Navistar International Corporation
Q2 2017 Earnings Call Transcript

Published: 7 Jun 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Navistar Second Quarter 2017 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 Instruction] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Marty Ketelaar, Vice President of Investor Relations. Sir, you may begin.

[Marty Ketelaar:]

Thank you. Good morning everyone and thanks for joining us for Navistar’s second quarter 2017 conference call. Today, we will discuss the financial performance of Navistar International Corporation for the fiscal period ended April 30, 2017. With me today are Troy Clarke, our Chairman, President and Chief Executive Officer; and Walter Borst, 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 for today’s call in the Q&A session are Persio Lisboa, Executive Vice President and Chief Operating Officer; Bill Kozek, 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 presentation slides has been posted to Investor Relations page of the website for reference. The non-GAAP financial measures discussed on 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 filing. I would also refer you to our Safe Harbor statement and other cautionary notes disclaimer presented in today’s material for more information on the subject. With that, I’ll turn the call over to Troy Clarke for opening comments. Troy?

[Troy Clarke:]

Okay. Thank you, Marty and good morning everyone on the call. I will provide an overview of the quarter, and then Walter will talk you through the details of the financials, and then we’ll take your questions. The headlines are, we are on track to deliver to our plan for the year. I know our guidance on this has been broad, because the industry has been weak as the year started, but at this point in time, we are confident we can deliver year-over-year improvement. Our new products are being well received by customers. Our increased orders and production are beginning to translate into improved market share. Warranty and used truck issues from the MaxxForce 13 EGR products continue to diminish and now is the time for us to take steps to put these issues behind us faster. We’re moving ahead rapidly to take advantage of the opportunities from our alliance with Volkswagen Truck & Bus, which we just closed during the quarter, although it seems like a while ago now. We promoted a new Chief Operating Officer, Persio Lisboa, who played a key role in creating our alliance with Volkswagen Truck & Bus, and as President of Operations led many of the initiatives to improve our operations over the last few years. Taken together, the work we’ve done in the first half, positions us to deliver stronger second half results, consistent with how we thought 2017 would play out. Let me provide a little more explanation of these points. In our last quarterly update, we indicated that Class 8 industry softness would continue into our second quarter. And while this proved to be the case, we are tracking to deliver results that will support a fifth consecutive year of adjusted EBITDA improvement. The ACT industry forecast and other indicators have shown the Class 8 market to be recovering and coupled with a strong Class 6-7 industry, overall, market conditions are expected to be better in the second half of the year. We also see economic improvement in Mexico, which is an important market for international trucks. And while retail share were vary from quarter-to-quarter, our share is improving. Our core market share improved from a year ago quarter. Our Class 8 share is up sequentially from Q1 and we’re seeing significant share improvement in the medium segment. We’re holding discussions and winning sales from significant customers that we have targeted and our improving cost structure is allowing us to be more competitive in today’s market. Our backlog is growing and we are adding to our production schedule for the second half of the year. In fact, our backlog now stands into our fourth quarter. Much of this has to do with the positive reception of our new products. Customers are impressed with the quality, fuel economy and uptime. Our new product offerings are working together to improve our market position and to provide opportunities for growth. The new LT Series Class 8 on-highway tractor powered by the Cummins X15 began shipping in January and is doing very well. In addition, more than 1,500 orders in our Class 8 backlog are now for the new A26, 12.4-liter engine, which we introduced in March and expect to begin shipping in the coming weeks. This quarter, we also launched the RH Series of regional haul trucks for which the A26 is ideally suited, creating the most capable truck in that segment. These products will further strengthen our ability to grow market share in the Class 8 space, especially the important 13-liter segment, where we have underperformed over the last few years. We’re now getting all the pieces together. Our launches of new truck offerings will extend through 2018 and these will include new medium and severe service products, as well as new powertrain options school buses. We continue to manage cost effectively. As I indicated, the cost drag from our MaxxForce 13 products is diminishing. Warranty spend is returning to normal levels and gross used truck inventory declined for the fourth straight quarter. Also, we are seeing our newer used trucks, trucks with SCR N13 and ISX engines returning to normal trade cycles and values. We announced today that we are changing our sales strategy for MaxxForce 13 used trucks to take advantage of a significant opportunity in markets outside the U.S. And now we plan to sell the majority of our MaxxForce 13 used truck inventory into these export markets. With this change in our used truck disposition strategy and the associated charge, we are taking an important step to put this legacy issue behind us. Walter will provide more details in a few minutes. This is actually the next in a long series of steps that we have taken to aggressively address the drag of what we call legacy issues, which have been masking the underlying improvement in our financial results and we’ll do more. Also, there were some additional accomplishments in the quarter. Total run rate in production of General Motors Cutaway G Van which we manufacture at our Springfield, Ohio plant. We also expanded our connected vehicle services under the OnCommand Connection grant. We announced the launch of our Electronic Driver Log app which will greatly assist smaller fleets and owner operators in compliance with new federal regulations. And we also unveiled the OnCommand Connection Marketplace, a new open architecture cloud-based technology platform for a broad range of driver support tools and applications. For both Navistar and third-party developer, we surpassed 300,000 OnCommand Connection subscribers. Now, this industry-leading connected vehicle subscriber base, positions us well for future opportunities in vehicle to vehicle technologies and truck automations, such as platooning. The Volkswagen Truck & Bus alliance is off to a fast start. Our procurement joint venture is identifying cost savings opportunities and we expect it to be accretive in year one. The technology aspect of our alliance will allow us to better leverage our R&D spend and will ultimately provide new products and opportunities from integrated technologies. Our U.S. and Canada commercial parts business had another solid quarter and we expect it to do even better in the second half of the year. In closing my comments, I want to stress that our 2017 plan was built around a stronger, second half of the year, and with the positive signs that we are seeing in the market, the market’s receptivity to our new products and the orders already on our books, we are confident that we will deliver a stronger second half in line with our guidance of year-over-year improvement. Looking out a little further to 2018, we foresee further progress from a completely new product portfolio in Class 6, 7 and 8; expansion into the Class 4 and 5 market; greater penetration in the connected services space; and synergies from our alliance with Volkswagen Truck & Bus. And with that, let me turn it over to Walter.

