Thank you, Sergey. Good morning and afternoon, everyone. We would like to welcome you to the CNH Industrial Third Quarter 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 expressed written concept of CNH Industrial is strictly forbidden.
We are pleased to have here with us today CNH Industrial CEO, Hubertos Moulhoiser and our CFO, Max Carra, who will be hosting today's call. They will use the material you may download from the CNH Industrial website. After their presentation, we will hold in a Q And A session. As a final comment, please note that any forward looking statement might be making during today's call are subject the risk and uncertainties mentioned in the Safe Harbor statement, including in 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 equivalent authorities in the Netherlands and Italy. The company presentation may include certain non GAAP financial measures. Additional information, including reconciliation to the most directly comparable GAAP financial measures is included in the presentation material.
I will now turn the call over to Bethus.
Thank you, Federico, and good morning, and good afternoon to everyone. I'm very months and a half, I've been traveling extensively to visit our facilities and meet with our regional management teams and of course, our customers. At the end of the presentation, I would like to share with you some of my initial impressions as well as my thoughts on our priorities. But for now, I would like to touch on a few earnings highlights before we move into the detailed results. Spite uncertainties related to the geopolitical headwinds and raw material inflationary challenges that have had an impact in most markets where we compete.
We achieved an adjusted diluted EPS of $0.16 per share, up 45% compared to the Q3 of last year. We have seen continued margin improvement in all industrial segments with strong operating leverage in agricultural and construction equipment, while in commercial vehicles, the refocusing strategy on product mix is on track as anticipated. We continue to invest in new product and technologies to drive the next generation of platforms, particularly on Precision Farming and Stage 5 transition on off road engine applications. Lastly, we are confirming our full year expected now at the high end of the range. Moving on to Slide 4, let me provide you with a high level industry update for the third quarter.
I won't go through line by line, but what I just would like to highlight here is that in ag, NAFTA row crop continues to trend positively, with strong performance as customers replace dated equipment, especially in the high horsepower segment. In this replacement demand environment, order book remains strong despite sentiment softening with an after orders up about 10% year over year Q3. CE once again was positive in all regions as a global construction trends we have been seeing continue and in some cases gained strength. Especially in heavy equipment. In the quarter, our production levels were up 15% supporting a healthy order book For CV, the EMEA truck market was up 7% year over year, with most key markets demonstrating positive growth and continuing to perform at high level.
Brazil was up 51% off a low base and Argentina down 31% in the quarter due to a difficult macro environment. Overall, while we're seeing some weakness in certain specific markets, the key markets for us are generally improving with strong positive demand trends. At this point, I hand it over to Max for the financial overview of the presentation. Max?
Thank you very much, Hubertus. And good morning or afternoon to everyone on the call. Moving now to the key figures of our third quarter. In summary, we finished the quarter with strong earnings and improved operating profitability across our segments after most end markets remained healthy during the quarter. Although the top line was flat year over year, we did have an 18% improvement in construction equipment sales and a 4% increase in agricultural equipment, offset by a decline in commercial vehicles and powertrain.
Net income of $231,000,000 for the third quarter of 2018 included a pretax gain of $30,000,000 of certain health care benefits in the United States, following the favorable judgment issued by the United States Supreme Court as previously announced. Instead, as a reminder, in the third quarter of 2017, net income included a charge of $39,000,000 related to the repurchase of notes as well as a $53,000,000 of restructuring charges, primarily in our firefighting business. When I move to our non GAAP figures, adjusted EBIT of industrial activities closed at $321,000,000, with margin up 100 basis points to 5.1% with all segments reporting higher margins than the same period last year. Adjusted EBITDA of industrial activities was 591,000,000 up 13% from last 7% year over year with adjusted diluted EPS at $0.16 a share, up 0 point 0 $5 from previous year. On a year to date basis, our revenues are now up 10 45 percent to $1,150,000,000, denoting a strong operating leverage mainly as a result of incremental production and favorable price realization across the portfolio, while we continue to enjoy efficiency in our industrial operations to offset raw material headwinds and inflationary cost increases.
Adjusted net income for the 9 month period is up almost 80% with adjusted diluted EPS up $0.25 per share. Of that increase, 2 thirds is due to the operating performance improvement and 1 third comes from lower interest expense and a lower tax rate now at 28% for the year to date period, in line with our full year expectations as well. Net industrial debt at the end of September was $2,000,000,000, $700,000,000 higher than in June due to the seasonal increase in net working capital. Although I will describe in more detail, the cash performance in Q3 in the following pages, let me tell you that based on where we are at the end of September and looking at our historical cash flow performance achieved in Q4, We feel confident we can reach our net debt guidance for the full year. Available liquidity was 8,300,000,000 slightly down compared to the end of June 2018.
The liquidity to revenue ratio was maintained at just below 30% with net industrial debt to adjusted industrial EBITDA below one times. This performance is a clear sign that we remain fully committed to our further improving our credit rating from the current levels. In the quarter, we also had a positive development at S And P rating with the raising of 1 notch to BBB flat of our long term rating at both the industrial as well as the capital entities as a testament to our balance sheet deleveraging efforts now coupled with a strong operating profitability improvement year over year. Turning to Slide 6, let's discuss the 3rd quarter performance in our Industrial Activities net sales. Net sales were flat in the 3rd quarter when compared to the third quarter of year with FX currency translation negative 4%, primarily driven by the stronger U.
