Navistar International Corporation
Q3 2019 Earnings Call Transcript

Published: 4 Sep 2019

[Operator:]

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

[Marty Ketelaar:]

Thank you, Daniel. Good morning everyone, and thanks for joining us for Navistar’s third quarter 2019 conference call. Today we will discuss the financial performance of Navistar International Corporation for the fiscal period ended Jul 31, 2019.With me today are Troy Clarke, our Chairman, President and Chief Executive Officer; Walter Borst, our Executive Vice President and Chief Financial Officer; and Persio Lisboa, Executive Vice President and Chief Operating Officer. After concluding our prepared remarks, we’ll take questions from participants.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 on this call are reconciled to the U.S. GAAP equivalents and can be found in the press release that we issued this morning, as well as the appendix of the presentation slide deck.Today’s earnings press release, investor presentation and our prepared remarks may include forward-looking statements about our expectations for future industry and financial performance, and the company expressly disclaims any obligation to update these statements. Actual results could differ materially from those suggested by our comments made here.For additional information concerning factors that could cause actual results to differ materially from those included in today’s presentation, please refer to our most recent SEC filings. We would also refer you to our Safe Harbor statement and other cautionary notes disclaimed or presented in today’s material for more information on this 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 and welcome to Navistar’s third quarter earnings call. I’ll open with a few high level thoughts on the quarter and the industry, and Walter will walk you through more details on the company's financial performance and the outlook for the rest of the year.We delivered another strong quarter. Total revenues grew 17% over $3 billion. Adjusted EBITDA grew 22% and adjusted net income increased 55%. The growth came from the truck segment or volumes rose 45% year-over-year. Retail market share continues to grow year-over-year as well. In the third quarter Class 8 grew 1.6 points to 13.9% and medium Class 6/7 share rose 4.9 points to 26.8%.From an industry perspective, the U.S. economy is moderating. A number of key economic indicators remain above their long-run averages, but they are trending lower. U.S. GDP is softening and is expected to be around 2% for the balance of the year. The 2% threshold is important to us as the industry tends to add capacity when GDP increases more than 2% annually.The ISM Manufacturing Index, something we also follow, also continues to trend lower and is hovering around 50, indicating to us that manufacturing growth is shifting to neutral. Yet consumer confidence and spending remain positive, but new housing permits are still running lower than expected. Lots of mixed signals indicating the economy that is in transition.The truck market is decelerating. Truck orders tend to be a leading indicator of economic activity as carriers forecast their need for trucks. As freight tonnage and rates decline, industry orders for Class 8 trucks in particular have also declined about 75% in the quarter.The used truck market is also slowing, pressuring prices as inventories of less than 5 year old sleepers are rising as trade receipts have increased in conjunction with new truck deliveries.Build rates of new trucks have exceeded orders causing industry Class 8 backlogs to decline 44% since peaking last October.Navistar’s backlogs are declining as well, and as you have seen, we are actively managing this by adjusting assembly line rates to create a balance between customer demand, inventory levels and a healthy backlog. For example, in November of last year we added a second shift to meet Class 8 demand, while increasing line rates at all our truck plants. In addition, we added over time and weekend shifts as needed.Today weaker U.S. orders, as well as lower Mexico and Latin America orders has resulted in the need to reduce assembly line rates in both of our truck plants. We make these type of decisions everyday, actively managing our business appropriately with the goal of an efficient, order to delivery process. As a result, total company and dealer inventories remain at the low-end of the normal range at 85 days.Over the balance of 2019, order activity should pick up from the levels of the last couple of months due to the traditional fleet ordering season, as carriers continue to replace aging trucks. This fall ordering season will provide further insight into 2020. Currently, we are expecting 2020 corn industry volumes to be down about 20%, reflecting a 25% reduction in Class 8 trucks and a 10% reduction in Class 6/7 and bus units. Tentatively we are planning for 2020 Class 6/8 trucks and buses in our core markets to range between 335,000 and 365,000 units.Given Navistar’s strong Class 6/7 and bus franchises, we do not expect to be down as much as the industry, but we will continue to refine our view and share more details with you in the near future.Shifting gears, in over the past several years we've made a number of investments to improve our business. We invest in a lot of times customers, listen to their feedback, ideas, their suggestions. Next with this understanding we invested in our products, we developed and delivered a full line of new products which have been very well received as demonstrated by our growing retail market share; improve sales, selected volume and share, earnings and improved cash flow.Now it's time to make investors in the next phase of our future. Earlier this quarter we announced we were investing $125 million in our engine plant in Huntsville, Alabama over the next three years. This investment is being made in preparation of producing our next generation big-bore diesel power train being developed with our alliance partner TRATON. The production of these new proprietary power trains will add to the existing facility where we currently build our international A26 engine.We also invested in our uptime commitment. A new parts distribution center in Memphis is now open offering industry leading cut-off times for next day delivery of parts. Our service partnership with Love’s is now operational, adding more than 320 Love’s and Speedco locations and more than 1000 technicians to our service network. And an updated version of our dealer parts inventory management system has significantly reduced emergency orders and works to position parts where they are needed.You know our third quarter was another great quarter for Navistar. Our operational and financial progress demonstrates that our investments are paying off. Market share is increasing, revenue and earnings are growing and now we're accelerating investments to improve operations and deliver on our promise of uptime.I look forward to talking to you again at our Investor Day later this month, where we’ll discuss our plans to further grow the earnings power of Navistar.And so with that, let me turn it over to Walter.

