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Edited Transcript of NAV earnings conference call or presentation 7-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Navistar International Corp Earnings Call

WARRENVILLE Mar 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Navistar International Corp earnings conference call or presentation Tuesday, March 7, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marty Ketelaar

Navistar International Corporation - VP of IR

* Troy Clarke

Navistar International Corporation - Chairman, President and CEO

* Walter Borst

Navistar International Corporation - EVP and CFO

* Bill Kozek

Navistar International Corporation - President, Trucks and Parts

* Persio Lisboa

Navistar International Corporation - EVP and COO

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Conference Call Participants

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* Unidentified Participant

- Analyst

* Jeff Kauffman

Aegis Capital - Analyst

* David Leiker

Robert W. Baird & Company, Inc. - Analyst

* Steve Volkmann

Jefferies LLC - Analyst

* Andrew Casey

Wells Fargo Securities, LLC - Analyst

* Ben Burud

Goldman Sachs - Analyst

* Neil Frohnapple

Longbow Research - Analyst

* Cleve Rueckert

UBS - Analyst

* Robert Wertheimer

Barclays Capital - Analyst

* Seth Weber

RBC Capital Markets - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to Navistar's first-quarter 2017 earnings conference call.

(Operator Instructions)

I would now like to introduce your first speaker for today, Marty Ketelaar, Vice President of Investor Relations. You have the floor sir.

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Marty Ketelaar, Navistar International Corporation - VP of IR [2]

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Good morning everyone, and welcome for joining us for Navistar's first-quarter 2017 conference call. Today, we will discuss the financial performance of Navistar International Corporation for the fiscal period ended January 31, 2017. With me today are Troy Clarke, our Chairman, President, and Chief Executive Officer; and Walter Borst, our Executive Vice President and Chief Financial Officer.

After concluding our prepared remarks, we will take questions from participants. In addition to Troy and Walter, joining us today for the Q&A session are Persio Lisboa, Executive Vice President and Chief Operating Officer, and Bill Kozek, President of Truck and Parts.

Before we begin, I would like to cover a few items. A copy of this morning's press release and the presentation slides has been posted to our investor relations website for reference. The non-GAAP financial measures discussed in this call are reconciled to the US GAAP equivalent, and can be found in the press release that we issued this morning, as well as in the appendix to the presentation slide deck.

Finally, today's presentation includes some forward-looking statements about our expectations for future performance, and the Company expressly disclaims any obligation to update these statements. Actual results could differ materially from those suggested by our comments made here.

For additional information concerning factors that could cause actual results to differ materially from those included in today's presentation, please refer to our most recent SEC filings. We would also refer you to our Safe Harbor statement and other cautionary notes disclaimer presented in today's material for more information on the subject.

With that, I'll turn the call over to Troy Clarke for opening comments. Troy?

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [3]

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Thanks, Marty. We are really glad to have you on board. Good morning, everyone. I will start things off with some highlights for the quarter, then I will turn it over to Walter for more detail on the financials, and then we will take your questions.

The headlines for this quarter are, we are off to a good start. We are on track with the plan that supports the guidance that we gave you all on the last call.

Beyond financial performance, we continue to deliver on our new product launches, and we're seeing some green shoots or leading indicators that continue to bode well for improved market share. Since the start of the calendar year, we have taken advantage of a good market condition to improve our cash position and repriced some of our debt, and we have now closed our alliance with Volkswagen Truck & Bus, and we are hitting the ground running to take full advantage of the new opportunities that the alliance provides.

As we pointed out during our last call, we expected industry conditions in the Class 8 segment to be challenging in the first half of 2017, as we work through what we believe is the trough of the Class 8 cycle. In spite of those industry headwinds, we had a solid quarter. Our results came in slightly ahead of our internal plan, and are consistent with our full-year guidance.

We expect these industry headwinds to continue in our second quarter. However, because of improvements to our break-even point, we are well-positioned for improved profitability in the second half of the year as the Class 8 industry rebounds. Recent ACT research data for February indicated the Class 8 market might be on its way to recovery later this year.

Our order share continues to outpace market share, and our backlog grows, which gives us confidence in the retail share improvements to come. Our Q1 2017 order volume in our US and Canada truck markets increased 4% year-over-year. Customer response to our new products has been positive.

We essentially doubled our penetration in the important rental and leasing segment, which is a very encouraging sign. And thanks to our new LT series on-highway tractor, we are back in the door with several large private carriers we haven't sold to in a number of years. We received more than 5,000 orders for the LT, and we have shipped approximately 2,500 units. Our parts team also posted another quarter of solid results, with substantial improvements in both our Fleetrite All-Makes business and our remanufactured parts business.

Our Navistar defense unit recently won two significant foreign military contracts for the US Army Contracting Command. The first is to produce and support the MaxxPro mine resistant ambush protected vehicles or MRAPs for Pakistan, and the other is to reset, upgrade, and support MaxxPro MRAP vehicles for the United Arab Emirates. The combined value of these two contracts comes to more than $475 million.

We are making good progress on the three parts of our strategy: Driving operational excellence, growing the core business, and building new sources of revenue. And so here is a brief overview of those highlights:

In driving operational excellence, we continue to manage costs out of our business. Benefits from procurement and manufacturing are contributing to stronger manufacturing gross margins, and our new product launches are improving profitability. Our global segment continues to run at near breakeven levels, despite the ongoing tough industry and economic conditions in Brazil.

And for the third consecutive quarter, we reduced used truck inventory levels, as we continue our success in exporting used trucks. A positive development is that we are seeing our newer products returning to normal trade cycles.