[Walter Borst:]

Thank you, Troy. Good morning, everyone. This morning, we’ll review the results for the second quarter. As Marty indicated earlier, additional details can be found in the slide deck posted to our Investor Relations website. Despite signs of recovering market, we continue to see the impact of soft industry conditions on our results this quarter. Also as Troy mentioned, we took a major step forward to address legacy MaxxForce 13 used truck inventories that impacted our financial results in the past couple of years. We’re taking steps to improve our performance in the second half of the year, keep us on track to achieve our fiscal 2017 guidance and position us to continue our positive momentum in the future. For the quarter, consolidated revenues were $2.1 billion, down 5% compared to last year. Core chargeouts were down 5% to 15,000 units, yet this outperformed U.S. and Canada core industry volumes which were down 13% year-over-year. Our loss was $80 million or $0.86 per diluted share and adjusted EBITDA for the quarter was $65 million after excluding pre-existing warranties and impairment and restructuring charges. The main item impacting our second quarter results, as well as the truck segment, is an addition to the used truck reserve of $60 million primarily resulting from a change in our sales strategy for MaxxForce 13 trucks to focus more on export sales. We believe taking this action now will eliminate the need for future meaningful used truck reserve additions, related to MaxxForce 13 trucks and clears the way to move the vast majority of the remaining units and inventory by the end of 2018. As from this action, disposal of these units and related reserve adjustments might continue through 2020 or even longer, clouding a remarkable turnaround story. Excluding the increase to the used truck reserve this quarter, adjusted EBITDA would have been significantly higher, our truck segment would have been profitable and on a consolidated basis, our results would have been much closer to breakeven. Let me give you some additional insights into our change in strategy. As we’ve mentioned previously, while there’s a strong appetite for the MaxxForce 13 trucks in certain export markets, the values of these markets have typically been lower than what could be achieved domestically. Over the past two years, there has been significant pressure domestically on used truck pricing across all OEM brands due to an oversupplied market. As a consequence, the price gap between the domestic and export markets, has narrowed, providing us with a great opportunity to take action and put this issue largely behind us. Meanwhile, we continue to successfully export these units as evidenced by the fourth consecutive quarterly decline in our used truck inventory levels in Q2. In fact, the number of MaxxForce units and inventory has declined by 25% since the peak a year ago. As a result, we made the decision to shift our used truck sales strategy from focusing on the domestic market to more aggressively pursuing export opportunities for the MaxxForce 13 units. We believe now is the right time to pursue this strategy, and we see several potential benefits, including accelerating the velocity of sales thereby driving inventories lower; less domestic supply, making it relatively easier for dealers and customers to sell their MaxxForce 13 trucks; and allowing our used truck organization to focus on selling and maximizing values of newer international trucks powered by our N13 engine and other powertrains coming back in trade. This action will allow us to sell more of our MaxxForce 13 used trucks inventory into export markets, and we have the opportunity to move these units faster than otherwise would have been the case. In turn, this significantly reduces the risk that meaningful additional used truck reserves for these units will be required in future quarters. In addition to the improvement, we expect to see from our used trucks business going forward, we continue to see excellent progress in warranty. Excluding pre existing charges, warranty expense, as a percentage of manufacturing revenue was 2.4% this quarter versus 2.9% a year ago. Meanwhile, pre-existing warranty expenses have normalized. During the first half of the year, we had a net reversal of $10 million, as legacy products roll off their warranty coverage periods and the quality of our new products improve. With lower used truck pricing levels for our remaining inventory and few remaining MaxxForce 13 units with warranty coverage, we believe these two legacy EGR issues are coming to an end. As Troy mentioned earlier, a number of legacy items have impacted our financial results. We’ve addressed several of them over the last few years. And this quarter, we took another major step forward. We’ll continue to look for opportunities to resolve other legacy items to clear the way for more profitable future that will drive greater shareholder value. Moving to our segment results. As I mentioned earlier, core market chargeouts in our truck segment were down 5% year-over-year due to weaker industry conditions and cessation of sales to Caterpillar. Our improved cost structure has allowed us to be more competitive in the market, enabling us to strengthen customer consideration and market share. Additionally, we saw sales mix shift from higher revenue Class 8 trucks to lower revenue, medium duty Mexico and export trucks. As a result, truck sales were down 6% year-over-year to $1.4 billion. Lower core unit sales and average selling prices plus the used truck reserve increase of $60 million contributed to the segment’s loss of $56 million. Also note that prior year results included a $90 million benefit from the recognition of income for an intellectual property license. Our parts business is feeling the impact of lower sales at our Blue Diamond Parts business, a joint venture we have with Ford, with segment revenue down $37 million in the quarter. Meanwhile, the commercial parts business remained robust, supported by the fleet right and remanufactured parts businesses. For the quarter, parts results were down $23 million compared to a record performance in the comparable period. Our global operations segment continued to make strides to offset declining revenues, resulting from the ongoing difficult economic conditions in Brazil. For the quarter, global operations reported a loss of $7 million, as revenues fell 9%. The financial services segment experienced lower interest revenue from finance receivables and unfavorable movements in foreign currency exchange rates impacting its Mexico portfolio. Q2 revenues were $56 million; segment profit fell to $50 million, reflecting the impact of lower interest margins, as well as the paydown of certain intercompany loans that have been a source of profit for this segment. Moving to manufacturing cash. We ended the quarter with $918 million, which includes the receipt of $256 million equity injection from Volkswagen Truck & Bus in February. Also during the quarter, the sequentially higher volumes resulted in net working capital being a source of cash, while we used cash to pay down certain intercompany loans, make warranty payments in excess of expense and fund annual payments for employee compensation and benefit programs. We’re on track to end 2017 with about $1 billion of manufacturing cash, consistent with our guidance on the first quarter call. As we look to the second half of the year, we expect our earnings to improve due to the following factors. Number one, improving Class 8 industry conditions; number two, stronger backlog due to our new LT, RH and HX product offerings as well as the new A26 proprietary engine; number three, stronger performance from our parts segment, bus operations and Mexico and export operations as we enter important seasonal periods for those businesses; number four, significantly less used truck reserve adjustments for MaxxForce 13 trucks, for perspective in the second half of 2016, we added more than $100 million to our used truck reserves, which we don’t expect to repeat in the second half of 2017; and number five, cost savings from product cost initiatives including better utilization of our manufacturing facilities as we ramp up production of G Cutaway vans for GM and initial savings derived from the procurement JV as part of our strategic alliance with Volkswagen Truck & Bus. These factors give us confidence that we’ll improve on last year’s adjusted EBITDA results in 2017. 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 the line of David Leiker with Robert W Baird. Your line is open.

