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Edited Transcript of NAV earnings conference call or presentation 18-Dec-18 2:00pm GMT

Q4 2018 Navistar International Corp Earnings Call

WARRENVILLE Jan 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Navistar International Corp earnings conference call or presentation Tuesday, December 18, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Martin P. Ketelaar

Navistar International Corporation - VP of IR

* Michael Cancelliere

Navistar International Corporation - President of Truck & Parts

* Persio V. Lisboa

Navistar International Corporation - Executive VP & COO

* Philip J. Christman

Navistar International Corporation - President of Operations

* Troy A. Clarke

Navistar International Corporation - Chairman, President & CEO

* Walter G. Borst

Navistar International Corporation - Executive VP & CFO

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Conference Call Participants

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* Abdulrahman S. Tambal

JP Morgan Chase & Co, Research Division - Analyst

* Brian C. Sponheimer

G. Research, LLC - Research Analyst

* Chirag M. Patel

Jefferies LLC, Research Division - Equity Associate

* Christopher G. Laserinko

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* David Jon Leiker

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Emily Gretchen McLaughlin

RBC Capital Markets, LLC, Research Division - Associate VP

* Erika Mary Jackson

UBS Investment Bank, Research Division - Equity Research Associate and Generalist

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* John Sykes

Nomura Securities Co. Ltd., Research Division - Analyst

* Michael James Baudendistel

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst

* Robert Hudson Salmon

Wolfe Research, LLC - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Navistar's Fourth Quarter 2018 Earnings Results Conference Call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

And now I'd turn the conference over to Marty Ketelaar, Vice President, Investor Relations. Please go ahead.

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Martin P. Ketelaar, Navistar International Corporation - VP of IR [2]

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Thanks, Candace. Good morning, everyone, and thank you for joining us for Navistar's Fourth Quarter and Year-End 2018 Conference Call. Today, we'll discuss the financial performance of Navistar International Corporation for the fiscal period ended October 31, 2018. 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'll 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; Michael Cancelliere, President of Truck and Parts; and Phil Christman, President of Operations.

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

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 also refer you to the 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 A. Clarke, Navistar International Corporation - Chairman, President & CEO [3]

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Hey, thanks, Marty, and good morning, everyone. I'll provide a brief overview of the quarter and the full year. And then Walter will walk you through the financials and our 2019 guidance. And then we'll take your questions. Q4 was a great end to a very good year, thanks to the Navistar team and our dealer partners for their hard work and contributions. During the quarter, chargeouts increased by 45%. We also grew market share in every vehicle segment both sequentially and year-over-year.

We paid off our October convertible notes with cash on hand, and we concluded 2018 with a strong cash balance, which will help us address the April 2019 convertible maturities as well. And thanks to steps taken earlier in the year, no other debt maturities are scheduled before 2025. For the full year, there was significant improvement on nearly every key metric. All 4 segments, Truck, Parts, Global and Financial, posted higher revenue for the year and also chargeouts, adjusted EBITDA and net income. Positive free cash flow was achieved on a full year basis for the first time since 2011. During the year, we also significantly reduced our pension and OPEB liabilities, warranty liability balance and gross used truck inventories. There is strong momentum on market share. Overall market share in core markets increased for this second consecutive year. Class 8 share, for the year, was 13.5% compared with 11.8% in 2017. And Navistar was the only truck OEM to grow Class 8 share during 2018. And with strong marketplace preference for the LT Series and the A26 engine, our Class 8 heavy market share increased by 2.5 percentage points. We also grew school bus share by 1.3 percentage points.

The recently launched truck products, the vocational HV Series and medium MV Series helped grow backlogs in the medium-duty and vocational segments. Entering 2019, these backlogs are 3x as large as the year before. We are moving forward rapidly with our alliance with the TRATON Group, saving money through our procurement joint venture and pressing forward in a number of key areas of technology collaboration. These accomplishments position us well to enter 2019, and we anticipate this will be another year of significant progress.

From an industry perspective, 2019 is shaping up as another very good year. Freight demand and carrier profit are both strong, and current forecasts indicate Class 8 sales will remain well above replacement demand through the year. Class 6 and 7 sales will also remain strong due to high replacement demand and growth in key economic sectors. Consumer confidence, a leading indicator of the consumer economy, has increased in each of the last few months. The ISM Manufacturing Index, a leading indicator for the trucking industry, still indicates expansion.

Construction spending is forecast to grow by 4.5% next year. And small business optimism continues a 2-year string of record highs. We are calling the market at a range between 395,000 and 425,000 units Class 6 through 8 plus bus. Entering the year, our backlog is 3x higher than it was this time last year. In response to this demand, we have increased production, yet again, by adding a shift -- a second shift at the Escobedo plant. In addition to the strong market, we have taken a number of additional steps in building a new Navistar.

In November, the new CV Series was launched, our reentry into the Class 4 and 5 market. In December, we entered into an arrangement to sell 70% of the defense business to Cerberus Capital Management. This transaction provides Navistar Defense with a well-established, long-term partner. Also this month, Navistar announced the creation of a new eMobility business unit led by Gary Horvat, formerly the Chief Technology Officer at Proterra, the industry's leading electric city bus supplier. The investment in this new business unit highlights the importance that Navistar places on emerging technologies and supports future, electric-powered product development.

2018 was special for another reason as well. It's the year when we no -- are no longer preoccupied with the past. We are facing forward, addressing the challenges and opportunities of 2019 and the years to come. And our improvements over the past 5 years have established a strong foundation, and we're in a position to generate superior shareholder value. Since shareholder value based on stock price appreciation is a function of future earnings and cash flow growth, no other truck OEM has a better opportunity to grow earnings and cash flow than Navistar. We have upside potential that's superior to that of the industry based on several factors. First, there's market share. We have only begun to regain the market share that we lost earlier in this decade, giving us greater upside opportunity. A large part of this opportunity comes from having the newest product lineup in the industry, which is part of an overall solution that emphasizes superior uptime and lower total cost of ownership for current and prospective customers.