S. Dollar. Net sales at constant currency increased organically $259,000,000 or 4 percent with agricultural equipment contributing $205,000,000 $240,000,000 and up 8.4% as a result of price realization across all regions and higher sales volume primarily NAFTA. Construction equipment net sales increased $131,000,000 or 21 percent as a result of higher volume and favorable net price realization on the back of a sustained positive industry trend, primarily NAFTA and APAC. For commercial vehicles, net sales decreased $76,000,000 or 3 percent as a result of lower sales volume, primarily in heavy vehicle trucks in EMEA, partially offset by favorable pricing across all regions and the positive end market demand environment in light duty vehicles in Europe with the other markets down in volume, primarily Argentina and Turkey.
Powertrain was down 6.4% year over year Instead. In terms of regional mix, NAFTA is growing three points offset by LatAm and APAC, which are down inclusive of the negative FX impact. Turning to Slide 7 now with an overview of our operating results at the industrial activities level for the third quarter of 2018 and compared to prior year. On a flat revenue, we were able to reduce cost, improve margin and maintain cost discipline in our SG and A expense, to close the third quarter with an adjusted EBIT up 24% year over year to $321,000,000, with a margin over revenue of 5.1% improvement of 100 basis points year over year. Most segments contributed positively, all posting improved EBIT margins versus the same quarter last year moving the adjusted EBIT margin improvement on a year to date basis to 130 bps for the industrial operations.
The adjusted EBITDA closed at $591,000,000 with a margin of 9.5 percent, up 110 basis points compared to last year. Moving on to Slide 8 to discuss our net industrial debt performance. Net industrial debt of $2,000,000,000 at the end of September was $700,000,000 higher than the end the second quarter of 2018 as a result of the cash flow usage of $700,000,000 during the third quarter. The cash usage in the period is primarily the result of 3 things. First was the typical seasonality trend caused by the summer production shutdown in NAFTA and EMEA second was the larger payable decrease due to higher production in the second quarter of 2018 versus the same quarter in 2017.
And third was the increase in inventories caused by engine stockpiling in preparation to the Stage 5 transition at the beginning of 2019 and by some supply chain bottlenecks in NAFTA due to constraints in ramping up capacity at our supplier base. When we look at the full year, we are on path to achieve our net debt target within the guided range of between 0.7 and 0.9. $1,000,000,000 as we are targeting a cash generation figure for the fourth quarter of between $1,100,000,000 to $1,300,000,000 which is below the average realized Finally, we start seeing a double digit increase in our CapEx program, up 16% year over year, flowing through in the third quarter. More importantly, is the mix shift within the categories of spending where we are actually more than doubling the spending in new products in an effort to accelerate initiatives to support the growth in our Industrial segment. CapEx is now running around 2% of revenues in line with our expectations for the full year.
Moving on to Slide 9, our Financial Services business. Net income was up $6,000,000 compared to the third quarter of last year. For the quarter, retail loan originations were $2,400,000,000, flat compared to last year, a result of a third quarter performance where originations were growing in the aftermarket after 3 consecutive years of declines due to the ag cycle since 2014. The managed portfolio of $25,500,000,000 as of the end of September was up $400,000,000 at constant currency. With NAFTA negative more than offset by the other three regions or positive.
Credit quality performance is improving on the back a healthy evolution in our primary end market, with delinquencies tracking on average at 3.2% of the total portfolio, down 40 bps versus 1 year ago, half of which comes from a benign credit environment in Brazil, while the other half is split between NAFTA and EMEA. Turning now to the individual segment performance. On Slide 10, Agricultural Equipment increased net sales of 8% on a constant currency basis, was primarily the result of price realization across our regions and higher sales volume in NAFTA, partially offset by soft demand in Australia and Northern Europe due to severe drought conditions and in Turkey and Argentina due to geopolitical worries. Adjusted EBITDA was $272,000,000, up $17,000,000 compared to the third quarter of 2017, with a margin of 10.3%, up 30 bps. Adjusted EBIT was shy of $200,000,000 in the third quarter of 2018, a $23,000,000 increase compared to the third quarter of 2017.
Adjusted EBIT margin increased 60 basis points to 7.4% compared to the third quarter of 2017. The increase was mainly attributable to a favorable net price realization of approximately 3%, including the flow through of the benefit from the investment grade achievement in lower interest compensation to financial services, while the anticipated raw material cost increase was offset by manufacturing efficiencies and lower warranty costs due to improved quality performance. Similar to previous quarters, the segment continued to see increased product development spending related primarily precision farming and compliance with stage 5 emission requirements with a 10% increase year over year. Additionally, lower JV income and negative foreign currency exchange impacted the result. Inventory levels in NAFTA row crop fled to the end of June remaining balance with the expectation of a retail to production ratio for the full year is slightly below 1.
While we are continuing with the stocking in NAFTA, hay and Forage as discussed in previous quarters. Turning to the next slide. Construction equipment net sales increased 18 percent in the third quarter of 2018 compared to the third quarter of 2017. As a result of favorable end user demand, primarily in NAFTA and APAC and net price realization. Adjusted EBITDA was $41,000,000, up $23,000,000 from last year, with a margin of 5.6%, up 70 bps.
Adjusted EBIT was $26,000,000 in the 3rd quarter, a $24,000,000 increase compared to the third quarter of 2017, with an adjusted EBIT margin increase of 330 bps to 3.6% as a result of higher volume favorable product mix and net price realization more than offsetting raw material cost increases and negative effects. In the quarter, production levels were 13 above retail demand in anticipation of the 4th quarter retail seasonality. We did our inventory up versus June, primarily in NAFTA, at stable forward month of sales debt. On Slide 12, commercial vehicles net sales decreased 7% in the third quarter of 2018 compared to the third quarter of 2017. Down 3% on a constant currency basis as a result of lower sales volume primarily in heavy vehicle trucks in EMEA partially offset by favorable pricing across all regions.