[Walter Borst:]

Thanks Troy. Good morning everyone. Navistar’s continued its cadence of delivering excellent results in the third quarter. Revenues, adjusted EBITDA, adjusted net income and free cash flow were all up year-over-year.Let's dive into the results. As Troy mentioned, revenues grew 17% in the quarter to $3 billion. The improvement was driven by a 28% increase in core truck volumes. Core market share grew 2.6 points to 18.2%, reflecting higher share in all vehicle segments year-over-year.Q3 gross margin was 17.8%, up a point from last quarter. Segment mix continued to impact consolidated gross margins as truck revenues including the new Class 4/5 products grew substantially year-over-year. As we've discussed previously, parts margins are higher than truck margins and in the long run selling more trucks today will benefit parts sales in the future.Turning to structural costs, year-over-year SG&A expenses declined 25% to $167 million, largely from the release of a $32 million accrual related to certain legacy engine litigation. Engineering costs increased $9 million, largely from the development of next generation power trains with our alliance partner TRATON.Even if when adjusted for the legal accrual, structural costs including SG&A and engineering expenses fell as a percentage of revenue to 9.2% from 11.3% in the prior year. Net income in the quarter was $156 million or $1.56 per diluted share. Prior year income of $170 million or $1.71 per diluted share included a $71 million settlement gain related to a business economic loss claim.Excluding one-time items in both periods on an after tax basis, adjusted net income in the quarter grew 55% to $147 million versus $95 million last year. Adjusted EBITDA rose 22% to $266 million in the third quarter versus $280 million a year ago after excluding onetime items on a pretax basis.Moving to the segment results. Our truck segment sales in the quarter grew 25% to $2.4 billion. The sales growth was driven by an increase in all core product segments, plus the production ramp-up of the new Class 4/5 trucks.Total core volumes grew 28% to 24,400 vehicles. Truck segment profit grew and excluding the two one-time line items I mentioned earlier, the segment was up 44% year-over-year. The increase was largely driven by higher volumes and improved pricing, partially offset by the impact of the sale of a majority interest in Navistar Defense.Our parts business delivered another solid quarter. The parts segment revenue results were impacted by the new revenue recognition standard which Navistar adopted at the beginning of this year. The implementation of this standard reduced their quarter revenue by $31 million. On a comparable basis, revenues were largely flat from Q3, 2018.Profit was up 3% to $149 million due to improved U.S. operating results, reflecting our growing private label business, partially offset by lower Blue Diamond parts volumes. Part segment profit margin grew over 2 points year-over-year to 26%. The global operations segment continues to be impacted by a weaker than expected economy in Brazil. Revenues were flat year-over-year and the operations remain profitable.Our financial services segment is benefiting from larger average portfolio balances. As a result, revenues increased 14% to $74 million. Segment profitability rose $30 million, largely from higher interest margin and the income from inter-company loan, partially offset by the write-off of debt issuance costs.During the third quarter NFC closed a new five year, nearly $750 million revolving credit facility and repaid its $400 million Term Loan B issued in 2018. The new facility provides for additional liquidity with increased flexibility at a lower borrowing cost.During the quarter the company generated $250 million of manufacturing free cash flow, largely from strong adjusted EBITDA and net working capital performance. Company ended the period with the manufacturing cash balance of $1.1 billion.Next, let me take a moment to update our guidance for 2019. For the Class 8 industry we expect volumes to come in towards the upper end of our prior range. Also, we're seeing higher Class 6/7 volumes, including greater gasoline units where Navistar does not participate. We now believe 2019 industry volumes will range between 435,000 and 455,000 units, a 10,000 unit increase from our prior guidance.To-date retail market share is 18%. During the fourth quarter we expect share to continue to grow, largely from the seasonal increase in school bus registrations. As a result, we believe fiscal year retail market share will range between 18.5% and 19%, 1 to 1.5 points higher than 2018 market share.As Troy mentioned, the decline in domestic and export orders and backlogs led to the decision to lower assembly line rates in both of our truck plants. Due to lower production volumes in the fourth quarter, we expect revenues to be towards the lower half of our guidance range of $11.25 billion to $11.75 billion for the year.To-date consolidated gross margin is 17.7%. We are expecting margin growth in the fourth quarter from the seasonal benefit of higher parts revenues, to larger mix of severe service truck sales. We now believe gross margins will end up between 17.75% and 18% for the year.Lower aggregate gross margin from lower production volumes and revised margin percentage expectations is being offset by lower SG&A expenses. Consequently we are holding our 2019 adjusted EBITDA guidance at the midpoint of $900 million for the year.Finally, capital expenditures are trending lower and are now expected to be $115 million versus our prior guidance of $150 million.In summary, the third quarter results show the effectiveness of executing our strategy as we are recapturing market share and growing revenue, EBITDA and cash flow. I look forward to talking to you again at our Investor Day on September 19, where we’ll provide insights on our strategy, improvements we've made to the business and our roadmap to becoming a market leader.If you haven't registered for the event, please reach out to the IR team for details. We look forward to your attendance. Also, we invite you to see our latest product offerings and technology developments at this year's North American Commercial Vehicle Show in Atlanta from October 28 through 31.With that, I'll turn it back to the operator to begin the Q&A.