We made progress in growing the core business, with our new product introductions. Last week, we strengthened our Class 8 lineup with, when we unveiled our new 12.4 liter engine, the A26. This new lighter-weight engine provides us a competitive entry in the 13 liter segment, which makes up 50% of the Class 8 market, and it is now available for mid calendar year delivery in the LT series. And we expect it will build on the very positive market reaction that the LT has already received.

Looking ahead, additional new product launches are expected every four to six months, so that by the end of 2018, our entire product portfolio will be new and also expanded, thanks to our planned reentry into the Class 4 and 5 market.

In summary, we are bringing to the market the trucks that customers need, and solutions that deliver uptime, support our parts business, and position our dealer network for success. We are building new sources of revenue, by pursuing opportunities to leverage our manufacturing, testing, and validation capabilities. Last month, we begin manufacturing General Motors Cutaway G Van at our Springfield, Ohio plant. This generates additional revenues and certainly improves our manufacturing capacity utilization.

We continue to build OnCommand Connection, our industry-leading telematics system, which surpassed 270,000 subscribers at the end of February. With new features and services, we plan to bring to market later this year.

And to wrap up, last week we announced the closing of our strategic alliance with Volkswagen Truck & Bus. Joint teams are already working to capture the opportunity the alliance makes possible. It will help us reduce cost by taking advantage of global scale procurement, and allow us to optimize our R&D spend. It will help us grow our core business by bringing to the market new products and advanced technologies and services, that will build new sources of revenue.

We continue to expect the alliance to be accretive in its first full year, and we project that cumulative synergies for Navistar will ramp up to at least $500 million over the first five years, reaching annual synergies of $200 million a year by that point, with even more to come. We are also excited to welcome two highly respected executives from Volkswagen Truck & Bus, Andreas Renschler and Matthias Grundler to our Board of Directors.

During my career, I have been a part of a number of strategic alliances. This is a very exciting opportunity for Navistar. I am personally excited because as we have worked with Volkswagen Truck & Bus to put it all together, it has been very clear that we share similar visions about the industry and its future.

There's a great cultural fit, and a strong desire to collaborate. The excitement and energy as you get close to this is infectious. We are committed to take full advantage of this alliance, in building Navistar into a North American champion.

This is an exciting time to be at Navistar. Let me turn it over to Walter now.

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Walter Borst, Navistar International Corporation - EVP and CFO [4]

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Thank you Troy, and good morning everyone. Before we dive into the results for the quarter, I would like to echo Troy's excitement about the closing of the alliance with Volkswagen Truck & Bus. This alliance is a real game changer for us and the Volkswagen Truck & Bus team will be great partners. I hope you can see, as I do, that this alliance will make Navistar a stronger, more competitive company.

Now let's shift our focus to the results for the first quarter. Please note, additional details can be found on the slide deck we posted to the investor relations page of our website. As we discussed in December, we expected our first quarter, in fact, our first-half results to be challenged, due to the continued softness of the Class 8 industry that began in 2016. The results you saw this morning reflect the realization of that expectation.

Consolidated revenues were $1.7 billion, down 6% compared to last year. The revenue decrease was largely driven by a 7% decline in our core charge outs to 10,200 units, but outpacing the US and Canada core industry volumes, which were down 18% year over year.

Additionally, our global revenues continued to face economic headwinds. Our loss in diluted earnings per share from continued operations were $62 million, and $0.76 per share, respectively.

The improved quality of our trucks on the road today is benefiting our results. During the quarter, we reversed $17 million of pre-existing warranty accruals, primarily related to lower claim frequency across both the medium duty and big bore engine families, as well as a one-time benefit related to our Brazilian engine operations. Excluding pre-existing, warranty expense as a percentage of manufacturing revenue was 2.9% this quarter.

Adjusted EBITDA for the quarter was $55 million after excluding pre-existing warranties, and other charges related to impairments and restructurings. While these results were short of first-quarter 2016 results, they exceeded our internal targets, and we're pleased with our start in 2017.

Turning to the results of our operating segments, lower Class 8 industry volumes heavily impacted our truck segment. As a result, first-quarter sales were down 9% year-over-year to $1 billion.

The segment's loss widened to $69 million this quarter, largely driven by lower volumes, partially offset by improved used truck results, and continued material cost improvements. Additionally the prior-year results included a $50 million benefit of a one-time fee from a third party.

Our parts business is doing a terrific job growing new revenue streams, like our Fleetrite All-Makes brand, and the remaining factory parts business, to offset lower export and Mexico volumes. For the quarter, parts sales were $570 million, and segment profit was $149 million, both comparable to last year.

Our global operations segment is doing a great job controlling costs. For the quarter, global operations achieved near breakeven results, even as revenues were down 46%. The year-over-year volume decline reflects the end of a customer contract early in the second quarter of 2016, and the ongoing difficult economic conditions in Brazil.

The financial services segment is feeling the impact of the lower volumes from our manufacturing operations, and unfavorable movements in foreign exchange rates impacting its Mexico portfolio. As a result, Q1 revenues were down 8% to $54 million. Segment profit also fell this quarter to $13 million, reflecting the impact of lower interest margins, as well as the paydown of certain inter-company loans that had been a source of profit for this segment.

Used truck inventory levels declined for the third consecutive quarter, and we are managing trade receipts and aggressively pursuing sales opportunities, both domestically and abroad.

