CNH Industrial's (CNHI) CEO Rich Tobin on Q4 2015 Results - Earnings Call Transcript

| About: CNH Industrial (CNHI)

CNH Industrial NV (NYSE:CNHI)

Q4 2015 Earnings Conference Call

January 29, 2016 10:30 AM

Executives

Federico Donati – Head-Investor Relations

Rich Tobin – Chief Executive Officer

Max Chiara – Chief Financial Officer

Analysts

Joe ODea – Vertical Research Partners

Henry Kirn – Societe Generale

Ann Duignan – JP Morgan

Monica Bosio – Banca IMI

Alberto Villa – Intermonte Sim

Richard Smith – Citigroup

Christophe Boulanger – Barclays

Ross Gilardi – BoAML

Massimo Vecchio – Mediobanca

Operator

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

Federico Donati

Thank you, Maria. Good afternoon, good morning. We would like to welcome you to the CNH Industrial fourth quarter and full year 2015 results webcast conference call. CNH Industrial Group CEO, Rich Tobin and Max Chiara, Group CFO, will host today’s call. They will use the material you should have downloaded from our website, www.cnhindustrial.com. After introductory remarks, we will be available to answer the questions you may have.

Before moving ahead, let me just remind you 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 included in the presentation material.

I will now turn the call over to Mr. Rich Tobin.

Rich Tobin

Thank you, Federico. Good morning or good afternoon, everybody. Overall, it was a good quarter for our CNH Industrial. I’ll start by providing some highlights of our operational performance.

Industrial operations improved operating margin by 3.5 percentage points versus Q4 2014. All four of our operating segments posted profit margin improvements but the agricultural equipment segment posting at 11.7% margin for the quarter. Our efforts in world-class manufacturing and footprint optimization programs reduced manufacturing and quality costs.

In Europe, Iveco gained market share in commercial vehicles in both the light and heavy segments in Q4 and posted market share gains in all three vehicle classes for the year. We generated $1.6 billion in working capital cash flow in the quarter and exit 2015 with a net industrial debt of $1.6 billion, a reduction of $1 billion for the year.

The demand conditions remain challenging in some of our business and operating geographies during the quarter. But we did a good job of navigating them. We increased profits while reducing inventory, adopted our cost structure to prevailing demand conditions, demonstrated the strength of our product portfolio by gaining share and positioned ourselves to compete in 2016.

In light of this performance, we have announced a dividend recommendation of €0.13 a share and announced to initiate a share repurchase program of up to $300 million.

I’ll hand over the presentation to Max, who will take you through the financial results. And I will go through the operating segments further in the presentation. Max?

Max Chiara

Thank your, Rich. And good morning, good afternoon. On Page 5, and let me walk you through the financial highlights for the quarter on the full-year. Net industrial activities level, net sales were $6.9 billion for the quarter down 3.6% compared to the comparable period of prior year on a constant currency basis. For full-year net sales stood at $24.7 billion down 9.6% in constant currency.

The Company achieved an operating profit of industrial activities for the fourth quarter of $563 million, up 63% versus Q4 of 2014, with operating margin at 8.2% for the quarter. operating profits for full-year was $1.4 billion with the margin of 5.8%. Net income before restructuring and other exceptional items was $262 million or $0.19 per share up 57% year-on-year for the quarter and was $474 million or $0.35 per share for the year.

Net industrial debt at December 31 was $1.6 billion versus $3.8 billion at the end of December and $2.7 billion at the end of September, sorry – and $2.7 billion at the end of December 2014.

Available liquidity was $9.3 billion at the end of December inclusive of $3 billion in undrawn committed facilities verus a comparable figure of $8.9 billion at the end of last year.

Moving on to Slide 6, industrial activities net sales composition and by segment, excluding negative impact from currency translation, net sales decreased 3.6% in the quarter. As you can see on the net sales by currency pie chart Q4 continue to negative affected by the strengthening of the U.S. dollar versus our major trading currencies that make up approximately 70% of our revenue. We expect this to continue into 2016, but at a lower rate.