[Operator:]

Thank you [Operator Instructions]. Our first question comes from Stephen Volkmann with Jefferies. Your line is now open.

[Troy Clarke:]

Steve, are you there?

[Stephen Volkmann:]

Yeah, I am. Sorry about that. Good morning.

[Troy Clarke:]

Good morning.

[Stephen Volkmann:]

So, maybe let’s just start off you know since you provided this kind of preliminary look into 2020 industry volumes, I guess we have yet to really have a clear idea from you guys about how you think you'll perform in a down market and I guess specifically, you know I'm thinking about decremental margins. I know you've lowered your breakeven significantly, but any help you can give us just on how you kind of modeled the business in a declining top-line environment would be great.

[Walter Borst:]

Yeah Steve, it’s Walter, you know we’ll probably provide some additional insight on that on our Investor Day. But you did allude to the fact that we continue to work to lower breakeven point, that's continued. We've also been growing our share, so you know the decline that we could see in the industry volumes before we would you know drop to breakeven results in our truck segment give us even that much room versus where we were a couple years ago.As we enter 2020, you know we do continue to see opportunities to grow our market share given the strong product offering that we have and with the, you know the industry environment changing we would expect to be able to continue to improve our cost structure as well as we wouldn't have the same kind of headwinds that we had the this year and the strong industry with supplier costs and the like. So you know we think that our position for next year will continue to improve even as the industry volumes decline, you know from a profitability per unit perspective.

[Troy Clarke:]

Yeah, I mean Steve. This is Troy. But you know obviously this is a cyclical industry. We talked openly about that I think on this call and other occasions in the past, we've been preparing for this. So we have modeled out the scenarios of what we think 2020 looks like, kind of to the good and to the bad levels and we think 2020 will be a good year for Navistar with gains and things like market share and continued progress on costs as Walter indicated.

[Stephen Volkmann:]

Okay, and just so I make sure I understand what you said Walter, it sounded like you're kind of saying that you think you can grow EPS in a down market, basically around what you’ve forecast the next year or am I reading that wrong?

[Walter Borst:]

No, I don't think you're reading that right. I think what I’d trying to say at least was that you know on a per unit basis, we would continue to look to improve our profitability. If units are down, then the overall earnings would probably be down as well. But we’ve got you know a lot more room vis-à-vis our breakeven than we had a couple years back, right.

[Stephen Volkmann:]

Okay, great. Alright, I'll pass it on thanks.

[Operator:]

Thank you. And our next question comes from Andrew Casey with Wells Fargo. Your line is now open.

[Andrew Casey:]

Thanks a lot. Good morning.

[Troy Clarke:]

Good morning.

[Walter Borst:]

Good morning.

[Andrew Casey:]

Within, back to the 2020 sales view, I appreciate you expect to be down less than the industry, but can you give us a little bit of color around the commentary you made, specifically the Class 8 assembly line reduction so far and I'm just wondering how to frame up 2020 as – you know are you expecting that to be down 25% on retail basis off of that or for production to kind of scale down during the year if orders do not improve?

[Troy Clarke:]

Yeah, I think it's more the latter. You know look, we made these – this is a company that ran for a number of years with no or a very skinny backlog, and you know we've taken advantage I think of these last couple of years to restore backlog to a far more, you know normal range. Our current backlog is in the kind of at the industry average over 150 days closer to 165.We adjust our production rates to maintain some manner of backlog, because this order to delivery system runs more effectively, more efficient balancing between customer needs, the needs to manage the inventory, you know that's in the pipeline, as well as the inventory that’s basically on the ground.With these adjustments, you know we believe we see a stable environment through Q1, and then we’ll have to see how the seasonality of additional orders that are coming in from larger players, from larger customers plays out through the year. Not very recently, I won't make any announcements, you know several large players, our share of their buy year-over-year is going up and it's very encouraging, so it supports the thought that with the adjustments we’ve made we should be stable through Q1 and then we’ll have to see what happens if the economy and the industry as we go past that.But certainly to me it would be a topic we’ll update at our next earnings call, you know as well. We’ll just have more insight at that particular point in time.

[Andrew Casey:]

Okay, thanks Troy. I'll leave it at that, thank you.

[Troy Clarke:]

You’re welcome Andy.

[Operator:]

Thank you. And our next question comes from Neil Frohnapple with Buckingham Research. Your line is now open.

[Neil Frohnapple:]

Hey guys, thanks and congrats on a good quarter. Walter, can you remind us from a high level, what the adjusted EBITDA number is you need to generate in order to be free cash flow break even. Is it still in that $650 million to $700 million range. Just trying to get a sense of whether, you guys will generate free cash flow in FY’20 even as the market cycle is down?

[Walter Borst:]

Yeah, I hope to see you at the Investor Day.

[Neil Frohnapple:]

Alright, and then just could you Walter discuss the slight reduction in the gross margin outlook versus your prior guidance. You know any more granularity on the puts and takes, whether the embedded price cost outlook is less favorable, are you see more news, more aggressive new truck pricing, whether it's just mix. Just any help that would be great?

