Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial 2018 Second Quarter And First Half Year Results Conference Call. For your information, today's call is being recorded. After the speakers' remarks, there will be a question At this time, I would like to turn the conference over to Federico Doniti, Head of Investor Relations. Please go ahead, sir.
Thank you, Lisa. Good morning and afternoon, everyone. We would like to welcome you to CNH Industrial Second 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 expressed written consent of CNH industrial is strictly forbidden.
G And H Industrial Interim CEO, Direct Nielsen and Max Yara, Group CFO, are hosting today's call. They will use the material you should have downloaded from the CNH Industrial Group website. After their presentation, we will be holding a Q and A session. As a final comment, Please note that any forward looking statement we might be making during today's call are subject to the risks and uncertainties mentioned in the Safe Harbor statement including 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, SEC, and the equivalent authorities in the Netherlands AFM and Italy concept. The company presentation may include certain non GAAP financial measures Additional information concerning these measures with reconciliation to the most directly comparable GAAP financial measures is included in the presentation material. I will now turn the call over to Mr. Derek Nelson.
Thank you Federico. And good morning, good afternoon to everyone. I'd like to start today by taking a few minutes to talk about our Chairman, Mr. Sergio Marconi. As you are no doubt aware, we received the terrible news yesterday, I think morning that Sergio had passed away.
This is an incredible sad and difficult time for all us at CNH Industrial and our thoughts and prayers going to Sergio's family, friends and colleague Our Chairman had a remarkable ability to drive us forward towards new and ever increasing goals. Through our unique combination of courage, tenacity and unconventional way of thinking. This was true leadership. His unnerving forensic knowledge and sharp wit made a lasting impression on everyone who came into contact with him. In his 15 years at the helm of First Field Group, an end FCE And CNH Industrial, the champion to transparency, responsibility, openness and respect.
We will not forget these principles, and we will continue to build on the legacy he has left us. I know that I speak in behalf of all my geck colleagues and the entire personnel of CNH Industrial, when I say that it has been a privilege and an honor to work alongside such a unique and inspirational leader. We will miss him immensely. All CNH Industrial locations across the globe will be observing a moment of silence during the summer to pay the respects to Mr. Machioni.
I would please ask Guiller to now join me in a minute's silence in memory of a very unique and special person. As difficult as it is if I can bring us at this point back to the business. We are pleased to report a solid quarter in terms of year over year improvement in each of our businesses and across across the key metrics. And for that, I would like to give credit to the CNH Industrial team who has, as you know, encountered several changes in leadership both at the beginning and during the quarter. Despite these changes, the team remained fully focused and delivered in line with our business plans.
This is how we will continue and honor Sergio's legacy. If I look at end markets, I would say that they continue to demonstrate sustained demand result in strengthening order books, increased production and stable inventories to comparable periods. A few highlights here before we move into the overall results, we achieved an adjusted diluted EPS of $0.28 per share, up 56% compared to Q2 last year, which marks our strongest quarterly performance since 2014. Operating cash flow of $800,000,000 contributed to a lower net industrial debt of $1,300,000,000 at the end of the quarter as well as continued profitability improvements in all industrial segments with year over year adjusted EBIT and margin growth. Our quarterly R and D was up 15% over 2017 as we continue to invest in new products and technologies to drive the next generation of our platforms and increase our product competitiveness.
Our CapEx was up 7% while we continue to drive improvements not only in our products, but also in the efficiency over industrial operations. We also have a positive message related to Moody's that Max will speak about in his section a little later. Before moving ahead, I'd like to discuss our preliminary view on a few of the key market developments affecting our industries. In terms of our strategy for material cost increases, the structure and timing of our supply contracts have minimized the impact during the first half of this year. Looking ahead, we have implemented price increases and or steel surcharges where applicable to offset the increased cost that will impact us in the second half.
So here, we are not expecting any significant negative headwinds. Despite the problematic macro environment, uncertain farmer sentiment and the geopolitical and trade tensions underway. We believe we have a sustainable core business performance going forward, as demonstrated in this last quarter. But the current scenario makes it more difficult to project demand going forward. Hence, we are adopting a cautious and sensible approach to the outlook for the balance of the year.
That said and based on our strong Q2 performance, we are updating our guidance metrics for 2018 by increasing our adjusted diluted EPS to between $0.67 $0.71 per share and by lowering our net industrial debt guidance to between $700,000,000 $900,000,000. If we move forward to Slide 4 and going into a bit more detail, This gives you a good overview of Worldwide tractor in combine industry units were up 9% versus last year. And after row crop continues to trend positively, with strong performance as dealers restock inventories and customers replaced dated equipment. In LatAm, Brazil was slightly positive with a strong finish in June after the more the frothy conditions were released for the new harvest season, partially offset by a distinct weakness in Argentina due to weather and monetary instability. Production was up 9% versus last year, flat to retail on a worldwide basis, with company inventories slightly up in tractors, and up 19% in comments due to a positive order book development in Q3 and NAFTA and in support of an improved industry outlook and result for Q3.
