy for our volumes. Let's do the analysis now in the next month, and then we come back to you, and we basically give you our conclusions, okay?
Got you. Fair enough. The CapEx and the R&D, are you viewing this right now as sort of a one-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&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? That needs investment into R&D.
Is this new consortium with Shell and some of these other players on LNG a part of that CapEx increase at all? Can you just explain a little bit more about what your role in that project is? 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, and we give you a call later on and give you some details on that and how the funding mechanism works, okay?
Sounds great. Thank you.
Thank you.
Thank you. We will now take our final question today from Larry De Maria from William Blair. Please go ahead.
Thanks. Good morning, good afternoon, everybody.
Hi, Larry.
Hubertus, with the Farmers Edge. Hey, Hubertus. With the Farmers Edge announcement within the past year, just curious, how do you think about the commercial opportunity there and the potential for channel conflict?
No, we don't see a channel conflict there. 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 if 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. Obviously, the connectivity will then give the telematics aspects and effects 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. That's the reason why we're very positive around the Farmers Edge development.
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 strong partnership. As you know, they're kind of exclusive with our dealers. I think we have a very good platform there, which is different to our main competitor. It's an open platform. There is no conflict. If somebody wants to continue to basically go on Climate Corp, that is not a problem. If somebody wants to continue using our other solution, that's not a problem. We're kind of having an Android approach here, and we can basically interface to any existing infrastructure that is there on the farm. By the way, we are also working in.
Okay. That's helpful.
Max saying that we are working very well also with Climate Corp. We give the freedom to our customers, of course, 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 competitive. We like the team there, we like the company. We're supporting them.
Okay, thanks. Hubert, 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. I'm curious about how the uptake in R&D is skewed between the segments, if it's particularly skewed towards ag, maybe not so much towards the other segments, which are much more difficult to get to that leader position.
The question is always how you define leader. Obviously, that's why there was no comment on construction. We're not a market share leader in construction equipment. The question is, in these respective segments you operate, you want to have a leadership position in technology. I think what also people have not yet realized is with the going down of diesel, the emergency of 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. 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. It's going to be USP for us. That's how I would define leadership.
It's in the segments where you act, that you have a leadership position in terms of a service or a product that you offer. Needless to say, our margins today are not where they should be. I think they are very competitive in the powertrain segment. We're industry-leading there. We are very competitive in ag, we have enormous room for improvement in commercial vehicles and on the CE side. I think we can do this despite having the scale of some of our larger competitors. That's what we're going to analyze in our strategic business plan, how we can basically bring those markets up, how we can increase scale where needed, how we can refocus in areas where we do have a competitive advantage, where we basically get that innovation premium that will drive the margins.
Talking about innovation premium, and we are not the largest CV manufacturer on the planet, clearly not. We're number five in Europe. However, in that niche, which has become a 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 input. We miss you down here at Napa. Talk to you soon. Thanks.
Thank you. Bye-bye.
Thank you. That will conclude the question and answer session. I would now like to turn the call back over to Federico Donati for any additional or closing remarks.
Thank you, Emma. I wish to thank you, everybody, to participate today at call. 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.