Navistar International Corporation
Q1 2019 Earnings Call Transcript

Published: 8 Mar 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Navistar First Quarter 2019 Earnings Results Conference Call. At this time, all phone participants are in a listen only mode. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today’s conference may be recorded. I’d now like to introduce your host for today’s conference, Mr. Marty Ketelaar, Vice President of Investor Relations. Sir, please go ahead.

[Marty Ketelaar:]

Thanks, Liz. Good morning, everyone, and thank you for joining us for Navistar’s first quarter 2019 conference call. Today, we’ll discuss the financial performance of Navistar International Corporation for the fiscal period ended January 31, 2019. 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 would 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 would also refer you to the Safe Harbor statement and other cautionary notes disclaimer presented in today’s material for further information on the subject. With that, I’ll turn the call over to Troy Clarke for opening comments. Troy?

[Troy Clarke:]

Okay. Hey, thanks, Marty, and good morning, everyone. I’m going to share a few thoughts on the quarter and then Walter is going to provide a deeper dive. This is a good quarter. Hey, in fact, Navistar’s best Q1 since 2010. Thanks to the Navistar team and our dealers for their hard work and contributions during the quarter. Navistar enjoyed strong growth in revenue and adjusted EBITDA, improved gross margins year-over-year in all four operating segments and achieved significant market share gains. We are confident that 2019 will demonstrate the capability of the new Navistar. Growing backlogs, great visibility into 2019 as a whole and our analysis of economic and industry factors confirms that 2019 will be another very good year for the industry and especially for Navistar. Key U.S. economic indicators are softening slightly off their peaks, while we remain well above historical averages. On the industry side, the ATA Truck Tonnage Index has been steady. The industry’s Class 8 backlog moved slightly lower in January, but remains at 2.5 times the 10-year average, and the industry’s Class 6/7 backlog held steady, with orders roughly equal to the industry build. Both Class 6/7 and Class 8 retail sales should remain well above replacement demand in 2019. Navistar’s order backlog is the strongest it’s been since 2009. We have added production capacity and supplier constraints are easing. Share growth result of our new products. These new trucks exceed customers’ expectations in terms of reliability, durability, fuel economy and driver attributes. We continue to build on our uptime promise. Yesterday, we announced a service partnership agreement with Love’s Travel Stops. The agreement brings the international service network to a total of more than 1,000 locations in North America, the industry’s largest. And it also provides customers with increased access to same-day service for a wide variety of repairs. It remains our belief that Navistar represents a unique opportunity in the commercial vehicle industry. And I’ve said this before to some of you, but let me reiterate. Navistar has unique opportunity to gain significant market share in sales volume. Navistar has the ability to increase margins and lower costs as a function of the integrated powertrain in procurement economies that come from the Traton alliance. In addition, the Traton alliance provides access to advanced technology at lower costs, as we pay our share of development. Integrated powertrains ultimately lead to higher service parts sales and margins and improved cash flow enables us to reduce debt, lower interest expense and derisk the balance sheet. To sum up, first quarter results confirm our belief that no other truck OEM has better opportunity to generate superior shareholder value. So now for the details, let me turn it over to Walter.

[Walter Borst:]