Gross inventory fell to $388 million, a level not seen since October 2015. The decline was largely due to the receptivity of our used trucks in certain export markets. With reserves staying relatively flat, the net inventory balance fell to $177 million at the end of Q1, and we'll work to drive used truck inventories lower over the balance of the year.

Moving to manufacturing debt, this quarter we took advantage of market conditions to help provide ongoing financial flexibility by completing two capital markets transactions. First, in January, we closed a deal to tack on an additional $250 million to our existing 8.25% senior notes that come due in late 2021. Then in February, we were opportunistic in the market, and completed the repricing of our $1 billion term loan, which lowered interest expense by 150 basis points annually.

All in all, we were able to raise additional liquidity without materially increasing interest expense. Since the benefit from the repricing largely offset the incremental interest expense from the debt issuance. These transactions helped solidify our capital structure, as we begin developing plans to address our upcoming debt maturities, beginning in late 2018.

On the cash side, we ended the quarter with $697 million of manufacturing cash, which includes the net cash from the tack on to the senior notes, but does not include the receipt of the $256 million equity injection from the Volkswagen Truck & Bus alliance that was completed in February. Therefore, on a pro forma basis to include this equity injection, we would have had approximately $950 million of cash exiting the first quarter, our seasonally weakest quarter of the year.

In the quarter, the sequentially lower volumes resulted in net working capital being a use of cash. This, together with seasonally higher interest payments and warranty spend in excess of expense more than offset the EBITDA generated by our operations, and the cash received from the incremental debt issuance. Looking forward, we expect to end 2017 with about $1 billion of manufacturing cash.

In closing, we expect Class 8 industry headwinds to keep blowing in the second quarter, challenging our results against a very strong prior-year comparison. We do however expect improvement in the Class 8 industry volumes in the second half of the year, largely due to improved consumer confidence, reduced dealer inventories, improving OEM backlogs, better freight rates, and growth in municipal spending. Therefore, we remain on track with our plan to further improve adjusted EBITDA this year.

As we continue to grow our presence in the market with our new products, we have positioned ourselves to benefit once the Class 8 industry begins to turn. The closing of our strategic alliance with Volkswagen Truck & Bus marks an exciting new chapter in Navistar's history. The expected benefits of the alliance are not only readily apparent to us. In this regard, last week, both S&P and Fitch upgraded their credit ratings of the Company after the transaction closed. We look forward too many great opportunities that will come from this alliance, that will benefit both our customers and the Company, and in turn, drive greater shareholder value.

Last, we're planning to have an investor event at the North America Commercial Vehicle show in Atlanta in late September. Please mark your calendars for Navistar's event on September 25, and stay tuned for more information to come from our investor relations team. With that, I will turn it back to the operator to begin the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Ann Duignan, JPMorgan.

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Unidentified Participant, - Analyst [2]

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This is Christie on for Ann. Can you lay out the exact cadence of shipments for the quarter by the defense orders you have seen?

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Bill Kozek, Navistar International Corporation - President, Trucks and Parts [3]

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Sure. This is Bill Kozek. We were ordered. We did, awarded a number of contracts. Really, it wasn't just the two. There was seven or eight more that we were ordered since the beginning of November.

Obviously, as Troy said, the first to produce and support the MRAPs for Pakistan, and then the other one to reset the MaxxPros for UAE. As you are aware, the majority of the work is going to be done in West Point. The first one, delivery is planned for 2017 calendar year.

And the UAE one will begin in the middle of this year and go through fiscal -- some of it will be done in 2019. That was a little bit longer. Really no change on our guidance for 2017 or 2018.

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Unidentified Participant, - Analyst [4]

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Okay. Secondly with the growing talk around electric commercial vehicles, especially in the transit bus space. What is Navistar's position on this, and how big do you think that market is today? And how big do think it will be in five years?

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [5]

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This is Troy, Christie. I was just down at TMC and gave a little talk that highlighted -- I think what our thoughts are and our position is. I think the bottom line, as the cost of electrical storage batteries continues to come down, it reaches a point where for short loop type transits, like school buses, for instance, or pickup and delivery type thing, especially within urban environments, that electricity can become a compelling source of fuel, basically for these vehicles.

To us, the indicator to really watch is what is the cost per storage, or what they call the cost per kilowatt hour. And if in fact the industry is correct, it has been coming down significantly, like 14% per year for the last decade, and 16% per year over the last two or three years, then you can look to a period of time in the early part of the next decade, where the cost of a battery in certain applications becomes very comparable to the cost, or operating cost of a diesel engine.

So we think it is something that the industry has stated, we all have got our toes in the water, so to speak, and are dabbling around in it. I think you'll see that, as the industry goes forward. And I think you'll see the real commercial application, or real segments where those are going to stick, and maybe have great opportunity in the early part of the next decade.

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Unidentified Participant, - Analyst [6]

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Okay. Thank you for the color. I will pass it on.

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Operator [7]

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Jeff Kauffman, Aegis Capital.

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Jeff Kauffman, Aegis Capital - Analyst [8]

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Congratulations on closing Volkswagen, and congratulations to Persio, as well. Real quick, Troy did I mishear you? You said the value of these new defense contracts -- I thought you were going to say $475 million, but it sounded like trillion. Could you clarify that?

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [9]

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It was $475 million with a M. I am sorry. I thought I said million.

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Jeff Kauffman, Aegis Capital - Analyst [10]

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You may have. I may have misheard you. And secondly, can I focus a little bit on the financing transactions, Walter? You talked about the reversal in the warranty accrual, and you identified two other charges, but can you talk about maybe any other cost drags you had in the quarter, whether it was related to debt refinancing, or whether it was related to closing this Volkswagen transaction, just to get a sense for unusual below the line costs?