[David Leiker:]

I’ve got two items, I wanted to walk through. First just a great move on the used trucks and trying to accelerate game that’s behind you. My first question is related to used trucks. We look at the difference between your gross and the net debt accumulative write down you’ve taken on that inventory. Is that the right way to look at that?

[Walter Borst:]

Yes.

[David Leiker:]

Okay. And then, if you look at the MaxxForce 13 trucks that are still in the field, how many of those do you think come back to -- are you through those -- down into your inventory?

[Walter Borst:]

Yes. We think we’re through the lion share of what we’re going to be taking back. We’ve worked with our customers on that. That’s another good reason to take the action that we’re taking now. We don’t expect as many more to be coming back in the future as what we’ve taken over the last few years.

[Troy Clarke:]

Yes. David, I think part of that story is over the past couple of years, we’ve been very proactive with our customers; we’ve been reaching out to them; we’ve been trying to work them out of those units. And in many cases that required us to take those units. And so, we in fact then took the disposal responsibility in excess of what we might have done under a more normal circumstance. So, from a very planned basis, we kind of see that we’re through that. I mean, we have a very good line of sight on the number of trucks that we’ll take back. And I would say, Bill, I want to use the term, minimal, but you may have a different point on that. So, we make this move with I think a surprising amount of clarity on how these numbers should work out for us as we go forward over the next 18 months.

[Bill Kozek:]

Yes. David, this is Bill. The big thing is we want to take care of the customers and we continue to have the conversations with them about taking back. But we believe, as Troy and Walter both said, it’s a very minimal number of vehicles between now and the end of really 2018, so really felt us. And I think our analyses support it. It’s a really prudent action at this point in time to just really accelerate this issue, get into the rear view mirror and begin to uncover the financial performance that the Company is really capable of generating.

[David Leiker:]

No, secondary effect of this is you essentially have written on the value of the trucks that are still in the field. How do you think that plays out that the trade-in on those at lower values versus the price you get for your truck, I mean in some fashion on a net basis that shows up in price that you start to see some recovery on that price?

[Troy Clarke:]

Yes. I mean, part of our analyses would suggest that if we pull these out of this -- we have a used truck market today that is like oversupplied by everybody, okay?

[David Leiker:]

Right.

[Troy Clarke:]

And so, there is a lot of used truck markets. If we pull these or plan to pull these basically out of that market, it will have a -- it will provide favorable opportunities for the pricing related to dealers and customers, as they’re seeking to dispose. There are still customers for these trucks out there. And in a number of places around the country, people do a lot better than we do on the prices that we sell for basically. And now, we’re going to clear a little bit out of the way so that they can go out and I think experience what the real market value of those products could be.

[Bill Kozek:]

Those deals are largely behind us, David. And so, looking forward, we are in a pretty decent position from a pricing and going to market strategy.

[David Leiker:]

Okay, great. And then, one last item, the last couple months, the order numbers on the Class 8 have been a little bit weaker, but the last six, seven months, we’ve had some pretty strong numbers on that Class 8 piece. Can you talk about what your incoming orders have looked liked in the face of that strong -- stronger volume and then impact that this weakness is having on your numbers? I know that’s a little bit of detail, but any thoughts you can share that would be great.

[Bill Kozek:]

Sure. We’re participating in the increase in order intake as well. Our medium growth is significantly higher than the Class 8, but the Class 8 is holding its own. And we’re seeing that in segments a little bit different than you might see in October, which is leasing small to midsized over the road fleets, small to midsized private fleets, municipalities are buying, construction is strong, certainly the energy segment continues to be strong and utilities have been very strong for us. So, we’re pretty bullish on the rest of the year in terms of order intake. And as Troy said, our backlog is as far out as it’s been since I’ve been here. So that’s a positive trend for us in the second half. But the other piece of that is customers are having pretty good years in general. And now, they’re looking at vehicles for now and then into 2018.