Thanks, Troy. 2019 indeed has started off well for Navistar. First quarter results were strong, primarily due to healthy industry conditions and the ongoing success of our new product lineup. These factors led to much improved first quarter results and our decision to increase 2019 financial guidance. Let’s start by reviewing the results for the first quarter, then I’ll provide an update on 2019 expectations. In the quarter, revenue grew 28% year-over-year to $2.4 billion. The improvement was driven by a 50% increase in core truck and bus units. Navistar’s market share was up as well. Year-over-year, core market share was up by 1.8 share points during the quarter. Total Class 8 share increased by 0.8 points. Meanwhile, Class 6 medium and 7 medium share grew by 6 points. Gross margin for the quarter was 18.7%, up sequentially from Q4 2018. Compared to last Q1, gross margins increased in all operating segments, but declined on a consolidated basis due to segment mix, as truck revenues grew 44%, while parts revenues were up modestly after adjusting for the new revenue recognition standard. Structural costs increased $6 million. This increase was largely driven by higher engineering spend on development of next-generation products with our alliance partners at Traton, partially offset by lower SG&A expenses. As a percentage of revenue, structural costs decreased to 11.2% from 14% last year. Please note that reported SG&A expenses in both Q1 2018 and 2019 are lower with the corresponding increase in other income and expense for certain periodic pension expenses due to the implementation of another new accounting standard. March 1 represented the two-year mark since the company formed its alliance with Traton. We’ve reached a point in time, where funding for alliance projects will begin to increase, such as the work being done on the next-generation diesel powertrains to be introduced as early as 2021. While our structural costs will begin to increase modestly over the next few years, that spend will be much more efficient than if we had developed such products by ourselves. Net income was positive in Q1 for the first time since 2010, growing to $11 million, or $0.11 per diluted share versus a loss of $73 million, or $0.74 per share last year. Net income was impacted by certain one-time items, including a non-cash charge of $142 million, or $104 million after-tax related to a Canadian pension annuity transaction and $59 million of gains from the sales of 70% of the Navistar Defense business and the company’s ownership interest of the JND joint venture. Adjusted EBITDA rose 66% to $173 million in the first quarter versus $104 million a year ago. As a percentage of revenue, adjusted EBITDA grew to 7.1%, compared to 5.5% in last year’s first quarter. Moving to the segment results. Our Truck segment took another step forward as it returned to profitability in the first quarter. Sales in the quarter grew 44% to $1.8 billion. The sales growth was driven by an increase in all core product segments. In particular, Class 6/7 volumes grew 39%. The segment reported profit of $90 million in the quarter, compared to a loss of $7 million a year ago. The improved performance was largely driven by higher volumes, partially offset by higher material costs, largely from commodities, expedited freight costs and production ramp up costs. During the quarter, we successfully added a second shift in our Escobedo plant, plus began production of the new Class 4/5 truck series in Springfield, Ohio plant. Year-over-year, assembly line rates increased by nearly 50% in the first quarter. Also noteworthy for the segment. At the end of December, Navistar finalized its agreement with Cerberus Capital Management, which acquired a 70% interest in Navistar Defense. The purchase price of $140 million included $79 million of cash and a recorded gain of $54 million. The company will also benefit from a long-term exclusive supply agreement to build and supply chassis and parts to Navistar Defense. Our parts business delivered another solid quarter. The Parts segment revenue results were impacted by the new revenue recognition standard, ASC 606, which impacts Navistar beginning this year. In the first quarter, the implementation of ASC 606 reduced sales by $27 million. On a comparable basis, revenues grew 1% year-over-year. Profit for the quarter was $144 million, up 5%, as growth in the private label businesses was offset by lower BDP volumes and higher freight costs. As a percentage of revenue, Parts segment profit margin rebounded from 2018 levels to 26%. In the Global Operations segment, engine volumes increased 15%, yet revenues declined 10% to $73 million, largely due to the impact of foreign currency translation that resulted from the Brazilian real weakening by 14% versus the U.S. dollar. Profit for the quarter was $6 million, compared to a loss of $7 million a year ago. The profit was driven by higher volumes and the gain from the sale of our ownership interest in the JND joint venture in China. Our Financial Services segment grew its portfolio balances in the U.S. and Mexico from higher loan originations. As a result, revenues increased 25% to $74 million. Higher interest margin from improved funding strategies and income from intercompany loans drove profitability higher by 55% to $31 million, despite higher depreciation expenses on operating leases. Moving to cash. Lower sequential volumes resulted in net working capital being a use of cash. This, together with accelerated 2019 pension funding, seasonally higher interest payments, capital expenditures and warranty spend in excess of expense more than offset EBITDA generated by our operations and cash received from the business divestitures. The company ended the quarter with $1.2 billion of manufacturing cash. This cash balance positions the company to payoff the $411 million of convertible notes due in April with cash on hand. A couple more positives during the quarter. As I alluded to earlier, the company entered into group annuity contracts with two insurers and transferred $268 million in pension obligations in Canada. This represented about 8% of our overall pension obligation. The transaction reduces the company’s non-operating financial risks and administrative costs and represents another step towards improving our credit profile. Moreover, the company received a one-notch ratings upgrade from Standard & Poor’s in January, reflecting the improved financial results and action we – we’ve taken to strengthen the balance sheet. Moving to our 2019 guidance. On the strength of higher orders, our backlog was up 18% sequentially in the first quarter and our order board is virtually filled for 2019. We are raising our core market share outlook for the year increasing it by 0.5 a point to 19% from 18.5% previously. As a result of higher expected volumes, we’re also raising our revenue expectations by $250 million to a range of $10.75 billion to $11.25 billion for the year and adjusted EBITDA guidance by $25 million to a range of $850 million to $900 million for the year. Navistar is off to a great start to the year. Our first quarter performance provides several proof points that Navistar is much more than a cycle play. We’re recapturing market share, improving EBITDA margins and derisking the balance sheet. The growth in our orders and backlogs are further evidence we’re delivering products customers want and gives us additional confidence 2019 will be a very strong year for Navistar. We look forward to putting more points on the Board in coming quarters. With that, I’ll turn it back to the operator to begin the Q&A.

[Operator:]

[Operator Instructions] Our first question comes from the line of Neil Frohnapple with Buckingham Research. Your line is now open.

[Neil Frohnapple:]

Hi. Good morning and congrats on a great quarter.

[Troy Clarke:]

Yes.

[Neil Frohnapple:]

First wanted to start on the increased EBITDA guidance for the year. So I think a stronger than expected first quarter than the Street certainly had anticipated. But historically, Q1 is around 10% to 15% on the full-year, but the guidance would suggest Q1 will be around 20% this year at the midpoint. So could you talk about some of the puts and takes, Walter, on EBITDA margins for the remainder of the year?

