CNH Industrial N.V.
Q2 2018 Earnings Call Transcript

Published: 26 Jul 2018

[Operator:]

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-and-answer session. At this time, I'd like to turn the conference over to Federico Donati, Head of Investor Relations. Please go ahead, sir.

[Federico Donati:]

Thank you, Lisa. Good morning and afternoon, everyone. We would like to welcome you to the CNH Industrial's second quarter 2018 results webcast conference call. This call is being broadcast live on our website and this is copyrighted by CNH Industrial. Any other use recording, or transmission of any portion of this broadcast, without the expressed written consent of CNH Industrial is strictly forbidden. CNH Industrial Interim CEO, Derek Neilson, and Max Chiara, Group CFO are hosting today call. They will use the material you should have downloaded from CNH Industrial Group website. After their presentation, we will be holding a Q&A session. As a final comment, please note that any forward-looking statement we might be making during today call are subject to 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 20-F and EU Annual Report, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission, SEC and equivalent authorities in the Netherlands, AFM and Italy, CONSOB. 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 Neilson.

[Derek Neilson:]

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 Marchionne. As you're, no doubt, aware, we received the terrible news yesterday morning that Sergio has passed away. This is an incredible sad and difficult time for all those at CNH Industrial and our thoughts and prayers go into Sergio's family, friends and colleagues. Our Chairman had a remarkable ability to drive us forward, towards new and ever-increasing goals, through a unique combination of courage, tenacity and an unconventional way of thinking. This was true leadership. His unnerving forensic knowledge and sharp vet made a lasting impression on everyone, who came into contact with him. And his 15 years at the helm of first Fiat Group and FCA and CNH Industrial, he championed transparency, responsibility, openness and respect. We will not forget his principles and we will continue to build on the legacy he has left us. I know that, I'm speaking behalf of all my Jag colleagues and the entire personnel of CNH Industrial, when I say there has been a privilege and an honor to work alongside such a unique and inspirational leader. We will miss him immensely. Of CNH Industrial locations across the globe, we will be observing a moment of silence, during the summer to pay the respects to Mr. Marchionne. I would please ask you to now join me in a minute's silence in memory of a very unique and special person. Thank you. It's difficult as 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 the key metrics. And for that, I would like to give credit to the CNH Industrial team, who have, as you know, encountered several changes in leadership, both at the beginning and during the quarter. Despite these changes, the team remain 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 continued to demonstrate sustained demand, resulting 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 $0.20 per share, up 56% compared to Q2 last year, which marks our strongest quarterly performance since 2014. Operating cash flow of $0.8 billion contributed to a lower net industrial debt of $1.3 billion, 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&D was up 15%, over 2017, as we continued 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 continued 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 headwind. 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 and $0.71 per share and by lowering our net industrial debt guidance to between $0.7 billion and $0.9 billion. If you move forward to slide 4, I'm going into a bit more detail. This gives you a good overview of the industry trends we faced for each of our segments during the quarter, with the relevant company specific comments. Worldwide tractor and combine industry units were up 9% versus last year. NAFTA row crop continues to trend positively with strong performance as dealers restock inventories and customers replace dated equipment. In LATAM, Brazil was slightly positive, with a strong finish in June, after the more of the frothy conditions were released for the new harvesting 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 inventory slightly up in tractors and up 19% in combines, due to a positive order book development in Q3 in NAFTA and in support of an improved industry outlook in Brazil for Q3. CE, again, was positive in all regions, as the global construction trends we have been seeing continue and in some cases gain strength, especially in the heavy equipment. Worldwide light and heavy industry units were up 20% and 34% respectively versus 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 markets demonstrating positive year-over-year growth and continued to perform at high level. LATAM specifically was up 28%, with Brazil up fully 45% off 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, in 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 trends and solid order book on-hand. Trade and geopolitical tensions are not making it easy to forecast, but, although, we are not seeing material effects, so far on end user demand, we believe the industry will show some softening in the second part of the year compared to the first half. 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 would 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 we're 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, especially on heavy equipment. Finally in Commercial Vehicle, the market in EMEA remains 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 an attractive to customers. On slide 6, we had another great quarter in terms of awards, product introductions and cost saving efforts. Last month Iveco Defence Vehicles was awarded a contract to deliver an amphibious platform to the U.S. Marine Corps, in partnership with BEA Systems. The initial award is for 30 vehicles, with an option for over $200 million, worth up to $400 million over the first four years of the contract. In terms of product introductions, Iveco Trucks has been completing the launch of the newest Stralis X-WAY. Last month we unveiled Intermat in Paris, its natural-gas powered vehicles. This vehicle was developed for construction logistics and urban services that combines all the benefits of Trakker chassis and off-road capabilities with best-in-class payload on-road performance and fuel efficiency. I would also like to take this opportunity to congratulate the hard work of our employees at Jesi, The New Holland plant in Italy. The plant achieved the Silver Level World Class Manufacturing award. Our world class manufacturing program along with other cost saving strategies has been vital to our company's improved results. At this time, I will now hand over to Max for the financial overview of the presentation. Thank you, Max.

