Good morning, and afternoon, ladies and gentlemen. And thank -- and welcome to today's CNH Industrial 2019 Fourth Quarter and Full Year Results Conference Call. For your information, today's conference call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir.

Thank you, Maria. Good morning, and afternoon, everyone. We would like to welcome you to the webcast conference for CNH Industrial Fourth Quarter and Full Year 2019 Results for the period ending December 31. This call is being broadcast live on our website and is copyrighted by CNH Industrial. Any other use, recording or transmission of any portion of this broadcast without the expressed written consent of CNH Industrial is strictly forbidden. We are pleased to have here with us today our CEO, Hubertus Mühlhäuser; and our CFO, Max Chiara, who will be hosting today's call. They will use the material available for download from the CNH Industrial website. After their presentation, we'll be holding a Q&A session. As a final comment, please note that any forward-looking statements we might be making during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included 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 and equivalent authorities in the Netherlands and Italy. The company presentation may include certain non-GAAP financial measures. Additional information, including reconciliation to the most direct comparable GAAP financial measure, is included in the presentation material. I will now turn the call over to Hubertus. Hubertus Mühlhäuser: Thank you, Federico, and good morning, and good afternoon to everyone. 2019 was marked by several important milestones for CNH Industrial as we launched Transform 2 Win, our strategy focused on driving margin improvement, investing in long-term growth and transforming our portfolio to create 2 leading and separate companies focused on our on- and off-highway businesses. The challenging macroeconomic conditions…

Thank you, Hubertus, and good morning or afternoon to everyone on the call. As we have seen end markets deteriorated rapidly in the fourth quarter with increased uncertainties affecting end-user sentiment, and we took decisive actions starting in the second half of 2019 and continuing through Q4 to reduce our production, primarily in our off-highway segments, AG and CE, to reduce our and our dealers' inventory. While we were able to make good progress in our Agricultural segment, achieving a production performance for the full year, mostly in line with retail, in Construction, we finished the year with production outpacing retail by 5% globally with a more acute outcome in our high growth markets. This impacted our top line as well as our profitability as lower cost absorption persisted throughout the fourth quarter. The combination of these factors, together with a year-end spike in the euro rate caused a net debt to come in above the upper end of our guidance. We are accelerating certain of our Transform 2 Win profitability improvement initiatives, and we are also focusing on disciplined cost management, while sustaining investments in our future growth. Moving now to the key figures for the fourth quarter and full year. Net sales in our Industrial segments were down 6% reported and down 2% constant currency for the full year 2019. Adjusted EBIT of Industrial Activities was $1.4 billion for the same period with a margin of 5.3%. This was down 40 bps compared to 2018, mainly due to unfavorable volume and mix as well as raw material headwinds, which more than offset positive pricing and cost management actions. Furthermore, continuous efforts have been taken to improve our below-the-line items with net interest expense reduced more than 20% year-over-year. Our adjusted ETR also decreased to 22% due to a…

Thank you very much, Hubertus. This concludes our prepared remarks for the fourth quarter and full year 2019 results. And we can now open up for questions. Operator, over to you.

[Operator Instructions] We will take our first question from Steven Fisher from USB (sic) [UBS].

Just on the guidance. The bridge you gave there from an Investor Day to 2020 is very helpful. I'm just curious about a bridge from 2019 to 2020, $0.84 to $0.82 at the midpoint. With industrial sales that are really just kind of flattish or only down slightly, given that you have all those initiatives on cost savings, I'm surprised that the EPS would be down and not up. So I'm just wondering what are some of the other bridge items that might push the EPS lower in a flat industrial sales environment? And is it a particular headwind in the FinCo? Or are you just sort of baking in a measure of conservatism?

So this is Max speaking, Steve. So obviously, the revenue were disappointing in the fourth quarter; they came in below guidance that we adjusted down the quarter before by about $400 million. But definitely, also, when you look into the granularity of the results segment-by-segment, you see that we took this onetime measurement in the Commercial Vehicle segment, which also had a toll on our EBIT. Hubertus Mühlhäuser: And I think to also answer your question, the bridge from 2019 to 2020 and the guidance range, you see that we have widened the range. We widened it to the lower end, and we feel comfortable right now, given market uncertainties that we are kind of covering the potential outcomes that we see right now for 2020.