[Walter Borst:]

Sure. We’re really happy with the first quarter first of all. So thanks for the congratulations. And we did set ourselves up to do better this year. Last year, we had some additional downtime to increase the amount of volume that we could produce. And so this year we did have more working days in the quarter, which allowed us to build more units and have better profitability in the quarter. As we look out over the balance of the year, we’re happy to be able to increase our guidance for the year. And we’re highly confident that we’ll be able to produce the units and deliver those to customers. We do continue to watch the supply base, which continues to be tight, and we continue to watch material costs around commodities and expedited freight and those types of things as our plants are kind of working at capacity here.

[Neil Frohnapple:]

Okay. And then as a follow-up, can you provide more granularity on new truck pricing? Do you feel like you were successful in implementing net positive price? And curious on the price cost could become more of a tailwind later in the year and what’s currently embedded in the guidance? Thanks.

[Walter Borst:]

Yes. I’ll start and then maybe Persio wants to jump in or Michael. We had indicated on our last call that we would expect pricing to be beneficial for us and it was beneficial for us in the first quarter. So we are seeing some modest improvements in pricing even as we’ve been able to improve our volumes and market share considerably.

[Neil Frohnapple:]

Okay, great. Thanks. I’ll pass it on.

[Operator:]

Our next question comes from the line of Adam Uhlman with Cleveland Research. Your line is now open.

[Adam Uhlman:]

Hi, everybody. Good morning.

[Troy Clarke:]

Good morning.

[Adam Uhlman:]

The follow-up on the pricing question. Could you talk about your pricing strategy for next year considering your production slots this year already filled? Have you opened up 2020 build slots yet and how are you pricing those orders?

[Persio Lisboa:]

This is Persio. We have – traditionally, we have price basis last year. We had two different price lists that we issued during the year. We try obviously to cover by all the cost increases, commodities and all other input costs that drive up the material, not only material costs, but total product costs. So we are planning to do the same thing. And most often with some customers we have contracts that allow us to do that automatically, but no to price wages. So usually, we will have a change. And by mid-year is when we can [Multiple Speakers]

[Troy Clarke:]

But I think the phenomena – this is Troy, the phenomena that Persio referenced is, we will continue to take price increases as appropriate, given the performance of our products in the market and as we have to digest costs like commodities and such. But you typically won’t see those until those products come into the order – come into the production and delivery cycle, which is 2020. So that would indicate that there is probably more positive pricing that we’ll see next year than this year, given our view of the market at this particular point in time.

[Adam Uhlman:]

Okay, gotcha, thanks. And then could you expand on the new Class 4/5 vehicles and the production ramp as we go through the year? And maybe to mention how big the channel still opportunity could be for Navistar? Thanks.

[Persio Lisboa:]

Yes. I think, the Class 4/5 market is a very large market, but you should narrow that down to these applications and plus the range of products that we have. We’re talking about a 45,000 to 50,000 unit market. Then between us and our partner, we are really aggressive in terms of gaining market share. But you think that we started production right now. We are ramping up production, as we speak very successfully. So we’ll monitor the sales, because right now those units are going to the initial dealer inventory, but a lot of them are sold units at this point in time…

[Troy Clarke:]

It’s hard for us to really forecast how successful we will be. I mean, all indications are extremely positive right now. As I think, basically, all the vehicles we have the capability to build this year are sold. So, it’s getting off to a very good start and it’s very positive. So – but that’s a great question. And as we fill those orders and look for opportunity to create more, we’ll keep your abreast.

[Adam Uhlman:]

Congratulations. Thanks.

[Troy Clarke:]

Thank you.

[Operator:]

Our next question comes from the line of Ann Duignan wit JPMorgan. Your line is now open.

[Ann Duignan:]

Hi, good morning.

[Troy Clarke:]

Good morning.

[Ann Duignan:]

Maybe just a follow-up on that last question. I know you said Class 4/5 sold out for the year. How many are you anticipating producing just from our modeling perspective?

[Troy Clarke:]

Class 4/5?

[Walter Borst:]

Class 4/5, yes.

[Troy Clarke:]

Yes. Well, we are targeting somewhere between 15,000 to 20,000 units there.

[Ann Duignan:]

And that’s pretty aggressive market share gains then? [Multiple Speakers]

[Troy Clarke:]

Yes. So GM will have the lion’s share of that, right.

[Ann Duignan:]

Okay, thanks. I appreciate that color. And then can you talk a little bit more about the relationship you announced with Love’s and Speedco and just – how should we think of parts sales from here and into next year? And what kind of a ramp – what kind of the incremental sales would you anticipate coming through from those relationships?