[Massimiliano Chiara:]

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. Marchionne. 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 would be ever grateful for having had the chance to be guided and inspired by him, these past five years at CNH Industrial. With that said, I would like to return to the business in hand, exactly as he would have expected me to do. Moving on to slide 7, key figures for the second quarter. 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 businesses, leading to net sales of our industrial operations up 16% year-over-year at $7.6 billion. 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 then ETR of 23% allowed us to report an increase in our adjusted net income of almost $150 million 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 two consecutive quarters, for the full year 2018, we are upgrading our expectation for an adjusted ETR of approximately 28% from 30% before. Adjusted EBIT of Industrial Activities closed at $571 million, with margin up 1.4 percentage point to 7.5%. Adjusted EBITDA of Industrial Activities was $843 million, 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 $1.3 billion at the end of June 2018, $0.6 billion lower than in March as a result of strong operating cash generation in the quarter. As a result of continued actions to reduce our gross indebtedness during the first part of 2018 the ratio of gross industrial debt to adjusted EBITDA was 2.1 times with equivalent net debt to adjusted EBITDA ratio at 0.5 times at June 2018. Available liquidity was $8.4 billion, up $0.7 billion compared to March 2018. The liquidity to LTM revenue ratio was maintained just below 30%. This performance is a clear sign that we remain fully committed to further improving our credit rating from the current levels. Speaking about debt, 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 our healthcare plan following the favorable judgment issued by the United States Supreme Court, as previously announced on April 16, 2018. Turning to slide 8, 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 billion, net of the $220 million positive currency translation impact, net sales increased $834 million or almost 13%, with Agricultural Equipment contributing $507 million 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 million or 22%, as a result of favorable volume and mix across all regions and especially in Ag Equipment industry, which was up 34% year-over-year in the quarter. For Commercial Vehicles, net sales increased $154 million or 6%, as a result of favorable volume and mix in buses and positive price realization primarily in EMEA and LATAM truck markets. Powertrain was up $15 million. 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 a quarterly Industrial Activities adjusted EBITDA and adjusted EBIT walk. Adjusted EBITDA closed at $843 million, with a margin of 11.1%, 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% of the increase, with adjusted EBIT ending up almost 45% to $571 million with a margin of 7.5% as we continued to deliver on our profitable growth targets. Moving onto slide 10 our change in net industrial debt. Net industrial debt of $1.3 billion at the end of June decreased by $0.6 billion from March, as a result of strong operating cash generation and a positive change in working capital, primarily coming from higher payables in support of the increased production levels. When comparing the operating cash flow generation this quarter to last 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 and with a shift in focus to new products spending, particularly the spending is around Stage V engine applications, the precision farming program in Agricultural Equipment and a continuous focus in new product developments for our Truck and Bus division. In April, we paid an annual dividend to shareholders for $235 million. In addition, we have continued to execute on our stock buyback program, adding almost 4 million of our common shares for a total consideration of $44 million, 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 second part of the year albeit at a more moderate path than last year to achieve our net industrial debt target. Moving onto slide 11, our Financial Services business. Net income was up $15 million compared to the second quarter last year, primarily due to better performance in NAFTA, EMEA and LATAM and a favorable effect from the lower U.S. tax rate. For the quarter retail loan originations were $2.6 billion flat compared to last year. The managed portfolio of almost $26 billion at the end of June was up $0.8 billion 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. Agricultural Equipment's net sales increased 20% in the second quarter of 2018 compared to the second quarter of 2017 or up 18% on a constant currency. A favorable end user demand environment with NAFTA row crop industry demand up 9% in high horsepower 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 million, up $135 million compared to the second quarter of 2017, with a margin of 14.3%, up 2.1 percentage point. Adjusted EBIT was close to $400 million in the second quarter of 2018, $135 million increase compared to the second quarter of 2017. Adjusted EBIT margin increased 2.6 percentage point to 12% compared to last year, a level of margin we have not seen since 2014 in this business. About half of 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%. Raw 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&A and a 10% increased spending in R&D, where the main focus is on precision farming and compliance with Stage V emissions requirement. Turning to the next slide. Construction Equipment's net sales increased 23% in the second 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 and 34% in heavy year-over-year. Adjusted EBITDA was $48 million, up $25 million from the same quarter in 2017 with a margin of 6%. Adjusted EBIT was $33 million in the second quarter, a $26 million increase compared to the second quarter of last year with a margin increase of three percentage point to 4.1%. As a result of higher volume, favorable product mix, positive industrial absorption and positive price stabilization at 2.5% of which 1% for FX offsetting raw material cost increases. We see continued year-over-year momentum building into CE as far as sales and profit margin are concerned. Adjusted for summer seasonality, albeit at the more moderate path than what experienced in H1. On slide 14, Commercial Vehicles' net sales increased 11% in the second quarter of 2018 compared to last year or up 6% on a constant currency basis, as a result of a favorable product mix and positive pricing primarily in EMEA and 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 – 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 million with a margin of 8.3% compared to the second quarter of 2017. Adjusted EBIT was $92 million, an increase of $20 million 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 FX in the EMEA and LATAM truck markets, partially offset by a 24% increase in R&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 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 second part of the year, we are staying the course with the product and customer refocusing approach in heavy vehicles in EMEA, including increased penetration of our natural gas powered vehicles, which are building momentum in the marketplace and envisage to build on the progressive improvement in profitability in the segment. For LATAM, we expect an initial sharp slowdown in the Argentinean 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 point versus last year. Adjusted EBITDA was $141 million, up $13 million compared to last year with a margin of 11.6%. Adjusted EBIT was $108 million for the same period, an $11 million 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 increased SG&A and R&D expenses. We are very pleased to see that Powertrain continues to deliver a 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 guidance for full year 2018. As a result of the profitability improvement achieved in the second quarter of 2018, CNH Industrial is updating its guidance for the full year of 2018 as follows. Net sales of Industrial Activities unchanged at approximately $28 billion. Adjusted diluted EPS increase to between $0.67 and $0.71 per share from previously $0.65 to $0.67. Net industrial debt at the end of 2018 improve to between $0.7 billion and $0.9 billion from previously $0.8 billion to $1 billion. This concludes our presentation and we can now open up for questions, unless Derek has any conclusive remark to make.