So in other words, in the event that you do come in with Industrial Activities flat, that you could still be -- with your cost savings initiatives, still be up for EPS. Is that what you're kind of messaging?

That is what the upper end of the guidance for 2020 would say. Hubertus Mühlhäuser: Yes. Correct.

Okay. So there's no particular FinCo additional headwinds that would be outside of that industrial?

No. Hubertus Mühlhäuser: No. Not that we see right now.

We will take now the next question from Larry De Maria from William Blair.

Hubertus, you mentioned the AgDNA, FMIS and the ability to generate service revenue. Can you just a, parse that out a little bit more how you're going to generate the service revenue? And secondly, just discuss your AI and machine learning strategy, which is obviously a hot topic in the industry right now. Hubertus Mühlhäuser: On the AgDNA integration, what we do is we have acquired this software company, which we are now fully integrating with our AFS and PLM platforms for Case and New Holland, respectively. And that will provide telematics service and a full connectivity of our products around a complete software service. So we see already that we have launched on the back of AgDNA purchase that we have launched 20 new service packages alone in 2020, which will come to the market, which will drive aftermarket revenue. And you've seen some of the aftermarket revenue uptick already in 2019. Relative to wholesales, we have improved that by 1%. So we are very confident that with that platform, now that's far easier to use, far more intuitive for the end customer, that we will be able to drive telematics services for our equipment. And the second question on artificial intelligence, I didn't want to go too much into detail on that extent. But I think it is very noteworthy that we have several artificial intelligence algorithm companies in that portfolio. So we are driving artificial intelligence. We take that data with these start-up companies, and we are integrating those algorithms as we basically implement our new strategy for precision farming of our ag machinery. So we have already introduced sensor technologies, obviously, on our cash crop tractors, but also on the vineyard side. And we've also integrated artificial intelligence on our vineyard tractors and our sensor tractors for cash crops. So I do believe that we are moving firmly ahead on this one. We have somehow a different approach to John Deere that we work with partners in an open innovation platform rather than acquiring just one company. So rather than having one company which we acquired, we have several companies that contribute positively to our overall R&D development in the ag machinery space. I hope that answers the question.

We will take now our next question from the line of Ann Duignan from JP Morgan.

Hubertus, can you talk about your outlook for flat to down slightly revenue for 2020? Given that coming into Q4, we had expected flat revenue, and we were down 6%. So flat, given all of the underproduction and the lack of visibility in each of your end markets looks aggressive or optimistic. Why didn't you guide more conservatively on the revenue side? Hubertus Mühlhäuser: Well, I think we mentioned that in the script. I think we have changed our view on North America that where we now call the market down 5%, and we are also preparing our production for that by underproduction versus retail over 10%. We feel that we are appropriately conservative in South America right now. Everybody, as you know, was expecting this market already up last year. We're projecting it flat. We're currently seeing a good order intake, at least from the tractor side. And I think it's also noteworthy that we have significantly increased our share in South America on the weakness of one of our competitors on the tractor side specifically. And Europe flat is, you can say, flat to slightly down, but it has also -- Europe is perhaps the most promising and optimistic right now where we basically see perhaps more downward risk, but it's honestly too early in the year to really say that. But overall, with that guidance that we have there for AG flat to slightly down, we feel, given that we are really in many markets at the bottom of the cycle, we feel that this is appropriately conservative. And again, we do not want to repeat what we have done in 2019 where we have not cut enough of the production and where we basically based our production plan too much on hope. I think we're far more conservative going into 2020. And of course, you have the pricing, which holds very nicely in AG, which is a positive. I hope that answers your questions, Ann.

It does. And then just a quick follow-up or clarification on your guide for further residual value reductions on the truck side. How much have you baked in for 2020 in the guidance you've given? Hubertus Mühlhäuser: Max?

So right now, as you know, IVECO -- where IVECO sits on the food chain is not a price maker, is a price taker. So we have seen that deterioration in the last part of the year, in the last quarter. So we had to adjust our book for what we see as a price deterioration going into 2020.

But how much have you baked in for 2020?