We start seeing price realization in heavy at work in Europe. Total deliveries were down 8% year over year as increased volume in light commercial vehicles and in buses as a result of increased end user demand in EMEA and Brazil were more than offset by the impact of lower volume in heavy 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 alternative propulsion vehicles. Consistent with this trend in sales, We are reducing channel inventory to make sure we maintain the product availability in balance to the run rate of our sales with a mix changing towards natural gas engines in anticipation of the strong demand growth in that segment going forward. Adjusted EBITDA in the 3rd quarter was $216,000,000 with a margin of 9%, up 210 bps compared to last year.
Adjusted EBIT was $68,000,000 for the 3rd quarter, a 58% increase compared to the same quarter last year. With an adjusted EBIT margin of 2.8 percent. The increase was the result of a favorable product mix with favorable volume in light and buses more than offset by lower sales in heavy EMEA as a result of the anticipated lower fleet related sales, including sales with buyback commitment, and positive price realization, primarily in the truck product lineup. In the other CV segment divisions, we experienced strong performance in the expected, where we are reducing our loss position year over year by half. The market share for trucks in Europe was 11.4%, down versus last year as we anticipated when we announced the new customer refocusing sales program, including of the reduction in sales with buyback commitment.
This being said, I will note that there are pockets of order strength in each region such as light truck order book up double digit in EMEA and truck order book solidly up 40% year on year in Brazil, although from starting from a lower base. Medium continues to be weak across the board, although it remains as far as smaller market than it used to be in the past cycle. Trucks book to bill was 0.9 in EMEA and 1 in LatAm. While it is still early, indication lead us to believe that the EU EBIT truck market may continue to see demand momentum into 2019 and Brazil should continue to recover from a very low base. Powertrain net sales, I'm on Slide 13.
Powertrain net sales decreased 10% in the 3rd quarter 2018 compared to the third quarter of 2017, down 6% on a constant currency basis due to lower sales volume, primarily attributable to calendarization of the engine sales associated with the transition to the new stage 5 regulation. Sales to external customers accounted for 52% of total net sales versus 48% last year. Adjusted EBITDA was $113,000,000, slightly down compared to last year with a margin of 11.6 percent, up 40 bps. Adjusted EBIT was $82,000,000 for the 3rd quarter, compared to $88,000,000 for the third quarter of last year. Adjusted EBIT margin slightly increased to 8.4% as favorable product mix more than offset a 9% decline in engine volume, offset somewhat by raw material cost inflation.
I have concluded my presentation and will turn it back over to Hubertus for the outlook and his final remarks before opening up for the Q and A session.
Thank you, Max. When we turn to the market outlook for the full year on Slide 15, the performance in the majority of the industry where we compete has been better than we anticipated last quarter. While trade and geopolitical tensions are still making it very hard to perfectly forecast, we have slightly tweaked some of them up. I won't run through all the changes here, but generally speaking, while the outlook for AG is more or less the same, estimates for the other industries have been shifted to the high end of our existing Q2 outlook. Of particular note, I would say, that while Ag sentiment has softened over the summer and fall months, This has not yet translated into slowing replacement demand as commodities have stabilized and government support enough that has shifted the conversations more to yield improvements and put precision ag front end center in many of the customer and dealer conversations.
In terms of CE, the market fundamentals continue to be supportive in especially in NAFTA and APAC. While we have seen an impact from the tariffs, we have been able to mitigate these with price surcharges. CV markets aside from Argentina continue to progress at high level of demand, and we don't see any significant weakening of the macro demands of the demand macros to use to gauge further demand. In both light and heavy trucks demand in Europe, we see progress at a high level, so stained by urban mobility and long haulage, eco efficient policies. Many of our end markets are in the initial stages of recovery, while others are experiencing strong demand.
We feel confident about the current business conditions, and we will continue to monitor various market fundamentals and provide 2019 guidance when we release our full year earnings next year. On the next slide, we highlight our guidance for full despite increasing uncertainties related to the trade policy environment and raw material inflationary headwinds together with foreign exchange volatility in the emerging economies, CNH Industrial is confirming its 2018 guidance as follows. Net sales of industrial activities at approximately USD 28,000,000,000. Adjusted diluted EPS between $0.67 71 per share. In light of the 3rd quarter earnings results, with the expectations to be at the high end of the range.
Net industrial debt at the end of 2018 between $700,000,000 to $900,000,000. Now I'd like to discuss a few quarterly highlights in terms of product accolades and sustainability awards. On Slide 18, you see that we had another great quarter in terms of awards, product introductions and cost saving vehicle trade show where we displayed 18 vehicles to showcase a sustainable offering across the whole product line for alternative electric CNG and LNG traction vehicles. In fact, just the other week, the Stralis NP460 with E. ON E.
LNG achieved a record breaking 1728 kilometer trip on a single fill of natural gas. Just yesterday, it has been awarded sustainable truck of the year 2019 in Italy after winning low carbon truck of the year in the UK last year. In conjunction with the show, FPT demonstrated its work with hydrogen fuel cell technology, which includes research that one day could lead to 0 emission solutions across vehicle range. Additionally, Iveco also launched a new daily 4x4, which offers a full lineup of all road and road vehicles up to 7 tons. If we turn to the AG portfolio, Ks IH Puma 2254 tractor Wanna Technology Innovation Award in China's top 50 plus agricultural machinery products of the year award, while New Holland won the same award for RB 125 round betas.