C, again, was positive in all regions as the global construction trends we have been seeing continue and in some cases gained strength, especially in the heavy equipment. Worldwide light and heavy industry units were up 20% 34% this is last year. In the quarter, our production levels and retails were up supporting a healthy order book, which is up approximately 15% compared to the comparable period. For commercial vehicle, the EMEA truck market was up 11% year over year, with all key market with all key markets demonstrating positive year over year growth and continuing to perform at high level. LatAm specifically was up 28% with Brazil up fully 45% of a low base granted and Argentina slightly down 3% in the quarter.
When we turn to the market outlook for the full year on Slide 5, It's no secret that our year to date performance and the majority of the industries where we compete has been better than we originally anticipated at the beginning of the year. With that in mind and despite a difficult to predict business environment, we have modestly updated several of our industry estimates as a result of the year to date trend and solid order book on hand. Trade and geopolitical tensions are not making easy to forecast, but although we are not seeing material effects so far on end user demand, We believe the industry That said, it's key to highlight that we are carefully monitoring the situation and are ready to quickly respond to any relevant negative twists and business sentiment that will translate into demand weakness if that were the case to take place. I won't go through all the changes here, but generally speaking, EMEA Ag, retail is still seen as flat year over year. And were adjusting for lower unit registrations due to factors associated with the Tractor Mother Regulation introduction at the end of 2017.
In construction equipment, we have increased our industry outlook across the board as we have seen and are anticipating better than originally expected demand is especially on heavy equipment. Finally, in commercial vehicle, the market in EMEA remained at high level. So we see it coming closer to the top of the range we laid out last quarter as fundamentals in the industry remain particularly solid in terms of fleet replacement, freight indicators and finance interest rates remain unattractive to customers. On Slide 6, we had another great quarter in terms of awards, product introductions and cost saving efforts. Last month, High vehicle defense vehicles was awarded a contract to deliver an amphibious platform to the U.
S. Marine Corps, in partnership with BEE Systems. The initial award is for 30 vehicles with an option for over 200 worth up to $400,000,000 over the 1st 4 years of the contract. In terms of product introductions, Iveco trucks has been completing the launch of the new well as X-ray. Last month, we unveiled our intermat in Paris as natural gas powered vehicles.
This vehicle is developed for construction logistics and urban services that combines all the benefits of tracker, chassis and off road capabilities with best in class payload, on road performance and fuel efficiency. I would also like us opportunity to congratulate the hard work of an employee inside the Yeezy New Holland plant in Italy. The plant achieved the silver level world class manufacturing in the world. Our world class manufacturing program, along with other cost saving strategies, has been vital to our company's improved results. At this point, I will now hand over to Max for the financial overview of the presentation.
Thanks, Max.
Thank you very much, Derek, and good morning, good afternoon, everyone on the call. Before I start my section, please allow me to add a brief comment regarding Mr. Machionna. I would like to share with you the uniqueness of our boss who was an inspirational and motivational leader beyond anyone else. It is no secret that many in our organization like me will be ever grateful for having had the chance to be guided and inspired by him this past 5 years at CNH Industrial.
With that said, I would like to return to the business in hand exactly as you would have expected me to do. Moving on to Slide 7, key figures for the 2nd quarters. In summary, we ended the quarter with solid end market demand in our main businesses driving increased volume with an improved product mix and achieved positive price realization across our business leading to net sales of our industrial operations, up 16% year over year at 7,600,000,000. With this top line performance, we were able to demonstrate strong leverage with a 44% increase in our adjusted EBIT with all businesses improving year over year as a result of increased production and more favorable mix, especially in Ag and CE. Those improvements coupled with a further reduction in interest expense and an ETR of 23%.
Allowed us to report an increase in our adjusted net income of almost $350,000,000 year over year or 56%. Despite increased FX volatility, mainly in emerging markets. Specifically, on tax, as a result of a more stable trend achieved now for 2 consecutive quarters. For the full year 2018, we are upgrading our expectation for an adjusted ETR of approximately 28% from 30% before. Adjusted EBITDA of industrial activities closed at $571,000,000 with margin up 1.4 percentage point to 7.5%.
Adjusted EBITDA of industrial activities was $843,000,000, up almost 30% from last year, with a margin of 11.1%. Adjusted net income was up 56%, versus last year Q2 and adjusted diluted EPS increased to $0.28 per share, up $0.10 from last year. Net industrial debt was $1,300,000,000 at the end of June 2018, $600,000,000 lower than in March as a result of strong in cash generation in the quarter as a result of continued actions to reduce our gross indebtedness during the 1st part of 2018 The ratio of gross industrial debt to adjusted EBITDA was 2.1 times, with the equivalent net debt to adjusted EBITDA ratio at 0.5 times. At June 2018. Available liquidity was $8,400,000,000, up $700,000,000 compared to March.
2018. The liquidity to LTM revenue ratio was maintained just below 30%. This performance is a clear that we remain fully committed to further improving our credit rating from the current levels. Speaking about that, during the quarter, Moody's raised their outlook to positive from stable for both CNH Industrial NV and CNH Industrial Capital LLC. And we booked a positive impact from the modification of a health care plan following the favorable judgment issued by the United States Supreme Court.