Navistar also has unique potential to benefit from Parts revenue growth. Our vehicle part will grow with market share gain. And its new proprietary powertrains developed with the TRATON Group provide improved parts opportunities in our trucks and buses. And our alliance with TRATON positions Navistar to make more progress in lowering material cost and growing margins. Leveraging the global scale of the procurement joint venture will allow Navistar to offset commodity and supplier cost increases.

And there's also upside on pricing. With the legacy issues largely behind us, Navistar can increasingly take price to reflect improved quality in our products and services and higher value to our customers. And as free cash flow is available to pay down the company's debt load, interest expense will come down, and net income will improve substantially. Other OEMs do not have as significant an opportunity for relative improvement.

So to recap, while we expect 2019 to be another strong year for Navistar and the industry, it's important to recognize that Navistar is an investment as much more than a cycle play. As our ongoing improvements indicate, the company also has strong opportunities to benefit by recapturing market share, growing Parts revenue, improving margins, generating free cash flow and further de-risking and delevering the balance sheet. We're very pleased with the gains that we made in 2018.

2019 is shaping up as another very strong year, and we have a clear road map to sustained future progress. And so with that, let me turn it over to Walter.

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [4]

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Thank you, Troy, good morning, everyone. In 2018, Navistar took another big step forward as it moved from turnaround to growth. During the year, the company grew annual revenue in all segments, increased Class 8 market share 1.7 points, generated significant free cash flow from manufacturing operations and strengthened the balance sheet.

In 2019, Navistar looks to build on its successes with additional growth in revenues, market share and margins in its core Truck, bus and Parts businesses. This morning, I'll review the 2018 Q4 results and provide 2019 financial guidance.

In the fourth quarter, revenue grew 28% year-over-year to $3.3 billion. The improvement was driven by a 45% increase in core truck and bus chargeouts. Moreover, Class 8 truck volumes grew 60%, greater than the industry growth rate of 36%. Gross margin for the quarter was 18.5%. During the quarter, the company continued to face higher freight costs and commodity prices, particularly for steel. The supplier constraints discussed on last quarter's call have eased, but due to the high order activity, stress in the supply chain remains. For the year, gross margin increased 100 basis points to 18.9%. Warranty expense, including preexisting, fell to 1.7% of revenue compared to 2.4% last Q4, as the strong quality and reliability of our new products continues to positively impact the financial results. Structural costs as a percentage of revenue declined to 9.4% this quarter versus 11% last year. Structural costs increased $25 million year-over-year, largely from higher investments in the development of next-generation powertrains and profit-sharing accruals.

Net income for the quarter grew nearly 40% to $188 million or $1.89 versus $135 million or $1.36 per diluted share last year.

Fourth quarter adjusted EBITDA increased 20% to $322 million versus $268 million in 2017.

2018 marks the sixth consecutive year of growth in adjusted EBITDA, on both a dollar and percentage basis. Full year adjusted EBITDA was up 42% year-over-year to $826 million or 8.1% of revenue.

Turning to the segment results. In the Truck segment, chargeouts grew in all core product segments. Sales grew 41% in the quarter to $2.6 billion, reflecting higher volumes, particularly of Class 8 trucks. Truck segment profitability grew 76% to $197 million in the quarter from $112 million a year ago. The increase in profits resulted from growth in truck volumes and cost-savings initiatives, including those from the procurement JV with the TRATON Group. Navistar Defense profitability also grew substantially in the quarter. In addition to strong government sales, the defense business realized receipts of $26 million from 2 requests for equitable adjustment claims and prior government contracts. Headwinds in the quarter for the Truck segment included higher commodity and structural costs as well as the impact of supplier constraints.

Parts segment quarterly revenues grew to $633 million as double-digit growth in Fleetrite branded components contributed to the continued shift in volumes to more private-label sales from proprietary and Blue Diamond Parts sales. Segment profits were flat year-over-year as the increase in revenues were offset by higher freight expenses and internal allocation of development, engineering and SG&A costs.

In the Global Operations segment, revenue was $93 million, and this segment was profitable in the quarter. Brazilian operations benefited from prior restructuring actions and improved economic conditions.

The Global Operations segment was profitable for the full year for the first time since 2011.

The Financial Services segment grew average portfolio balances due to financing originations, with revenues increasing 11% to $70 million. Segment profit was $26 million this quarter comparable to last year as higher revenue was offset by higher borrowing costs driven by larger average loan originations and rising interest rates.

Moving to the balance sheet.

Navistar had another quarter with $1.36 billion in manufacturing cash. For the year, Navistar generated positive manufacturing free cash flow of $307 million and strong EBITDA results and net working capital performance from higher truck volumes that more than offset capital expenditures, interest payments, warranty payments and pension and OPEB funding. The company is in a strong cash position to weather its seasonal cash usage in fiscal Q1 and address the $411 million of convertible notes that mature in April 2019.

In 2018, the company's balance sheet improved in several areas. In October, the company repaid its $200 million convertible notes issued in October 2013 with cash on hand. The underfunded status of the pension and OPEB liabilities declined by over $400 million to $2.1 billion due to cash contributions, an increase in the discount rate and favorable OPEB claim experience. This decline is on top of a $550 million reduction in 2017. The warranty liability balance fell to $529 million compared to $629 million at the end of 2017, well off its peak of $1.35 billion in 2013.

And with inventory. Gross used-truck inventory fell to $154 million at fiscal year-end compared to $206 million in October 2017, representing 1/3 of its peak balance of nearly $450 million back in April of 2016.

Earlier this month, the company entered into a definitive agreement with Cerberus Capital Management, under which they will acquire a 70% interest in Navistar Defense. Navistar expects to realize approximately $140 million of total value for the defense business including a 30% equity stake, cash and earnout proceeds and the transfer of certain liabilities. The deal is expected to close this month, subject to regulatory approval. Additionally, the company will benefit from a long-term exclusive supply agreement to build and supply chassis and parts to Navistar Defense. The proceeds from the transaction will further bolster Navistar's balance sheet, while better positioning the defense business for future growth opportunities.