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Walter Borst, Navistar International Corporation - EVP and CFO [11]

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Yes. In our press release, the charges for the quarter and year-over-year are highlighted. They are relatively flat year to year. So the decline year-over-year is really a function of slightly lower volumes, as we indicated, as well as some lower profitability at NFC from the lower margins that we are experiencing there, and the lower volumes coming from the manufacturing business.

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Jeff Kauffman, Aegis Capital - Analyst [12]

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Okay. So you would say that $13 million number is more of a run rate, and not anything unusual?

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Walter Borst, Navistar International Corporation - EVP and CFO [13]

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We took some additional reserves for our [Pexican] portfolio, so that might not be repeating. We have continued to see a run off of the retail portfolio in NFC, and so you should expect the run rate to be lower at NFC this year than last.

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Jeff Kauffman, Aegis Capital - Analyst [14]

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Okay. If I adjust for the reserves, what run rate are we looking at there?

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Walter Borst, Navistar International Corporation - EVP and CFO [15]

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I'm not going to go there today, Jeff. It was a small amount in the quarter.

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Jeff Kauffman, Aegis Capital - Analyst [16]

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All right Walter, thank you. Congratulations. Thank you very much.

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Operator [17]

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David Leiker, Baird.

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David Leiker, Robert W. Baird & Company, Inc. - Analyst [18]

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I wanted to walk through a bit, if we could flesh out the contribution margin here. Year over year, if you make some of those adjustments, year over year, it is still pretty big contribution margin. It is not a low revenue number, but can you help flesh that out a little bit?

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Walter Borst, Navistar International Corporation - EVP and CFO [19]

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I'm not sure exactly what you're getting at David. Help me out a little bit.

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David Leiker, Robert W. Baird & Company, Inc. - Analyst [20]

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It is about a 50% decremental margin on the revenue decline. Again, it is a relatively small revenue number, but the impact of it is pretty meaningful. Maybe you could pull out last year's -- the income from last year, you pull off some of the warranty from this year, and it is about a 50% decremental margin on the truck business.

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Walter Borst, Navistar International Corporation - EVP and CFO [21]

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Oh, on the truck business. It is on the gross margin comment that we made.

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David Leiker, Robert W. Baird & Company, Inc. - Analyst [22]

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What's the segment number that you report for North American truck? We can follow-up off-line.

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Walter Borst, Navistar International Corporation - EVP and CFO [23]

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We had a one-time item last year. We mentioned that. $15 million.

And volumes are lower by about $100 million. You would have to take a look at your normal margin that you have in your model for the truck business, and you would probably get to most of the year-over-year change.

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David Leiker, Robert W. Baird & Company, Inc. - Analyst [24]

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I guess what I am trying to go with this, it looks like it would be something closer to a normal type decremental margin, which would imply some of the structural cost changes are being anniversaried, and that this is probably more normal run rate for the business. Is that fair, or are there still some margin opportunities from the structural actions you have taken?

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [25]

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I think first off, what you are seeing, David, is in fact, you're seeing inside the segment, you're seeing a cleaner, you're seeing the business becoming a little cleaner. We have fewer of those adjustments that are made inside the segment, that are deteriorating from margins. So you are seeing the margins begin to lift, to represent more in line with where they think they should be, and where they are going.

That said, it is not soup yet. We are not totally there yet. We still have other opportunities.

We continue to, we are still -- it is good to see the fact that some of the things that we've done already have in fact, are in fact showing themselves in the gross margin of our products, but we still have action plans that were taken last year that have yet to come to fruition. So we think we are going to see more of that.

On top of that, when you add the alliance stuff on top of that, where we think there is opportunities for additional material savings, and I would say a stabilization of our engineering spend. So the engineering spend won't be so inflationary with new projects, let's say, or volatile with new projects.

In addition, I would like to point out, when we launch new products, they have a lower design cost than the products they replace, basically. Higher function, lower design. So, the fact that we are still launching new products for the next 18 months indicate to us that our cost position will fundamentally change.

We have also, as we are launching new products, continuing to invest in our manufacturing facilities to drive additional efficiencies, and again, with the GM project that we had, it lets us continue to thin some of that. The thinning of the fixed cost really is just offsetting some lower volumes at this particular point in time.

So we're encouraged to see the improvement in gross margins. There is a cause-and-effect of the things that we have done. There is more to come, largely because of the fact we have new products, and we still have actions that we have taken, and the run on, or the ramp of some of the value of the alliance.

I don't know, Persio, am I saying this the right way? I'm trying to grab a couple of pieces of paper that I've got here in front of me, David, and summarize them in a very short period of time, but we can give you additional detail on a follow-up call for sure.

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Persio Lisboa, Navistar International Corporation - EVP and COO [26]

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You are perfect, Troy. I think we are all super excited with the opportunity on the procurement side, with the joint venture. I think the team hit the ground running, and we have everybody in the right place. We know where to get it started, and the activity is taking place right now.

We're not going to wait for future performance coming out of that team. That is number one. You are spot on, on the manufacturing side, as well.

I think a lot of the investments that we have made in the new products are investments made also in manufacturing, which brings those products to life, on a more effective cost basis. That is happening today and better absorption that they're having with the launch of the defense. So all of those things, they tied up really well, to what we're going to see in future for 2017.