As previously announced on April 16, 2018. Turning to Slide I would like to talk in greater detail about the total change in industrial activities net sales at constant currency by each of our business. In total, for the quarter, net sales were up over $1,000,000,000, net of the $220,000,000 positive currency translation impact Net sales increased $834,000,000 or almost 13% with agricultural equipment contributing $507,000,000 and up 18% as a result of favorable row crop demand, primarily in NAFTA, positive company inventory conversion in NAFTA, and to a lesser extent, in EMEA, and price realization across all regions. Construction equipment net sales increased $145,000,000 or 22 percent as a result of favorable volume and mix across all regions and especially in air equipment industry, which was up 34% year over year in the quarter. For commercial vehicles, net sales increased $154,000,000 or 6 percent as a result of favorable volume and mix in buses, and positive price realization, primarily in the May and LatAm truck market.
Powertrain was up 15,000,000 On a total industrial base by region, net sales were up across the board with a particularly strong performance in EMEA and NAFTA and LatAm to some extent. Turning now to Slide 9, with the quarterly industrial activities adjusted EBITDA and adjusted EBIT walk. Adjusted EBITDA close at $843,000,000 with a margin of $11,100,000. It was up 1.1 percentage point compared to the same quarter of last year. Looking at the adjusted EBIT walk, all segments again contributed positively with ag making up more than 75 percent of the increase with the adjusted EBIT ending up almost 45 percent to $571,000,000 with a margin of 7.5%.
As we continue to deliver on our profitable growth target. Moving on to Slide 10, our change in net industrial debt net industrial debt of $1,300,000,000 at the end of June decreased by $600,000,000 from March as a result of strong operating cash generation, and the positive change in working capital, primarily coming from higher payables in support of the increased production levels. When comparing year's quarter. On top of the stronger operating performance, we have an improvement in total inventory with a lower seasonal build up coming primarily from the ag company inventory conversion and other general working capital improvements. In CapEx, we are now starting to see an inversion in spending moving up year over year with a shift in focus to new product spending, particularly the pending is around stage 5 engine applications, the precision farming program in agricultural equipment and a continued focus in new product development for our truck and bus division.
In April, we paid an annual dividend to shareholders for $235,000,000. In addition, we have continued to execute on our stock buyback program, adding almost 4,000,000 of our common shares for a total consideration of $44,000,000 repurchased in the quarter. In terms of where we expect to move from here when we look at the cash flow performance in H2 and compare it with our full year guidance, The expectation is to generate cash in the 2nd part of the year, albeit at a more moderate path than last year to achieve our net industrial debt target. Moving on to Slide 11, our financial services business. Net income was up $15,000,000 compared to the second quarter last year, primarily due to better performance For the quarter, retail loan originations were $2,600,000,000, flat compared to last year.
The managed portfolio of almost $26,000,000,000 at the end of June was up $800,000,000 at constant currency. Credit quality remained strong with delinquencies tracking on average at 3.3% of the total portfolio, mainly due to improvements in NAFTA and LatAm. Turning now to the individual segment performance on Slide 12. Agrical Agricultural equipment net sales increased 20% in the second quarter of 2018 compared to the second quarter of 2017. Or up 18% on a constant currency.
In Iowa Power tractors and 26% in combine harvesters coupled with increased sales from company inventory conversion led to the segment's strong retail performance. Price performance was also favorable across all regions. Adjusted EBITDA was $472,000,000, up $135,000,000 compared to the second quarter of 2017, with a margin of quarter of 2018, a $135,000,000 increase compared to the second quarter of 2017. Adjusted EBIT margin increased margin we have not seen since 2014 in this business. About half of the increase was due to a favorable volume and mix performance including positive industrial absorption, primarily in NAFTA and EMEA.
The remainder was due to sustained price realization at 3%. Pro material cost increase experienced during the quarter was offset by manufacturing efficiency and product cost reductions effort from our established efficiency programs. Additionally, we had a modest increase in SG And A and a 10% increase pending in R&D where the main focus is on precision farming and compliance with stage 5 emissions requirements. Turning to next slide. Construction Equipment net sales increased 23% in the 2nd quarter, up 22% on a constant currency basis.
On the back of a favorable end user industry demand environment, substantially across the board. Demand was up 20% in light 34% in heavy year over Adjusted EBITDA was $48,000,000, up 25 from the same quarter in 2017, with a margin of 6%, Adjusted EBIT was increase of 3 percentage point to 4.1 percent as a result of higher volume, favorable product mix, positive industrial absorption and positive price realization at 2.5% of which 1% for FX, offsetting raw material cost increases. We see continued year over year momentum building into CEA far as sales and profit margin are concerned adjusted for summer seasonality, albeit at a more moderate path than what experience in H1. On Slide 14, commercial vehicles net sales increased 11% in the second quarter of 2018 compared to last year, 4, up 6 on a constant currency basis as a result of a favorable product mix and positive pricing, primarily in a man in LatAm, Total deliveries were flat year over year as increased volume in light commercial vehicles as a result of favorable end user demand in EMEA and Brazil and buses in EMEA and buses deliveries in EMEA and LatAm were offset by the unfavorable unit volume impact from the refocusing of the medium heavy vehicle sales to a more profitable product portfolio, which includes alternative propulsion vehicles, primarily in LNG and CNG.