On Slide 7, in the quarter operating profit was up $236 million or 63% versus last year at constant currency basis, with all segments up year-over-year. Margin improvements across the segments led to an industrial activity margin of 8.2% up 3.5 percentage point versus last year.

Moving on to Slide 8, with financial services posting operating profit at $118 million, down $29 million year-on-year primarily due to FX. Consolidated operating profit stood at $596 million, up $161 million versus last year.

Restructuring expenses, totalled $32 million in the quarter, $54 million lower than Q4 2014. These expenses were mainly as a result of actions in construction equipment and commercial vehicles as part of the Company’s efficiency program launched in 2014

Interest expense net totaled $138 million for the quarter a decrease of $26 million or 16% compared to Q4 2014, as a result of lower average debt and a reduction in our average cost of funding.

Other net was a charge of $100 million for the quarter, an increase of $43 million compared to the same period in 2014, due to higher foreign exchange losses primarily in Argentina.

Income taxes were $101 million for the fourth quarter of 2015 representing an effective tax rate of 31%, versus an effective tax rate of 47% in Q4 of prior year. For the full year the effective tax rate close at 63% or 37% when we exclude the impact of the Venezuelan devaluation and the inability to record deferred tax assets on losses in certain jurisdictions primarily Brazil. The long-term effective tax rate target of between 34% and 36% range remained unchanged.

Net income before restructuring and other exceptional items was $262 million or $0.90 per share in the quarter up $95 million and $474 million for the full year or $0.35 per share.

Moving on to Slide 9, representing the change in net industrial debt for the quarter and the full year. The positive net industrial cash flow of $1.8 billion was primarily driven by inventory reduction which I will cover in detail on the following slide.

For the full year the change in net debt shows a reduction of $1.1 billion, primarily driven by the full year effect of our inventory reduction actions and a favorable FX translation on our non-U.S. dollar denominated debt.

Next Slide Number 10. As you can see in the chart, the primary component of our cash generation was a significant reduction of company inventory during the quarter for $1.1 billion and $0.5 billion for the full year. This mainly was generated in the agricultural business. As far as the total channel inventory reduction at December end of 2015 worldwide company inventory was down roughly 30% and total channel inventory down 60% in constant currency, primarily due to our efforts to reduce row crop inventory in NAFTA. The effort to reduce inventory in ag whole goods will continue into 2016 as a Rich will explain later.

Next Slide Number 11, provides detail on capital expenditures by spending category and segment. CapEx was $279 million in the quarter with full year down 35% this prior year, partially due to FX. The reduction for the quarter is mainly coming from lower spending for engine and machine compliance programs and the 2014 investment in the New Daily Program. IT spending also contributed to the reduction year-on-year.

Moving onto Slide 12, our financial services business. Net income for the quarter at $91 million down $7 million compared to last year mainly due to reduced net interest margin and the negative impact of currency translation, partially offset by lower income taxes. In the full year 2015 net income was $368 million, compared to $364 million in 2014. Lower provisions for credit losses and SG&A expenses coupled with reduced income taxes were partially offset by the impact of currency translation.

Retail loan originations in the full year were $9.4 billion down $1.4 billion compared to 2014 due to reduced agricultural equipment sales in NAFTA and the negative impact of currency translation in EMEA and LATAM. The managed portfolio including non-consolidated JVs of $24.7 billion was flat versus 14% if we exclude the impact of foreign exchange translation. The average quality of the portfolio continues to improve with delinquencies on book over 30 days down 0.3 percentage point versus 2014 now 3.2%.

Slide number 13 shows the company’s debt maturity schedule and the available liquidity. Available liquidity in the quarter increased to $9.3 billion at December and that includes $3 billion of undrawn under our medium-term committed unsecured credit lines. That compares to $7.4 billion at the end of September 2015. The increase in liquidity is mainly attributable to the cash generation from operating activities.

Our liquidity to revenue ratio increased to 35% versus 27% at September 2015 and December 2014 respectfully.