[Persio Lisboa:]

Well, first of all, Ann – this is Persio, we are very excited about the relationship, because this is one of our important step on supporting the uptime leadership position that we want to take. So that’s really what the lost relationship is about, is taking care of our customers, making sure that we deliver better than anybody else the promise off putting the trucks back on the road in less than 24 hours, that’s what it is. Well, we – I’ll view that by doing that, we see that those units that get into the Love’s network would also generate parts and service. So that, that is going to be supplied by us. I don’t think we’re at a point to provide guidance on that, but you just think that we have 30% more of our current existing network getting expanded as we speak with their points of sale.

[Troy Clarke:]

Yes. I mean, I think the theory there is that they have more available hours, seven days a week short repairs. You don’t have to stand in line, so to satisfy our customers better. But Ann, how this thing rolls out is, there will be training and setting up of systems in the second quarter. And then the Love’s stores basically come on in Q3 – in two tranches, Q3 and Q4. So we’ll be in a ramp-up mode between now and the end of our fiscal year.

[Ann Duignan:]

Okay, I appreciate. I presume that, that would mean stocking shops is an incremental product shipment. And as an adjunct to that, is there any risk of disenfranchising your existing dealer network? I mean, is this – is there any risk of cannibalizations?

[Persio Lisboa:]

Absolutely no risk. Actually, this expansion was developed in conjunction with our dealer network, endorsed by our dealers and actually bought off our strategy to increase our overall uptime. So totally supported by the dealers, we don’t see cannibalization we’re adding to our performance.

[Ann Duignan:]

Okay, I appreciate the color. I’ll get back in line. Thank you.

[Operator:]

Our next question comes from the line of Steve Volkmann with Jefferies. Your line is now open.

[Stephen Volkmann:]

Hi, good morning, guys. Maybe just a little bit of detail just relative to what you guys are seeing in the market. And maybe I’ll just start with you. You put a chart in your handout around dealer inventories, which have obviously come up quite a bit. And I don’t know if that’s more just because you’re filling out all your different product type stuff. But just comment on how you feel about the dealer inventories relative to that chart you provided us? And then if I could just tack on just some color in terms of what you’re seeing in your order book, it looks like you’re seeing lots of strong orders, what types of customers, what types of applications, just some detail around what you’re seeing in the market, would be great? Thanks.

[Troy Clarke:]

Yes. Well, I’ll lead up then pass over to Persio. But with regards to dealer inventory, we manage that or we monitor that. If we – if you look at dealer inventory in terms of days of inventory, where you take the sales rate into consideration, although the number of units has gone up. The actual days of supply, which in a robust market, you need to – we need to monitor, it’s in a very normal range. It’s not really gone up. And so that’s the appropriate level of dealer inventory for the level of sales that we’re having. Quite frankly, we’re extremely encouraged, because as we’ve kind of gone through our turnaround, reengaging the customers that the dealers are the primary source of contact with has been very important to us. And so trucks on the lot are very important basically to that.

[Persio Lisboa:]

Yes. I think, we see activities in all segments, right? We – you guys saw in the medium performance in the first quarter was very good. We believe it stays like that. But also on the heavies and vocational, we are seeing throughout the core of our enterprise, the business is still out there. And then as Troy said, the quality – the most important thing about the backlog is really the quality off of the backlog. And that’s something that we’re very happy with. Our specific backlog today has high-quality. We can point to the majority of the backlog has sold units with a customer name attached to it, which is – no makes us really believe that the remaining half of the year here is going to be very strong and we’re just working to take more if we can. As Walter alluded, we have supplier constraints, but we are managing through them. We are adding capacity in the supply base whenever we can. And once we do that, we adjust our production to build more and gain share. So that’s our strategy for 2019 and 2020.

[Stephen Volkmann:]

Okay, thanks. And just anything to call out relative to sort of, I don’t know day cab or sleeper mix, or small fleet, large fleet, any type of application stuff like that?

[Michael Cancelliere:]

Well, it’s Michael here to help in the answer. But I think, we see at least normal, nothing really unusual.

[Persio Lisboa:]

No, that’s right. We’re not – day cab sleeper – the trend – the historical trend has not changed how we see orders, they can’t sleep, or sometimes that’s impacted by – throughout the year by different customers that order – that place orders, some of them were day cab oriented, so that could swing a number of temporarily one way or another, but over time, not yet.

[Troy Clarke:]

Yes. It’s a very normal mix that you would expect.

[Stephen Volkmann:]

Great. Thank you, guys.

[Operator:]

Our next question comes from the line of Andy Casey with Wells Fargo. Your line is now open.

[Andrew Casey:]

Thanks a lot. Good morning, everybody.

[Troy Clarke:]

Hi, Andy.

[Andrew Casey:]

Just a couple of questions. First on the Class 8 market, order trends, there’s more an industry specific. It looks like you guys continue to grow your backlog. But we’ve seen the recent lower industry orders relative to last year. We – clearly, we have our views on that. But I was hoping you could give us some feedback on what you’re hearing about the drivers behind what appears to be industry-wide order hesitation?