Now let's turn to 2019.

The following guidance includes the fully consolidated financial impact of the Navistar Defense business. Once the transaction with Cerberus closes, the company will provide an update to its 2019 expectations to reflect its minority ownership in the defense business going forward.

2019 industry volumes are expected to, again, be strong, largely driven by Class 8 volumes. The company is increasing its expectations of Class 6 through 8 plus bus industry volumes by 10,000 units to 395,000 to 425,000 units. Navistar volumes in 2019 are expected to increase due to share growth and the ramp-up of Class 4/5 volumes. This should enable the company to grow 2019 revenues to $10.75 billion to $11.25 billion.

Gross margins are expected to grow next year despite unfavorable profit mix from higher expected truck sales growth relative to parts sales growth.

Pricing and material cost savings from the procurement joint venture are expected to more than offset the impact of tariffs and higher commodity prices.

All in, gross margins are expected to increase to between 19% and 19.5% of revenue. In 2019, structural costs, defined as engineering and SG&A expenses together with certain periodic postretirement benefit costs that will be reported in other income and expense going forward, are expected to range between $1.25 billion and $1.3 billion. This is expected to be higher than in 2018 as the company increases funding of ongoing engineering projects as part of the TRATON alliance; makes investments to upgrade IT infrastructure and funds sales and service growth initiatives.

In total, the company expects 2019 adjusted EBITDA to be $850 million to $900 million.

In summary, 2018 was a breakout year for Navistar and marks the end of the company's turnaround and the beginning of a new phase of long-term growth. In 2019, the company will continue to grow revenue, market share and margins and strengthen its balance sheet. These are very exciting times for Navistar, and as Troy mentioned, the company is well positioned to be the best truck OEM investment opportunity in the sector.

With that, I'll 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) And our first question comes from David Leiker of Baird.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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So I wanted to talk about high-class problems, what your balance sheet is, where the cash flow is. You're in a position now to essentially have some excess cash. What are your thoughts on what you do with that and what the structure of the balance sheet looks like going forward?

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [3]

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Yes, David, it's Walter. The first thing that we plan to do is to pay off the convertible notes that come due in April of next year. So that's a little over $400 million, and we're extremely well positioned to take care of that with the year-end cash balances that we have. Beyond that, we'll continue to invest in the product. We've got a number of growth initiatives, including with the TRATON Group, as we've discussed before, and that puts us in a good position to continue to invest in the business as well.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Okay. And then I -- a question on the margins. The Truck margin -- I guess, how much headwinds are you seeing in there right now operationally? And where do you think the upside is of that, if you got to a point of just kind of a normal manufacturing environment?

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [5]

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Yes. Well, we have seen headwinds because the hedges that we had on had rolled off. More recently, we've seen some commodity prices moving in the right direction for us so that potentially that provides some upside opportunity for us into the future.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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And then just one last item. On the Global Operations. What's the strategy for that? I mean, we've spent all the time talking about the truck side of the business and bus and revitalizing that portfolio. We haven't really spent much time on that part of the business. What are your thoughts there?

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [7]

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Yes, I'll start and maybe some of my other colleagues want to jump in. First of all, we're back to profitability, which -- and we expect to grow profitability further in 2019 in our Global Operations, which are principally our Brazilian operations. We do -- our biggest customer there is MAN, and it's part of the TRATON Group, so we do see additional opportunities there to work together with them going forward.

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Persio V. Lisboa, Navistar International Corporation - Executive VP & COO [8]

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This is Persio, David. I -- just complementing what Walter said. Also there we have some new products that we are launching in the market that we will hit probably 2019. So we are continuing to invest in the business in a moderate way and make sure that we take advantage of the recovery of the local market in South America.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [9]

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And I think what Persio is really referencing, this is Troy, is that we need to do a better job leveraging some of the technology that we have down there into other Latin American markets to include Mexico, where those products in those power ranges really give us an opportunity to gain some incremental market share and some additional margin there as well.

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Operator [10]

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And our next question comes from Chirag Patel of Jefferies.

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Chirag M. Patel, Jefferies LLC, Research Division - Equity Associate [11]

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Just wanted to kind of talk through a little bit about the defense side of the business. I saw in the K that there is about $534 million associated with defense sales for 2018. Just trying to get a sense for how much of the EBITDA contribution was from defense?

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [12]

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Yes. We haven't broken that out separately. But the margins for the defense business are slightly higher than the margins that we have in the Truck segment overall. So that can probably point you in the right direction. We will provide some additional information on the defense sale once it closes. So I think you'll get a better sense of what the revenues and profits for that sector looked like in '18 at that time.

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Chirag M. Patel, Jefferies LLC, Research Division - Equity Associate [13]

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Okay, that's fair...

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [14]

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As we look forward to '19, we do expect those revenues to decline probably a little less than half of the numbers that you mentioned. So less than half of that $534 million as we -- we had a couple of big contracts in 2018 that rolled through our results, in particular a contract for UAE and another one in Pakistan that we've talked about previously on these calls.

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Chirag M. Patel, Jefferies LLC, Research Division - Equity Associate [15]

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Okay. And then, I guess, what I'm trying to also understand a little bit is just the margin profile of the Truck business x defense as we move forward. If I strip out a few of the items that were onetime in nature, one being the $70 million in the third quarter that was associated with a benefit there. And then the $26 million you just kind of called out here on the defense side that you kind of got there. I get to a Truck margin for the full year of 2018 that's closer to about 4% or so. Just want to get a sense for, one, how you think that moves as we go forward. What kind of volume expectations you need in order to see that kind of ramp a little bit to a higher degree? And if there is some cost initiatives that can be further taken here to kind of reduce that?