[Derek Neilson:]

Thanks Max. No further remarks from my side. I think we can open for questions.

[Federico Donati:]

Yeah, thank you. Go ahead, yeah, take the first question.

[Operator:]

We will take our first question from Mike Shlisky from Seaport Global. Please go ahead, sir. Your line is open.

[Michael David Shlisky:]

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 I look at the last three years you've made above half, call it, half to two-thirds of your full year earnings in the second half of the year. You really put up in the first half about $0.43 of EPS, in the first two quarters and things seem to be going quite well. I know there's some caution Derek you said out there in certain select areas, but is there a reason why you're expecting a pretty significantly lower back half (29

[Derek Neilson:]

Hi, Mike, I mean, the – first of all thanks for your message. I mean, essentially the trade war is what's driving the prudent approach, we've taken in the second half of the year. As you know equally as well as I, it's changing by the hour, not even by the day. So, again, we understand in the last 72 hours, we have the $12 billion aid package. We saw in the news last evening that the U.S. EU zero tariff trade platform approach seems to be positive. But quite frankly we need to unwind what those two factors are going to deliver. More than in terms of payment rather than in 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 H1 forward into H2. But really we are 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.

[Michael David Shlisky:]

Okay. That's fair. Perhaps secondly, Derek, obviously not you're not someone new at CNH, you've been around for a while, but you are new to being the CEO. Could I get 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 low-hanging fruit you can do is from a cost structure perspective or maybe some small tweak to the prior portfolio that might be on your current list of things to do here in the first couple of quarters?

[Derek Neilson:]

Yeah. I mean, again as I referred earlier, I mean we're 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, it's 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 come in, really case of pushing hard on the things we've done well thus far into the second half of the year and make sure that we sustain a positive level of performance going after.

[Michael David Shlisky:]

Great. Thanks, Derek. Appreciate it.