Subsequent to the end of the quarter, New Holland won 3 awards at the EMA International Innovation contest in Bologna this week. Congratulations to both brands on their hard work and dedication to excellence, which these awards have come to signify. If you turn to the next slide, Slide 19, I would like to take a moment to highlight some of our sustainability growth drivers. As you know, quite well, we have historically taken sustainability and the core principle that encapsulates very seriously at CNH Industrial. The 4 growth drivers inform and guide the investment decisions of the company and are closely related to the definition of the interventions priorities and the company's medium and long term targets.
Additionally, CNH Industrial was reconfirmed as industry leader in the Dow shown sustainably indices world in Europe for the 8th consecutive year. This inclusion among other things demonstrates the robustness of the program improves our dedication to the initiative. Lastly, in closing, I would like to share some first impressions as well as 2 priorities that will guide us over the next quarters. As stated earlier, I'm currently in an in-depth getting to know CNH Industrial Tour. The strengths that I find in our company are noteworthy.
Starting with our global operations. World class manufacturing is implemented at all sites across all segments. This drives impressive year over year productivity improvements and will continue to contribute positively to our margin journey. Our technology positions are noteworthy as well. The progress that I've seen in the digital transformation of our business segments is very encouraging and next year's product introductions will be a major leap forward, especially in ag.
Also, the partnership with FarmerZ, the leading solution provider in agronomy services that we announced last week will help us secure and gain market share in the rapidly growing precision farming space. Farmers Edge will also allow us to connect our already installed base in a fast and efficient way. Switching to FPT in our commercial vehicle segments, I'm deeply impressed with the technology position of FPT. Having led a is the importance of our leadership position in CNG and LNG engines and its specific short term importance for our commercial vehicle segment. With the latest legislation changes across Europe and specifically Germany, we will see an increase in LNG fleets to reduce emissions and to benefit from toll discounts and other incentives given the lower emission profile of CNG and LNG.
Last but not least, our strong base of dedicated competent and I must say ambitious colleagues across the globe. I find an environment that has a passion for continuous improvement and that embraces change, and this is a very strong base to build on. Therefore, as an organization, we are now working on 2 priorities. Priority Non-one. We will continue on the operational performance improvement journey, building on the progress that we have made in the last quarters, we will continue We see operating margin improvement potential not only in commercial vehicle and construction equipment, but also in the ag and powertrain segments.
We have become quite complex in our product portfolios and processes, and we will address that complexity with the eightytwenty principles that many world class organizations have implemented successfully. Taking complexity out of our business will help drive margin improvement and we have started exiting reduction coupled with world class manufacturing will help us move margins in the right direction. In the meantime, we're going to maintain a laser focused commitment on our efforts to deleverage the balance sheet with the aim to further strengthen our investment grade rating position going forward. The second priority is in Q1 of next year for all of our segments, and we'll get back to our investors with our strategic conclusions in the course of 2019. All of our businesses will change due to digitalization, electrification and automation and is our strong strategic intent to lead in the areas we are rate in rather than follow or even worse be disrupted.
This will require investments in innovation, and it will require strategic choices. I now turn it back to Federico.
Thank you very much, Hubertus. This concludes our prepared remarks. For the 3rd
question and answer session will be conducted electronically. We will take our first question from Larry De Maria from William Blair. Please go ahead.
Hey, I'm curious about the NAFTA sentiment softening and obviously orders are still nice, up 10% but you guys overproduced by 15% and last year at the same time underproduced. So the question is how comfortable are you with this dynamic? And what does it mean into 2019? Other words, are we risking a softening of orders in excess inventory?
Hi, Larry. This is Max speaking. I'll take these questions. So as we said, we overproduced, in Q3, slightly in row crop, but this is in anticipation of the typical strong Q4 selling season. So our, as I said in my remarks, our expectations for the full year is to be balanced between production and retail in row crop NAFTA, potentially is slightly below 1.
So under producing retail slightly low single digit. So we don't see that risk of buildup of inventory coming at the end of the year at this point.
And sentiment, despite having worsened a little bit demanded there, so the order books are up and are holding as it seems.
Okay. Thanks. And then secondly, I recognize that strategic review is underway, but you've purchased your curious your early intentions and your appetite for broader, more strategic changes. And if the board is open to them, obviously thinking about the subscale businesses like trucks, construction, maybe even New Holland, Is the board looking to open to the idea of maybe monetizing or doing some of the things that are more strategic is it more about just improving the operations of those in your review? And I'll leave it there.
Thank you.
No, I think it is both. First of all, our Board is very, very open minded. And I think the first priority is that we have to continue on the margin journey. I mean, if you look at the segments, our margin is not satisfying for sure not in commercial vehicle and CE, and you see that the turnaround is working. We're moving in the right direction.
And we also see potential and FPT. That being said, I think the board charged me very clearly with understanding what is the full potential of all our different segments looking ahead 5, 10 years. So where can we be and what is the investment that it takes to get there? And we will do this analysis year. And then we basically count the eggs together and basically see whether, whether we have to make strategic choices and focus or whether the synergies between the segments strong enough.
And talking about synergies, I mean, I said that, there are a lot of synergies between the 4 different segments. I mean, They're all faced, with connectivity and the digital revolution, and we can use those synergies. We all see different propulsion system, and driven by electrification, And that and how big are the synergy between the four areas to then basically make our strategic conclusions that we would then share with our investors in the course of 2019.