Right now, the book should be in line with the deteriorated pricing conditions. But again, we need to see quarter-after-quarter where the deals have traded on the used market. Hubertus Mühlhäuser: But we've taken the best shot given the information that we had available to us in Q4. So we would assume that we're appropriately reserved for 2020.

We take now our next question from the line of Rob Wertheimer from Melius Research.

Hubertus, can you talk a bit about the pace of savings in 80/20? You've obviously got a lot underway with 60% of the SKUs, I think you said you identified in North American AG, for example. Should we expect full savings to come through on that in 2021? And just as a quick clarification. You've identified 60% and you'll get 50% or almost all of that in 2020? Or is there more on the table? I'm not sure I understood your script versus the slide. Hubertus Mühlhäuser: No. I mean, as you know, we're not basically detailing the individual savings per initiative. And if you look at 80/20, the first impact that you have from the decomplexing of your product and putting it into A and B product is a pricing effect. And you see that positively in both Construction and in AG. And the second effect that you have and this is what I referred to in 2020, we're now, of course, seeing the less complex or basically winded out or wooded out product lineup to basically have impacts, positive impacts on the supply chain. So less inventories, better purchasing prices, less SKUs in the line. So now we're going to see -- on the back of the pricing, now we're going to see the supply chain impacts. But again, we are not detailing how much in percent that is because in the end, it's not good if we basically give you one number of saving. It has to fall down the bottom line. And what we're saying is we're going to see that positive impact already reflected in our AG margins for 2020, where we basically are anticipating a slight increase in the margin. Max?

I just wanted to clarify that. The supply chain savings will have a longer time to realize as we need to, obviously, make modifications through the elimination of individual part numbers. And that's why the second part of the savings is more geared towards the longer -- the midterm, which means end of '20, early '21. Hubertus Mühlhäuser: Yes. And as you know, we have not started to do it, to roll it out everywhere. We first started with CE. We then went over to AG. Then by the end of 2019, we went over to CV and Powertrain. And by 2020, by -- so mid by this year, we're going to have all segments and all regions covered. And the first savings that you see is on the pricing side that contribute positively. And then you have the supply chain impact, okay?

We've now the next question from the line of Ross Gilardi from Bank of America.

I just wanted to clarify the comments on the inventory for ag equipment around the world from your opening remarks. So in the slides, you say worldwide inventory is up 22% in tractors and up 11% in combines, but your North American row crop inventory is down 16% year-on-year. Does that mean all of your excess inventory is concentrated predominantly in Europe and South America and North America small AG? If so, why are the production cuts concentrated in North America row crop, if your inventories were already down 16%? So I just got confused with all the moving pieces.

Okay, good question. So first of all, as you know, we have a spread out business in the various geographies. So from a numerical standpoint, the higher inventory sits in areas outside of the U.S. What we are doing in the U.S., we are taking a very conservative stance, and we are changing the seasonality of our production with more pronounced cuts in Q1 and Q2 in AG row crop to kind of front-load that inventory development during the year and avoid to find ourselves in case of the market ends up down 5% in a similar situation as 2019. So that's why we are front-loading the year with cuts in our production. And we under-produce retail in row crop in North America as we discussed.

So just a quick follow-up on that. Hubertus Mühlhäuser: Does that answer your question?

Yes, I think so, Max. So just a follow-up outside of the U.S. is that it sounded like Hubertus thought the European market was fairly stable and the most promising. Is the excess inventory, therefore, concentrated in Brazil? And any sense as to what's really going on?

No, no. Brazil -- in Brazil, we have a little bit of excess inventory in combines, but I think that's the result of the unexpected market dynamics. So as the market, let me say, flatten out, we should be able to correct this issue in the first part of 2020. In terms of tractors, it's primarily rest of world. So it's at 3,000 units. But again, it's in a market that is more than 1 million. So... Hubertus Mühlhäuser: Yes. And just to be very clear, Ross, I said completely opposite. Europe -- we think that North America, South America, rest of the world, we are appropriately conservative in our market outlook. Europe is a bit of a question mark. We had an internal debate whether we should do it flat or to minus 5%. We settled now with flat. But I think going into 2020, there might be a bit more risk. So if you think about conservatism, we are conservative in the other markets. Europe, we might be a bit too overoptimistic. But again, we wait how the markets will develop, and we are very conservative on our production.