[Derek Neilson:]

Thank you.

[Operator:]

We will take our next question from Ann Duignan from JPMorgan. Please go ahead. Your line is open.

[Ann P. Duignan:]

Hi, good morning.

[Derek Neilson:]

Hi Ann.

[Ann P. Duignan:]

Hi. Sorry, I didn't know if you were there or not. And I would just echo everything you said when I initiated the coverage on CNH 15 years ago, I had an overweight rating. And the pieces that I wouldn't bet against Sergio, so I think 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 a limited X-factor in the Midwest right now. Maybe you could address and talk about the fundamentals in Europe, in particularly what you're seeing in the dairy sector, the cereal sector, especially in light of recent weather and the expectations there for Stage V pre-buying versus the fundamentals? Thank you.

[Derek Neilson:]

Thanks Ann. I understand I'm relatively new to this, you've followed it for the 15 years and you appreciate the distance the company has come over that period under the stewardship of our Chairman. I mean, what's specific -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 are performing 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 very low base from the last years is a positive sign, given the weight of France on the European market. We see the northern hemisphere of Europe, again, remaining stable, solid across sort of various sectors of the Agricultural business. So again, I think 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 heights of the peak and trough that we may be experienced in the last decades. I think what we see now it's becoming more of the norm and I think it will be a strong 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 steady growth 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 protect the industry. So farmers are also quite unified in most regions and make their concerns heard 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, Ann.

[Ann P. Duignan:]

Yeah. 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%?

[Massimiliano Chiara:]

Yes, so this is Max Ann speaking. Basically 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 $0.67 to $0.71. So if you look at the upper end of the guidance, obviously, there is more upside to come from the business than from the tax rate.

[Ann P. Duignan:]

Yes. I appreciate that. Okay, thank you. I'll get back in line.

[Derek Neilson:]

Thanks, Ann.

[Operator:]

We will now take our next question from Steven Fischer, UBS.

[Steven Michael Fisher:]

Thanks very much and offer my sincere condolences 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&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?

[Derek Neilson:]

Hi, Steven. Maybe I'll ask Max just to walk you through some of the key highlights or the key metrics within there.

[Massimiliano Chiara:]

Yeah, 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 CE and CV. As we've said 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 vis-à-vis the Ag business. So at the end, the twist in our number for the second half is going to be sitting in the Ag performance.

[Derek Neilson:]

And I would only add to that. I mean, we have a couple of businesses that, let's say, haven't been performing in line with our expectations. I know we've reported on previous calls that we've taken some remedial action to address the improvement in those business and we start to see those businesses turnaround and contributing to the overall performance as well. Again, it's something we'll continue to push forward and something we're confident, continue grow the overall performance of the business.

[Steven Michael Fisher:]

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?

[Derek Neilson:]

Yeah, I mean, specifically to answer your question on the order book, I would say that from a consolidated – in the Agriculture business, at a consolidated level, we're tracking slightly ahead of last year. But I think the key sentiment, the key positive factor within that is, if I look at our high horsepower tractor and combine order book in NAFTA in the row crop segment, we are particularly positive year-over-year. So again, we are very – I'd say, 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 are relatively good base. So again expectation to have increases year-over-year weren't necessarily the case. Again, I go back to the trade war, from 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 the end user sentiment is negative, is what may be there. But when we typically talk to the end users themselves, there is 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 will likely slow down a little going forward until there is more clarity of what this trade restriction actually means going forward. But I think in summarizing the question we are actually quite comfortable and positive on an order book as it is today.

[Steven Michael Fisher:]

Okay. Thank you very much.

[Derek Neilson:]

Thank you very much.

[Operator:]

We will now take our next question from Rob Wertheimer from Melius Research. Please go ahead.

[Rob Wertheimer:]

Hi, everybody. It's Rob Wertheimer from Melius. And just to add I mean the portfolio of companies sort of overseen by Sergio have all 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 in the margin and what structural actions do you think you have left to take to, the business is at a high cycle in the major market, obviously not in Brazil, I mean what's left to improve on there please?

[Derek Neilson:]

Thanks. Thanks for your kind word, Rob. So I mean the (41

[Massimiliano Chiara:]

If I 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, the diesel propulsions 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.

[Rob Wertheimer:]

Thank you.

[Operator:]

And our next question is from Monica Bosio from Banca IMI.