Understood. Okay. Thanks and good luck, Hubertus.
Thanks.
We'll now take our next question from Joel with the Vertical Research Partners. Please go ahead.
Hi, good morning. First I just wanted to understand some of the margin headwinds potentially into the 4th quarter, I think overall a good margin quarter in 3Q, but what you're seeing in terms of raw material inflation, any timing factors with respect to price cost and what you're seeing on the currency side, just to appreciate What that looks like sequentially on some of the margin pressure?
Look, no doubt. I mean, the margin performance in the year has been there for each of the three quarters. Right now, the implied estimate for the 4 quarter is obviously that year over year trajectory to soften, but we continue to believe that the business has the has the capacity to deliver. We just need to maintain a cautious approach vis a vis all the uncertainties that have come to fruition in the third quarter, including, the trade policy discussions and also some macroeconomic hiccup in certain counties that are relevant in the developing economies. And so we prefer to maintain a very cautious approach for Q4.
And we'll see where we end up at the end of the year.
And if these hiccups don't come, we might be better than we guided, but for the time being, I think it is prudent to be cautious and conservative.
And I guess part of
it is just trying to understand how much of the maybe cost structure challenges in 4Q you would view as more transitory. And so whether there's anything on the price cost dynamic that gets a little bit tougher in the fourth quarter, but would likely improve into next year, if there's anything you're thinking about in terms of shifting around production and to some of the FX headwinds you had in persist as a margin pressure into next year?
Yes, there has definitely been a step up in headwinds, particularly raw material the initial bite on the tariff as well in Q4 is expected. But as we have been saying at the beginning of the year, we anticipate paid that this inflationary cost increase by pricing ahead of time. And we continue to look for pricing opportunities moving into early 2019 to be able to offset the headwinds that we're going to face into 2019 for raw material inflationary pressure as well as the tariff assuming those tariffs stay in place. As they have to date.
And can you just size the what kind of dollar headwind do you think tariffs represent for you at this point?
For Q4, it's going to be a minimal amount. So it's not material, but, I would say on an annualized basis, I could give you a range of between $50,000,000 $100,000,000, depending if we talk only about enough a tariff, sorry, we also consider the impact of the situation in, in Europe that, as we know, is temporary right now. There have been regulations put in place based on quota allocations through February. If those gets extended into the whole of 2019, then we are going to look at the number, which is closer to the upper end of the range that I gave you.
That's helpful. And then just a last question on stage 5. I'm just trying to understand a little bit better the impact that that had on powertrain in the quarter? And what's your strategy is for the transition? And I think it sounds like building some stock ahead of that.
I don't know if that means most of 2019 will still be stage 4 engines, just given how the transition works. But a little bit more details on the impact in the quarter and how you're thinking about stage 5?
Yes. I think you've got the mechanics So PTFPT produced engine on let me say the previous on the previous regulations and will produce through the end of this year, right? Those engines will be sold to third parties and to the captive customers. Which will hold the engines in stock until they get depleted in the production into next year. Right now, let me say that our estimates, of the stockpiling inventory that we have is about, let me say, $80,000,000 to $100,000,000, bit to end that will be at the end of this year.
Which will be depleted into next year. So powertrain enjoyed some favorable absorptions impact during the current year that will not repeat next year because of the stockpiling effort.
And the revenue headwind in the quarter?
No, it's going to be
headwind for 2019 for FPT. That's for sure. And then we're going to have to gap that.
Thanks very much.
We will now take our next question from Ann Duignan of JPMorgan. Please go ahead.
Hi, good morning, everybody.
Hello, Ann.
Good morning. Ubert, maybe you could talk about sentiment in the Midwest and how, surprisingly it's held up until most recently. However, I mean, 50% of soybean exports are made between September January and we've kind of lost that window now particularly with Brazil likely harvesting early. For an argue, I mean, there's kind of sort of no scenario in which, sentiment doesn't get worse before it gets better. So I'm wondering about how you're preparing the Ag division, particularly the row crop U.
S. Division for what could potentially be a particularly weak year in 2019, even if the tariffs disappeared at this point.
Yes. Well, I mean, let me start and then Max is going to add. As said, sentiment has decreased a little bit, but but the order book still holds strong. The specific soybean issue is, of course, is, of course, something that needs to be seen where this where this is coming and going. And of course, we don't really know what the Chinese tariff situation is going to be, which has a big impact on that.
Hence, the uncertainty right now in the overall political environment and hence, our caution on the guidance and the conservatism, how are we going to deal with it, Max?
So, I mean, at the end of bottom line, there is a relative, balance on a worldwide basis between production and consumption of soybean between soybean and soy meal. So there are flows ins and outs between the countries, while we anticipate short term disruptions, we also think that in the long term, there will be an adjustment. How that adjustments will play out is not completely clear today, but definitely one lever that the North American farmers can pull is to work towards, improving the productivity. Obviously, also switching, in the planting season, switching crop could also mitigate some of the pressure And then continuing to manage, let me say, the pricing function between spot and pre sold is obviously also important from the economics of the farming business.
And I think to add to the switching of the crop, I think this is what you're going to see year, you're going to see that farmers will switch away from soy more to other crops. And then also still demand will hold for that for our tractors. So I think it's going to be good.
And by the way, obviously, we see this this pressure mounting up in North America. And at the same time, we see a very benign environment developing in Brazil. And potentially a recovery in Argentina for next crop, which is expected in terms of underlying expectations, let me say to the positive end, of the spectrum. And, and so obviously it's about, where you sell your equipment at the end, right? And, and how much, I mean, the farmers push into the productivity game to reduce the input cost?