We will take now our next question from Chad Dillard from Deutsche Bank.

So I just wanted to spend some time on price/cost. It still remained pretty positive in the fourth quarter. Just want to understand how you guys are thinking about that dynamic as we go into 2020? And then separately, just wanted to clarify whether -- if there was anything related to Nikola or any benefit embedded in the 2020 guide?

So first question, I'll take the first one. Price to cost, yes, I mean, the price to cost performance in 2019 was affected by the raw material headwinds on the cost side, which we were able to more than recover in pricing. As you know, we put pricing out at a specific point in time during the year, primarily when we launch new model years. So there is an embedded carryover pricing into 2020 already. Plus we expect to take individual actions as we launch new products during the year, or we reassess the situation of the economics region-by-region during the course of 2020. On the positive side, we expect now raw material to flatten out, especially in the first part of the year. So that should be a positive contributor in the early part of the year. Hubertus Mühlhäuser: And then in terms of Nikola, yes, we have reflected the cost in the 2020 budget for Commercial Vehicles. As you know, we have a part of in kind contribution and the step-up that we're going to do in engineering is going to be covered for there. So there will be a cross charging with Nikola for these additional costs. The revenue for the truck, the Nikola TRE, you're going to see them popping up in 2021. And obviously, we're going to give more color on the roadshow then for our on-highway business, because I think the market does still not understand the potential of this joint venture and that partnership with Nikola, which is really substantial.

That's helpful. And then just really quickly on the LNG market. Can you just talk about your views in terms of market share -- end-market growth? And how are you thinking about that in 2020? Hubertus Mühlhäuser: Yes. Well, the market has developed as predicted. It went basically double to 2% TIV. We have a conservative view, 50% up this year, and we have said that we want to defend our 50% market share. We ended the year with 53%. Obviously, you have now 2 new players competing with us, that is Volvo coming in late and Scania. However, our product, given that we have been, by far, the first introducing LNG trucks, is still far more competitive, has a far longer-range, which is on the long-haul business, of course, a key competitive advantage. So we assume that we're going to maintain our 50%-plus market share in the market that I would say conservatively, will grow 50%. And if you basically follow the Ukraine deal and you basically see legislation that is happening right now in all countries in Europe, they are actually all reconfirming the subsidies for LNG, some countries even extending. We heard from Germany that they would like to extend the period of the subsidy even further. So I think that market is really continued to poised to grow. And as said in the script, I mean, that is, for us, a nice hedge in an overall more muted and down medium and heavy-duty truck market. So this will help us to basically stay competitive in 2020 and also get the nice volumes. And we are predicting right now that we're around 4,500, 5,000 trucks for 2020 on the LNG side.

We will take now our next question from the line of David Raso from Evercore.

To keep the question fairly straightforward and simple, using Slide 24 as a guide of what's changed since the Capital Markets Day, how much revenue did you reduce from the Capital Markets Day to today for the AG segment? And ideally, if you can tell me how much was that industry versus incremental inventory reduction?

Dave, I don't have the split between the 2 pieces with me here, but it's a substantial amount. Hubertus Mühlhäuser: Yes. And if you look at that bridge, it's really very clear to say that the difference between the Capital Markets Day, $0.95 to $1, to where we are right now with our guidance, is really 100% based on significantly lower AG end markets where we've all predicted an upswing in the market well into 2020. And the disappointment on the Construction side, I think is kind of offset by the better news on the profitability and margin improvement initiatives. That, as I've said, we have stepped up significantly in Q4 and going into 2020. So Construction and the better performance on the initiatives is awash, but the market, we cannot compensate with initiatives. So that's just the reality.

The percentage change, David, is about mid-single digit, probably on the AG revenue.

What I'm doing here, if I'm looking at the cut by 10% to North America and 20% to South America from the prior expectations, but I'm backing out parts. So I'm not applying to the entire geographic revenues, I'm appropriately pulling out parts. If you drop North America by 10% and South America by 20%, that's almost $600 million right there. So I'm just trying to weave this into how much did you take out from an industry perspective? And then are you taking more inventory out in '20 than the prior expectation at the Capital Markets Day?