Adjusted EBITDA was $239,000,000 with a margin of 8.3%. Compared to the second quarter of 2017. Adjusted EBIT was $92,000,000, an increase of $20,000,000 compared to the second quarter of last year, with a margin of 3.2%. The increase was the result of a favorable volume and mix performance, primarily in buses, and positive price realization about 2% globally, of which 1% due to effects. In the EMEA and LatAm truck market, partially offset by a 24% increase in R And D Spending in new product development initiatives aimed at enhancing our product competitiveness and fuel efficiency.
The market share for trucks in Europe was slightly down in light and down about 1% in heavy, as we anticipated as a consequence of the refocusing strategy on more profitable customer segments in the heavy duty range. Including the reduction in sales with buyback commitment. Trucks book to bill was at 0.8 in EMEA and 1.3 in LatAm. Going into the 2nd part of the year, we are staying the course with the product and customer refocusing approach in every vehicles in EMEA, including increased penetration of our natural gas powered vehicles which are building momentum in the marketplace and envisaged to build on the progressive improvement in profitability in the segment. For LatAm, we expect an initial sharp slowdown in the Argentinian market post currency devaluation.
Our actions are focusing now on our financial services offering and local program subsidy schemes to revive an ailing demand. But we're also expecting to offset some of that with an increase of activity in Brazil. Slide 15, powertrain net sales increased 7% in the second quarter of 2018 compared to the second quarter of last year. Sales to external customers accounted for 49% of total net sales and were up 2 percentage points versus last year. Adjusted EBITDA was $141,000,000, up $13,000,000 compared to last year with a margin of 11.6%.
Adjusted EBIT was $1,108,000 for the same period, an $11,000,000 increase compared to the second quarter of 2017 with a margin of 8.9%. The increase was due to a favorable product mix and manufacturing efficiencies partially offset by increases G And A and R&D expenses. We are very pleased to see that Powertrain continues to deliver very solid profit and margin performance and we expect that to remain for the balance of the year net of the impact of the seasonal summer shutdown in Europe in Q3. Lastly, on Slide 17, we highlight our updated on quarter of 2018, CNH Industrial is updating its guidance for the full year 2018 as follows: net sales of activities unchanged at approximately $28,000,000,000. Adjusted diluted EPS increased to between $0.67 $0.71 per share, from previously $0.65 to $0.67.
Net industrial debt at the end of 2018 improved to between $700,000,000 $900,000,000, from previously 0.8 to 0.21000000000. This concludes our presentation and we can now open up for questions. Unless Derek has any conclusive remark to make.
Thanks, Max. No further remarks on my side. I think we can open for questions.
Ladies and gentlemen, today. Ladies and gentlemen, today's question and answer session will be conducted electronically. We will take our first question from Mike Chalinski from Seaport Global. Please go ahead, sir. Your line is open.
Good morning guys and certainly my condolences. So I want to quickly ask about the guidance. First of all, it's certainly great that you've increased it. But if you look at the last 3 years, you've made above half, call it, half to 2 thirds of your full year earnings in the second half of the year. You've already put up in the first half about $0.43 of EPS, the first two quarters, and things seem to be going quite well.
I know there's some caution. Derek, you said are in certain select areas. But is there a reason why you're expecting a pretty significantly lower back half, or we won't get at least 4 times in the back half? Or is there a certain signal you're waiting for to kind of hear about what happened to maybe up the back half on the next quarter's conference call?
Hi, Micah. I mean, the first of all, thanks for your thanks for your message. I mean, essentially, the trade war is what's driving the prudent approach taken in the second half of the year. As you know, equal as well as I, it's changing by the other, not even by the day. So again, we understand in the last 72 hours.
We have the $12,000,000,000 8 package. We saw in the news last evening that the U. S. E. Euro 0 tariff trade platform approach seems to be positive.
But quite frankly, we need to unwind what those two factors are going to deliver. More in terms of timing rather than terms of expectations as well. So I mean, I can assure you the machine is running well. And we are confident we can carry the performance that we saw in Q1 forward into H2. But really, we are we're taking a point of caution and being prudent on the forecast based on the uncertainty of the trade war, which we believe is a sensible approach from our side.
For sure, as we go through Q3, Then we would hope that that will unravel and become much clearer to us. And then obviously, we can give you a much clearer consensus or forecast for the full year.
Okay. That's fair. Perhaps secondly, Derek, obviously, you're not somewhat new at CNH. You've been around for a while, but you are new to being CEO. Could you give us a sense, even though you're interim, are there anything you're kind of thinking about changing at the company?
Are there any quick payback hanging fruit you can do is from a cost structure perspective or maybe some small tweaks to the product portfolio that might be on your current current list of things to do here in the 1st couple of quarters?