Yes, but you purchased back to your switching of into other crops comment. I mean, North Dakota and South Dakota alone planted 12,000,000 acres a soybeans this year. So if we got 12,000,000 acres switched into some other crops, primarily corn, maybe some wheat, won't that have a negative impact on those crops and oversupply situation ends up happening there? Just broadening the negative sentiment
Look, I don't want to this is Max again. I don't want to get into a macroeconomic context here, but We see a stock to use ratios on the other crops that are moving in a positive direction. Definitely the switching on the on the plant in the planting season may put some pressure on those ratios, but we have seen a big chunk of the corn stock being depleted, for example, in China. You know, which may made up in the past that the peak made up almost 50% of that ratio. And we also see some relative positive price development on the wheat side, which also could help, manage the mix of the crops into next year.
Okay. I'll leave that question there. I just wanted to follow-up on the stage 5 stage for, engine stockpiling. Again, just philosophically, you talk about sustainability and with pride. And then we find that we're stockpiling engines that don't meet next year's emission standards.
I mean, how do you reconcile that with your sustainability goals and targets.
Well, I don't think it goes against our sustainability goals. If you see all our investments that we're doing and we're encouraging, of course, our customers to switch over from diesel into gas engines. But as a matter of fact, this is not always possible. And you know that those emission regulation very, very tight timelines. So, and we are serving 3rd party customers, and we cannot, mandate them to basically switch over with their customers and we have serve them.
What we have done with our own developments, we were trying to limit the stockpiling to a minimum and to be compliant, even earlier than what's demanded by legislation because if you look at the LNG engines as a matter of fact, they are already significantly cleaner than everything that you have on the diesel side. So I do think we take the sustainability efforts very, very serious. And we're not encouraging internally to basically, go around and break some rules there, but we're following the rules. And we're encouraging our customers, as I said, to switch to cleaner engines even sooner. And also the economic impact for us is good because because, I mean, the higher regulated engines all have a better margin for us.
And this is also what you see in FPT, and you see that where the profitability increases in the mix. So that's a, that is a good one for us. So we have no interest to basically stay with the old engines.
Yes. We did note that at the IAA, you certainly were not highlighting diesel engines on display stuff. Thank you for that. I'll leave it there.
We called it, we called it no diesel. And as I said in my prepared remarks, and, I think there is a shift ongoing right now. We're rethinking in Europe, 2 LNG engines. And, And even though some of our competitors are lobbying heavily for diesel engines, we are lobbying heavy for the right thing to do, which is LNG because that is the only sensible and economic sensible bridging strategy, between now and potentially fuel cells in 5, 6 years. And we are the leader in that, and we see that this segment is going to grow and that LNG is going to take significant share.
And this is completely consistent with our sustainability targets as well.
Yes, I think the competitors recognize that also. Okay. Thank you. I'll leave it there.
Thanks Ann.
We will now take our next question from David Raso of Evercore ISI. Please go ahead.
All right. Thank you. Just trying to think about the margin profile going into next year, especially with the strategic review that you're going to undertake. The fourth quarter, just so I understand, you're implying your sales are up about $1,600,000,000 sequentially, where we're talking the industrial company. But your EBIT must decline, I don't know, $50,000,000 or $75,000,000 to come up with that low in EPS to be at the high end of the range.
And I'm just trying to understand how to think about the margin profile going forward. Correct. I mean, why would sales be up $1,600,000,000 sequentially in your EBIT's down that materially? I know you went through some issues. But then how do I extrapolate that in thinking about the review into 'nineteen?
And I don't know if if you'd like to touch on the old margin targets that we used to have that I know were challenging to achieve. But I'm just trying to understand the fourth quarter, what are you really implying and how to think about margin profile going into 2019?
Yes. Max is going to take the Q4 and the 2019 question.
So I mean, as I said before, David speaking about the Q4, we don't want to entering to a reconciliation exercise with your spreadsheet. But basically, you have seen, you see the the underlying performance of this business. You have seen it for three quarters now in a row above 100 basis points of margin improvement. So underlying performance is there. We just see a lot of headwinds coming in front of us, including obviously some of those tariffs and incremental raw material costs that are pushing us down in the fourth quarter.
But if some of those uncertainties don't really materialize, then obviously we have some upside potential in the fourth quarter.
Yes. And for 2019, you will understand that I don't want to give here after 6 weeks into the chair any margin guidance different segments. That is really what we want to do on the, on strategic review that we're going to have next year. What I can say from a distant and, of course, knowing 3 of the, of the 4 segments very well, because I lift those with competitors I think we have improvement potential for all of the four segments right now. And as I said, priority number 1 is, A, to continue on the margin improvement journey.
And as you will see in the last 3 quarters, we have increased margin, versus prior year. We intend to do this and to continue on that journey in 2019, and this will be helped by a world class manufacturing, which is which is providing, impressive productivity improvements year over year. It will be achieved by fighting against inflationary tendencies on the raw material so that we're seeing and we have pricing opportunities. And it will be achieved by simplifying our business. And I know that in AG, AT2020 has not been frequently done, but many analysts here on the call know, the AT2020 principles very well.
It's a very interesting set of tools, that, that I have personally deployed at other companies. And that have been widely deployed by world class organization. And we're going to be very, very consistent on that journey. Implementing those tools and driving profitability with that. And then so then in the course of next year, we're going to be able to then give margin targets, for the various segments that we have.