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [16]

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Yes. Truck margins have been increasing here with the stronger volumes and the cost initiatives that we've taken, and we expect those to improve, again, in 2019. We're surely not done on the cost initiatives side. In particular, we continue to look at product costs as we look for additional efficiencies in our material costs by working with the procurement joint venture that we have with the TRATON Group. So we continue to believe that will provide us significant opportunities into the future that will help us grow our EBITDA margins overall over the next few years.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [17]

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This is Troy means, I mean, maybe taking a -- maybe how I look at it, building on Walter's comments, is the couple of pieces that impact, I think, Truck margins going forward, first off, is the increase in commodity costs. But if you think about increased commodity costs, what's remaining of that should be almost a onetime 2019 type of event. And then we'll continue to kind of -- we'll continue to improve material costs largely through the procurement joint venture than we have with TRATON Group and get into global -- and getting more global scale. And then the third piece of that is then, in a couple of years, the advent or the introduction of integrated powertrains, to a much higher level than this company has ever experienced before, really powering better than some of our competitors. And so you see this in a couple of steps, I think, as we walk out over the next couple of years, you'll see a steady margin build on trucks largely due to those 3 things.

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Chirag M. Patel, Jefferies LLC, Research Division - Equity Associate [18]

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And the TRATON piece was -- I think we had called it out in 2016, when you guys initially signed up -- combined. Was the idea that there'll be $500 million or so in potential savings with a $200 million run rate? Is there any sort of dollar amount that we can associate with the amount that you've already kind of achieved? And some sort of a level of cadence that we can imply?

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [19]

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Yes. So those estimates that we had provided back then are still relevant over time. We had indicated $500 million accumulative savings with a $200 million run rate in the fifth year. For the first couple of years, we're on track or slightly better than what we had anticipated going into the JV a couple of years ago. And that -- you see that reflected in our results. I also want to come back to a comment you made earlier about the $70 million adjustment that we had in -- back in Q3. That does run through the Truck segment, but it doesn't run through the gross margins, which you tend to see on the face of our presentation deck here.

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Chirag M. Patel, Jefferies LLC, Research Division - Equity Associate [20]

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Right. So that'll just be on the (inaudible).

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [21]

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(inaudible). Other income.

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Operator [22]

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And our next question comes from Ann Duignan of JP Morgan.

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Abdulrahman S. Tambal, JP Morgan Chase & Co, Research Division - Analyst [23]

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This is Abdul Tambal on behalf of Ann. Just a quick question regarding the Cummins engine representation from your engine shipment in Q4. I notice it's up around 580 bps year-over-year. I'm just wondering if you can kind of explain what drove this increase.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [24]

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Yes. Michael, do you want to go head and touch that real quick?

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Michael Cancelliere, Navistar International Corporation - President of Truck & Parts [25]

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Yes, thank you. So this is a production mix question. And, really, it's driven by 2 things. Primarily, we had Navistar offering our N9/N10, at the same period in our vocational products, last year, which we don't have this year. That was the primary driver. And then also it's a bit of a customer mix depending upon the customer fleet mix and their engine preference during that period of time. It could swing numbers one way or the other. I really wouldn't overreact to that theory, the 90-day period.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [26]

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Yes. And so just in summary, we had our own 9,10 engine. We've replaced that with the Cummins ISL. So it's 100% Cummins ISL in that particular segment right now. And then Michael's comment, a handful of these large fleets that we've conquested or re-conquested, one fleet takes X15s, really starts to skew the numbers just in terms of volume. I think kind of an under-told story here is the gains we continue to make with the A26. I think that the A26 is -- we've indicated in the past, every A26 we sell is incremental market share, and that's what we've seen. It really doesn't attract from selling X15s as much as it's back into a segment in its own right, that's in that 12- and 13-liter segment. And we continue to make significant gains in both the number of A26s we sell, but in addition to that, the satisfaction and the feedback we're getting from our customers on how much they like the product. So couldn't leave that particular question without also commenting what a great job the A26 is doing for us in the market.

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Operator [27]

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And our next question comes from Christopher Laserinko of Wells Fargo Securities.

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Christopher G. Laserinko, Wells Fargo Securities, LLC, Research Division - Associate Analyst [28]

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I'm on for Andy Casey this morning. Just to kind of continue in that vein. I knew that NAV is the only OEM to gain market share for the year. But any idea what that stickiness looks like going forward once supply chain constraints start to loosen up around the industry?

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Michael Cancelliere, Navistar International Corporation - President of Truck & Parts [29]

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Yes, this is Michael. So -- yes, we look at our order board and the share gains we've made in 2018 and the customer preference of our products. What's important to customers is fuel economy, weight, uptime, driver preference. And that really speaks well for our LT and A26. Our order board is up significantly, and we really moved into a phase where customers went, from about a year ago or so, to trying the product to experience it firsthand to now really enjoying the performance and benefits they get. Keep in mind one of the biggest challenges the industry has is drivers. So it's important for fleets to buy a product that their drivers like, as an attraction and a recruitment retaining tool. In fact, I just got a call yesterday from a fleet with over -- he's got over 1,000 trucks and recently purchased as many of our trucks and just to quote him -- he referenced that he had a couple of veteran drivers call him and said, "Boy, these trucks are phenomenal." The LT with the A26 are the quietest trucks they've ever driven. And that he felt very positive about the impact that would have on the business. So in summary, we're optimistic about continued share gains in that segment.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [30]

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Yes, let me -- it's Troy. Let me just put it another way. I had Michael go back and look at some numbers. This is really only the third time in the history of the company that we have gained 2 percentage points or more in the heavy segment. And I would tell you it's the first time the company has ever done it, and they did it profitably. The previous 2 times, the company did not do it profitably for a handful of reasons. And the irony of the whole situation -- and I think you were actually pushing on this, Christopher, is if it wasn't for the supplier constraints that we ran into in the Q3, it would have been higher than 2 points of -- 2.5 points of market share gain in the heavy segment. It would have been in addition to that. So it would have been the highest single-year gain that this company has ever had. We can only read -- and again, with this anecdotal information that Michael says, which is one of dozens of comments that we get, we can only read that we really have a product that has the ability to get real traction in the market. And we're very excited about what 2019 portends for us in that regard.