[Troy Clarke:]

And I think anecdotally, David, I mean, Bill should take credit. We have sold a handful of fleets since the beginning of the year for delivery later in the year. These are brand name fleets that haven’t bought a truck from us in over five years. And so that’s the kind of interest that I think our new products are extremely excited about, all these new products, the LT has been received in the market for all the good right reasons, right? It’s great quality, terrific fuel economy and probably the most driver-friendly truck on the road today. So, we’re tickled to death and really are optimistic at what we’re going to be able to continue to do throughout the year. We’re pretty confident; we can hold our fresh air here.

[David Leiker:]

Okay. Thanks for your time and it’s great to see you turning the corner here.

[Troy Clarke:]

Yes. Thanks, David.

[Operator:]

Thank you. Our next question comes from the line of Brian Sponheimer with Gabelli. Your line is open.

[Brian Sponheimer:]

Just staying on the used truck portion of the call here, how much did the closing of the Volkswagen partnership factor into your decision to change strategy on the used truck side?

[Troy Clarke:]

Hi. You know, Brian, it really was an unrelated factor.

[Brian Sponheimer:]

Okay.

[Walter Borst:]

I think it’s really more the issues that we mentioned earlier around the time is right, given where we are in the used truck cycle for these particular trucks and the success we’ve had selling these units into export markets.

[Brian Sponheimer:]

Understood. Just to understand what -- so just to be more clear here. Does this mean that you think you’re going to accelerate the number of vehicles you’re going to take in on trades over the course for the next 6 to 12 months or is this merely what you’re doing with your inventory that’s on the balance sheet right now?

[Walter Borst:]

It means that we’re going to try to accelerate the sales of those units, so that we can get through most of the remaining inventory of these trucks that we have by the end of 2018.

[Brian Sponheimer:]

So, you’re taking what you already have and selling that; you’re not trying to take out of customer hands and then resell?

[Troy Clarke:]

Yes. Brian, we actually kind of -- we kind of make a plan that we pretty well stick to through the year. We have a pretty good line of sight for entire year on the inflow of used trucks, the number of deals that we have that require a used truck engage. And I would say, we know 95% of those deals between now and the end of the year. So, this really does not represent an acceleration or an increase in the number of used trucks we might take, we know what those deals are, we know how to manage that, it’s really increasing the disposal of the -- how many trucks do we have -- about 7,000. It’s increasing the disposal. The real takeaway here I think that excites me about this whole thing is about getting it behind us is, if we don’t take advantage of these export markets, which are half for us and they love these products, then Walter indicated, this is an issue that’s going to be with us, this inventory will be with us through that 2020 and maybe beyond time period. We think we’re going to get through -- this time next year, you probably won’t hear us talking about this situation.

[Walter Borst:]

And Brian, this gives us an opportunity to have a more normalize used truck operation. The MaxxForce engines have been a bit of anchor on our performance and we want to put it behind us. And we’re pretty excited going forward about having more normalized used truck activity, where we can take care of customers and we can make a little money in used truck.

[Brian Sponheimer:]

If I can ask just one more, just customer behavior since the Volkswagen deal was announced and since it’s closed. How has that changed and how has that affected the way that you go to market to compete?

[Walter Borst:]

The conversation have certainly changed and it’s a situation of there -- now they see a long-term viability, and the things that we’re doing today give them excitement, because now we can participate in a number of technologies that we wouldn’t have been able to, had VW not joined up with us. So, generally, extremely, extremely positive and the conversations have certainly changed.

[Troy Clarke:]

Yes. Very excited about this opportunity, and the customers are reflecting back to us as they are very excited for us in the opportunity that this access to technology and relationship and scale and all the things that we thought the venture to be -- the alliance to meet, so good stuff.

[Operator:]

Thank you. Our next question comes from the line of Jeff Kauffman with Aegis Capital. Your line is open.

[Jeff Kauffman:]

Thank you very much. Could you talk a little bit -- you made a comment about how we may be bottoming out in terms of the parts contribution to the P&L and you talked about seasonality. But could you give us a little more clarity or maybe some of these other factors such when A26 starts selling, is that something that begins to contribute to parts and kind of how do you feel about the parts contribution as we go into fiscal 2018 with some of these other new products and programs coming out?

[Troy Clarke:]

Yes. Great question, Jeff and it’s evidence, the way you ask the question, let us try to clarify a little bit what we think we said because it may be a little bit different than how you phrase it to us. And if we don’t really touch it, make sure you stop us, so that we come back and clarify any point, okay? Walter, why don’t guys start with what we think we said?

[Walter Borst:]

Yes. So, Jeff, good morning first of all. What we indicated was that in particular in the Blue Diamond Parts joint venture, we saw less sales and that’s not unexpected over time. It’s a long tail to it, but as we’ve indicated before but we would expect those sales to wane over time, given that that joint venture was terminated a few years back now. The second part I think of your question or second piece -- first part of your question maybe was how we see kind of parts developing over the course of the year. And if you look back over the last five years for example, parts tend to do stronger in the second half of the year than they do in the first half of the year at the profit level. So, we would expect that to continue this year. Last year, we had a very strong second quarter, it was a record quarter and maybe that was a little bit more of the anomaly than what’s historically been the case. And then, as it relates to things like A26, I mean this is a great opportunity for us to have parts business in the future but that’s a few years out. That will really only kick in after the warranty period. But, the key there is as we have proprietary engine technology that that will be a nice stream of revenue for the parts business over time and speaks to the longevity of that franchise.

[Bill Kozek:]

Yes. And if I could just jump in also, we expect 2017 will be a very strong year for our parts business and 2018. The market is growing and we anticipate participating in that where we’ve been hurt as Walter said Blue Diamond Parts, which is we totally expected this, we forecast the continued run-off, it’s got a long tail but it’s going to run-off; we know that. And then as you mentioned, proprietary -- the proprietary A26 engine is going to help us moving forward and but we’ve grown All-Makes business as well as remanufactured business, which has some margin degradation for us but overall we anticipate continued growth in our parts business.