Yes. I mean, again, as I referred there, I mean, we are confident we can drive the business forward in H2 as we have in H1. Those include a number of different activities, cost containment, margin improvement, focused activities within specific models, products and specific marketplaces. Again, again, business as usual, quite frankly, in the second half of the year compared to the first half. I don't think there's any magic or dramatic factors comment, I realize the case of pushing hard on the things we've done well thus far and in the second half of the year and ensuring we sustain a positive level of performance going after.
We will take our next question from Ann Duignan, JP Morgan. Please go ahead. Your line is open.
Hi, good morning.
Hi, Ann.
Hi. Sorry. I didn't know if I was you were there or not. And I would just echo everything you said when I initiate a coverage on CNH 15 years ago, I had an overweight rating and the thesis that I wouldn't bet against Sergio. So I think that we all agree with your sentiment.
My question I think we all appreciate what's going on with trade wars. And I agree the visibility is limited to the best out there in the Midwest right now. Maybe you could address and talk about the fundamentals in Europe, particularly what you're seeing in the dairy sector, the cereal sector, especially in light of recent weather, and the expectations there for page 5 pre buying versus the fundamentals? Thank you.
Thanks, Anne. No, I understand that I'm relatively new to this. You've followed the 15 years and you appreciate the distance the companies come over that period under the stewardship of our Chairman. I mean, with specific or specifically to answer your question, I mean, EMEA is not for the first time a complicated environment. I mean, we have a number of markets that performance slightly better than expectation.
Unfortunately offset by a number of markets, which we see softening. I would say France starts to show some sign of recovery, which, again, coming off a variable base from the last years is a positive sign given the way of France on the European market. We see the northern hemisphere of Europe, again, remain in stable, solid across the sort of various sectors of the agricultural business. So again, I think net net net, net, we are forecasting the market to be flat or slightly up Again, I don't see us quite frankly, I don't see us returning to the dizzy heist of the peaking trough that we may be experienced in the last decades. I think what we see now is becoming more of the norm.
And I think it'll be a slow and steady growth and decrease that we see in EMEA. I would say, however, positively, I think we've reached the bottom of the cycle. We're now in a aesthetic with in there as well. I mean, specifically to your question on dairy prices, I mean, as we've seen in the past quarters and quite frankly over the past years, the EU support of ag is quite important, and they've demonstrated that they'll protect the industry. So farmers are also not quite unified in most regions and make their concerns, Herb, when policy changes are being contemplated.
So It's something we continue to monitor closely. But again, we are not envisaging any major changes in the business direction than we've reported in the past. Hope that answers your question then.
Yes. And my follow-up then will be, of the revision to your guidance, how much of that revision is actually the tax rate going from 30 to 28?
Yes. So this is Max Ann speaking. Basically, it's half of the improvement comes from the tax rate and half comes from the improved performance, but with the caution of the sensible approach. So that's why also we have reopened up the range a little bit from 67 to 71. So if you look at the upper end of the guidance, obviously, there is more upside to be to come from the business than from the tax rate.
We will now take our next question from Stephen Fisher, UBS.
Balances as well. It seems like your guidance does suggest some margin pressure in the second half of the year. How much of that is the price versus cost dynamic, versus R and D step up versus maybe just other things or just keeping the top line flat because you are trying to be conservative out there given the environment?
Hi, Stephen. Maybe I'll ask Max just to walk you through some of the key highlights, are the key metrics within there?
Yes. I mean, it's very simple answer. At the end, what we anticipate is to continue to improve our performance in the two business that are particularly under watch for, turnaround and recovery. So C and CV, whereas we said that during the presentation, we expect powertrain to continue to deliver at those levels. So the big question marks is around the unknown and the end market.
And the turn of the farmer sentiment visavis the ag business. So at the end, the twist in our number for the second is going to be sitting in the ag performance.
Sorry, I was going to add to that. I mean, have a couple of businesses that, let's say, haven't been performance in performing in line with our expectation. I know we've reported on previous calls that we've taken some remedial action to address the improvement of those business. And we start to see those businesses turn around and contribute to the overall performance as well. Again, it's something we'll continue to push forward and something we're confident to continue to grow the overall performance of the business.
Great. And then can you just maybe give us a sense of your ag order book by region year over year? I mean, what's the extent of the visibility that you do have to 2019 at this point? And Have you seen any real change in farmer sentiment in recent weeks? Any kind of changes in order patterns or anything like that?
Yes, I mean, specifically to answer your question on the order book, I would say that from a consolidated and the agricultural business, our consolidated level, we're tracking slightly ahead of year. But the I think the key sentiment, the key positive factor within that is if I look at our high horsepower tractor in combine order book in NAFTA, in the row crop segment, we are particularly positive year over year. So again, we are very I say, no, we're very hopeful we can continue that trend going, but the NAFTA order book is indeed very positive year over year. The others are tracking plus or minus a few percentage points. Again, some of them have a relatively good base So again, expectation to have in cases year over year weren't necessarily the case.