Reduction of the intersegment balance continued during the fourth quarter at $0.4 billion, with a net balance at the end of the year now at $1 billion, down about 70% from one year ago as we continue to strengthen the independence of our financial services funding sources from the industrial activities.

This concludes the financial review portion of our presentation, let me turn back to Rich now for the business overview session.

Rich Tobin

Thanks Max. Starting with agriculture on Slide 15. Agricultural equipment net sales were $3 billion for the quarter, down 3.8% compared to 2014 on a constant currency basis. The decrease was driven mainly by industry volumes in the row crop sector, primarily in NAFTA and LATAM, offset by favorable net price realization. Operating profit was $348 million for the quarter, up 54% on a constant currency basis, with margin at 11.7% up 4.6 percentage points.

Positive price realization, manufacturing and purchasing efficiencies and a reduction in structural costs were able to offset the reduced shipment volume and negative effects of fixed cost absorption in the quarter. And our main ag products during the quarter, global combines under production versus retail at 30% with production levels down 35% versus Q4 2014. Global tractor production was 9% below retail with the production levels flat versus Q4 2014.

Worldwide total channel inventory was reduced in both categories with current inventory showing a significant change in mix to lower horsepower tractors as a result of the reduced demand in the row crop category. Worldwide market share performance was good considering the positive net price realization to margins for the period. Market share performance for the year was satisfactory in tractors where we held share on a worldwide basis. The LATAM share is measured in wholesale shipments, and our performance is a reflection of our channel inventory reduction efforts. In combines, our performance was good; and despite the large cuts in production, we were able to increase share in NAFTA during the quarter.

As you can see from the chart on the bottom right, we did not get a lot of help from commodity prices during the year and it’s not going to affect our net farm income in the United States. We’re dealing with that affect in machinery demand, which I’ll cover in a moment. It should be an interesting year for farming profit in many geographies as the market digest the changes in dollarized commodities and the depreciation of many producer currencies versus the U.S. dollar.

We have seen that the machinery demand in Europe has held up reasonably well in 2015 and we would expect the emerging markets to follow suite as the cycle turns. In consequence of the decline in commodity prices our NAFTA row crop production was down 50% versus last year, and 27% versus the last quarter both in excess of the market the decline. NAFTA row crop channel inventory was down 24% versus last year with both company and dealer inventories down year-over-year 12% and 26% respectively in units. SG&A expenses were down 27% for the quarter in the agricultural segment.

In construction equipment net sales were $609 million for the quarter, down 18.7% compared to Q4 2014 on a constant currency basis. Reduced deliveries of whole goods and parts and NAFTA as a result in increase 2014 comparable shipments into dealer rental channels on forecasted 2015 demand and Brazilian macro market weakness being offset by increased shipments into APAC.

Construction Equipment reported an operating profit of $18 million for the fourth quarter, compared to $9 million for Q4 2014, a result of favorable net price realization of NAFTA, efficiency program, structural cost reductions, lower material costs and cost containment actions, more than offsetting reduced volumes and negative fixed cost absorption, particularly in Brazil where the group has held a historically strong market share position. As a result operating margin of the quarter increased 1.9 percentage points to 3%.

Construction Equipment worldwide, 31% under production versus retail in the quarter, but the total production down 22% versus Q4, as a result of production level changes in LATAM and NAFTA. In 2015, Construction Equipment industry unit sales for heavy and light products were down 18% and 4% respectively compared to 2014. Decreased industry volumes in LATAM and APAC were partially offset by moderate growth in NAFTA. Demand for heavy and light in Construction Equipment was flat in EMEA for the period.

Market share performance for the quarter was disappointing in NAFTA, light equipment as a result of reduced shipments into the rental channel. Overall market share performance was held for the quarter without heavy discounting.

Moving on to Slide 20, here you can see a recap of management actions implemented in the course of the year, coupled with the efficiency program rollout. All announced projects are in line and ahead of schedule. The startup of manufacturing operations in the excavator segment are targeted to increase manufacturing capacity utilization, resulting in increased fixed cost absorption in 2016, primarily in Europe.