[Persio Lisboa:]

Well, I think – this is Persio. Actually, what we’re seeing is that if you just look at what happened in the last year, right, through August, September, the industry was really taking orders at a range of 600 – annualized volumes equivalent to 600,000 units, and this is not a 600,000 unit market. So what we are seeing now is an adjustment on how the customer that placed orders last year, they are now waiting for the deliveries in the backlog and we’re starting to talk about the second-half and 2020. But if we just look at the quality of the backlog and that’s what I want to know reinforce it. The orders that we’re seeing or just don’t have names, and we’re really getting all getting them into our production schedules with a lot off certainty that they will be there. There is a phenomenon that I think is happening in the industry in terms of cancellations. And I think, perhaps, we can take this as an indication for all of us see it. The industry operates with cancellations and reordering. And sometimes that happens, because a customer we initially place an order and then there’s a spec change or there is a deliberate day change, and that order gets canceled and reordered. We’re seeing a little bit of that on our side, but that’s a very normal level of single digits. We don’t see anything major on that area. So we are seeing, from our standpoint, the reduction on orders is more of a normalization of what we saw with an abnormal level of order intake in the last half of 2018 and we just expect. We’ll be monitoring the market as we go, but no activities out there. So we’re still working with our customers and getting more business.

[Troy Clarke:]

Yes. The very nature of the backlog being so robust for the entire industry really takes monitoring orders on kind of a monthly basis, say, well, what does those numbers really tell us anymore at this particular point in time? As Persio noted, this is just adjusting to probably a more normal range. There’s still a lot of activity. As Persio indicated, relative builds for the second-half and placing builds into 2020. We’re optimistic, and quite frankly, we’re encouraged and we’re excited that this is a strong market and we think it’s going to continue for a while.

[Andrew Casey:]

Okay.

[Walter Borst:]

Andy, I would add to that just I’ve some note that we did indicate that our backlog actually increased 18% in the quarter. So there’s an industry element to this, but Navistar’s backlog actually increased and we did provide additional information on our orders in our Q.

[Andrew Casey:]

Yes. It was more of an industry question. Thank you. And then just a follow-on to those comments. Are you guys seeing fleet expansion, or is it primarily replacement?

[Persio Lisboa:]

We are seeing expansion in some cases. We are seeing that happening still. I think it was more intends to the latter part of last year, but we are still seeing expansion in 2019.

[Andrew Casey:]

Okay.

[Troy Clarke:]

I think, we would have seen more fleet expansion if drivers were available. But a lot of these drivers is being addressed by the industry, I think, which is providing a very metered growth in the size of the fleet. With the higher GDP and economic activity, we just need a larger fleet to haul the goods. So that’s what we’re seeing in – as Persio indicated, some portion of the orders.

[Andrew Casey:]

Okay, thanks. And then one last one, used trucks, you’ve been saying the legacy issue is behind you. We definitely are seeing corroborating evidence for that. I’m wondering if you’re starting to see the difference between the used truck pricing that you’re realizing and the rest of the industry is that starting to narrow at an accelerating pace?

[Troy Clarke:]

It’s really narrowing as we’ve moved from the having largely inventory of MaxxForce trucks to N13 vehicles. So we are closing the gap, yes.

[Persio Lisboa:]

Yes. Andy, but as you guys, I’m sure follow, use truck supply is relatively tight in the industry is until we deliver new trucks and our competitors’ delivery new trucks, they’re still holding on to the trucks that they have. So it’s something we’ll continue to manage in through the year.

[Andrew Casey:]

Okay. Thank you very much.

[Operator:]

Our next question comes from the line of Steven Fisher with UBS. Your line is now open.

[Steven Fisher:]

Thanks. Good morning, and congratulations on a good first quarter. I know you guys said that the days of dealer inventory haven’t really changed. But I guess, I’m curious as to when you think it makes sense to start trying to bring that down? I know you said it’s still a pretty good market out there and the orders are just sort of normalizing. But what signals are you looking forward to start taking that dealer inventory down?

[Troy Clarke:]

I mean, we work with our dealers on this. Quite frankly, the dealers are very good at understanding the demand in the areas. But I don’t want to leave you the wrong conclusion, we’re not cramming the channel full thinking that somehow that pressurizes sales, the backlogs that we currently have and the quality of that, we really don’t need to do that. So the first signals of any adjustments in dealer inventory really come from our dealers themselves, who kind of indicate to us by not ordering more trucks, because they want to sell kind of what they’ve got. Look, the majority of those units don’t think of these as units that are stock These are units that the dealer has specked with a particular customer in mind, okay? So there’s a very high probability. There’s a customer associated with that. We just sometimes don’t know who it is, because it’s a much smaller customer. So, as we have seen in the past when you look at how this is working in the past, like 2015, the dealers start pushing back and pulling back some of their orders that they get their inventory in line. So, again, our dealers right now, I don’t know, Persio, they’re pretty optimistic, I dealt with the opportunities that are out there.