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [27]

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And two things, David, I don't know exactly how they factor right into that, but one is, I think something very significant that Walter mentioned, this is the first quarter in some time, where we have actually had a reversal of accruals with regard to warranties. Again the investments in quality are paying off for us, and customer service. Hopefully we are seeing better days in that.

And last but not least, I think very important to us inside the company, (technical difficulty) I think this is a big deal, the fact that we are over the hump on that. We can see the end of it. This has been a significant drag to our earnings for a period of time, and once that comes off, I don't want to say it is free money, but it certainly is a margin we are counting on for a more normalized business.

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David Leiker, Robert W. Baird & Company, Inc. - Analyst [28]

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Great. And then just one quick follow-up. What do you think the tightening is for the alliance savings to start to show up?

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [29]

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We had said that we expect it to be accretive in the first 12 months of operation. I think we will stand on that for right now, and give us the opportunity to surprise you with some good news as we work through implementing our early plans here.

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David Leiker, Robert W. Baird & Company, Inc. - Analyst [30]

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Okay. Great. Thank you very much for taking the call. Appreciate it.

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Operator [31]

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Steve Volkmann, Jefferies.

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Steve Volkmann, Jefferies LLC - Analyst [32]

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I was hoping I could get you to expand a little bit on a couple of things that you said in your prepared remarks. I think you said that you are starting to see some green shoots relative to market share. We haven't really seen that in the numbers yet, but I am curious if you might give us a little more detail as to what you are seeing and maybe which of your products we might expect. If we look at slide 13 in six months, where will we see a difference?

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [33]

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Let me lead off, and then I will toss that over to Bill if I could, who is up to his eyeballs in those numbers every day. Here is the things that I look at.

One is, where is our quoting activity. Quoting activity was up from 2016 over 2015. That trend appears to be continuing, if not accelerating. For instance, in 2016 we quoted, of the top 50 customers in the market, 50 largest customers, we quoted 20% more of them than we did the previous year. We got awarded 50% more than we did the previous year.

And we have this concept called share of wallet. Do I get the majority of their buy or not? That increased nine fold in 2016 over 2015, and those trends are continuing. That quoting activity continues to rise.

Interest in our new LT product is up. I was at TMC last week, and definitely there was people in and out of that truck all the time with very favorable comments, and these are the people who really make buying decisions, and maintenance decisions, so we are very excited about that.

Bill can elaborate more, but we got customers talking to us who haven't talked to us for the better part of this decade. They are interested in not just our story, but in fact, they're interested in what our products can do for their business. So these are all very encouraging signs. They are the things that I would highlight as green shoots.

Our investments in uptime, service, quality, et cetera, are beginning to pay off. And one of the things that we look at as a leading indicator is order share, and our share of orders has increased in this quarter, 4%. I think it was 4% year-over-year. Bill?

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Bill Kozek, Navistar International Corporation - President, Trucks and Parts [34]

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Yes, Stephen, the market share, the piece that I think you are alluding to is on the heavy piece, and the big reason for the decline from fourth quarter to first quarter was, we began ramping up production of the LT during Q1, so that caused a lower run of heavy products for us in the quarter. When you do that, you can't get those into the retail numbers until you get to the dealers, and then we will start to see some share gains in heavy.

Medium has been a success story for us. Our order share is significantly up over our retail share, and thus continues to be a good story for us. At the end, we are up just short of 1 percentage point year over year. I expect that to continue to grow.

Backlog is up quarter over quarter in all segments by pretty good percentages. And during the fourth quarter, our Class 8 production share was over 13%, which is another positive sign for share growth. We have got a lot of hard work to do, but we have got some new products. Our dealer body is engaged. There's been a lot of improved economic activity, certainly in the infrastructure space, and I'm optimistic about share growth for 2017.

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [35]

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If I just add a couple final comments to that, Steve, giving Bill and his team all of the credit in the world. I am expecting we will have share increase in the segment where the HX participates in, because we launched late last year for the construction season. Today we stand here with all configurations available, and ready to participate in what we hope to be a robust construction season, as the weather gets better in the northern part of the country.

We expect continued gains in the LT with the X15, and over where the ProStar was, and then basically our reentry to the 13 liter segment with the new A26 with deliveries available midyear. Couldn't pick a better time, if the market is recovering in the second half of the year, to have these new products come about. We've really been nonexistent in that 13 liter segment and this remains 50% and growing of the heavy on-highway type market. Very specifically, those three entries I think are going are going to tow the mail.

Very exciting, we've got the RH launch coming up, I think a little bit later this year. Next month, and then of course, the DuraStar replacement later in the year. The hits just keep coming, and I expect every one of them is going to contribute incrementally to our markets there.

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Steve Volkmann, Jefferies LLC - Analyst [36]

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All right. Great. I appreciate that. Maybe just a quick follow up for Bill.

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [37]

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You can tell I've been working with the sales guys a lot here lately.

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Steve Volkmann, Jefferies LLC - Analyst [38]

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I was waiting for the ba-dum-bum ching at the end of that. Maybe just a quick follow-up for Bill. The latest 2 to 3 months of orders for the overall industry have certainly been a little bit stronger than most people have been looking for.

What are you hearing from customers? Why are they re-stepping up and ordering more vehicles now? We don't see a lot more freight movement. Are the other things that are driving this in your feedback loop?

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Bill Kozek, Navistar International Corporation - President, Trucks and Parts [39]

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Yes. I was at TMC last week, as well. There was a lot of great customers there. And almost to a person, everybody's volumes are up, year over year. The fact that we haven't had much of a winter in the central part of the US has certainly helped keep the freight moving.