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Christopher G. Laserinko, Wells Fargo Securities, LLC, Research Division - Associate Analyst [31]

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Okay. I wonder if I could ask a couple kind of housekeeping questions and then get back to the market share. The housekeeping questions I have: Any guidance that you're willing to provide for 2019 manufacturing cash balance? And the second one is, you're exiting this year with 30% incrementals give or take. Is it reasonable to expect that level of incremental going forward? Also anything that you're willing to share in terms of decrementals if volumes start to decrease? And then on the market share side. If you do start to see those industry downturns, is there anything to prevent market share leakage, like you've had, in the past, downturns, and really kind of cement those gains, other than kind of the understanding of new product launches, the reception of the A26, et cetera?

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [32]

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Yes, well, -- so let me hit the last one head on. I mean, there's kind of the -- there's the quantity of backlog, and there's the quality of the backlog. And certainly, in light of the fact that this is an important subject for all of you and, I think, an important subject for the industry, I would say over the last 6 to 8 weeks, we've spent a lot more time really understanding the nature of our backlog to ensure that, number one, it's not being overstated in any way; but number two, how can we reflect to you the confidence that we have. Our cancellation rates are relatively low compared to the industry. And the fact of the matter is we can tie a name to over 85% of our backlog. And this isn't just John Doe, these are names of the -- some of the largest and most important customers in the trucking industry that we've worked hard to create a different kind of relationship with. So we have 2 things. One, we have a lot of confidence in the backlog, and we don't believe that we face massive cancellations, which could be one cause for market share erosion as you've noted. And then I think the second thing is that given the fact that the majority of the market share came from large customers, it is not impossible, as a matter of fact it is highly probable, that in any market softening, our market share would nominally strengthen, given the larger customer profile that our backlog is constructed of at this particular point in time. So that's just a comment on that. I'm looking to Michael. He's nodding his head. So I think I'm portraying it accurately. Let me pass over the incrementals to Walter.

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [33]

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Yes, let me start with the cash first, which is, we provided manufacturing cash guidance during the turnaround. That was appropriate at that time. With $1.36 billion of cash at year-end, this is not, I think, the most relevant metric going forward. So we've provided a fair amount of additional guidance that you'll see in the presentation deck. But we're starting to pay down debt with our cash, and we'll continue to make sure that we retain enough cash to run the business and make the investments in the future.

On incrementals, just kind of stick with the comments that we made earlier, which is that we do expect our truck margins to grow again in 2019. In my prepared remarks, I mentioned that we expect price increases plus additional cost savings we'll get out from the procurement JV to more than offset the commodity headwinds and some of the other cost that we're seeing in the market right now. So I'm not going to comment on specific incrementals other than to say that both in the Truck and in the Parts segments, we expect margins to continue to be higher in '19.

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Operator [34]

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And our next question comes from Brian Sponheimer of Gabelli.

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Brian C. Sponheimer, G. Research, LLC - Research Analyst [35]

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Just a question on the defense business. It's a nice little business for you and so clearly there are some trade-offs with you selling it. I'm just curious whether this business was a hurdle in any way to increase collaboration with TRATON, either through engineering, through tech development or even through increased ownership by them above the 20% hurdle.

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [36]

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Yes, Brian, I mean the reason we did the transaction is we've had a very good run in defense. You see that in our 2018 results. We're really kind of at a point now where incremental investments need to be made in the defense business, and we've chosen to work together with Cerberus in that regard. And we think that portends to a very good future for NAV defense over time. But we'll split those investments with them and have additional cash that we'll take out of the transaction to put towards our core operations going forward. So we'll continue to participate in the upside of defense with a 30% interest. We continue to have a exclusive supply arrangement to that entity, and we're partnered up with, we think an excellent partner going forward.

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Operator [37]

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(Operator Instructions) And our next question comes from Mike Baudendistel of Stifel.

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Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [38]

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Just wanted to ask you about this Slide 14, the U.S. and dealer stock inventory and that seems to be creeping up. And I just wanted to get some context of how much of that is the Class 8 versus the medium-duty and just any other sort of context. Is that some of the newer product that dealers are stocking? Or just sort of any other context there.

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Michael Cancelliere, Navistar International Corporation - President of Truck & Parts [39]

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Yes -- this is Michael. So really the dealer inventory is just growing at levels that we consider more normalized levels. Throughout the year, the strength in the market demand has caused the inventory -- dealer inventories to dramatically decline. And what we've been doing throughout the year due to the challenges we had earlier in the year on supply constraints, we were prioritizing customer deliveries over dealer stock units. So they're now returning to normalized levels, as we work through the backlog, dealers are excited about our new product line. They are selling to more conquest customers than ever before, not only number of units but number of customers. And they're moving out their old inventory and stocking up with the new product. It's -- they recognize how important it is to have inventory on the ground. They look forward to a positive 2019. And you can't sell what you don't have. So they're comfortable with those inventory levels.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [40]

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Yes. I think the inventory levels that we're looking at, as Michael indicated, we had to short the dealers almost for a period of time to make sure we were delivering to customers who had ordered units rather than putting the units on the lot. To your point, a lot of the medium-duty stuff and some of the vocational stuff do go through dealers and so you see a very nice mix of products on their lots, not exclusively those. They do also have heavy and other Class 8 products. And you know, we're kind of looking to keep them in a range. And they're looking to keep in a range of 60 days of inventory, given the current sales rates, and that's kind of the ballpark that we're in.

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Persio V. Lisboa, Navistar International Corporation - Executive VP & COO [41]

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Yes. And Troy if I may add. The other important think of the quality of the inventory the dealers is that we completed a transition for the new products. So now, the inventory that is on the ground is off new -- all the new models, the new MV, the new HV with A26, all the launches that we completed in the second half of last -- of this year.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [42]

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Yes. So it's pretty good -- so it's a pretty good -- quite frankly, we're very pleased with where that inventory is right now. And I think the dealers are as well.

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Operator [43]

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And our next question comes from Erika Jackson of UBS.