[Troy Clarke:]

Yes. Let me just fill in just couple of gaps here for those of you who are listening in because we haven’t talked about this for a while. Blue Diamond Parts are really Ford power stroke pickup truck engines, okay? We no longer make than engine, that vehicle park is peaked. Typically they’re sold of Ford dealers and then as a result when the truck eventually goes to its second and third owner, they buy it from somebody other than the Ford dealer. So that’s why Blue Diamond Parts comes down, it’s really not related to our core business as a standard today. The second thing that is in both Walter and Bill, those comments are we are just now seeing the big bore engines come out of warranty and the parts revenue to start. So, these are basically the MaxxForce engines, there is a number of those out there. And so, those revenues will start to ramp up for us and we’re seeing that already. And then, because of the fact we have other products that have been basically deleted from the portfolio, we are ramping up very quickly our All-Makes business and things like our reman growth to kind of fill in any bump there while the A26 eventually tours into parts revenue stream. I hope that makes sense.

[Jeff Kauffman:]

That was terrific. And I guess when I peer through the fog, it looks like we’re seeing some encouraging sides on the truck business as well. So congratulations and then thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Stephen Volkmann with Jefferies. Your line is open.

[Stephen Volkmann:]

I have sort of two questions that have nothing to do with used trucks. The first one is more about the Volkswagen cooperation. Now that you guys have closed that, I wonder about, as you look out over the next few years, if there’s anything you want to tell us in terms of an update relative to kind of product planning. And we have discussed I think at the outside about what sort of the first cooperative type product might be. And I wondered if that is sort of on track and continuing or if there is just any sort of update now that you guys have had a chance to kind of get under the hood more?

[Troy Clarke:]

Yes. So, in my comments, Steve, and I referenced it’s ramping up quickly; we are extremely excited about it. Let me flip that to Persio who is in a closer position on the day-to-day of the venture. And Persio, maybe you’d like to make a couple of comments?

[Persio Lisboa:]

Sure. Okay. Thank you, Troy. Yes, Steve. First of all, we are very excited with the progress that we’ve made so far. You know that we closed it during the quarter, and immediately, the technical teams, they jumped on it. I think the nice thing about it is that we have a ton of activities taking place here in U.S. and in Europe right now. So, we started to collaborate and make joint decisions already for future program. So, when you talk about collaboration on the technical side, there are a handful of programs that we already have, we got started and actually a lot of activity is taking place that is -- always an initial step for us. Initially, we indicated that powertrain area is the natural area that we’d be collaborating, but that is absolutely not limited to that. Actually, we found that when we talk about the self driving vehicles and new advanced technologies, there is a lot of new opportunities for us. So, those other technology discussions are also taking place and we’re starting to collaborate on that. That’s on the technical side. When you go to the JV side, on the procurement, there is also a lot of excitement because we -- the team has really hit the run very quickly, the road quickly. They got into know the opportunities that we initially identified when we put the JV framework in place. And so, just so you know, we had more than 100 meetings with suppliers so far, very exciting initial results, actually, confirming that our estimates that we had initially forecast that for the JV are going to materialize. So, we’re very confident on where we are today.

[Stephen Volkmann:]

Do you have any idea just roughly about when we might see some sort of common powertrain components between the two companies?

[Troy Clarke:]

Yes, we really do, Stephen, but I think before we’re able to do any announcements, we have to -- there is some i’s to be dotted and t’s to be crossed, timing of announcements, and of course, since our partners are involved in that, it’s not appropriate for us to make announcements unilateral for what they may be announcing over in Europe. So, a little more complexity there. That’s coming. I want you to know that that’s coming and we look forward to that day and we’re excited. We’ll just be grinning ear to ear when that day comes, but that’s not something we can really announce here as we speak. I hope you sense from the tone of our voice that we are really excited to be able to make those announcements in the future.

[Stephen Volkmann:]

I got that. Persio teed me up a little bit on the follow-on. So, I’m going to just jump in. Some of your larger competitors have talked externally about doing some self driving tests, maybe some electric drivetrain type testing. And I’m curious if you guys feel like, you’re kind of in the hunt and making similar progress. Do you have any type of product that you’re testing either with respect to electric or self-driving or just sort of an update on your thinking there, Troy?

[Troy Clarke:]

Yes. I guess, it wouldn’t be appropriate for me to just say yes to that question; you’re looking for a little bit more. We’re really excited about these trends that are coming to the industry. We call it self-driving or automated trucks, platooning, and we are pleased to have one of the leading products in the space, which is key to all of those and that’s OnCommand Connection. With 300,000 vehicles monitored and integrated into our service platform and the ability to do things like Over-The-Air Programming, we’re really setup on this. I think we’re the first to offer standard collision mitigation on our new LT and the sensors that go into collision mitigation are the exact type of things that you need to have when you start to talk platooning. Some of you came to the demonstration of platooning application at the proving ground and test facility that we had last fall, outside of South Bend. And then, hey, last but not least, we now have access to the Volkswagen Truck & Bus suite of technologies and thoughts around this process. So, we’ve definitely got our fingers on the pulse of this topic. To include electrification, don’t let me leave that out, because that is something really we’re excited to work on as well and we look forward to building on I think the unique position that we have, maybe compared to our competitors, with regards to the very large vehicle park of connected vehicles. So, I don’t want, Persio, if you want to add anything to that.

[Persio Lisboa:]

No.