[Walter Borst:]

Yeah, probably three or four items, you know I’d point to. Pricings actually been good, as we indicated in our remarks, pricings is up year-over-year. So that's kind of come in as we expected.What we’ve continued to see is you know the segment mix which I commented in my remarks, so truck versus parts as the truck volumes have been stronger, that impacts our overall gross margins because our parts margins are higher than our truck margins.We have seen some impact on customer mix. We've grown market share smartly in the medium space and so you know the medium segments in particular we've grown with our lease and rental business, so that’s had some impact on our margins.Thirdly we've seen, you know in the strong environment we see higher commodity prices which we'd indicated at the beginning of the year would be a headwind and we’ve seen additional freight costs as well with the tighter supplies, so that has impacted our material costs.And then lastly as Troy mentioned in his remarks, we've seen some weakness in used trucks, in particular the sleeper market and so we've made some small adjustments there to our the prices of the units in our used truck portfolio.

[Neil Frohnapple:]

Okay, thanks. I’ll pass it on.

[Operator:]

Thank you. And our next question comes from Ann Duignan with J.P. Morgan. Your line is now open.

[Ann Duignan:]

Yeah, thank you. Good morning. I wonder if you could give us a bit more color on the lower production levels at both facilities. I mean how much lower is production going to be in fiscal Q4. Is it going to be at you know whatever fiscal Q4 run rate is at the end into Q1 of next year. Just from a modeling perspective if you could give us a bit more specifics on those?

[Persio Lisboa:]

Ann, this is Persio Lisboa and while I think for Q4 the exit rate, we are probably going to be calibrating. As Troy mentioned we are rebalancing our lines. So overall throughout all plants will be down close to 15% versus the Q3 which is -- and that's the level, that where we're going to enter Q1. But you have also to consider that that's the nominal rate. We used a lot of overtime days in the last few quarters and we are removing some of them. So but overall nominal rates will go down 15% and that's what we know intend to keep for the first quarter as well.

[Troy Clarke:]

And Ann I just might indicate that by taking down those rates, that’s after we increases the rates earlier this year, so that brings the overall daily rates back to about where we were in November and December of 2018. So you know on earlier calls we reported about production, line rate increases, we're now effectively reversing that with this 15% reduction that Persio mentioned.

[Ann Duignan:]

Okay, that's very helpful, especially on the year-over-year to keep that – to bear that in mind, that we did pick up production and then back.And then just a quick follow-up; you know last quarter you guys had noted that the summer months were going to be very important for fleet orders. I think all the OEM 2020 order books are now opened. Now we're kind of pushing them back saying the fall months are going to be very important. What are the large fleets saying and doing? I know you said you're gaining more share of pocket with them, but in general what is the commentary that you're hearing from the large fleets. They obviously are not placing orders yet?

[Troy Clarke:]

Yeah. Whatever you talked about previously Ann was you know in some years where everybody anticipates you know that the following year or the coming year like in 2020 would be strong, people would open up their order books in the July timeframe. But the more traditional time frame is September and it is in fact that's what we're seeing. So this really supports what we think to be you know a fairly normal, you know I think timing for an ordering cycle.So we are engaged with large customers and you know quite frankly you know can just put a plug in for the products. Our products are performing well in their fleets and you know this what we're hearing from them and what we're seeing from them, the deals that we’re working on with them is – we are continuing to improve our share of their buy on large fleets and that's our expectation. So we would expect certainly in the Class 8 space that we’ll continue to grow with these large customer.The second thing is we have a lot of trucks. We have some real momentum building on the vocational side of the business. Obviously lower volume and share impact, but you know pretty good business for us and you know quite profitable and a lot of those units are still working their way through the TEMs and so we anticipate that this momentum on the vocational side of the house will continue well into 2020.And then last but not least, you know as you indicated or as you heard in my comments, you know we’ve picked up nearly five points of market share in a piece of the business where we are traditionally very strong, in the medium-duty segment. And the discussions that we're currently having with customers who buy those trucks without, you know without giving too much more away, you know our portion of that buy continues to be strong as we look into 2020. So we're not planning on seeding certainly any share in a segment that you know we believe we have you know advantages over our competitors.So you know as far as some color and insight goes, yep 2020 is going to be down, but if you take a look at that, we have a concept we call kind of share wallet or a share of a target customers buy. Those numbers look that they will continue to improve and that's how the orders are lining-up for us, you know as we speak. We’ll give a little more color you know in our Investor Day, but again contribute this whole thought process that you know we’ll roll into Q1 a lot like we look today.

[Ann Duignan:]

Okay, I appreciate the color and look forward to hearing more. So, I’ll leave it there. Thanks.

[Troy Clarke:]

Thanks Ann.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Adam Uhlman with Cleveland Research. Your line is now open.

[Adam Uhlman:]

Hey guys, good morning.

[Troy Clarke:]

Hey Adam, good morning.

[Adam Uhlman:]

Congrats on all the progress. I guess I wanted to start with a clarification. Walter you had mentioned you know several headwinds that we faced this year with suppler costs, and material costs and I believe you gave us a figure at the beginning of the year. I was wondering if you could update us with that, so we can put that into in the contacts when we think about you know the 2020 profit headwinds that shouldn't exist.

[Walter Borst:]

Yeah, at the beginning of the year I think we’d said that overall, we would expect performance and pricing less the headwinds that we saw. Material cost tend to be positive to the bottom line. That's still the case as we sit here today, but it's less so than what we had seen, given the factors that I mentioned impacting our you know product costs on the procurement and logistics side of the business.But net-net it's still a positive for the year as we had expected coming in and that in large part is due to you know our continued efforts, including from the procurement joint venture that we have with TRATON to continue to work our product costs lower.