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Erika Mary Jackson, UBS Investment Bank, Research Division - Equity Research Associate and Generalist [44]

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I was just wondering if you can touch just a little bit on the supplier constraints that you called out in Q4. I know it's a strong industry, and it's mostly (inaudible) that. But I guess, just specifically wondering, if you are able to clear all the shipments that were missed in Q3 that I think you expected to push into Q4? And I guess to what extent you expect supplier constraints continue in 2019?

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [45]

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Yes. What happened was as we and the rest of the industry ramped up their volumes much, much earlier in the year. We, as well as our contemporaries in the industry, ran into a handful of supply issues from just a handful of suppliers. We worked very hard with those to eliminate these bottlenecks. Some of which were very structural in terms of tooling capacity and things like that. By and large, as we entered the fourth quarter those issues were resolved. Given though that the market is up, the supply chain is really just pulled very, very tight right now. And what would be traditional levels of buffers between suppliers and ourselves, they're just not there. And so any type of disruption, we had a couple of hurricanes, for instance tend, to put stress on supply chain. What that does now, we're in a mode, it's not so much that we'll lose units, it's that we have to incur premium freight so that we can expedite parts to keep the line running. So we're not in a position today where we lose units as such. We've added a second shift to one of our lines in Escobedo. Where we really are is, we are in a position where the cost, because of force majeure, so to speak, or acts of nature can be a little higher than we planned. But those costs continue to improve as the -- I think as the supply chain continues to stabilize. The holiday period would be a great time, to be very honest, for some of our suppliers to refill those buffers and make sure that the, not just ourselves, but the balance in the industry is more normal when we go forward. Phil?

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Philip J. Christman, Navistar International Corporation - President of Operations [46]

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No. I think that you covered exactly right. Look, we're confident in the strength of order board and supplier capacity, put on additional shift in Mexico, and we're excited to build more units for our customers.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [47]

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Great.

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Erika Mary Jackson, UBS Investment Bank, Research Division - Equity Research Associate and Generalist [48]

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Got it. And then also just wondering if you have any expectations that you can share for the Class 4/5 product. Have you given any like market share targets or how that -- you expect that to ramp up over this year?

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [49]

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Yes. Well, you know we just introduced it in November, and it's a great product. The more I'm around it, the more I like it. And of course, I guess, I'm kind of biased. But we had a launch event where we -- I'm going to turn it over to Michael he'll give you the specific of it. But a tremendous enthusiasm around this product. It's a -- I think it's going to do very well.

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Michael Cancelliere, Navistar International Corporation - President of Truck & Parts [50]

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Yes. Troy, exactly right. The launch event customers -- the product was extremely well received. What they like is that there is finally a product offering by a true commercial truck manufacturer, one that that understands the business and knows how to build a robust product, give the customer flexibility and have the dealer network to support that product. So the receptivity has been really terrific by customers.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [51]

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Yes. We have about 300 customers there. And quite frankly, I think, we split the production with General Motors. We won't go into the details on those numbers right yet, because not fully aware of what General Motor's order profiles are. But I think we're quickly approaching that we'll be kind of, I don't want to say sold out, but we're quickly subscribing the portion of the volume that we have allocated to ourselves. We find it's a very unique product, right? I mean, it's got a 23,500 GVW, and I think a normal Class 4/5 truck in that particular segment might be a 19,500 GVW. So it definitely has some additional capability that lets it play up. And this, by the way, is a growing segment. So we haven't participated here for a while. We're really excited to get into it. And I think we're going to surprise ourselves with how well we can do. But we'll have to learn a little bit because it's a different set of customers in some cases, but we're pretty pleased.

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [52]

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Yes. Maybe Troy, if I can just add. Because this is a new product and kind of a reentry of a segment for us. But the Class 4/5 segment is about 85,000 units, and the part of it that we'll compete in is about half of that amount. So that's 40,000 to 45,000 units there that we can go after our fair share of. So just to kind of size the opportunity, I think, both GM and Navistar have put their pricing out. It's a little over $40,000 a unit, I think, is where the MSRPs are, $40,000 to $45,000. So that'll help you gauge this a little bit. And then for us, it's 2 things. It's one, it's the sales of our units, which our customers are relishing to, to get into their hands is -- was mentioned here. But then secondly, it's also assembling those vehicles for GM under our contract manufacturing arrangement, which will help then some of the fixed cost in our manufacturing facilities, in particular, in Springfield.

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Operator [53]

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And our next question comes from Seth Weber of RBC Capital Markets.

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Emily Gretchen McLaughlin, RBC Capital Markets, LLC, Research Division - Associate VP [54]

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This is Emily McLaughlin on for Seth. On the 1% share improvement embedded in the 2019 outlook, do you expect improvement across all core products or is there more of a pickup expected in certain vehicle classes?

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Michael Cancelliere, Navistar International Corporation - President of Truck & Parts [55]

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Yes. Emily, this is Michael. So it would be a combination of all the vehicle classes. Again, we have the industry's newest product line and customer receptivity has been terrific throughout the product. In fact, in November, while the industry shrunk 20% on heavy orders, our orders were up 102% year-over-year. So, yes. And on the medium side as well, we're seeing a -- we recently launched the MV Series, and our order share was up over 3 points on year-over-year basis. In fact, our chargeouts were in excess of the industry growth last year. However, we weren't able to get them all through due to delays in supply chain as well as backup at body companies. But since we've launched the MV Series, the industry's largest buyers have responded well to. And of course, a lot of customers were waiting for it because they wanted to make sure that they have the latest product and models, particularly, in the leasing industry where resale value is important.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [56]

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So we have a backlog that basically supports increased market share, we think, across all of our product line up. It will be a little choppy because of the fact that some of this stuff has to go through bodies -- through body manufactures, and it'll take longer for them to get registered. So the right thing to look at is basically our chargeouts and kind of year-over-year improvements in chargeouts.

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Emily Gretchen McLaughlin, RBC Capital Markets, LLC, Research Division - Associate VP [57]

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Okay, that make sense. And then just a follow-up. Do you have any thoughts on the spike in industry of Class 8 cancellations in recent month and new orders? Are you hearing anything from dealers in terms of the quality of new orders?