[Persio Lisboa:]

Not only that and there was a lot of – actually, I didn’t know second-half of last year, we put priorities on customer orders that we had to deliver directly. So really, actually, as we transition from the medium duty platform, for instance, from the dual start to the MV, it took us a while to not kind of recompose that now to MV inventory. So right now, I think, we’re averaging the right place where we want to be and dealers are happy with that.

[Steven Fisher:]

Okay, that’s helpful. And then just curious about severe service. I know before you said that there’s no major trend between day cab and sleepers. But just curious if you could talk about some of the underlying market trends you’re seeing within severe service by product? And then I noticed that your backlog there is up about 100 units sequentially after being up kind of 1,500 to 2,000 over prior several quarters. How much of that is just lapping the new products versus the market?

[Troy Clarke:]

Well, I’ll start of and flip it over to Persio or Michael, whoever want to say this. One of the things, I think, because severe service doesn’t get a lot of attention that people didn’t notice, it was really last year that we kind of just completed the product portfolio by putting the 826 engine into the severe service. And a number of those applications seek that lighter engine. And so, the product portfolio as of kind of mid last year was really became full. And so part of what we’re seeing now is an uptake on orders, because we have a broader product portfolio. That said, there is, I think, a very – there’s a backlog at truck equipment manufacturers, okay? So you don’t see all that quite yet in DTUs, but the orders are there to be able to push these units to the body – to the bodybuilders and stuff.

[Persio Lisboa:]

Well, that’s exactly what I was going to say. I think, first of all, the new products are out there, started in the last – second-half of last year, we had the HV with 826 launched. And but what we are seeing is, the truck performance from our plants is kind of better in terms of OTD than what we are experiencing with bodybuilders. So the backlog on bodybuilders on our new products is big, which is a good thing, is going to come out as share now for us as we get into 2019. So we’re very positive and optimistic about that as well.

[Troy Clarke:]

But I think, it’s – and again, this is and all those things, correct me, Persio, if I’m wrong. But it’s kind of – we see uptake kind of across the board…

[Persio Lisboa:]

Yes.

[Troy Clarke:]

…and even into some segments where we really haven’t had a strong presence in the past. But in utility, I think, we’re establishing our presence there in…

[Persio Lisboa:]

…construction in general, yes.

[Troy Clarke:]

…new concrete mixer is barrel products, I think, and…

[Persio Lisboa:]

I think, we just had a very successful NTA show now with a lot of presence in many bodybuilders. So…

[Troy Clarke:]

Yes.

[Persio Lisboa:]

…we’re excited about that.

[Steven Fisher:]

Okay, terrific. Thank you.

[Troy Clarke:]

Okay. Thank you, Steve.

[Operator:]

[Operator Instructions] Our next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.

[Robert Wertheimer:]

Thank you. Good morning, everybody.

[Troy Clarke:]

Hey, Rob.

[Robert Wertheimer:]

Just wanted to talk a bit about capacity. I mean, the inventory is obviously a healthy point now and you’re getting share, which is great. And I think you sort of said, you’re close to filled up for the year. So how can you flex that, or how much can you flex out if the industry continues to be healthy next year and you continue to gain share?

[Persio Lisboa:]

Well, first of all – well, I think Walter alluded here. We raised our production. We raised a second shift in our Escobedo facility. Actually, pulled that I had from where we were planning to do our acceleration in 2019, because we saw – we broke some of the constraints in the supply base, saw the opportunity to get more parts we adjusted the schedule in our plant. So that’s what we’re doing as we go. And the – I think the most positive thing is, as we are taking market share, now we are really adding capacity. We are not necessarily adding capacity to the supply base, we’re switching usage of supply base capacity towards Navistar, which is a very positive thing. So we keep working on those two fronts, adding capacity and taking from others, which is how we win.

[Troy Clarke:]

Right. So we find the next bottleneck. Right now, there is not a bottleneck internal to our operations. These are bottlenecks that are largely existing in the supplier network. And as Persio indicates, there’s ways that we get that sometimes we help them with capacity, sometimes we convince them that look, this is really unsold unit by a competitor, so that same component really is geared towards them. But right now, it’s more dependent upon our suppliers, look, give us the challenge to build more units. And we’re going to – I love – we love that kind of challenge, right? We just love them. As we enter 2020 to – finishing up all question, and then we see that now we are working on the supply base to add permanent capacity where it makes business sense for them and for us. So we’ll be prepared for 2020 if the industry gets better.

[Robert Wertheimer:]

Okay. Thanks.

[Operator:]

Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open.

[Jerry Revich:]

Yes. Hi, good morning. Really interesting work on your Canadian pension plan. Walter, I’m wondering if you can just expand on that point any opportunities to do something similar with other parts of the footprint in terms of the legacy costs? And then just to clarify, the $268 million net liability reduction, can you just flesh that out a bit more, so that liability effectively rolls off the pension, because you’ve effectively been able to match with annuities contracts. Can you just confirm that we have that right?