[Adam Uhlman:]

Okay and the freight headwinds, and the supplier disruptions, is that still s meaningful headwind outside of price costs.

[Troy Clarke:]

We see that as an opportunity to be less of a negative impact you know going forward. You know, the comments I did to Steve earlier in the call about you know as we look into 2020 is those headwinds bait that should help our profitability per unit.

[Persio Lisboa:]

And this is Persio, we are also seeing on a supply base much fewer disruptions than we've ever saw before. So I think at the levels of production that we are today, we are pretty safe on the supplies side, and freight rates are coming down. So you could imagine that as we are running over time, days and extra on weekends we were basically driving more volume and capacity in the supply base and generating some level of expedite, that's all gone.

[Adam Uhlman:]

Okay, got you. And then on the capital spending plan, for this year going forward that you know the CapEx came down, but there are several big projects, you know it sounds like underway. You know should we be expecting a material pick-up next year or maybe back to what the prior plan was and then just along with that, if you could just expand on the Huntsville plan through 2021, what steps should we be thinking about or listening for? Thanks.

[Troy Clarke:]

Yeah, let me break it into couple of pieces and call it as a product and join in as well. So cap spending, you know we indicated is going to be lower this year than what we had said previously. In part that’s due to the stronger industry that we've seen. So we’ve pushed out some projects, some of the maintenance and so on that we do in our facilities as we wanted to keep those running. So you know we'll be able to do some of that work as the industry slows a little bit in 2020, back more to kind of replacement volumes.We do see CapEx will be increasing. We’ll provide some more insights at Investor Day around that as well as we do have some of these investments like the Huntsville investment coming. That will come in over the next few years in Huntsville and is related to the alliance activities around the localization of some big-bore diesel engine, or diesel power train investments that we've mentioned previously.So CapEx will be up versus you know this year's levels, but obviously CapEx has been favorable to our cash flow for this year versus what we had originally suggested.

[Adam Uhlman:]

Okay, thanks.

[Operator:]

Thank you. And our next question comes from David Leiker with Baird. Your line is now open.

[David Leiker:]

Good morning everyone.

[Troy Clarke:]

Good morning David.

[Walter Borst:]

Good morning.

[David Leiker:]

Walter, I want to go back and revisit. I know you talked through this, and I wanted to just try and find some of the puts and takes on the truck, pretty significant revenue increased the flat profits and I know there's a moving pieces underneath the surface. But can you just help reconcile that a bit for us to just kind of get to what the real contribution margin was here in the quarter.

[Walter Borst:]

Well, I guess I didn’t a good job in the first time.

[David Leiker:]

Well I might have missed it too.

[Walter Borst:]

Yeah, so you know what, if you are just looking within you know the truck segment, then of the comments there, I did mention earlier on the call that we do have the segment mix between truck and parts which we make all year long as the truck volumes have been strong.Within the truck segment, you know we mentioned a couple of times I think on the call, we did grow our medium share. Some of that was with rental and leasing customers, those margins are lower than with some of our other customers.We've also been ramping up the Class 4/5 vehicles and so those have a lower profit margin than our average portfolio as well. We produce those units largely for General Motors on a cost plus type basis, which helps them, they are fixed in our plants, but those margins aren't as high and we do run that through the revenue as well as the profitability side of our income statement, so that year-on-year is a lower average profit margin. We also don't have the defense business this year, which was a big contributor to profitability in the third and fourth quarter of last year. So those would be a couple of puts and takes.

[David Leiker:]

Okay great, thanks. And then Troy as we look at going in to year-end and then calendar 2020, can you talk at all about what you think the makeup of the backlog looks like? You know if people cleaned out that backlog how real that is and then just kind of your thoughts of cancellations as we go into 2020.

[Troy Clarke:]

Yeah, you know look – I’ll make a couple of comments here and then I’ll ask Chris here to jump in as well, because you know I mean I think you know certainly the second half of this year, these are numbers that you know we’ve looked at quite a lot, just to make sure that we're making the right decisions and have the right interpretations.I think, you know let me just say overall. I think the quality of our backlog is very high you know when I say that we have a very normal backlog in the 165 day range which I think is comparable to where are the competitors are, there's not a lot of orders in there which have the potential for cancellation.There are orders that have the potential for retiming because as we are attempting to deliver units, some of our customers have to, they have to figure out how to dispose of their use truck right now and now we're slipping into that you know thing we've been in the past where they go to the market with a truck that has a book value and if the markets value below, you know then they have to work that equation a little bit more, so that they don't take a loss and that sometimes gets in the way of our delivery. And that happens with very large customers and it happens very small customers.We have the ability to help somewhat in used trucks, okay, but you know we've been in difficulties in used trucks in the past and so we're working to manage that very, very assiduously as well, okay. So that’s kind of the phenomena, but I would say the backlog itself we believe is fairly high quality.Let me pass it to Persio who really keeps track in our – I know he watches these numbers on cancellations, you know more than I say – well, we all look at it, but he's the guy who kind of keeps his eye on that to make sure that the quality’s backlog is high.