And we're also going to give a time when those should be achieved. And of course, we've got to see whether what the top line is going to do and where we are in the cycle and that has, of course, an impact. So my tendency is always to do those targets on flat revenues or basically have the average through the cycle. So we get back to you with a detailed analysis and a conclusion.
Given your history with the eightytwenty, and knowing these businesses, should we think of a year of review? And then is there some margin pressure going through that evolution to simplification before we see improvement. Just trying to think about how you philosophically view the past, the timing again, is there some initial pain for the eventual reward? Just so we can get some groundwork here on.
If you, I mean, depending on the speed that you exercise with eightytwenty, there might be pressure on the top line, and you can gauge this basically with price increases. Which I've done in my, in my last jobs, successfully. So we would see, we would basically see that we have a steady improvement of profitability going forward because of eightytwenty and we will communicate back to the market, what we're doing, how many use we reduce. And as you know, eightytwenty has 2 elements. We have the product line simplification, and we also have the customer profitoration.
And where you basically look at your A customers and your B customers, and then, and this will automatically drive customer and dealer consolidation, which is something that we want because we want to have strong and good dealer And then so that's the other element of it. And I think it's going to be a long year journey, but you're going to see the first results for sure in 2019 of that.
Okay. Thank you very much. Appreciate it.
We will now take our next question from Ross Gilardi of Bank of America Merrill Lynch. Please go ahead.
Humbert, I just want
to understand your comments just as it pertains to portfolio. I mean, is it fair to say that 2019 is really going to be a strategic review year in that if there eventually are any portfolio moves that are coming on the back of that, that's not happening until very late 2019, 2020 at the earliest. I mean, that's kind of what it sounds like if we piece together all of your comments upfront?
What I said in the course of 2019, and I don't want to be nailed down now, whether it is Q1, Q2, Q3 or Q4, In the course of 2019, we will share with our investors, our corporate strategy and our business unit strategies. We'll basically give our targets and we will answer those questions then. And then we also talk about the implementation of when the one or the other action might or might not
occur. Okay. Maybe you could just talk a little bit more about your initial feel investment. I mean, you mentioned that you've been very impressed with the asset quality overall, but, particularly in trucks, I mean, from the outside, if echo has got the obvious strength in LNG, but it doesn't seem like there's been much of an investment in electrification do you feel like that's a weakness? And do you feel like Iveco needs to invest in the business via higher R and D and higher CapEx to really be competitive over the long term and get the margins up before considering what the really what to do with that longer term.
Yes. Well, I mean, 1st of all, Iveco has invested into electrification. And if you look at our buses we are the leader in electrification and buses. If you look at our daily, we have an electrified product since 2 years on the market and we're coming with a refresh of that very, very soon. Electrification in the high duty truck it doesn't really make sense at this point in time.
They are talking about a fuel cell technology. And I think we've been the only one that was showing a kind of working prototype of that already at the IAA show, a couple of weeks ago. So I think we are in terms of Drivetrain, we are really, where competition is and taking gas, we are ahead of it. When it comes to, automation and automated driving obviously, these are big investments that have to be taken. I agree.
And also on the connectivity front, this is exactly why I said we want to do a strategic review next year for all our business segments and really understand what is the full potential that the business could have and what is the investment needed. And before this analysis is not done, I do not want to make any confirmatory comments here. Just to say, I think Iveco is competitive where it is right now. Iveco has patches of weakness, where we're bleeding. And those are addressed right now.
And I think the margin improvement that you see is the adjustment of those weaknesses where we stop the bleeding. And that strategy seems to work very well. Okay.
Thank you. And just lastly, on ag, with respect to the deceleration, I mean, you saw in Q3, I mean, basically went from 18% organic to 8 percent, which is still healthy. And you highlighted the strength in the order book in the U. S. But how much of that deceleration actually came from Argentina and Turkey that you mentioned before.
And can you quantify the importance of those 2 countries to overall ag. And I thought that, I thought the Turkey exposure was really more in your, your Turkish JV if I'm not mistaken.
Well, it's not only there. It's Turkey, it's Argentina, it's both Canada and it was also Australia. And Max can provide the details.
Yes. So I mean, in general, for the Ag business, revenues were up 15% in NAFTA, where single digit up in EMEA. We're basically flat in LatAm and we're down, double digit in APAC. So that in that performance is a result of a healthy development in NAFTA, which is more or less in line with what we have seen before. Because we believe row crop is a replacement now, solidly at replacement, although the sentiment, as we know, is softening a bit.
While we continue to destock in our network in hay and forage because of that particular vertical is at the low point in its cycle. But in the known NAFTA markets, I mean, we have seen pockets of weakness as I said before. And I mean, we have definitely a large portion of our art businesses outside of NAFTA. So that has an implication to the segment figure as a whole.
Thank you. We
will now take our next question from Steven Fisher of UBS. Please go ahead.
Thanks. Good morning. Wondering, just wanted to follow-up on the farmer sentiment here in NASDAQ mentioned it a number of times and really just trying to understand how you're measuring it. Are you looking at just the various barometers that are out there that are published? Is conversational.
And just to make sure it's not transactional, so I really want to understand what you're seeing in terms of used inventories in your dealer channel because we've had heard some anecdotal evidence that, that there has been a little bit of a buildup over the course of the growing season as grain prices soften. So if you could just talk a little bit more about that sentiment and how you see that translating at the transactional activity?
Yes. I mean, one is, I mean, of course, we look at transactional second one as we talk to our customers. So so and having been on the road now for the last weeks, I talked a lot with our dealers specifically in the Northern American region. And, and what they're seeing has said that the sentiment is going down, but they're still positive and the order book is up. And this is the fact, and this is kind of what is reflected by them.