Our brand repositioning efforts in EMEA have made significant progress in 2015 and we expect to complete the transition by the end of 2016.

In 2016 Construction Equipment will be introducing a new delivery for the Case brand and announcing expansions to its light equipment product offering.

Moving on to Commercial Vehicles, net sales were $2.8 billion for the quarter slightly down compared to Q4, 2014 on a constant currency basis. Excluding the negative impact of currency translation, EMEA net sales increased driven by higher industry volumes, and market share increases for light and heavy trucks and for busses.

In LatAm net sales decreased mainly due to the significant decline of the Brazilian market, partially offset by increased deliveries in Argentina in anticipation of the introduction of the 2016 of the Euro-5 emission transition.

Operating profit was $155 million for the fourth quarter of 2015, up $80 million on a constant currency basis, with an operating margin of 5.4%, a 2.4 percentage point over the same period in 2014.

Positive net pricing in all regions as a result of significant rejuvenation of the product portfolio, manufacturing efficiencies, structural cost reductions, improved product quality and material cost savings all contributed to the increase in profitability.

The bottom of the slide, we’ve highlight of the commercial vehicles margin trajectory, that shows year-over-year improvement in each quarter of the year, exclusively driven by trucks and buses volume growth in EMEA, coupled with market share gains in the light and heavy segments, that have more than offset reduced shipments in LATAM and APAC and reduce volumes in the profitable specialty vehicle segment.

Fourth quarter on production – underproduction versus retail was 11%. In 2015 the European truck market grew 16% compared to 2015. The light vehicles market increased by 16%, while the medium vehicle and heavy vehicles market grew by 5% and 19%. And LATAM new truck registrations declined 40% compared to 2014 with a decrease of 47% in Brazil and 42% in Venezuela, while Argentina increased 5% for the period.

In the quarter, total deliveries were 41,500 vehicles representing an 8% increase compared to Q4 2014. Commercial Vehicle deliveries increased 18% in EMEA, but decreased in APAC and LATAM down 9% and 33% respectively.

Total orders worldwide went up 9% versus Q4 2014, with EMEA trucks up 27%. Commercial Vehicles Q4, book-to-bill, at 0.87, is flat versus Q4 of last year. European market share was up 0.5 percentage point to a 11.6% with all segments up for the full-year. The introduction of the Daily Hi-Matic and the increasing market acceptance of the Group’s SCR-only technology across the portfolio have allowed the business to drive improved performance in both the commercial vehicles and bus segments.

The Group’s Efficiency Program in on schedule to be completed by 2016 with the last step being the completion of the changes in the industrial footprint. By the end of year, we will have our light, medium, and heavy products being produced in dedicated single purpose facilities. This optimization program will increase our production capacity and further allow for the implementation of our world-class manufacturing programs designed to increase efficiency and improve product quality.

With the launch of the new Eurocargo awarded with the International Truck of the Year in 2016, Iveco has completely revamped its core product lineup in both commercial vehicles and bus segments. The portfolio now includes an award winner in each vehicle class. In 2016, we’ll be launching new products in the Heavy Commercial Vehicle segment and further expanding our gas and hybrid product offerings with launches of new models of both the Eurocargo and Stralis Platforms.

Moving on to power train, net sales of $900 million for the quarter, an increase of 5.6% of the same year of 2014 on a constant currency basis, due to improved mix on engine sales, and increased volume in transmissions and axles to the commercial vehicle segment. Sales to external customers accounted for 49% of the total net sales, an increase of five percentage points.

Operating profit was $62 million for the fourth quarter at an operating margin of 6.8% compared to Q4 of 2014. Net of impact of currency translation operating profit improved $5 million from a favorable product mix and from a reduction of SG&A expense. During the quarter, power train sold approximately 131,000 engines, a decrease of 1.4% compared to Q4 2014. By major customer 40% of engine units were supplied to captive customers and the remaining 60% to external customers. Additionally power train delivered approximately 16,500 transmissions and 45,000 axles, an increase of 14% and 29% respectively compared to Q4 2014.