[Persio Lisboa:]

Okay, thank you Troy. What we are seeing today in the backlog is as Tory referred to, some of the – we have two types of orders that are getting to the system, some of those that are come from the very large customers that have a very constant no buy throughout the year and those have been timed as Troy referred to. I think that's where we see the most of that, because some of those customers are working through the use track, you know the kind of phenomena that Troy described.On the dealer side I think we have also the activity on the retail. That's the one that’s always more impacted in the short term and we monitor that very closely with our dealers.Now having said that, you know our dealers today have 85 days of dealer sales in that inventory, which is within the normal range that we operate. So we feel that now time will tell a little bit more as we get into Q4 and Q1, but we haven’t seen any abnormal signs of cancellations compared to what you're seeing in the industry for a backlog standpoint. I think we've averaged in the last quarter 3% to 4% of the backlog cancellation, which is now pretty well inside of the industry's been presenting to us as they have.

[Troy Clarke:]

Yeah. So David you know, let me just – if I could just summarize this, because I think this is kind of a point that I'd like to make. Look, our guidance for the fourth quarter provides for potential further softening in Mexico and Latin America where we really don't put those orders in until we know they got a home. The potential for customers to push out deliveries a little bit is the kind of thing that might happen, sometimes those get back field sometimes they just get out.And with the line rate adjustments we’ve done, we haven’t given up the ability to produce and deliver units to the previous levels that we highlighted of our guidance which in fact then allows us to protect the upside and we've done all this with the ability to roll into Q1 with a healthy back log that allows our order to delivery system to run efficiently without a lot of stranded inventory, a lot of premium freight and other type costs that that we might run into.I mean it's hard for us to describe because the company hasn't been in that position for a while, but you know we've got this thing locked in very nicely and all the numbers kind of interlock and we have a lot of confidence in our forecast and the ability to protect the upside.

[David Leiker:]

Great, thanks. Any thoughts on how the industry sits. I know that’s hard for you to do.

[Troy Clarke:]

You know I think we look at their numbers and they kind of look a lot like our numbers. So I mean, I don't know Persio.

[Persio Lisboa:]

I think from what we are experiencing with customers, I think we're all in the same position at this point in time and honestly I think as we've been gaining share, we want to continue the, now kind of the performance that we delivered to customers, not only on the products side but on the service side. And customers are valuing us more because of I think what we've done in the last few, weeks or months in early ’19. But I don't see anything different happening in the industry overall. I think all the customers are the same. We're all knocking on the same doors.

[Troy Clarke:]

Yeah, and I think they are doing the same thing. They are looking at what the orders are coming in, what the customers are telling them. There is just one small difference, you know our quarter ends at the end of October, right, our fiscal year. Does their fiscal years tend to end at the end of the calendar year.So you know the kind of the, the last minute puts you know to – you know to kind of retarget on the score cards looks a little difference between us and them. So you know I certainly anticipate that they will be pushing for deliveries between now and the end of the calendar year and our market share forecast by the way provides for that kind of push, because this is something that we have – you know we see every year.

[David Leiker:]

Yeah, great. Thank you very much.

[Operator:]

Thank you. And our next question comes from Seth Weber with RBC Capital Markets. Your line is now open.

[Brendan Nagle:]

Good morning. This is Brendan on Seth. Thanks for taking my question. You had a healthy market share gains this quarter again, you know and I appreciate the comments that you anticipate growing market share again 2020. I was wondering any extra color you can give on, I guess what you’re seeing that drove your decision to decrease the 19 share gain to the 18.5 to 19 from the over 19% indicated last quarter?

[Persio Lisboa:]

I think I can comment to that. Typically what we do, we have a forecast for the industry and we have a forecast for our deliveries. The delivers are pretty locked at this point in time. We know what they are going to be. What we don't know – a 100% control is the forecast on the top line of the industry and as we mentioned before, there is now – I think we are seeing more of an effort on a retail to retail more units from all distributors.And so the industry forecast being a slightly higher, now forced us to basically consider that now our share may not be as aggressive as we thought it would. Although, year-to-date we've been performing above I think where we were last year as we alluded in our prepared comments.So it is more of an adjustment on the forecasting of the industry than anything else. We don't see a deterioration in our forecasted deliveries and DPUs we call, the units that get charged out and retailed in the market. So it is more of an adjustment on the overall forecast and making sure as we got closer to the end of the year, it's easier for us to put a tighter range.

[Troy Clarke:]

Yeah, as so we look at the inventories, you know of our competitors and their dealers you know especially going into a softer year 2020, we have every reason to believe that they'll be pushing those units off the lots and through the pipeline just like we will be doing that. It’s one of the reasons why Walter increased in his comments the industry by 10,000 units and so it's really the effect of the increase in the industry. As Persio said, it's a math phenomenon as opposed to we think we’ll be selling fewer units in the quarter than we had planned.

[Brendan Nagle:]

Okay, great. Thank you.

[Operator:]

Thank you. And our next question comes from Jerry Revich with Goldman Sachs. Your line is now open.

[Ben Berude:]

Hi, good morning everyone. This is Ben Berude on for Jerry. So you all are currently guiding to about $900 million of the EBITDA this year at the peak of the cycle and if we think about layering on the TRATON cost savings, that number will move to more around 1.1 billion to 1.2 billion. Is that how we should think about what the next peak looks like in your business or you are achieving more of the TRATON sourcing cost savings already at this point.

[Walter Borst:]

Hopefully Jerry we’ll let you come to the Investor Day.