Those same customers the last 12 to 18 months have right sized their fleet, so they have taken some of their volume out of the system, in an effort to improve their rates. Haven't seen rate-improvement to date. However, a number of our customers are saying, that is coming. It's just over the hill.

The other piece is with all of the talk about infrastructure spending, we are seeing more activity in our vocational and severe service vehicles. That has been positive as well, and certainly the municipalities are purchasing more, as well. We're pretty optimistic that we bottomed out last year, in terms of the truck market, and that 2017 will be strong.

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Steve Volkmann, Jefferies LLC - Analyst [40]

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Great. Thanks a lot. I will pass it on. Thanks.

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Operator [41]

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Andrew Casey, Wells Fargo Securities.

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Andrew Casey, Wells Fargo Securities, LLC - Analyst [42]

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A couple of questions on the A26 engine introduction. First, do you have some of these already running in fleets? Second, should we expect, as that enters production, to have a little bit more conservative warranty accrual that could drive a clean warranty expense above 3% of sales? And I am just wondering, how quickly do you expect to ramp up that A26 equipped LT truck because as you pointed out, that could be a big shift potential for market share.

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [43]

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I will start answering that, Andy. We're going to be introducing it in midyear, and we do have a number of these vehicles running in customer fleets as well as our own test fleet, and they are performing extremely well. It is a quiet engine It is built for uptime.

The service intervals are improved, and it is a lightweight engine. We're very excited, and that is what our customers want. In terms of the warranty accrual, I think it is going to be zero, but let's have Walter answer that question. And the third piece of that is probably a Persio question. I will turn it to Walter first.

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Walter Borst, Navistar International Corporation - EVP and CFO [44]

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With respect to warranty, we are continuing to look to drive our overall warranty costs down. We have been driving to 2.5% of sales. We have been steadily below 3% of sales.

Taken together, no change there, in terms of where we want to go with our warranty spend. And beyond that, I'm sure Troy will push us to an even lower level to really be industry-leading in this area. That together with uptime are really, continue to be our focus on the quality side of the business.

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Persio Lisboa, Navistar International Corporation - EVP and COO [45]

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And if I may add to that, I think the engine itself is a simpler product. We reduced the hardware, we removed the components that were not necessary, and we're using proven technologies all over the product, so we feel really good about the warranty and where the engine is going to perform when we launch in mid 2017.

And regarding production, we will be ready. We're just waiting for the orders to come, because really that is what we need, and the plant is absolutely ready to go. We have gone through all of the pilots that are required to validate our manufacturing process, and we feel really good about what we are seeing today.

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [46]

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We actually have just opened the order book, with the introduction of the engine. But anecdotally, the number of customers that I have been -- had the good fortune to be with Bill and his team on, have been waiting for this. They want a truck with the lighter weight, and the performance of the new A26.

We don't anticipate a warranty spike. We have tested and validated this product, I think as well as we've ever done anything. It has really been a labor of love, I think, for the folks who really look for an opportunity to show how good we can be at a product like this. In addition to that, as we began our discussions around the Volkswagen alliance, I'd remind you that the base or the platform of the engine is really derived from the MAN product.

So we have had some level of technical exchange with our colleagues over there, just to get their reaction to the changes that we made to this engine, and their responses have all been extremely positive and favorable to not only the engineering approach, but how we ended up working out the hardware. We are really excited.

We are really excited about this, and we think our customer is going to be excited about it, as well. And it is important for us, because it does represent an opportunity to get back into a very important segment of this market that we've really had not had good representation for a couple of years now.

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Andrew Casey, Wells Fargo Securities, LLC - Analyst [47]

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Okay, thank you. Separately, I'm trying to understand the ending cash balance guidance. The implication of flat revenue for the year, after being down modestly in the first quarter, is growth for the combination of the last three quarters.

And then, on a pro forma basis of FQ1 cash about $950 million, coming out of the seasonably weak Q1. I am just wondering, with that $1 billion roughly flat with the end of Q1, are there any puts and takes we should consider that could weigh on the seasonably stronger cash generation later in the year, or is this just more or less conservatism?

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Walter Borst, Navistar International Corporation - EVP and CFO [48]

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We continue to expect to build cash over the balance of the year. The key thing here is that we've got a very solid liquidity balance. With the equity injection and then the actions that we took in the first quarter, there were some payments related to the term loan repricing that will impact our second quarter.

We have got some other items that we pay there annually, related to compensation and benefits, and otherwise. That will impact second-quarter cash flows. But just really happy that we have been able to do what we have been able to do on the liquidity front. It puts us in a good position to end the year strong.

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Andrew Casey, Wells Fargo Securities, LLC - Analyst [49]

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Okay. Thank you.

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Operator [50]

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Jerry Revich, Goldman Sachs.

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Ben Burud, Goldman Sachs - Analyst [51]

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This is Ben Burud on for Jerry Revich. You called out margin declines at your Blue Diamond parts business as weighing on the parts segment. Can you just help frame the magnitude of those declines, and maybe can you put some color on a potential run rate going forward over the near term?

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Walter Borst, Navistar International Corporation - EVP and CFO [52]

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We are not going to do anything on run rate related to Blue Diamond parts. What we said is that we would expect a gradual decline in those revenues over time, but that really is over an extended period of time. No news there that we haven't talked about before.

What we are really excited about is that the parts business overall continues to do very well, and we do particularly well in the Fleetrite area of our All-Makes brand, as well as the remanufactured parts business has continued to be a strong point for us. Overall the parts segment continues to be very strong, and we continue to expect that to do better this year than last.