[Troy Clarke:]

Again, same kind of thing, I would expect some pretty exciting announcements in the not too distant future. More to come.

[Stephen Volkmann:]

And just a quick follow-on. Are those 300,000 connected trucks, are you getting revenue from that or how do you think about that part of it?

[Troy Clarke:]

Our approach has been more of a Facebook approach to start. First off, let’s get a whole bunch of people signed up, let’s demonstrate to them the value of the product. And then, with the introduction of this marketplace that I referenced in my comments, where we can put apps on and third-party providers can put apps on, that’s what we view as the -- as A avenue for revenue in the space of the connected vehicle. The second thing is higher level of service around connected vehicles, you can expect some announcements on that. Those would also be revenue generating. And then last but not least, the integration of the connected vehicle into the service network that does things like enhance our ability to sell parts. So that revenue you basically see -- I think you see the green shoots of that, but you’ll see it in the parts side, we won’t call it out as an OnCommand Connection number in the future.

[Operator:]

Our next question comes from the line of Ann Duignan with JP Morgan. Your line is open.

[Christie Wei:]

Good morning. This is Christie Wei on for Ann Duignan. I just wanted to follow up on Class 8 orders. Are you concerned at all by the deceleration in North America Class 8 orders seen in May? What the orders have been for near-term deliveries, so what are you seeing in terms of second half backlog?

[Walter Borst:]

We are still very, very bullish on the second half of 2017 and into 2018. One month does not make a trend. And even if you look at the month of May, which historically is less -- comes down a little bit due to the spring season, we were still 20% higher than we were last year for Class 8 and 30% higher than we were -- when you add in medium duty. So, it’s still pretty good month overall. The positive thing for us is our share was up so much for the month of May. And we are very excited about our shares; severe was up 18% and heavy was 16%. So, we’re pretty excited, and we still continue to see activity that will be built in this fiscal year for us. So, I’m still bullish even though the total industry number was down slightly.

[Troy Clarke:]

Yes. Christie, I think one of the ways that I look at it is relative to economic activity. So, in the early part of the calendar year, there was a lot of anticipation of increased GDP basically, which then I think helped firm up used truck prices because used trucks in short-term economic improvement are basically used in lieu of new trucks while the new trucks are being ordered and basically planned to be delivered. What I think you see in the May timeframe is you saw a little bit of softening again in used truck prices which means there is just a little supply imbalance there or maybe some hesitation on people’s part on the rate of which we’re going to have economic growth. We’re bullish on the economic growth in the second half of the year, I think a lot of the customers we’re doing business with are, and so they’ve ordered some trucks to be delivered in those timeframes when economic growth should be much stronger than it was in the first quarter. So, we would anticipate that used truck pricing will, although it slipped a little bit in May, will begin to solidify, which again secures the equity that a truck owner has in that truck and allows him to make better decisions, better purchase decisions going forward. So, that’s kind of how I look at it and I think that’s in support of those point of view as well.

[Operator:]

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

[Andy Casey:]

Thanks a lot. And I’ll add my congratulations on the progress of getting passed some of those legacy issues. It has taken a long time coming, so congrats. I had a question on the short-term first. I know -- back to that May question, it’s only one month but could you give us a little more color on how much of your second half adjusted EBITDA improvement, the catalyst buckets that you talked about earlier, how much of that is dependent on stronger Class 8 industry, just in case these orders just kind of stay down here?

[Walter Borst:]

Yes. Andy, it’s Walter. So, the way we continue to think about the year which is the way we’ve thought about the industry playing out since the end of last year is that the second half will be stronger. We’ve stuck with our industry guidance range for Class 8 for the year at a 190 to 220,000 units and 305 to 335 overall including medium and bus. So, if you kind of take midpoint of those ranges and you compare that to the actuals in the first half of the year, then industry volumes would be up about 25,000 units in the second half of the year. And I think that’s directionally how we think about it. We’ll participate in that and we would expect to get at least our fair share of that. And so that would pertain to higher unit sales and revenues in the second half of the year for us than in the first half.

[Andy Casey:]

Okay. Thank you. And then on the, I think you said earlier 1,500 orders for the LT with the A26 engine. Are you planning on stocking any of those into dealers? I mean, are there dealer orders above and beyond the 1,500 or does that 1,500 include that?

[Troy Clarke:]

Well, the 1,500 includes that. There is a number of large customers in that number. It’s also not just to the LT, but it’s also the RH, which we just introduced in April. So, it’s a great opportunity for us to get our new engine and new truck out into the market. So, we haven’t seen the order intake that we anticipate and are forecasting. But I will tell you, we’re in -- we’re excited about it and we want to get the truck into our customers’ hands because that’s when we’re going to see the real input and the real increase in order intake.

[Walter Borst:]

Yes. I mean, lightest weight, best-performing from fuel economy standpoint engine in the segment, any truck that goes in is a winner, basically. And we have taken the time to really invest ourselves in the right processes to make sure that this is the right engine at the right time with the right quality. So, I don’t want to say it sales itself, but this is a product we’re extremely proud of and can’t wait to get it out there so that we can get the kind of feedback that sure we are going to get.

[Operator:]

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

[Jerry Revich:]

Two questions on market share. One, in medium-duty, you folks have picked up some loss share nicely within the past year. I’m wondering is this a type of a run rate that we should be thinking about for that product class, so what you folks outlined on page 13 here? And the other question is, another opportunity in the lower end, heavy-duty market would be with the Cummins 12-liter that’s coming to the market in the U.S. And I’m just wondering is that a market share opportunity for you on trucks powered by those engines, is that an opportunity that you folks are evaluating medium-term?