[Monica Bosio:]

Yes, good afternoon and good morning. And first of all before starting with a question, let me express my sympathy on the loss of Sergio, I join at the sentiment of the company. And then, thinking about business, I would like to ask about the outlook in NAFTA for high horsepower. The company at 9%, the market was up by 9% in the first quarter for high horsepower, but I see that the 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 – and then if you can comment a little bit more on the net debt trend evolution in the second quarter, because actually I was expecting a bit of a cash burn from working capital due to the ramp-up in production, maybe I lost something? And the third question is, if you can give us a rough indication of the financial charges by year-end and of the CapEx. Thank you.

[Derek Neilson:]

Thank you, Monica. I mean, I'll take the first question and then I'll ask Max to do your segment stuff. I mean the answer is yes. And again, I would break it into two sub answers on the high horsepower. There is a market up-to-date is represented in an order book, so that is end user demand. There's clearly a need for farmers to trade 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 waiting 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 what the end picture end position is, is it 100% tariff, is it 50% tariff and what is their exactly effect. There's no doubt that the aid package that was communicated by the USDA was – will be a positive factor. But again, from the data we've gathered thus far we understand that there will be three programs, they will 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 lack of need for the products themselves. It really is just to get clarity of this trade war fiasco that we're currently finding ourselves embroiled in..

[Monica Bosio:]

Okay. That makes sense.

[Derek Neilson:]

I'll ask Max to answer the other two questions, please.

[Monica Bosio:]

Thanks.

[Massimiliano Chiara:]

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 a year-over-year improvements on the financial chart – of the interest expense at about $55 million to $60 million, 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 our cost of capital as we now entered into full investment grade area. Moving to the net debt and the components of it, we typically tend to generate cash in the second quarter and in the fourth quarter with the fourth 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 first six months. But the expectation is for a cash generation number that is not to the tune of last year where we basically made $1.4 billion 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&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've clearly mentioned in your question is the working capital. And there are a few reasons for that. One is inconsistency with the cautious approach that we are taking vis-à-vis the end market, particularly in Agricultural Equipment. We are also trying to make sure that we don't get stranded 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 supply chain. And at the same time also, it's important to recognize that at the end of the year there will be the first introduction of the Stage V 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 two 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.

[Monica Bosio:]

Okay. Many thanks, very clear. Thanks to all of you.

[Derek Neilson:]

Thanks, Monica.

[Operator:]

We will now take our next question from Joe O'Dea from Vertical Research.

[Joseph John O'Dea:]

Hi, Thank you. Our thoughts 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 understand 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?

[Derek Neilson:]

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 in the marketplace. I would tell you that, we have taken full advantage of that or the product laying out that we have come 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 expectation, then we expect to take full advantage of that going forward. I hope that's enough to answer your question, Joe.

[Joseph John O'Dea:]

Yeah, maybe something we can follow-up on.

[Derek Neilson:]

Yeah.

[Joseph John O'Dea:]

Also just with respect to today's announcement and the agreement with IBM and you talk about some of the supply chain and manufacturing 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?

[Derek Neilson:]

Yes. As Max heads our ICT operations in CNH Industrial, I'll give him the stage to tell us exactly what he has done.

[Massimiliano Chiara:]

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 larger IT vendors. Fundamentally, there is in hard saving that we expect to achieve on a yearly basis, that have 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 into marketplace, as for example, e-commerce platforms and so on. So in summary, there are hard savings that we're starting, 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.

[Joseph John O'Dea:]

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 that's accurate.

[Derek Neilson:]

I think for the Agriculture business that would be an accurate assumption. Again with a slightly different blend by region. I mean as we know EMEA typically has a prolonged break in the period after, I'll tell you after the harvest but for sure in NAFTA, I think that would be fair assumption, Joe.

[Joseph John O'Dea:]

Okay. Great. Thank you very much.

[Derek Neilson:]

Thank you.

[Operator:]

And our next question is from David Raso from Evercore ISI.

[David Raso:]

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 for 3Q. Then obviously you also spoke about there was some uncertainty. The orders that you have now just so I'm clear the orders – these are second quarter orders you took for 2018 deliveries, has there been any early indication about 2019 and what you've been seeing maybe more recently?

[Derek Neilson:]

The answer – sorry, David, yes. The answer is, yes. So the orders that we have in hand we collected in Q2 for delivery in the balance of the year. We will be going out fairly soon for the underwriting 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.