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Michael Cancelliere, Navistar International Corporation - President of Truck & Parts [58]

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Yes. So -- I think as we stated earlier, we believe our backlog is firm. The majority of our orders are sold. They're for -- they're by customers, we've, in many cases, done business with before, and we're confident that they'll take the product. Our dealers don't put trucks on order unless they've got firm orders from customers on it. As well as our dealers' stock orders, we believe are firm as well. We hadn't create an environment where we're asking dealers to put orders in for a 12-month period or so, they pretty much put orders in on a short-term basis. They're very bullish about the business as well as their customers are optimistic about 2019, and the need to have new fuel-efficient trucks that drivers like, that gives them -- that impacts their bottom line, helps them make -- become more profitable. So dealers want to have trucks to sell and customers are looking to buy trucks, particularly, with the safety equipment on it to protect the driver and attract drivers as well. So we don't see -- we're not overly concerned about cancellations on our order board.

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Operator [59]

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And our next question comes from Rob Salmon of Wolfe Research.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [60]

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A quick follow up with regard to the long-term supply agreement you guys signed alongside the Navistar Defense kind of partial sale. How should we be thinking about the revenue impact of this agreement? And if pieces of the business are shifting from Truck into the Parts businesses as we look forward once it's completed?

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [61]

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Yes. So, I think what you'll see, and again, we'll provide some additional details around this after the transaction closes. But I think, you'll see 2 pieces, one, as I mentioned earlier in the call, defense revenues will be down in '19 versus '18, given the outsized year that we had in in 2018. And then secondly, once we go down to a 30% stake, we won't be reporting the revenues from NAV defense, we'll just be reporting our equity interest there. But we will continue to have the MilCOTS sales to the venture and that will run through our numbers, but that's a fraction of the $534 million of revenue that you saw in '19.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [62]

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Right. And then Walter, just as a kind of follow-up to that. I'm assuming you guys are going to add back the 30% to the adjusted EBITDA number from the minority interest. Am I thinking about that right or will that be excluded from the EBITDA, prospectively?

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [63]

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No. The 30% of the future earnings will be in the adjusted EBITDA number, will be included, yes.

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Operator [64]

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And our next question comes from John Sykes of Nomura.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [65]

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One question I had was, what's the contribution that Class 6 and 7 make to revenues in EBITDA? Do you guys disclose that?

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [66]

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I don't think we've broken that out separately. But you can, I think, you can get a good sense of what our volumes are in the back of the K.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [67]

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Okay. The next one is electrification. When do you really see that becoming a meaningful part of the business?

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Persio V. Lisboa, Navistar International Corporation - Executive VP & COO [68]

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Well, John, I don't know if you saw but today we just announced that we are creating a new mobility business unit I think Troy alluded that on his remarks. We -- that is a reality right now for us. We've been working the technology for now some time. Actually, Navistar was one of the first commercial vehicle companies to introduce our eStar back in 2010. So we have a lot of experience in the field and one of the things that we decided to do right now is really to expand our reach in the business more -- beyond the technology. We are really -- we are needing to get into the what we call this procurement experience for eMobility, which is really about the specs that the customers will help specing vehicles, will help developing vehicles, will help actually with financing of vehicles and now more available brands. The idea is that we will work on infrastructure and service network to support those vehicles, that's what this business unit is about. And to lead that business unit, we just brought to the company today, now one of the most reputable executives in the market, Gary Horvat. He was the CTO for Proterra, and he really now kind of joining the team right now. So more to come. So that's the reality for us is one of our priorities for the future.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [69]

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So what is the -- so the game plan is to sort of start with this eMobility business, get kind of an infrastructure type of business in place? And -- I mean, I'm assuming like the product itself, so it's easy for you guys to make an EV truck, right?

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Persio V. Lisboa, Navistar International Corporation - Executive VP & COO [70]

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Well, I think it starts with the product but no, really. I think the fact that we have the largest dealer network available in the market. And the fact that we are in contact with customers that also want to buy diesel products today. So we are really focusing on enabling the electrification in the segment beyond the product, I would say.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [71]

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I mean, I think, what we -- here's how we're looking at it. It really starts with the customer, right? So we're going to go out -- we -- so we have customers -- we know customers who -- they have an interest in the technology, and we believe the technology will work for them in such a way as to be manageable and/or improving their TCO at some particular point in time. And so those are the customers that we really have to kind of lean toward -- forward in our solutions. And we've indicated previously that the place where we think this most makes sense are school buses, okay, which (inaudible) and medium-duty trucks because in both cases the charging infrastructure is less significant than it is with, so to speak, an on-highway tractor. We've said previously, we'll have trucks on the road next year, and we'll have trucks in customers' hands the year after. But what Persio really referenced is, look, there's a lot of cycles of learning here, right? I mean, this is a field that you can spend a lot of money and there could be a lot of upset customers when -- they decide, "Wow, the electrical vehicle that I just spent a lot of money for really doesn't satisfy my needs." Quite frankly, we're looking to have very successful experiences for us and our customers, and we think our approach will lead us in that direction. Again, as Persio, indicated, we've been working on this stuff since much earlier in the decade. So we have some pretty developed thoughts.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [72]

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Yes, I mean -- I guess, the kind of genesis of my question is, suppose regulations change in certain states, right? I mean, start saying you can't bring a diesel truck into the city limits, it's got to be EV at that point. So then that -- can you guys -- are you guys ready if that happens to, boom, we have a product?

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [73]

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That's our goal. I mean, you know, that's our goal. I mean, the strategic flexibility, right? That's what -- we don't see that exact circumstance today. But if we're nothing here with Navistar, we are ready with alternatives.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [74]

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Okay. Now that's -- And then I guess lastly, it sounds like 2019 is going to be a decent year, right? And I know, we don't want to look too far forward. But how do you sort of -- I mean, you're doing a good job with the balance sheet. So you're taking out kind of a lot of volatility in the balance sheet. But how do you really take out volatility in the business just given it's a cyclical business that -- like the parts business is never going to be enough, I don't think, to compensate for the Class 8 business, for example. So how do you really smooth that out and make it less cyclical over time?