[Troy Clarke:]

Yeah, you need to come to Investor Day. Ben, I know Jerry is not on the line, but you need to come or Jerry needs to come to Investor Day because its – there is no 30 second answer to that particular question, okay you know. Look, we’re going to grow and we are going to continue to improve the returns that this business provides shareholders and to say that the TRATON savings that we talked about and were on track for is all we're going to be able to do, that is not the case, okay, but to explain what is the case you know we're going to need a little bit more time.But you should have confidence that, and I'll state it again in my closing remarks, no other OEM has the upside opportunity that we do to gain share, to lower costs, to grow their business, to create additional cash flow, and you'll see that and what our plans are for the next handful of years at Investor Day.

[Ben Berude:]

Got it, understood. And 3Q obviously continued this trend of strong market share gains you’ve all seen across the portfolio. How do we think about share gain momentum into 2020? Do we keep going at this this current cadence? And are there any more notable share opportunities on the horizon in 2020?

[Persio Lisboa:]

Well, I think you know what the -- we never say that – want to say that they are going to slow down anything. We continue to work the most rated value of our products and services to our customers and we've been rewarded by that.So again, I think we'll be able to provide more guidance into next year in our next call, but at this point in time we just want to stay the course and make sure that we continue to do the right things. There is a lot of activity taking place right now, not only on the product side of the business, but also on the service side.We launched a very aggressive plan to transform our dealer network. We have a lot of support and you heard Troy talking about Love’s and how we expanded our network to better serve our customers. Our uptime promises is really sticking. Right now we see that customers are valuing us more than just for the product that we deliver to them. So we hope that that will continue into 2020.

[Walter Borst:]

And we do expect our share to go up next year.

[Troy Clarke:]

Yeah, yeah. I'm sure everybody's going to say the same thing, but we really mean it.

[Ben Berude:]

Got it. Thank you very much.

[Operator:]

Thank you. And our next question comes from Steven Fisher with UBS. Your line is now open.

[Steven Fisher:]

Thanks. Good morning guys. Within your 2020 initial industry Class 8 outlook, do you have any feel yet for how that would share up between severe service and heavy trucks. I'm kind of particularly curious about the severe service piece in your backlog that’s been holding up better than heavy trucks, but it is starting to come down now as well.

[Troy Clarke:]

Yeah Steve, within that I’d have to look up the numbers, but I think within that we continue to see the severe service portion of Class 8 holding up a better for the industry as a whole, you know with heavy coming down a little bit more than severe.

[Steven Fisher:]

Okay and then I was curious what’s behind the double digit decline in the Class 6 to 7 outlook for 2020. I’ve always thought it out as a relatively steady your business, but still you have it down about 14% for the industry. We’ll what’s the thinking behind that, behind that market decline for next year?

[Persio Lisboa:]

Well, I think what you're seeing is as the industry peaked in two different segments. If you take leasing and rental there is usually a movement on with the leasing companies when they start seeing a decline in the market. What traditionally they do, they take their rental units and they move their own rental units into leasing business. And that's a portion, that's something that basically goes away from the industry, it is an internal movement, so that’s one thing.And then the others really are monitoring you know the housing starts and constructions and things that also impacted meaningfully these segments, and that one. You add all those two factors together, we got to do 10% I just saw there. But it is still at a very strong level. We are still considering that this is above replacement demand for medium duty.

[Troy Clarke:]

We are only counting on medium duty being down as an industry 10% last year and we don't think we’ll be down in line with the industry.As Persio indicated, you know 50% of the medium duty trucks are bought by the two largest rental and leasing companies. When they choose to push their units from rental to leasing, then nobody's building a unit for them and that’s part of what you see, you know part of what you see in that particular number.But again, you know this is above replacement demand, so it's an area of traditional strength for us that we built a lot on it in the last couple years and we’ll continue to do that.

[Steven Fisher:]

Great thanks a lot that.

[Troy Clarke:]

You bet.

[Operator:]

Thank you. And our next question comes from Rob Wertheimer with Melius Research. Your line is now open.

[Robert Wertheimer:]

Hi, thanks and good morning everybody. Troy, I think you mentioned you mean it on share gain and you've talked and we’ve talked in the past about some of the national entitlement coming and back to you as fleets that you know had been customers, weren’t customers are now starting to be customers. Any insight on how far along in that path you – you know, if you got them all trialing or only few of them trialing or they are trailing at high levels, normal levels you know still just testing the waters. Anything you can do there?

[Troy Clarke:]