Research and development spending for the quarter was flat to prior year despite the significant completion of the portfolio to Euro VI in Tier 4 final production as the business has begun to look to the future and meeting the demands of next generation of engines and the alternative combustion technologies.

In 2016 FPT will be launching new upgrades to its light commercial vehicle, heavy commercial vehicle engine lineups aimed at increasing fuel economy and launching a new CNG, LNG Powertrain in support of the commercial vehicle business.

Moving on to the industry outlook of 2016, the agricultural equipment industry at NAFTA is forecasted to decline in 2016 with the row crop sector down 15% to 20% as compared to 2015. EMEA demand to be mostly stable and LATAM to be down – excuse me 10% to 15% in tractors, and 0% to 5% in combines with a significant portion of the decline in the NAFTA and LATAM markets to occur in the first half of the year on a wholesale shipment basis.

In construction equipment markets are expected to be slightly down with demand in NAFTA and LATAM to be back-end loaded. In commercial vehicles we expect, EMEA to be up 5%, LATAM to be down 10% to 15% and the balance of the world unchanged.

Based on the estimated 2015, profit and retained earnings available for distribution by CNH Industrial NV and subject to formal board approval of the company’s 2015 financial statements, anticipated to occur on or before beginning of March 2016, the Board of Directors of CNH Industrial intends to recommend the company’s shareholders of the annual general meeting a dividend of €0.13 per common share, equivalent to approximately US$200 million at today’s exchange rates.

Additionally, we announced today a buyback program to repurchase up to $300 million in common shares from time to time, subject to market and business conditions and other factors, as previously authorized at the shareholders meeting held on April 15, 2015. The program will be funded by the company’s liquidity.

CNH Industrial is setting its 2016 guidance as follows: net sales of Industrial Activities between US$23 billion and US$24 billion, with an operating margin of industrial activities between 5.2% and 5.6%, excuse me 5.8 – excuse me 5.8%. Net industrial debt at the end of 2016 between $1.5 billion and $1.8 billion. The U.S. dollar is forecast to continue strengthening moderately against most of the company’s other trading currencies during the year.

That is the end of the my portion of the presentation, I’ll hand it back to Federico, we can open up for Q&A. Thank you

Federico Donati

Thank you, Mr. Tobin. Now we’re ready to start the Q&A Session. Maria, please take the first question.

Question-and-Answer Session

Operator

Thank you, Mr Tobin. [Operator Instructions] We will now take our first question from Joe ODea from Vertical Research Partners. Please go ahead.

Joe ODea

Hi, good morning. Could you just talk about the way channel inventory and large NAFTA ag round up for the end of the year, but what that sets up in terms of underproduction plans in 2016? And Rich I think you commented on kind of the first half, second half splits. So then how those plans might kind of consider what’s your first half underproduction is versus your second half?

Rich Tobin

Yes, sure. Our estimate right now is that NAFTA row crop production will be somewhere in the range of 15% to 20% below retail in 2016. So in line with the decline in the market, so just a steady runoff of the ending position of 2015. Based on order books right now and based on amount of uncertainty in the marketplace, we would expect to come out of Q1 at very low levels of production because we think that the market will build into 2016 rather than to be steady over the year.

So, we expect a significant portion of the production cuts to be made in Q1 of this year, so detrimental to earnings and the like. But we think that we get this right, we can still deliver the margins as we did at this past cycle by timing, the demand cycle with what we did at the industrial side to still protect margins as much as we can.

Joe ODea

Okay. And then just a pricing question, last quarter you had commented that on the ag side, pricing was holding up, but maybe you are seeing some indications of a little bit more competitive pressure there. Again, it looks like in 4Q pricing was positive. So maybe just how things unfolded over the course of the year and as you look at more underproduction, do you think pricing is still positive in 2016?