We don't see, by the way, big inventory piling. We do have inventory overhang, on the hay and forage side that was there was known. But on the other side, we don't see big inventory overhangs that are a concern to us right now. Max?
No. And just to follow-up on your answer, I would say on the used, we also see relative good stability on pricing So I would just caution you to take too much of importance from anecdotal evidence that maybe collected with individual transactions. I mean, net net, we see a stable environment yes, the sentiment has softened because we don't see that excitement in the order book we saw at the beginning of the year, but the order book is still running positively. And we think that the farmers are looking into the productivity improvements that they can, they can, achieve by switching equip to more technologically advanced equipment as well as recapturing that warranty coverage, which is tremendous importance in terms of minimizing the downtime risk and cost.
Okay. And I'm not sure if I missed this, but did you say how much visibility you actually have from your order book out into 2019 on ag at this point? And then a similar question on construction. I'm not sure if you said what the the order book growth was in construction. I think it was up 15% last quarter.
Just curious what the number is this quarter.
Yes. So let me start with the second part of the question. So the order book in construction is basically flat, but is actually up in heavy. Almost double digit on the back of a strong recovery on the verticals that are served with the heavy machinery. In general terms, our order book goes out, let me say, 3 to up to 6 months.
But right now, the focus is all on finishing up the year. And obviously, if there are customers that desire to basically sign up orders for next year. Obviously, we are more than happy to do it.
Sorry, on the ag side?
And in terms of ag is very similar, I would say, I mean, 3 months up to 6 with certain exceptions that go out maybe 9 to 12, but very, very limited units in that particular respect. And I would say that again, we are showing an order book, which is up 10% year over year in the core business, in the row crop core business in NAFTA.
Okay. And just then the implied decline in light construction equipment then, is that sort of NAFTA residential tide or what the implication there?
I think it's more of a regional mix. So the a portion of that compact equipment goes into ag and is primarily ag mix farming and livestock. And we are basically suffering, let me say, at the same pain of the hay and forage that we talked about in ag. So we see a little bit of that softening, going to, I mean, coming to fruition And that is obviously negative to the mix for us in total on the compact side, but the other verticals in the compact equipment are moving along in line with the market. So
Yes. And I think what we typically don't do, we don't talk enough about new product introductions, but specifically that light side, we have a couple of very, very interesting introductions in 2019 and beyond that's going to help us to recover some of the market share that we have lost Likewise, by the way, on the commercial vehicle side, our product introduction pipeline is actually quite full. And so that regard, we're looking positively, from an innovation point of view into 2019.
Thank you. And our final question today comes from Courtney Jagavonis of Morgan Stanley. Please go ahead.
Thanks guys for squeezing me in. Just wanted to go back on Joe's question just on some of the tariffs and packs and David's question. On just some of the things that are weighing down the 4th quarter margin. So I was just a little bit confused on some of the comments. So I think
you had said that on
the annualized impact, it was $50,000,000 to $100,000,000 of tariff headwinds. Is that including raw materials or was that just the section, 301 Trust, if you can just kind of disaggregate that a little bit? And just pairing that with the comments, because I thought you said that for the fourth quarter, it wasn't going to be very material, but I'm not sure if that was just because pricing is offsetting it. Thanks.
So for the fourth quarter, we don't expect an impact bigger than probably 10,000,000 to 20,000,000 maximum. More towards the low end. For the full year, as I said before, I gave a, let me say, a relatively large range cause, I have to be cautious with how the EMEA situation is going to evolve into 2019. So I would say that $50,000,000 is associated with the NAFTA tariffs, which is, the Section 31, primarily the second portion, so the upper end of the range depends how the legislation will develop in Europe after February. And how the quota usage will be calculated and applied to the individual participants in the market by the I hope that is
helpful. Okay. Yes. Thanks. That's a lot more clear.
So it doesn't include then the steel inflation indirectly to the 2.32 tariffs. So maybe you could just quantify how big of a headwind that was relative to pricing.
So we have been on that headwind for some time now. We've been offsetting that headwind with efficiencies in terms of our industrial base, both manufacturing as well as, products, product We expect another leg of headwind into next year, which we expect also to price for. So basically net net, we to be able Some of those are already in actions, obviously, on the model year 2019 main act, for example, in the into Q4 of this year.
Okay, great. Thanks. And then just lastly, Hubertas, you had mentioned that your plans to put precision at kind of front and center for the ag segment. Can you just talk a little bit about where your penetration for some of the precision ag features are right now? And is that part of the reason why you guys are seeing such favorable net pricing in ag right now, and, you know, just, talk a little bit about that.
Yes. I mean, I think, as you know, the company has stepped up investment significantly in the last 2 years, and we're now seeing new product coming to the market, which provides a precision ag and also the connectivity that we basically need. We've also announced the partnership with Farmers Edge. And different to some of our competitors, we have an open platform and we work with the best in the industry. And Farmers Edge is going to be exclusive to our customers.
It's going to be sold through our dealers. And Farmers Edge provides a complete new, service features in the agronomy side. So that's going to lift precision ag to the next level. And our objective is really to be become the leader in that, in that sphere. We are the leader, I would say, on the technology side, if you take the iron If we take the Tinder connectivity, the digital revolution with it, we want our object drafted a suite to become the leader in that space in Farmer Edge is just one more puzzle stone, one more is a Mosaic stone, to basically paint that picture.
That will conclude the question and answer
Thank you very much everybody and have a nice day.