[Walter Borst:]

Well, let me answer the medium-duty first. Absolutely, as you saw our share for the month or for the quarter was 29%, up significantly. Typically, historically, the second half has been a little bit less for us for medium-duty share. But I would tell you, all of the things we’re doing in our products and our dealers and the customers, we are selling these vehicles to are extremely satisfied with what we’ve done in the market. And we’re getting the trucks out. And as I said earlier, some of the segments, the construction, small construction, municipality and leasing have been key wins for us. So, we’re pretty excited about the medium-duty numbers.

[Troy Clarke:]

Yes. The question on -- we are aware of that, we have very close relationship with Cummins and we’re very aware of the product that they have. At present, we’re really focused on A26 and getting it launched. And we’re really -- we’re not making any other product announcements at this time. We think the best opportunity for us right now is to get the A26 launched and get back into, in a big way, a segment, the 13-liter segment of the Class 8 market, which is arguably 50% and probably increasing over time. And so, our best play is the A26 right now. And I think that’s where we’re at. We enjoy a very close working relationship with Cummins. We’ll stay appraised of what’s going on in their technology portfolio and where we see that presents an opportunity, I think we’ve demonstrated in the past our ability to be probably one of the most nimble companies in the space with regards to reacting to customer requirements and opportunities.

[Jerry Revich:]

And Troy, just on the used truck side, last quarter, you spoke about you folks were about 75% of the way through the trade-in process in terms of the trucks that you wanted to take out of the market. And so, I just want to square that up with your comments earlier on this call, which is to say, we’re seeing a slower pace of trade-ins of those trucks. So, can you just say more of the strategy shift in terms of the number of units you expect to trade in from here or maybe just flush that out for us in terms of the pace of trade-ins that you folks expected in the quarter and expectations in the back half?

[Troy Clarke:]

Yes. I think I’ll ask Bill maybe to comment here as well. The pace of trade-ins for the quarter, because we have a really good line of sight and that was exactly as we anticipated, I think we have a good line of sight, on amount of trades that we’ll take between now and the end of the year. So, think about that number that you’re referencing the 75% as we’re passed that; we’re already grinding through kind of the balance of that. I would expect over by far the majority, over the course -- the remaining part of this year and next year, a very -- I won’t give a percentage, just because I haven’t looked at the number, but those trades after that point in time will be minimal. I think we’ve got a line of sight on all the trades that we’ll take between now and then. And I think it fits within the intension of what we’re trying to do here, which is largely take this drag, this drag on our earnings from used trucks and kind of -- and put it -- not kind of, but put it behind us.

[Bill Kozek:]

And as we said earlier, we’re looking at every customer and having those discussions, and we anticipate significant reductions in the MaxxForce engines that we take back in the coming 2017 and 2018. So, we know what they are, we know who they are, and we’ve got deals out for them. And so, our plan is to take significantly fewer MaxxForce engines in the next 18 months.

[Troy Clarke:]

Yes. We’re really in the tail of the distribution and quite frankly we dabbled with this; there’s a chart that we can show you guys that illustrates this little bit better. We just couldn’t come up with one that didn’t generate more questions than it answered. So, I think you just have to take our word for it that we know the ones that are coming back, we are really on the downside of this, this will get it behind us, our current strategy, a lot quicker. I wouldn’t expect this thing to blow up and bubble up going forward. I think our plans are pretty solid around that.

[Walter Borst:]

Yes. I’ll just add, I think it’s consistent with what we said in the first quarter, I mean 75% through then, we’re more through now and that means there is not that much more to go in terms of what we’re expecting to take back.

[Troy Clarke:]

If you really want a number, an apples-to-apple kind of number, Jerry, maybe we can have a follow-up call and we’ll figure out a way to talk to you about that.

[Operator:]

Our next question comes from the line of Joe O’Dea with Vertical Research. Your line is open.

[Joe O’Dea:]

Hi. Good morning. First question on the electronic driver log app, could you, I guess talk, one, in terms of what you’re currently hearing from customers and anticipating for kind of the productivity impact; how significant that could be. And then also just your kind of option and how that comparison price is something that would be just hardware off the shelf?

[Troy Clarke:]

This is -- and I’ll make a couple of comments and I’ll ask Bill to jump in here. This electronic driver log, there has been a really long lead time around this subject. This has been in the market basically for a long time. My experience is that it is already in place with medium and large sized fleets, it’s really an issue for owner operators and very small fleets. You, like us, have read that there could be a 5% to 7% kind of impact on the capacity in the market or basically fallout because people not wanting to make that transition. I don’t know that I see that but I don’t have a figure to give you better than the ones that have been published. The purpose of our offering is given the nature of our OnCommand Connection product, it’s something that we can do integral to that product portfolio, that product suite. And so, our part is, is this is an ideal product that is targeted to the owner operator of the smaller fleet who, if in fact, they choose to be part of the OnCommand Connection world, this is a product that can be brought to them. And if it’s an international product, the most competitive price as an offering that they could probably find in the market. And I don’t want to say no fuss, no muss because there is something that they’ve got to do with regards to it but it’s probably easier for them to just incorporate this app into their suite of OnCommand Connection. And so, it should be a motivation for them to become part of the OnCommand Connection world and it’s also a way of introducing them to this in a way that it’s probably very manageable. So that’s kind of the target market I would say of our driver log technology.

[Bill Kozek:]

And I think Tory said it very well, I think the large and the medium sized guys have already implemented ELDs and we’re not going to see a huge capacity shift because of the mandate. So it’s anything -- any shift we’ve already seen is I guess my point.