Rich Tobin

Yes, I think that we’ve got a little bit scared of Q4 of 2014, where the market really turned down in that quarter and then it becomes a little bit difficult because everybody was trying to liquidate inventory simultaneously. I think that from an industry point of view, production has been cut pretty heavily. And so, pricing wasn’t prohibitive during the second half of the year and especially in Q4. And then going into 2016, on the row crop side, I think from what we can see, what we can see our own numbers; I think that we’re in pretty good shape on combines.

So the amount of cuts that we need to make on combine mines relative to 2015 should be marginal. I think that what – most of what we’re taking out of row crop going into next year will be in mid horsepower segment because that’s what’s been built up – because that’s where the demand was in 2015.

So we’ll see, I mean, I think that if we look at – what we think the demand is going to be versus the industry’s position in terms of standing inventory, if there’s going to be any price pressure, it’s going to be into the mid-low horsepower segment as everybody has been chasing the Dairy Livestock. On the upper end of the segment, if there’s been a significant clearance, if we’d like it to be more, we’re going to run again lower and our expectation is to bring down dealer inventory by another 30% in NAFTA, in 2016. And hopefully, if we get it right again that that pricing should hold up.

Joe ODea

That’s really helpful. Thank you.

Operator

We will now take our next question from Henry Kirn from Societe Generale. Please go ahead.

Henry Kirn

Hi, everyone.

Rich Tobin

Hi, Henry.

Henry Kirn

Could you talk about the capital and R&D spending projects and needs for 2016, and maybe specifically an update on the digital initiatives that you have gone on right now?

Rich Tobin

Both CapEx – as you’re referring to ag, I guess, but both CapEx and R&D will both go up relative to 2015 in ag, largely driven by, let’s just call it the whole precision farming ecosystem. There’s not a lot to be done on Q4 anymore. I mean, we’ve got a variety of different launches across the portfolio. We’re launching at new high speed planter. But what’s driving the year-over-year increase in R&D that’s baked into our outlook is largely driven by precision farming.

Henry Kirn

That’s helpful. And then with the new product introductions and Powertrain, can you talk a little bit about your view on the uptake of CNG and LNG engines over the next few years and what that could mean the company as a whole?

Rich Tobin

I think you’re bullish over the longer term. I mean with the downward pressure on diesel, right now, the economics of LNG, C&G are getting a little tighter. But I think from a medium term, not even a long-term perspective, we think that once the infrastructure is built out and they’re well on their way in Europe, I mean, NAFTA hasn’t started at all. But in Europe, once the refueling infrastructure is built out and with the pressure on emissions forget just the input costs on diesel that we’re pretty bullish in terms of the uptake on the conversion for long haulage applications.

Henry Kirn

That’s very helpful. Thank you very much.

Rich Tobin

You’re welcome.

Operator

We’ll now take our next question from Ann Duignan from JP Morgan. Please go ahead.

Ann Duignan

Hey, guys. It’s Ann.

Rich Tobin

Hi, Ann.

Ann Duignan

Well done in Q4 that was a good margin.

Rich Tobin

Thank you.

Ann Duignan

Can you just talk a little bit about if I look at your managed portfolio on the finance, wholesale finance went from about $8.3 billion in Q3 to about $8.66 billion in Q4. Should we be concerned that all that there were some channel stuffing and endurancy was very uncharacteristically very adamant that Case IH has been stuffing the channel on the – at least high horsepower tractor side.

Rich Tobin

So they’re worried about what we have in dealer inventory. But I don’t know, the only thing I can say about that is we’ve given more stats than anybody in the industry in terms of channel inventory and the movement. We give out all the stats in terms of production to retail. And then reposted some very good gains from pricing. So if we’re stuffing, it’s hard to say where that’s being reflected in the marketplace.

Ann Duignan

Okay, how do you explain that retail notes were down and wholesale notes were up quarter-over-quarter?