Again, I go back to the trade war and what that ultimately will mean for us at the end of the day. I mean, it's a strange situation. I mean, if we look at the order book, it suggests that end user sentiment isn't as negative as what may be out there. But when we talk typically talk to the end users themselves, there's an element of wait and see an element of caution in there as well. So as we said earlier in the presentation, we think that legally slow down a lot going forward until there's more clarity of what this trade restriction actually means going forward.
But think to summarize the question, we're actually quite comfortable and positive on an order book as it is today.
Okay. Thank you very much.
We will now take our next question from Rob Wertheimer from Manus Research. Please go ahead.
Hi, everybody. It's Robert from Amelia. And just to add, I mean, the portfolio companies sort of overseen by Sergio overall been remarkably impressive. So it's a testament to all of you
and to
him. Really impressive. So my question is on trucks. What actions have you taken that have yet to sort of show up the margin and what structural actions do you think you have left to take to businesses at high cycle in the major market? Obviously not Zill?
I mean, what's left to improve on there, please?
So I mean, the, that's predicted the answer to me today. So from an industry perspective, as we alluded to earlier, we are still managing within a very high industry in the European region, which again is good for us and we're taking fully advantage of. Our light and medium businesses have typically been good businesses. That again, we continue to grow margin, continue to grow share and continue to grow profitability in the back half. Again, I think it was explained in detail in the last quarterly call that we took an approach to focus on more profitable portfolio on the heavy truck segment.
Instead of chasing volume. We also are complementing that with, again, new products that were launched in this period. For the heavy truck. And those products include alternative propulsion propulsion vehicles, which again gives us some advantage in the marketplace as well. We're starting to see the dividend of that and the results.
We saw in the numbers that Mike presented earlier, but by no means at the end of the road, but we're confident the strategy we have in place is sustainable for the medium to long term future. I don't know, Max, is there anything you would add?
Or Just to put a little bit of caution into, Q3, we're probably going to face a little bit more pressure from a volume standpoint as we are building up into this strategy. Obviously on the other side, you're going to have the full realization of the pricing actions that we have put in place. And at the end, it will depend upon the execution on the mix change that Derek mentioned, moving away from the Let me say that diesel propulsion into the alternative propulsion, primarily LNG for heavy duty trucks, right, and CNG for light and medium. As we see the penetration of those applications growing fast as we move along our strategy.
And then our next question is from Monica Pascio from Bank of America.
Yes, good afternoon and good morning and first of all, before starting with the question, let me express my sympathy on the loss of Sergio. Join the sentiment of the company. And then speaking about business, I would like to ask about the outlook in NAFTA for high horsepower. The company had a 9% the market was up by 9% in the first quarter for higher power, but I see that industry outlook for the full year has remained unchanged. Is it due to your point of cautious or for other reasons?
And the second question is on the you can comment a little bit more on the net debt trend evolution in the second quarter because actually I was expecting EBITDA of cash born from working capital due to the ramp up in production, maybe a loss something. And the 3rd very third question is, if you can give us a rough indication of the financial charges by year end end of the CapEx? Thank you.
Thank you, Monica. I mean, I'll take the first question and then I'll ask Max to to do your second and third. I mean, the answer is yes. The and again, I would break into 2, 2 sub answers on the high horsepower. There is a market there today.
It's represented in an order book So there is end user demand. There's clearly a need for farmers to trade out their used equipment. Commodity prices are relatively depressed. So the farmers are looking for new equipment to be more efficient to ensure that their operations in the farm are manageable and profitable for them. And again, everyone's weighing and seeing from the farmer to the dealer to ourselves.
Just to try and understand how this whole trade war fiasco is going to pan out in terms of in terms of what the end picture and end position is, is 100% tariff, is it 50% tariff and what does that exactly affect? There's no doubt that the 8 package that was communicated by USDA was will be a positive factor. But again, from the data we've gathered thus far, we understand there'll be 3 programs they'll take effect in September. But we really need to get through the next weeks and unravel exactly what that means in terms of support to the farmers themselves. So again, it's a point of caution.
We don't envisage any major fundamental weakness in the business itself. We don't envisage any and a lack of need for the products themselves, it really is just to get clarity of this trade war fiasco that we're currently finding yourself embroiled in. Mark, you answered the other two questions, please?
Yes. Thank you, Derek, and then thank you, Monica, for your sympathy from myself as well. So let me start with the financial charges first. So basically what the number you see right now is our current run rate. And that speaks for year over year improvements on the financial of the interest expense at about $55,000,000 to $60,000,000, which is what we committed to at the beginning of the year.
Speaking about that, obviously, we continue to look opportunistically at the capital markets to see if we can identify with the right timing opportunities to further extend the duration of our debt and lower cost of capital as we now and thread into a full investment grade area. Moving to the net debt and the components of it, We typically tend to generate cash in the 2nd quarter and in the 4th quarter, with the 4th quarter being the highest performance of the year normally. So we are entering a second half of the year where we expect to generate cash We are basically, let me say, almost flat in the 1st 6 months. But the expectation is for a cash generation number that not to the tune of last year where we basically made the $1,400,000,000 in the second half. And there are two main reasons for that one, obviously, as we have been mentioning now for some time, we expect CapEx to start to ramp up and moving towards a 2% of sales down the road.