[Walter Borst:]

Yes. So the 268 kind of size is the opportunity on a balance sheet perspective in terms of reported. So there are assets on the other side of that. So you’re really not going to see a deterioration in the unfunded reported balance. But this is all about balance sheet management and risk management, right? So pension assets and liabilities don’t always go in the same direction, and so we saw an opportunity as our Canadian plan was fully funded to do an annuity with a couple of insurers, very strong insurers up in Canada and that mitigates future balance sheet risk that we have. We’ll continue to look for opportunities like that. We’ve done some other smaller things over time. But we want to make sure that we shared it with all of you, because we are looking for continued ways to improve the balance sheet whether that’s through debt pay down, like we did in October and we plan to do again here in April for our $411 million of converts or transactions like we’re doing here in the pension space. So we’ll look for additional opportunities and we’ll report on those in due course if we find them.

[Jerry Revich:]

Okay. And from a marketer standpoint, you folks, as a management team, have obviously executed really well compared to when you started out here. In the quarter, you had better order market share than I think the guidance increase of 50 basis points for price. Can you just say more with their specific concentration in terms of your orders in the quarter, because it feels like you’ve got more momentum than 50 basis points increase in guidance points there, can you just comment on that?

[Michael Cancelliere:]

Some of these – it’s Michael. Some of these orders actually start getting placed in 2020. So we won’t be able to benefit from all the order intake or all the order share, so to speak. But again, I would just kind of comment on the thought that, look, I think, orders right now in the industry, it’s not a direct line correlation, I think, too much, because there’s really no timing pressure to get orders in at this particular point in time, so.

[Troy Clarke:]

Yes. And Jerry, I mean, we didn’t have the full-year benefit of the MV last year, right? So the medium go up smartly in share here in the first quarter. As time goes on, we’ll have a – we’ll have tougher comps year-over-year. But share was up 1.8 points in total for core in the quarter and year-over-year and we’ve kind of guided you to 1.5 points the market share improvement for the year, that’s a lot in our industry. So, we’re – I hope you take away from this that we’re feeling pretty good.

[Jerry Revich:]

That’s clear. And Troy, you mentioned, you feel like the market is coming along. What indicators will you folks look at to see okay, what maybe we should tap the brakes from a production standpoint just, because we’re looking at spot rates and low to van ratios that are a bit tougher. So what do you folks look at and when to make that decision?

[Troy Clarke:]

I mean, at a very pragmatic level and I think I’ve alluded this in the past. This is seasons to the truck year, right? And I think the next season that is very important for us is, what takes place in June and July. If large customers engage us in June and July on placing orders into 2020, that’s a very good sign. In the years past where large fleets have began to line up their production or their orders that early in the year. That’s probably one of the best indicators that 2020 is going to be a very good year as well. Traditionally, they may choose not to engage until the September, October timeframe, okay? So those are kind of the two windows. I mean, so I think for us, it’s kind of pedal to the metal. We’ll take another good assessment on – I mean, guys like Michael Cancelliere and almost daily contact with we think many of the leaders of the industry the people that use these trucks and haul for freight. And so I think the next window for us at a very pragmatic level, we certainly have an ecomm [ph] staff that gives us lots of data. But June, July is an important time for us to look at the market and make an assessment. And then the next opportunity, I think, is September – that September, October timeframe. And it’s largely due with the engagement of the major customers in the market who have, I think, a very good idea as to where the freight industry and freight rates and freight capacity is headed.

[Jerry Revich:]

Okay. I appreciate the discussion and congrats on a strong quarter.

[Troy Clarke:]

Thank you.

[Operator:]

Our next question comes from the line of Jeff Kauffman with Loop Capital Markets. Your line is now open.

[Jeffrey Kauffman:]

Thank you very much, and I’ll echo all the other sentiments. So congratulations and it look like a terrific quarter. A lot of my questions have been asked. So I kind of want to go off a deep into the full-year a little bit. Can you talk a little bit about – I know you have the electric bus coming out. But you – can you talk a little bit about how the inquiries have been from customers on some of these alternative fuel or non-diesel vehicles? And what’s in the pipeline?

[Persio Lisboa:]

Yes. This is Persio, Jeff. A lot of interest. And actually, our main focus is not to do it for them, but do it with them. So what we’re now actually investing a lot of our time and money is to partner with customers. So we absolutely have the product that will meet their needs and exceed their expectation. So it’s not just about the product though, it is about how the product runs, which cycles the products are supposed to operate, how you charge them based on your type of operation, so we are really taking more of a consulting approach on the immobility than just now being able to put a bus together or medium duty truck together and some deliver it to customers and ask for their feedback. So we’re doing the opposite. Se we’re working upfront with them.

[Troy Clarke:]

I mean, the bus space is a great space for this kind of stuff, it turns out, okay. As we – you may recall, there was a lot of interest in propane and natural gas powered buses. And again, that was kind of segmented in certain parts of the country, it really gave us an opportunity to become involved in that. And then you also probably know, we have the gasoline engine offering in school buses. And again, a lot of interest in that in certain parts of the country under certain circumstances. And we have the absolute best distribution network in the industry, who are able to create these partnerships, as Persio has indicated. So, we’re just looking to build on that with regards to the opportunity for an electrified product. And so that we can make sure that we’re spending every investment dollar in a very efficient way that leads to satisfy customers.