Rich Tobin

I think you got to be very careful, I mean, there’s mix in there. There’s currency and variety of different things, I mean, I can get you a more detailed answer on that. I don’t operationally particularly look at it that way that’s more on the Finco side. But I’m not – our – we were below – wholesale was below retail, right, we’ve given you the stats. So whether there’s a mix effect in terms and there’s a portion of the pricing that’s baked into what’s been sold into the part of that $120 million is in the gross receipts.

Ann Duignan

Okay. Maybe we can take it offline and go through it in more detail. Can you just talk then a little about through 2016 outlook, if I do the mathematics, decrementals come in at about 14%. Can you just talk about the difference between the different groups and where would you expect decrementals to be worse and where would you expect them to be better?

Max Chiara

Okay, we look at it from a group perspective, the margin loss in ag about 50% of that is recovered by additional profits in the other three segments year-over-year. Without getting into decremental, incremental margins by particular sector, I mean that’s the way you can look at it. I mean, we’re calling the market down by 15%, 20% that would equate to roughly $400 million, but that’s not how it is baked in there so that’s got to be made up for the balance of the portfolio.

Ann Duignan

Okay, that’s helpful. I appreciate that .Thank you.

Max Chiara

You’re welcome. Thanks Ann.

Operator

We will now take our next question from Monica Bosio from Banca IMI. Please go ahead, your line is open.

Monica Bosio

Good afternoon and good morning everyone, I would add a few questions. That first one is on the total CapEx 2016. I understood that in [indiscernible] the CapEx and the R&D will be higher, but I was wondering what about the total of the group especially in the commercial vehicles?

And my second question is still on the commercial vehicles. Do you feel that, still sound trained in commercial vehicles in EMEA might continue to effect the weakness condition in the LATAM market.

And the third question is on the agricultural segment. Can you give us a flavor quarter-by-quarter, I’m just trying to figure out what could be there, the trend in the first quarter in terms of profitability given that, most of the production cut [ph] will be made in the first quarter of 2016. Thank you very much.

Max Chiara

Okay, I’ll do questions two and three first and I got to have to circle and come back to question one. Our expectation that EMEA volume will offset further declines in the LATAM. I think that, that’s our expectation of full year in terms of profits. Are we – on the ag side our weakest quarter in terms of margin will be Q1 of 2016 because of the fact that we’re going to be delaying the restart of the industrial machine. So there would be Q1 and likely Q3 as a result of more maintenance related shutdown periods.

And what was your first question again, sorry.

Monica Bosio

It was on the reported CapEx expected for 2016.

Max Chiara

It’s going to be up somewhere around 10%.

Monica Bosio

Okay. Thank you very much.

Operator

We’ll now take our next question from Alberto Villa from Intermonte Sim. Please go ahead.

Alberto Villa

Hi, good afternoon. Just a couple of questions, one is on the – what I’ve read on the Financial Times today that Brazil is planning to introduce some sort of incentives this year to revive investments. I was wondering if you think this kind of initiatives can allow you to, I mean, to see a little bit less negative outlook for Brazil, or you think that the demand there is going to be very weak this year.

The second one is on the guidance on net debt, I was wondering if you think whether the buyback realization of $300 million or not? Thank you.

Rich Tobin

On the first one, we don’t know yet. I mean, I read the same article this morning. But nothing has been publicly announced, so we don’t have anything baked into our forecasts for credit availability in Brazil or an improvement of where we are today or what our forecasts are today. In terms of net debt the answer to your question is yes. It’s baked in.

Alberto Villa

Thank you.

Operator

We’ll now take our next question from Richard Smith from Citigroup. Please go ahead.

Richard Smith

Hi there, thank for taking my call. Just bearing in mind the significant recovery in margins in Q4, in particularly in the agro business and then also I guess in commercial vehicles. Why are we still seeing 2016 guidance kind of down, is any of that margin improvement momentum expected to carry through into 2016 or is it more of a kind of a one-off?

And secondly with the 300 million share buyback program announced, are you still targeting an investment grade rating for your credit and how do you see share buyback being consistent with it?