[David Raso:]

Okay. That's helpful. And also on the price, cost and manufacturing efficiencies in second quarter for Ag were very impressive that it all netted out to the base 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 that 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 are going to be getting a little too aggressive on their increase to offset from the efficiencies?

[Massimiliano Chiara:]

Let me take – Derek let me take the technical part of the question and leave it to you for – to explain the efficiency program.

[Derek Neilson:]

Okay.

[Massimiliano Chiara:]

So, David, it's 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 cost methodology, right, that has an inventory, and they're not going to basically come to fruition into the P&L until we sell those units. So there is a little bit of hold back on the headwinds that will manifest themselves 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 Derek.

[Derek Neilson:]

Yeah. 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. That may not be exclusively and we may have some other adjustments, but I think they'd 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 a 365-day-a-year efficiency program that we continually drive in Industrial operations. So every day, we execute when it comes bottom line. I don't see any reason why that wouldn't continue in the balance of the year.

[David Raso:]

Okay. So some of the raw materials in the order book that ships in the third quarter will see that, but you've also taken price actions that you feel pretty comfortable with the price, cost/efficiency...

[Derek Neilson:]

Correct.

[David Raso:]

...relationship for the rest of the year?

[Derek Neilson:]

Correct. I mean again...

[David Raso:]

Thank you. (00

[Derek Neilson:]

Sorry. Yeah. That is 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 the news last evening the zero tariff trade approach from the U.S. and E.U. suggest that we should have seen the worst of it. But again with the current deviations we saw over the last six months. And I would like to understand exactly what that means before speaking knowledgeable. 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.

[David Raso:]

All right. Thank you for the time and my condolences to everybody at CNH. Thank you.

[Derek Neilson:]

Thank you very much, David.

[Operator:]

Our final question comes from Ross Gilardi from Bank of America. Please go ahead. Hello, Ross. Your line is open. You can please go ahead.

[Ross Gilardi:]

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 hard time and my thoughts are 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 out now Sergio's 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, does the timing of any decisions if anything do you think is impacted?

[Derek Neilson:]

No, I mean, first of all, Ross, thanks for your condolences. I mean, the – for me it's a never ending cycle. I mean we – every company and we are no different from those, continue to look at the portfolio of the products, the business, as part of let's say the functional operations of the business and we are 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 the great respect, we've taken on a new Chairperson since last Saturday. So again I think we need to give the training for the new Chairperson to acquaint himself for the business season and address those questions. So I don't think materially it's going to mean nothing again I think there's a robust solid team behind Mr. Tobin before and behind myself. So the team – and again there are seasoned professionals in the team, so they're constantly looking at the cycle of opportunities and how we can grow the business, organic, inorganic and so on and so on. So I don't think it's going to be a material delay if anything if we did consider to do something in the...

[Ross Gilardi:]

Okay.

[Derek Neilson:]

...future but I think we have to give caution to the appointed new CEO and the new Chairperson onboard and give them the opportunity to give you more clarity in the future.

[Massimiliano Chiara:]

If I may add a...

[Ross Gilardi:]

And just on that...

[Massimiliano Chiara:]

Ross, 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 – 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 two priorities.

[Ross Gilardi:]

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's going to appoint a new CEO in the future. What's being communicated internally about that? And can you say – do you expect to announce something by, will the company announce something by the end of 2018 and can you comment at all on whether the search is mostly internal or external?

[Derek Neilson:]

The only thing I would say Ross is – no, the only thing I would say is, I mean coherent with the press releases we saw over the last days, the search is 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 deliver our guidance for the year. So whether it be September, October, November, December, the machine and the management team will continue to drive the business on. And once the decision is made, then the decision is made. So you'll be the first to hear.

[Ross Gilardi:]

Got it. Thanks everybody. Best of luck for the rest of the year.

[Derek Neilson:]

Thank you.

[Ross Gilardi:]

Thank you.

[Derek Neilson:]

Thank you very much.

[Operator:]

And our last question comes from Mario Gabelli from GAMCO Investors. Please go ahead.

[Mario Joseph Gabelli:]

Hi. In light of the time, and let me echo all the comments of the preceding. I'll talk to you guys individually about what's going on in the truck market. Thank you very much.

[Derek Neilson:]

Okay. Thanks, Mario.

[Operator:]

That will conclude the question-and-answer session. I would like to turn the call back over to Federico Donati for any additional or closing remarks.

[Federico Donati:]

Thank you, Lisa. We would like to thank everyone for attending today's call with us. Have a good evening.

[Operator:]

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.