[Joe O’Dea:]

Got it. That’s helpful. And then, on just back half of the year and you talked a little bit about the anticipated step-up in industry volumes. Could you just give any indication in terms of how do you think that plays out in the 3Q and 4Q, so are properly calibrated on how to think about the implied step-up in EBITDA margins but just to make sure we think about it correctly in terms of split in the back half?

[Troy Clarke:]

Yes. We’re really not doing that at this point. So, we’re thinking about this first half and second half that’s why we’ve been talking to you guys about it, and the units will come when they come; we’re confident they’re going to come.

[Joe O’Dea:]

Well, I guess if we just look at kind of where the industry was kind of the sales volumes in the second quarter and looking at what would be kind of a high teens sequential uptick into the back half of the year, when we think about May at least, are you seeing that kind of progression in terms of we’re seeing a pretty sharp uptick right now for 3Q sales volume?

[Troy Clarke:]

Yes. I think in our case as Bill referenced this earlier, Bill you clarify if I catch this wrong. But in the cycle of the year, the Class 6-7 product kind of comes off the boil, so to speak because rental and leasing companies typically buy earlier in the year. So, in the third quarter, there is typically fewer deliveries in those spaces but it does start to pick up again in the fourth quarter. So, in the fourth quarter, you’ve got stronger typically Class 6-7. Our thought is Class 8 builds through the year. So that it’s incrementally we’re looking for a stronger third quarter and then even stronger fourth quarter in terms of Class 8 deliveries. Now, I think what the interesting factor is there is, if there is a significant infrastructure activity in the economy, then that could even be some additional opportunities if we can act on them quickly enough. That needs to be something that happens sooner rather than later because there is a winter seasonality associated, I think with some of that demand. Did I said that well?

[Bill Kozek:]

Yes, that’s well said.

[Operator:]

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

[Seth Weber:]

Sorry. I just wanted to go back to the used truck strategy shift. Does that require any additional infrastructure in place, or can you use from a sales perspective and guys on the ground, do you have enough bodies at this point in these export markets or working with these export markets, will you require additional investment here?

[Bill Kozek:]

Well, we distribute via a dealer body in each one of these specific export markets. So, it may require some investment at the local level by the local distributor. But, we continue to search for more and more opportunities or options to sell into different countries. Southeast Asia is very strong; Central and South America are very strong; and we’ve sold some vehicles into Africa as well. So, we continue to look for opportunities. And it will require not Navistar dollars, but certainly distributor dollars in those local markets.

[Seth Weber:]

Okay. That’s helpful. Thank you. And just on the global ops business, the loss actually ticked up here -- have been sort of trending lower. Is there a reason why the loss was a little bit higher in the second quarter and do you still expect that to be kind of a breakeven as short of business for the year?

[Persio Lisboa:]

Yes. Well, I think, first of all, the revenues fell 9% in the second quarter and that’s one of the drivers. But as Walter alluded here, we are very, and this is personal by the way, we are very confident that the team down there is really taking all the actions necessary to keep the business prepared for a potential uptick in the market. Right now, we are just waiting to see the developments on the political environment and economy in Brazil. But, we feel that we are right sized and we have some more opportunity that we keep exploring with the team down there and they are very focused on keeping the operations, at least at a breakeven level for us as we go through the end of the year.

[Seth Weber:]

Okay. So, by the end of the year, you think it’s a breakeven business, Persio?

[Persio Lisboa:]

Well, I think we’re going to have probably -- the losses that we have so far will probably stay. We don’t think -- we don’t envision that going up and picking up in the second half.

[Troy Clarke:]

It’s a little bit uncertain there, with the activities that we’ve seen recently. So, I think what we’ve said in the past that we stand behind is we reduced the breakeven point to not be a meaningful drag on our results at current levels. But we’re going to have to kind of watch to see what transpires there now over the balance of the year with the most recent political news down there.

[Persio Lisboa:]

Well said. Yes, because the first quarter for the economy indicated some growth. But everything is now on hold to see how the political environment is out.

[Operator:]

Our next question comes from the line of Neil Frohnapple with Longbow Research. Your line is open.

[Neil Frohnapple:]

The acceleration of used truck sales, will this materially impact your cash outlook at all over the coming quarters in 2018? You obviously maintained the cash guidance. So, is there a little bit of an offset there?

[Walter Borst:]

Well, used helps, right. So, if we move the units we actually -- it actually improves cash a little bit. But on the margin, we didn’t see any reason to change our overall guidance, which is a fairly rounded guidance of about $1 billion for the year. That’s not really the driver here, but net-net it provides some additional liquidity.

[Neil Frohnapple:]

And then just a follow-on to the ELD question. Do you guys expect any negative impact to used truck prices from this or are you factoring in that potential at all?

[Troy Clarke:]

We don’t think so. We’re taking to look at it and it’s all about supply and demand, and it’s the supply where to increase significantly. I think it could, but I don’t anticipate this year at all, to be quite honest with you.

[Operator:]

Thank you. And I’d now like to turn the call back to Mr. Ketelaar for closing remarks.

[Marty Ketelaar:]

Great. Thanks, Kalie. I’d like to remind participants of the investor of that we’ll be holding at the North American Commercial Vehicle Show which will take place in Atlanta from September 24 to -- on September 25th we’ll be holding press event to showcase our current product offerings, hosting a booth tour and a Q&A session with management, as well as additional activities. If you’re interested in attending this event, please contact me and Ryan Campbell for additional detail. I want to thank everyone for your participation on today’s call. For any investor or analyst that has a follow-up question, please reach out to Ryan Campbell at 331-332-7280. For any media follow-up please contact Jim Spangler at 331-332-5833. Thanks for joining us and have a great day.

[Operator:]

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