It's going to take some time probably. To unfold those new initiatives that hit R and D last year and this year into the CapEx number with the new tooling. But at a certain point is going to come. The second item that will be negative to last year, as you clearly mentioned in your question, is the working capital. And there are a few reasons for that.
1 is inconsistency with the cautious approach that we are taking vis a vis the end market particularly in agricultural equipment. We're also trying to make sure that we don't get trended on the supply chain. We are kind of holding some safety stock and that safety stock is going to obviously continue through the balance of the year and eventually grow to make sure that we don't get surprised by swings in the working in the supply chain. And at the same time, also, it's important to recognize that the end of the year, there will be the first introduction of the Stage 5 engine application. So some stockpiling actions also happening over there that will consume cash at least for the balance of the year.
So with those 2 item in mind and with a cautious approach, we would like to basically, confirm our guidance for the full year with a positive cash flow generation in the second half, which will obviously drive a number for the full year in line with our expectations. But it remains to be seen how much of that uncertainty will unfold in the market to see how the number may flex down the road.
We will now take our next question from Joe O'Dea from Vertical Research.
Hi, thank you. I thought certainly with all of you on the call and your colleagues worldwide during this difficult time. I wanted to circle back on trucks and just some of your comments around alternative powertrains, just to under stand where penetration is in Europe right now on CNG, LNG, how that compares to where it was a couple of years ago and then how you see that playing out over the next couple of years, just to understand that growth opportunity?
Thanks, Joe. I mean, we're not going to disclose any numbers. What I would offer to you is that we see as a growing segment the marketplace, I would tell you that we have taken full advantage of that for the product lineup that we have currently available to us. And I will also tell you that we continue to invest on that product line. And as this segment continues to grow, which is our expectations, then we expect to take full advantage of that going forward.
I hope that's enough
to answer your question, John.
Yes, maybe something we can follow-up on.
The
also just with respect to today as an in the agreement with IBM and you talk about some of the supply chain and manufacturing, kind of issues that will be addressed there. Can you put in context what that means from a margin opportunity side of things? What that means from a working capital management side of things and more cash that you can free up?
Yes. As Mark's heads are ICT operations in CNH Industrial, I'll give them page to tell us exactly what he's done.
Thank you, Derek. Good point, Joe. Actually, this is an important step into our transformation journey in ICT, as we continue to invest into, renewing and extending our platform partnership with large IT vendors. Fundamentally, there is a high saving that we expect to achieve, on a yearly basis, that has some relevance but it's definitely not a material number. Plus, obviously, once those technologies are being introduced into the business functions, there is another potential to take out cost or minimize cannibalization or loss of sales as new digital technologies being introduced in the marketplace, such, for example, e commerce platforms and so on.
So In summary, there are hard savings that we're starting to, let me say, book going forward pretty soon. And there are further potentials to be, generated once those technology are fully invested into the business.
Thank you. And then just one last one on the back half of the year guide, thinking that what you have in the order books at this point and equipment that you would be delivering into harvest season thinking being that 3Q might be a little bit more secure and that the caution might be a little bit more weighted toward 4Q uncertainty, just looking to see whether or not that's accurate?
I think for the agricultural business, that would be an accurate sum again, with a slightly different, blend by region. And as we know, EMEA typically has a prolonged break in the period after, particularly after the harvest, but for sure in NAFTA, I think that would be a a fair assumption.
And our next question is from David Russell from Evercore ISI.
Hi, hello, everybody. I had a question about the order book for NAFTA. I was encouraged by the comments you had about the positive order book development 3Q that obviously you also spoke there was some uncertainty. The orders that you have now, just so I'm clear, the orders these are 2nd quarter orders you took for 2018 deliveries. Has there been any early indication about 2019 on what you've been seeing maybe more recently?
The answer sorry, David, yes. The answer is Yes. So the orders that we have in hand, we collected in Q2 for delivering the balance of the year. We will be going out fairly soon to for an order rating program for the balance of the year, typically for delivery in Q4. We are not collecting orders at this point for 2019.
That would be something that we would be in a position to share with you when we have the Q3 call together.
Okay. That's helpful. And also on the price cost and manufacturing efficiencies in the second quarter, for ag were very impressive that it all netted out to the basically where all the pricing fell through to the bottom line. And again, I know it's hard to know exactly, but the way you bucket volume separately somewhat regardless of volume to some degree, how should we think about the rest of the year on price versus raw material and including the efficiencies. Now it just it was an impressive performance on the efficiencies and I'm just trying to understand can we hope that can continue for the back half of the year or raw materials maybe getting a little too aggressive on their increased offset from the efficiencies?
Let me take that, Derek, let me take the technical part of the question and leave it to you for us to explain the efficiency program. So David, it is important to keep in mind, obviously, we are running right now with raw material headwinds. That are starting to bite, but some of those headwinds due to our standard cosmetology, right, are held in inventory. And they're not going to basically come to fruition into the P and L until we sell those units. So there is a little bit of holdback on the headwinds that will manifest them in the second half.