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Michael Cancelliere, Navistar International Corporation - President of Truck & Parts [75]

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Yes. Well, first of all, 2019 is going to be a great year, okay? So not a good year, it's going to be another great year, and we're going to have to share -- yes, I think, you did. We're planning to put up better results as you see in our guidance. We've got the newest product lineup in the business. We've got a lot of market share that we can still grow. And so, I mean, if you look to the future, we're doing a couple of things and these are not new things. But really, we see upside on revenue growth, and then we see the ability to further improve our margins by reducing our cost, taking advantage of the alliance. Both the global scale that the alliance brings as well as the integrated powertrains that we'll be introducing into our product. So our goal as a management team continues to be profitable at all points of the cycle. And continue this positive free cash flow that we experienced here in '18 and will continue into '19 and the future so that we can continue to improve even further on those balance sheet actions that you've referenced.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [76]

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I mean, we think it's pretty straightforward. And we think we're very compelling, something other than a cycle play, because we've already done so much to improve our margins, okay? And we have more opportunity, again, through 2 strategies, primarily, one, is global scale through the procurement joint venture, and the second, is getting into the integrated powertrain. And then ultimately, the parts revenues that basically comes -- that basically come out of that. And then we have this tremendous opportunity for upside market share. When you look at our historical market share and the success that we're having in the market today. So we control revenue against that, okay? That -- and then that spins off cash that lets us put the balance sheet in order. And when you look at that and you say, "Wow, those are the 3 things that are really important, not the cycle." Okay? Because of the fact that we have this ability to function in a profitable range at all points of the cycle. That's the way I would tell the story, obviously.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [77]

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Okay. Yes, I mean, it seems like 4 through 7, that never seems to be that overly cyclical versus Class 8, right? So...

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [78]

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Yes. That's true. And we have big footprint in that 6 and 7 space. Now we have the opportunity to increase that footprint. All right, we probably should move on to the next question. But thank you, John, for your interest.

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Operator [79]

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And our next question comes from Jerry Revich of Goldman Sachs.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [80]

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Walter, I'm wondering if you could just spend a little bit more time stepping through the moving pieces around the EBITDA guidance, based on the top line guidance, it looks like you're only guiding for 7% incremental margin, but earlier in the call, you folks talked about price -- cost is positive and so can you just step us through any headwinds through incremental margins in '19 or are you folks just giving yourselves room to execute? Any pieces that you want to flush out, better headwinds that we're maybe missing?

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [81]

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Sure. So let's just go through the pieces again. We expect gross margins to be higher in '19. We indicated 19% to 19.5%, so that's up about 0.5 point from what we saw in '18 and it's the things that you mentioned, pricing, we expect to be favorable. We expect to realize further benefits from our procurement activities, including from the JV and that will help offset some of the headwinds that we're seeing in commodity prices and freight cost. Commodity prices were to come down, as we're starting to see them decline a little bit, then that could be a positive comps. The EBITDA margins are flat, I think, this is what we've kind of guided to at the midpoint year-over-year, because we are making some investments in our future, in particular, in future product engineering investments. So we've mentioned, previously, in our calls that while our engineering spend will be more efficient going forward as part of the alliance with the TRATON Group, that doesn't necessarily mean that they will be lower going forward as we invest in these integrated powertrains, which will then drive our results in the future. So the initial guidance is relatively flat on EBITDA margins, but that's going to set us up for the success, in the future, in the few years out, we still want to be getting our EBITDA margins up to 10%.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [82]

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Okay. And then in terms of -- I know it's not the base case, but if the market were to turn negative exiting '19, I think, typically for OEMs, we see mid-teens type decremental margins throwing out and you folks obviously have a lot of irons in the fire, in terms of what you folks are working on. What would you expect your decremental margins to look like compared to the mid-teens that we typically see once the cycle moves the other way. And I appreciate that's not your base case in '19, but would love to understand how are you thinking about the dynamic whenever the cycle does turn?

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Walter G. Borst, Navistar International Corporation - Executive VP & CFO [83]

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Yes. That's probably a little bit too much specificity today, maybe that's a good question for a analyst meeting or something sometime. But I think the key drivers for us, Jerry, will continue to be what we referenced a couple of times on the call. We're bullish on our ability to grow revenues. And we're bullish on our ability to continue to reduce our costs, in particular, on the -- through the procurement JV that we have. So that will help weather any downturn as well. In fact, in a downturn that you're alluding to, we probably wouldn't have some of the headwinds that we currently have on commodity prices, for example. So that wouldn't be replicated in a subsequent year after '19 as we see it as a headwind here in the current fiscal year. So our focus is going to be on those 2 things, growing our revenues, even in the down market, we should be able to grow market share and continue with our cost initiatives. And that should allow us to be profitable at all points of the cycle.

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Operator [84]

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And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. Troy Clarke for closing remarks.

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Troy A. Clarke, Navistar International Corporation - Chairman, President & CEO [85]

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Okay. Hey, thanks to everyone. Look, I apologize, I have a little head cold. So if it was a difficult to hear me earlier in the call, I apologize for that. Look, we have been talking to some of you, several of you, every quarter for the last 6 years. And quite frankly, we appreciate your interest and your understanding of the issues and steps that we've taken on our journey. And questions you've asked are certainly welcome and insightful. And in many ways has helped us become a better company, and we appreciate that. And I certainly hope that my nasally voice doesn't mute the enthusiasm that I have personally for not only the progress that this company has made but the progress that we can make starting with 2019. 2019 is going to be, as Walter indicated in one of the final questions there, a great year for the industry and a tremendous year for us to make additional progress. And we're very enthused about it, and again we appreciate your understanding of our industry. Want to wish all of you a happy and joyful holiday season. Look forward to talking you at least in March and as Walter indicated, maybe we'll look for an opportunity to have another communication event that we can manage somehow during the course of the year.

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Operator [86]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.