Yeah, you know I think I’ll give you a little bit of color on that, without trying to give you too much detail, because again, it kind of gets complicated, you know between Persio and Michael Cancelliere and sales. They have a number of very complicated charts.But look we staked out and you'll see a little bit more that on Investor Day as well, just putting in a plug for that. If you look, we staked out a number of customers, you know so think about like 15 major customers and between those, a bunch of them you know used to do business with us and then stopped and some of them stopped doing business with us and really never had a bad experience with you know the previous submissions technology.In both of those cases, okay every one of them have – in some cases for a couple years, had some of our new units with our new uptime proposition, with the new quality, the new design the new driver centric kind of design philosophy we had and every one of them have given us very positive feedback.Now in a handful of cases they have you know in the course of two years stepped-up their percentage of our buy to where we are at parity with the other brands that they buy for their fleet. In another handful of cases we are becoming the largest supplier to them and in another handful cases, you know they're working themselves out from under some longer term contracts. So we get a portion of their buy that we would anticipate that we would gain you know over time.You know Michael called these customers as influencers. These are the trucks that you know their color, their badging, the freight the haul, those are rolling billboards right, because they are endorsements that you know these are well run truck companies that manage total cost of operation, that don't make these decisions lightly. I mean they're making them for the right reasons.And so I would tell you, on all 15 of those very key largish kind of customers, we have made significant progress, some more than others. I mean, this is just one of the things that gives us tremendous encouragement for – look, I don't know that some of these customers are buy a 1000 trucks next year, they're going to buy 100 trucks next year. But you know over 50% in it, some of those customers, they're going to be our trucks and last year it was 50 and so you know that's the kind of, you know insight that we have.Now we'll take that 15 you know and we'll start expanding that for next year. You know we'll take the next five, the next 0 10 and then you know we have a very intensive sales process where we go in, we introduce ourselves, talk about the value proposition and you know and a good business to business kind of sales process. So we are extremely encouraged.

[Robert Wertheimer:]

Okay, thanks. That was very informative. Thank you.

[Operator:]

Thank you. And our next question comes from Rob Salmon with Wolfe Research. Your line is now open.

[Rob Salmon:]

Hey, good morning guys. I guess kind of segwaying on that question there. As you guys have been going into those larger kind of high profile fleets, could you give us a sense of any sort of residual value guarantees that you guys have been doing. Earlier in the conference call you had noted that you are seeing some weakness on the used trucks. So just curious how we should be thinking about that piece of the business?

[Persio Lisboa:]

Well, I – this is Persio. Now every case is a case. We used – traditionally don't have a lot of residual value again guarantees. We really manage to the fare amount market value of the units when they have to go for trade and customers understand that.I think the good news is that the new products that we have or have been really you know demonstrating that our residuals are going up now dramatically with all the new products that we've launched. So it is not a practice for us to really you know work with no residual value guarantees.

[Rob Salmon:]

I appreciate it. That commentary is helpful. So kind of more of just the improvement in the underline product driving that incremental market share from your perspective then?

[Troy Clarke:]

Yeah, and the confidence that the residual value will continue to improve over the life cycle, you know of the product.

[Rob Salmon:]

That makes sense. Could you speak more broadly about what you guys are seeing from a used truck inventory, as well as pricing perspective? We saw those kind of less than five year truck, particularly the four, then five year in the month of July inflect negatively looking at some industry data, but would love to get your perspective of what you're seeing across your dealers from both the price and inventory perspective.

[Troy Clarke:]

Inventories are going up, because the – you know strong new volume truck sales that we’ve seen this year. Our used truck inventories are up as well in the third quarter and we expect to work those lower in Q4.I think we alluded to the sleepers in particular where they saw weakness in the pricing. And what is happening right now is that, now in the past actually between the first and second quarter, I think it was taking longer for customers to trade their units and now we are seeing a higher velocity on the trade. So it is not taking as long, that's what I think is happening. The industries, has – the inventories start going up, that’s one of the reasons why as new units get delivered the old ones are returned faster.

[Rob Salmon:]

That makes sense and should we be contemplating just as the later model use truck inventories kind of rise and we see additional pressure there. Should we be contemplating softer pricing as we look out to next year, right relative to what we've seen this year?

[Troy Clarke:]

Well I mean I think, yes. You know I mean we're already seeing you know the softer pricing, but you know I mean – I think as we and the industry return those units, you know that will support pricing right.So a couple of things that effect the used truck value right. If you need a whole bunch of trucks, you tend to hold on to your used trucks a little bit longer while you are waiting for your new ones. That phenomenon is reversing, that is what Persio was describing.The second phenomenon is when the market starts to recover, used trucks is the quickest way to add capacity to your fleet and take advantage of rising freight rates. And so you know look, I mean I think how we look at this, we’re kind of in a period of time where especially on the Class 8 sleepers we are – we as an industry are a little over supplied and so there will be pressure on those prices until that over supply is resolved and you know I think that'll take probably a couple of quarters to make that happen.

[Rob Salmon:]

Got it. That makes sense. I appreciate the time guys.

[Operator:]

Thank you. Ladies and gentlemen, this concludes our question answer session. I would now like to turn the call, back over to Troy Clarke for any closing remarks.

[Troy Clarke:]

Yeah thanks. In closing, Q3 was a great quarter for Navistar and I really want to thank our customers, our employees, our dealers for helping us deliver these strong results. You know truth be told, as we've indicated it's no surprise the U.S. economy and the trucking market is moderating. Our industry tends to run in four year cycles. This isn't a surprise for us. We have been preparing for this time.During our turnaround, we lowered to breakeven point of the company by implementing lean practices, reducing our cost structure, while growing market share and strengthening the balance sheet.We are in a much better position today and we remain firm in our belief that no OEM has the potential to increase volume, gain share, lower cost and create improve cash flow like Navistar and we plan to continue those improvements into 2020. And this is why I remain optimistic that 2020 will be another good year for Navistar.We look for to talking to you again at our Investor Day. Please reach out to the IR Team for any additional questions or details on those events. Thanks for your time and interest in our company this morning.

[Operator:]

Ladies and gentleman, thank you for participating in today's conference. This concludes today’s program and you may all disconnect. Everyone have a wonderful day.