So that's why you tend to price ahead to be able to basically, once they come to fruition, have the pricing running to be able to offset some of that issue. As far as the manufacturing efficiency programs, I leave it to their
I mean as we said earlier, I mean, we have the pricing actions in place that we believe will accommodate for the raw material headwind in the second half of the year. So that may not be exclusively, and we may have some other adjustments, but I think they'll be minor rather than major. With that in mind, then that should allow the manufacturing efficiency to drop to the bottom line. I do have to temper that and say that if we do have a softening in the volume as we alluded to earlier, then obviously that would drive some unfavorable absorption of our plants, not material. But again, we have 3 65 day a year efficiency program that we continually drive and industrial operations.
So every day, we execute and it comes to the bottom line. I don't see any reason why that wouldn't continue in the balance of the year.
Okay. So some of the raw materials in the order book that shifts in the third quarter. We'll see that, but you've also taken price actions that you feel pretty comfortable with the the price costefficiency relationship for the rest of the year?
Sorry, it's a correct statement. I mean, again, it's a bit of a moving target as well. I mean, obviously, the tariffs have been affecting steel prices. Okay. We had news last evening, the 0 tariff trade approach from the U.
S. New Year. Suggest that we should have seen the worst of it, but again, would it come? Deviations we've saw over the last 6 months, then I would like to understand exactly what that means before speaking knowledgeable to it. So again, I think we are by and large covered in terms of pricing for raw material headwinds for the balance of the year.
We don't envisage that being a major issue.
All right. Thank you for the time. And Mike and dollars is to everybody at CNH. Thank you.
Thank you very much, David.
Our final question comes from Ross Gilardi from Bank of America. Please go ahead. Hello. Your line is open. You can please go ahead.
Hi, everybody. Sorry about that. Let me just add my deepest condolences on Sergio's passing as well. I'm sure it's a very part time. And my thoughts are everybody with everybody at the company.
Obviously a lot of conversations have been happening for years at CNH around future portfolio structure. And I realize it may be a hard question to ask, but I'm just wondering just directionally, does Rich's departure earlier in the year and now Sergio is passing, does it potentially delay the timing on any potential future transformation decisions to later in 2019 or 2020. And obviously, you've been kicking around a lot of ideas for many, many years. I'm just asking more about just the timing timing of any decisions if anything do you think is impacted?
I mean, first of all, Ross, thanks for your condolences and words. I mean, the for me, it's a never ending cycle. I mean, we every company, and we're no different from those, continue to look at the portfolio of the products, the business. It is part of, let's say, the functional operations of the business, and we're not different quite frankly. The I mean, clearly, we're going to appoint a new CEO in the near future.
I think we should be cautious to comment until the new CEO is on board because I think it's for him or her to make the statement of what may or may not change in the future. And again, with a great respect, we've taken on a new chairperson since last Saturday. So again, I think we need to give the time for the new chairperson to acquain themselves for the businesses and address those questions. So I don't think materially still in anything. Again, I think there's a robust solid team behind Mr.
Tobin before and behind myself. So the team, again, seasoned professionals in the team. So they're constantly looking at the cycle of opportunities and how we can grow the business, organic and organic and so on and so on. So I don't think it's going to be a material delay of anything if we did consider this in the future, but I think we have to give caution to the they appoint a new CEO and a new chairperson on board and give them the opportunity to give you more clarity in the future.
Rob, sorry if I may add a comment to your question. If you remember, the second part of the story that was being wired in the past was in the meantime until we get ready for whatever actions we may take in the future, Obviously, we need to continue to address our quest for further improvement in the credit rating as we strongly believe that our sector pertains to a high investment grade rating structure. And we want to get there as quickly as possible. And also, we are looking to continue to look opportunistically into our capital structure to identify options for extension of the duration of our debt. So while, I mean, we have to pause for a second the company and the team is not staying still, we keep working on those 2 priorities.
Thank you. Thank you for that. Max, and just Derek, I realize maybe it's a somewhat awkward question for you to answer, but you did mention that The company is going to appoint a new CEO in the future. What's being communicated internally about that in Can you say, do you expect to announce something by or will it comping out something by the end of 2018? And can you comment at all on whether the search is is mostly internal or external?
Or do you not?
The only thing I would
say is, I
mean, coherent with the press releases we saw over the last days, the searches in progress, I can confirm that's the case. Again, in the meantime, myself and the management team are focused on bringing forward our commitment and delivering guidance for the year. So whether it be September, October, November, December, the machine and the management team will continue to drive the business And once the decision is made, then the decision will make. So you're over the first to hear.
Got it. Thanks everybody. After the rest of
the year.
Thank you.
Thank
you very much.
And our last question comes from Mario Gabelli from Gamco Investors. Please go ahead.
In light of the time, and let me echo all the comments of the proceeding, I'll talk to you guys individually about what's going on in the truck market.
Okay, thanks Mario.
That will conclude the question and answer session. I would like to turn the call back over to Federico Donatelli for any additional or closing remarks.
Thank you, Lisa. We would like to thank everyone for attending today's call with us. Have a good evening.
That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.