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Ben Burud, Goldman Sachs - Analyst [53]

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Got it, And then can you give us an update on any trade-ins of your prior generation trucks? How many did you do last quarter, and how do you see that shaping up going forward, as well?

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [54]

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The used business, since I have been here, has been a very long journey. But we know we needed to take care of the customer. We expect, and I think we have told on this call before, the number that we plan to take back. We are over 70%, and it's starting to get over that 75% number of the vehicles that we expect to trade back.

I think later this year, this calendar year, we expect more normalization of our used truck business, as we work through the MaxxForce 13 population. As Walter's remarks said, we have had some success domestically, but the big success has come overseas, and we continue to see activity overseas, and in certain areas of the globe where these trucks perform very well. No projection about where we are going to end up, but with the activity that we have, we think business, we are going to be at a more normalized state of used truck business at the end of 2017.

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Ben Burud, Goldman Sachs - Analyst [55]

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Got it. Thank you.

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Operator [56]

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Neil Frohnapple, Longbow Research.

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Neil Frohnapple, Longbow Research - Analyst [57]

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Just a follow-up to Andy's question on the A26. Can you talk about the benefits on the cost side to the new A26 engine versus the M13? Is this going to drive higher material cost savings in FY17 than you were previously expecting in the guidance, or will it be offset by higher R&D costs?

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Persio Lisboa, Navistar International Corporation - EVP and COO [58]

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Neil, this is Persio. As Troy alluded before, he mentioned that every time we launch new products, that's a great opportunity for us to reduce design costs, and the A26 is not different. We are very excited with the product. From a functionality standpoint and the benefits of the customers will experience, the light weight, the fuel economy it will deliver.

And as I mentioned before, we're taking significant hardware out of the product, and we really believe that is going to be one of the most competitive engines in the marketplace. That will make us more profitable. We are very positive that the margins on the 13 liter segment can get better with the A26.

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Neil Frohnapple, Longbow Research - Analyst [59]

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So that product was considered in the previous guidance?

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [60]

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Yes. It was Neil. Just for a very simple example, the engine that it replaced was a compounded turbo charged engine, so it had two turbo chargers on it. This is a variable geometry turbo charger, it has one turbo charger on it. When you look at the side of the engine, there is about 100 parts, don't take that literally, but there is just a gob of stuff that is no longer hanging on the side of the engine.

That is a technical term. Gob. A gob of parts that are no longer hanging on the side of the engine. That does a couple of things.

One, it reduces the fundamental cost of the engine, because there is little material content in the engine. And two, it also improves the reliability. Every time you bolt something on, there's an opportunity for something to break down. We anticipate better quality over time.

And last but not least, the engine becomes easier to assemble. We have delved into this design for manufacturing and the design for maintainability, which I think when people see this engine over the cowl of one of our trucks, it is striking how much better this engine looks, and how much more understandable it is, even to the novice.

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Neil Frohnapple, Longbow Research - Analyst [61]

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Okay, and just a follow-up on that, with I think, Persio, you mentioned the fuel economy savings. What is some of your earlier test data showing versus the M13 and the Cummins 15 liter?

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Persio Lisboa, Navistar International Corporation - EVP and COO [62]

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We are 7% better.

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Neil Frohnapple, Longbow Research - Analyst [63]

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Than the M13?

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [64]

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Versus the M 13. And we think extremely comparable to the ISX15.

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Persio Lisboa, Navistar International Corporation - EVP and COO [65]

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And this is a combination of the A26 and the new LT which is performing better in the 15 liter as well. We are very excited about that.

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Neil Frohnapple, Longbow Research - Analyst [66]

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And one quick final one, maybe for Bill. You talked a lot about the improvements you're seeing in the Class 8 market, particularly for the second half of the year. Why not raise the full-year Class 8 industry outlook at this point? Is it still too early in the year or just any thoughts there?

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Bill Kozek, Navistar International Corporation - President, Trucks and Parts [67]

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It is still too early in the year. It is only March, and some of the activity we are seeing, as we all know, summer, things start to slow down from an order intake. I don't expect that to happen this year because there is activity, but I also know I am not ready to put my neck on the line by increasing the total industry yet.

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Walter Borst, Navistar International Corporation - EVP and CFO [68]

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We had to factor that into our guidance. I think the way I'd characterize this is that we are seeing more and more evidence that the initial guidance that we provided is directionally correct. So we had already said back in December that we would expect the second half of the year to be stronger, and our comments here are consistent with that.

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Neil Frohnapple, Longbow Research - Analyst [69]

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Okay. Great. Thanks very much.

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Operator [70]

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Cleve Rueckert, UBS.

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Cleve Rueckert, UBS - Analyst [71]

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I'm calling on behalf of Steven Fisher. In terms of OnCommand, can you tell us how much revenue the 270,000 customers are generating? And then what percent of those accounts are revenue-generating?

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [72]

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I think the key in OnCommand Connection is really that we continue to grow the base here, very considerably, both for international customers and other customers. That is going to put us in a good position going forward, to really participate in the revenue stream, as well as in a profitability stream in the connected vehicle space. That is not a significant amount to talk about yet. The key is just getting on as many vehicles as we can, continuing to provide great services to our customers, and looking to grow that business in a profitable way over time.

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Cleve Rueckert, UBS - Analyst [73]

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Okay. Thanks. Then we talked a lot about the cadence of second-half versus first-half. Can you just say if you expect to be profitable in the second half of the year? I'm just trying to get a sense of how much improvement you are expecting?