First of all, though, I mean, as I said, it's about a mid-single-digit percentage change versus what we had in the Capital Markets Day at constant currency, which is around about the number that you calculated. I would say that just as a bit of caution, in the Capital Markets Day number for 2020, we already had some dealer inventory reduction. So it is not a significant delta on that one; it's primarily industry.

Well, that's on target. So that basically -- there is no incremental inventory being taken out in your mind for '20, it just the industry sales got weaker. But you still are under-producing retail materially. So what you're saying is you always plan to under-produce retail in '20, it's just that retail went down. Is that fair?

A little bit, yes. A little bit, yes. Yes.

We are taking our next question from the line of Joe O'Dea from Vertical Research.

Related to months of inventory at the dealers, could you just talk about in North America, specifically, for AG row crop, where you see months of inventory at the end of 2019? Where you expect that to be at the end of 2020? And same thing on the Construction Equipment side, all specific to North America?

Yes, I don't want to give you specific numbers. But in terms of trends, we are not far off from the industry average in row crop. We are probably higher in small tractors. And there is where we have also to do some actions and which is what was already embedded in the 2020 Capital Markets Day number. In terms of Construction Equipment, we are definitely higher, I would say, on average a month higher. So we need to continue to obviously look at the capital over there to bring the number back in line.

And then, Max, on the AG side of things, talking about kind of small versus large then, you had already anticipated at the Capital Markets Day under-production on the small side. And then kind of related to David's question, on the large side, what's happening there is more just about kind of end market is going to be softer than what you expected, maybe there's a little bit of incremental destock?

Yes.

Our final question comes from Courtney Yakavonis from Morgan Stanley.

I just wanted to ask a little bit more about the Construction Equipment turnaround delay? I think originally when you rolled out -- or I mean, I guess, first off, did the rollout of the programs happen, and it's just that the end markets were softer? Or did you actually not start some of the programs? I just was a little confused because -- about why we didn't reach some of the margin acceleration that you guys had originally forecasted when you first started talking about what happens there? Hubertus Mühlhäuser: No, to be brutally honest, I think all the initiatives that we laid out are holding and it's exactly what we do. What we have underestimated were the issues that we have in the underlying manufacturing machine, mainly in North America. We had some significant gaps there when it came to product cost specifically in our Wichita facility, coupled with some also system cutovers that happened in Q3.And so basically, that led to a miscalling of the market overproduction with too high costs, coupled with some quality issues, and that's the reason why we basically, in Q3, changed management, put in new leadership, which is basically now taking control. And that means in the short term, addressing those quality issues that we had, getting the industrial machine smoothly running again but also cutting back production. And this is basically what you have to see and what you have to expect in the first half of 2020. The rest of the strategy is completely in line. The team knows exactly where to go. I'm very upbeat by our strong dealers and our sales team. I think they're doing a very, very good job in that environment. And as I said, I encourage you to come and -- come by at CONEXPO and to basically see what the team is doing there. So the turnaround strategy is exactly what we have said. It's just disappointing that it's going to happen a year later. So 2020 is a transition year. And what we also said at the end of my prepared comments is that the targets that we laid out there, the margin targets for our individual segments, they're firmly holding. I mean, this short-term market disappointment, and market disappointment doesn't change our long-term outlook, where these business segments have to be in terms of profitability.

And does that refer to the 2022 guidance at this point? So you are basically assuming '21... Hubertus Mühlhäuser: No, the 2024. We basically gave a 2024 guidance where we basically want to bring those businesses. And I think those targets -- and I referred that those targets are still valid and they hold. And we're working to achieving them.

Okay. But the targets you'd mentioned in 2022 might -- feels a lot to miss then? Hubertus Mühlhäuser: I said the long-term targets that have communicated in the Capital Markets Day, a 2024 target and strategy where we want to bring those individual segments in terms of margin performance and those targets still hold.

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

Thank you all, and have a nice day. Thank you. Hubertus Mühlhäuser: Thank you, and goodbye.

That will conclude today's conference call, thank you for participating. Ladies and gentlemen, you may disconnect.