[Jeffrey Kauffman:]

So the focus is more on the bus area right now, not so much on regional trucks?

[Troy Clarke:]

The interesting thing is kind of – our platform – the bus platform and the medium-duty platform for us is – has a very, very high commonality and high reuse. So I mean, any of the technology that we develop for bus, I mean, I don’t want to say it’s a bolt-on, but it is to a medium-duty truck. So it really gives us the opportunity to take that kind of same – to take that same approach. I think, from a demand standpoint and the ability to do things like get grants and other incentives to defer some of the costs and build out some of the charging infrastructure, the bus folks have plenty of access to those kinds of things. So they’re willing to be a fast mover. And so we want to take advantage of that, because we think that it does get us through a couple of cycle learnings quicker.

[Jeffrey Kauffman:]

Okay. Well, thank you very much, and again, congratulations.

[Troy Clarke:]

Thanks, Jeff.

[Persio Lisboa:]

Thank you, Jeff.

[Operator:]

Our next question comes from the line of Seth Weber with RBC Capital Markets. Your line is now open.

[Seth Weber:]

Hey, good morning, everybody.

[Troy Clarke:]

Hi, Seth.

[Seth Weber:]

Just wanted to go back to an earlier question about fleet growth and replacement demand. Troy, I mean, we always thought about replacement demand is something in like a 250,000 range for Class 8. Do you think that number is still – is that still the right number to think about? Do you think that number is moving higher? How do you guys think about replacement demand in the Class 8 market? Thanks.

[Persio Lisboa:]

Seth, I think that’s a great comment. We believe that replacement demand has gone up, right? I mean, I think, I – obviously, there’s a lot of message behind it, but the 3.2 million trucks all in freight. And basically, since 2008 up to last year, that was to support an economy that was growing roughly in the range of 2% or slightly less GDP a year. As GDP growth has gone up, okay, there needs to be more trucks. And so the size of the fleet needs to go from 3 million to 3.2 million units to something higher. And when you do that, if that GDP growth is sustained, this is just one attribute then replacement demand kind of by definition goes up. So, your points are very good point, and we put some numbers behind that. I don’t think we’re ready to share them on the call at this particular point in time. But look, I think, replacement demand – for the replacement demand to go up from what we’ve seen in the economy, 10%, 12% over what we’ve historically viewed, I don’t think that’s a lot, okay, yet I mean, I don’t think that’s overstating where the replacement demand could, in fact, be as we speak. And the longer this economic expansion goes on, I think the better. And then – but – and that kind of volume, hey, that’s material for this industry. And I think that the industry as a whole then will adjust to the capacity required, both at the supplier level and our level to satisfy that demand. So it’s a good thing. It’s a good thing. We do believe and we’re not the only people. I mean, we’re not trailblazing on this topic. This is covered in a lot of the journals and a lot of the press related – that’s related to us. But I do think, between now and this time next year, I think, there will be a large consensus in the industry. The replacement demand has gone up and has gone up in a material fashion.

[Seth Weber:]

Very interesting, thanks. And then just a quick follow-up on the strength in the Mexico and export market. Is that something that you think is sustainable here, or just any more color on what drove the strength there in the quarter? Thanks.

[Persio Lisboa:]

We are basically on export market strong. We see activity taking taking place. We are – and all of that really monitoring Colombia. They had a scrap law there that now was actually expiring at the end of the year, which we believe drives even more opportunity in the second-half. And Mexico stable, we are now always taking a look at the political environment in Mexico. So we try to balance our production now that are – that is dedicated to Mexico – between Mexico and the U.S. in a very diligent way. But we see that there is a stability in the forecast – in our forecast today and we’re taking a very close monitoring approach to see if anything changes we will just accordingly.

[Seth Weber:]

Great. I appreciate the comments, guys. Thank you very much.

[Troy Clarke:]

Thank you.

[Persio Lisboa:]

Thank you.

[Operator:]

And that concludes today’s question-and-answer session. I’d like to turn the call back to Mr. Ketelaar for closing remarks.

[Marty Ketelaar:]

Great. I want to thank, everybody, for joining us this morning, and thank you for your continued interest in Navistar. If there’s any follow-up questions, please feel free to reach out to either myself or Ryan Campbell. And otherwise, we’ll look forward to talking with you in early June for second quarter results.

[Troy Clarke:]

Yes. It is Troy. Thanks a lot again for your interest in Navistar. As Marty indicated, look, you can tell, we’re really excited about the results we were able to accomplish in Q1, but we’re not done. Many of you know us well enough that you would expect that statement. We’re actually more excited about the results that we plan to deliver in the future and 2019 is going to be a great year. Thanks.

[Operator:]

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