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Walter Borst, Navistar International Corporation - EVP and CFO [74]

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Our goal is surely to get profitable as soon as we can. But the key metric that we provided to all of you is that we plan to grow EBITDA for the year, again for the fifth year in a row. So we will see where that leads, in terms of profitability. Obviously we can keep moving EBITDA up, but we're going to see profitability as well.

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Cleve Rueckert, UBS - Analyst [75]

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Okay, thanks very much.

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Operator [76]

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Robert Wertheimer, Barclays.

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Robert Wertheimer, Barclays Capital - Analyst [77]

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Just a question on the more normalized used truck trade in, as you go into the end of 2017. Is there a step function change up in profit as you get through the backlog, losing money of taking in? It's not 100% clear how much that is costing you right now, and I am just curious if you think that is minor or material, if you can quantify?

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Walter Borst, Navistar International Corporation - EVP and CFO [78]

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Your question was a little garbled there. I think you are inquiring about used truck and how we see that impacting profitability over the course of the year? Is that right?

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Robert Wertheimer, Barclays Capital - Analyst [79]

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I am so sorry. Once you get through the abnormal trade ins of used truck, how much step function up in profitability might you expect?

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Walter Borst, Navistar International Corporation - EVP and CFO [80]

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A couple of things. One, we're already seeing some benefits year on year in used, because we didn't need to take the same level of incremental reserves this quarter as we did, for example, a year ago. We continue to mark our portfolio to market. We do that every quarter to the best of our ability. We would hope to have less, and expect to have less incremental reserves for use this year than we did last year.

Secondly, to your point, as we continue to work through some of the MaxxForce units that we had in our backlog, and we get some of our new product back, we would expect that to go to more normal trade cycles, and to come back at more normal levels, consistent with what we have seen historically. Overall, we expect this be a favorable item year on year.

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Robert Wertheimer, Barclays Capital - Analyst [81]

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Okay. And then just one quick small one. The variable geometry turbo that you're using in the engine, that is sourced from an external vendor, or is that the one you had in development years ago?

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Bill Kozek, Navistar International Corporation - President, Trucks and Parts [82]

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No. We don't -- it's not the one that we were developing some number of years ago, That was actually part of a business unit that we have since -- we no longer possess. And I don't believe, Persio, that product ever made it to market.

No, that product never made it to market. Unfortunately when we were in that 2012 and 2013 timeframe, when we had to pull in a little bit and get focused on being a great truck company, we decided that we couldn't continue to invest in becoming a great component company at the same time.

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Robert Wertheimer, Barclays Capital - Analyst [83]

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That is what I thought, and that makes sense. Just triple checking. Thank you.

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Bill Kozek, Navistar International Corporation - President, Trucks and Parts [84]

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There's some really good companies out there that have a lot of expertise in these products, and part of our open integration philosophy that you heard us talk about more a couple years ago was go out, find who has the best, and avail yourselves of their technology and their scale, and this is really an exercise in just that.

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Robert Wertheimer, Barclays Capital - Analyst [85]

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Thanks, Bill.

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Operator [86]

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(Operator Instructions)

Seth Weber, RBC Capital Markets.

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Seth Weber, RBC Capital Markets - Analyst [87]

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Most of the questions have been asked and answered, but maybe for Bill, on the Class 8 pricing environment, the new trucks, you referenced market pressures in the press release, but obviously, the environment seems like it's getting better. Can you just characterize the new truck pricing environment for Class 8? Thank you.

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Bill Kozek, Navistar International Corporation - President, Trucks and Parts [88]

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Sure. I have said it before. Obviously, with the amount of capacity in the industry, new truck pricing is competitive, and our customers are big and getting bigger. It is always going to be competitive. Our goal is to continue to maintain competitive pricing, and certainly provide our customers outstanding value, and that is what the new products give us an opportunity for. We are very excited about that, and that is going to be the key driver for us. But if your question is if anybody out there is doing bad deals, I would tell you the answer is no.

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Seth Weber, RBC Capital Markets - Analyst [89]

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That is helpful. Thanks. And just a clarification on the midyear rollout for the A26. Of that mid calendar year or mid fiscal year?

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Bill Kozek, Navistar International Corporation - President, Trucks and Parts [90]

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Calendar year.

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Seth Weber, RBC Capital Markets - Analyst [91]

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Okay. Thank you very much.

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Operator [92]

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(Operator Instructions)

I am seeing no other questioners in the queue at this time, so I'd like to turn the call back over to Troy Clarke for closing comments.

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Troy Clarke, Navistar International Corporation - Chairman, President and CEO [93]

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Okay. Thank you very much for your time this morning. It has been an interesting quarter for us, but again, I hope you can tell, a quarter that we actually exceeded our own expectations, at least internally. I will just draw everyone's attention to the fact that orders declined significantly in the last calendar year quarter of last year, and yet through that environment, I think we were able to keep our product programs on track, couldn't have found a better time to launch the LT product, especially as we anticipate some level of market recovery through the end of the year, or through the remaining portions of this year.

I am telling you, I said it once, I will say it again, we are very excited. It is a very exciting time to be at Navistar. Why wouldn't it be? We have new products, we have increased consideration. We have some level of market recovery on the horizon.

And last but not least, we finally have completed the new alliance with a very capable and a great partner. So we appreciate your time this morning, and we look forward to reporting more progress at our next quarterly earnings call. Thank you very much for your time today.

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Operator [94]

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Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program, and you may now disconnect at this time. Everyone, have a great day.