Rich Tobin

The answer for your first question, its volume related. I mean, we’re calling the market in ag down and ag is up most profitable segment within the group, so by its nature it’s going to come down some. In terms of our target to – remain investment grade we still have that target, the aggregate amount of the return on capital is the change, the overall performance of net industrial debt. So we end up right where we expect it to be and then return and make a return to shareholders.

Richard Smith

Okay. Thank you.

Rich Tobin

And the fact that the value of – what we would consider our shares undervalued on top of that.

Operator

We will now take our next question from Christophe Boulanger from Barclays. Please go ahead

Christophe Boulanger

Yes, hi. Good morning. I would have a question on balance sheet. I’m looking at your intercompany loans standing at $1 billion at the end of 2015. Could you share with us what will be the target for 2016? And the second question is on your pension, if you could share with us the size of your pension deficit at the end of 2015. Thanks

Max Chiara

So we expect the balance of our intersegment to be below 2014, 2015, in 2016. And the pension balance is about $2 billion.

Christophe Boulanger

$2 billion.

Max Chiara

$2 billion.

Christophe Boulanger

And…

Max Chiara

In op-ed [ph] all together…

Christophe Boulanger

Passion on op-ed, is – okay. And just…

Max Chiara

That operates 200 million.

Christophe Boulanger

Thank you. Just to come back on intercompany loan, do you plan to fully cancel intercompany loan at some point?

Rich Tobin

You’re saying do we cancel the intercompany or between industrial and…

Christophe Boulanger

To basically surprise the intercompany loan between industrial arm and the Fin Corp?

Rich Tobin

There is a level of funding that is physiological between the two pieces of the business, but again we expect to be below 2015 and 2016.

Christophe Boulanger

Okay, all right, thank you.

Operator

We will now take our next question from Ross Gilardi from BoAML. Please go ahead. Your line is open.

Ross Gilardi

Good morning. Thank you. Rich could you just talk about European truck order trends. I mean did they accelerate or decelerate you think as the year – as we came into the year end. I mean obviously the market performance was very good, but just curious more on directional movement in order trends in European truck?

Rich Tobin

Well, I think that on a percentage base, Ross, it’s come down because it’s starting from a lower base, but our backlog is flat year-over-year. So it’s steady, so once the percentage decline was just a function of the market moving up, but what we have in backlog is flat to where we exited Q3.

Ross Gilardi

And then, you said you got pricing in EMEA truck, but can you still took market share. So could you talk a little bit more about that? What parts of the truck market did you actually [indiscernible]. Was that more of a light and medium duty comment versus a heavy duty comment and any color geographically?

Rich Tobin

We actually gained share in all three segments for the year. Look, at the end of the day, I think, the price is more reflection of the fact that that product line has been rejuvenated. I mean, the Daily is brand new, we’ve made significant improvements to the quality to both the medium and the heavy segments and we’re pricing for it. We just think we have a more competitive product.

Ross Gilardi

Got it. Thanks, guys.

Rich Tobin

Thanks.

Operator

Our final question will now come from Massimo Vecchio from Mediobanca. Please go ahead.

Massimo Vecchio

Good afternoon. My first question is on the operating profit work for Ag. If I understand correctly from previous question, the positive pricing is an easy comparison with Q4. Is it correct with Q4 last year?

Rich Tobin

It’s correct.

Massimo Vecchio

And can you also detail what was benefit of low raw material in this breach? Is it probably included in the production costs?

Rich Tobin

That it’s a piece of it in production and a piece of it ends up in pricing because of inventory turn. It is approximately 10%.

Massimo Vecchio

Okay, so very small. Second question is on the tax rate, you said the long-term sustainable is 34%, 36%. When do you think you would get there and what can we expect for 2016?

Rich Tobin

I think that we can expect a steady walk down from where we are today. I think the 2017 depending on market conditions or demand conditions of the market would be where we get into the range – long-term range.

Massimo Vecchio

All right, thank you very much.

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. We would like to thank everyone for attending today’s call with us. Have a good afternoon and evening. Bye.

Operator

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

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