Navistar International Corporation
Q1 2016 Earnings Call Transcript

Published: 8 Mar 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Navistar First Quarter 2016 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 be given at that time. As a reminder, this conference is being recorded. I would now like to hand the meeting over to Kevin Sadowski, Vice President of Investor Relations. Please go ahead.

[Kevin Sadowski:]

Good morning, everyone, and thank you for joining us for Navistar's first quarter 2016 conference call. With me today are Troy Clarke, our President and Chief Executive Officer; and Walter Borst, our Executive Vice President and Chief Financial Officer. Before we begin, I'd like to cover a few items. A copy of this morning's press release and presentation slides that we will be using today have been posted on our Investor Relations website for your reference. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent as part of the appendix in the slide deck. Finally, today's presentation includes some forward-looking statements about expectations for future performance. 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 projected in today's presentation, please refer to our most recent reports on Form 10-K and 10-Q and our other SEC filings. We'd also like to refer you to the Safe Harbor statement and other cautionary notes disclaimer presented in today's material for more information on the subject. With that, I'll turn the call to Troy Clarke for his opening remarks.

[Troy A. Clarke:]

Okay. Hey, thank you, Kevin, and thank you, everyone, for joining us this morning. In my remarks, I will review the quarter's key performing metrics and business developments, and then I'll hand it off to Walter who will cover our financials. I will conclude the prepared remarks portion with some final comments before opening it up to your Q&A. Navistar's first quarter results got us off to a good start for 2016 as we build on last year's progress. Despite lower sales, we substantially improved adjusted EBITDA, up 43% year-over-year to $77 million. This reflects our ongoing ability to effectively manage the cost of our business. At this time, we are on track to hit our 2016 operating and financial goals of returning to profitability and generating positive manufacturing free cash flow. Four months into our fiscal year, we maintain our 2016 industry outlook. In short, we believe 2016 will look a lot like 2014, which was the second best year for the industry over the last decade. As we mentioned on our Q4 call, we expect Class 8 heavy industry to be down year-over-year, however, we project the medium, school bus and severe service segments to grow. Our Parts business continues to be a bright spot as we increased profit by 3% in the quarter. Together, these factors offset some of the weaknesses we see in the Class 8 market. Navistar's overall market share improved through the quarter. We started the quarter off slow and exited Q1 with December and January share higher than last year. Heavy was flat and Class 6 and Class 7 were down slightly during the period. However, our order share, a leading indicator of future market share, was up; rising in Class 6 and Class 7 and Class 8, and more than doubling for severe service. These are encouraging metrics towards our sales goals for 2016. Of increasing importance in the quarter, used truck is an area we are working demand (03

[Walter Gerhardt Borst:]

Thank you, Troy, and good morning, everyone. As Troy indicated, Q1 was a solid quarter in which we made real progress towards achieving our 2016 goals. We continue to take costs out of our business and we improved adjusted EBITDA year-over-year, even with lower revenues. We also operated within our indicated cash range in what is easily our most cash-intensive quarter. Finally, we remain on track to return to profitability and generate manufacturing free cash flow for fiscal year 2016. With that introduction, let me walk you through our income statement highlights, review our segment performance, and provide an update on our expectations for the remainder of the year. As shown on slide 10, core chargeouts during the quarter were 11,000 units, up 19% compared to the first quarter of last year. We recorded consolidated revenues of $1.8 billion, down 27% year-over-year. The decline reflects, one, lower volumes in our core U.S. and Canadian markets due to softer industry conditions; two, lower volumes in our Mexico and export markets and a stronger U.S. dollar; and three, lower engine volumes in Brazil due to the ongoing weak economic conditions there. Additionally, one-fourth of the decline year-over-year also reflects the impact of the Blue Diamond Truck joint venture that ended last April. Our loss from continuing operations, net of tax, narrowed to $33 million from $42 million last year, reflecting substantial cost reductions. Q1's diluted loss per share from continuing operations was reduced to $0.40 from $0.52 in last year's first quarter. As Troy noted, adjusted EBITDA was up 43% to $77 million versus the same period last year. The market improvement shows our ability to improve our results despite softer industry conditions. Cost savings came in better-than-expected; we achieved structural cost savings by reducing SG&A and engineering costs, as well as through product cost improvements, in part due to favorable commodity impacts. The improvement in our Q1 adjusted EBITDA margin to 4.4% from 2.2% last year shows the impact of our team's hard work to manage costs and deliver top-quality products. As we look towards the remainder of 2016, we anticipate reinvesting in our business to launch products, further improve uptime, grow market share through increased consideration and meet 2017 emission standards. As a result, we do not expect the benefit of the accelerated cost reduction actions seen in the first quarter to continue at the same rate through the rest of the year. Q1 2016 was a relatively clean quarter as shown on slide 11. The first quarter's adjusted EBITDA of $77 million reflects a $5 million charge for pre-existing warranties and a $10 million net benefit for other one-time items. Turning to slide 12, let's review our segment results. Truck sales were $1.1 billion versus $1.7 billion in the prior year, down 34% due to the factors I mentioned earlier

[Troy A. Clarke:]

Many thanks, Walter. In closing, our Q1 results show our ability to manage and optimize costs, bring to market trucks that customers want to buy and solutions that produce uptime, improve our Parts business and strengthen our dealer network to provide the absolute best service. On our last call, I said that 2016 is going to be an important year, and at this time, we believe the first quarter positions us to achieve our full year profitability and manufacturing free cash flow goals. We're excited about the future and we're confident that we're taking the right steps to regain a profitable market position and create value for shareholders. So with that, let me hand it back over to Kevin and we'll take your questions.

[Kevin Sadowski:]

Thanks, Troy. That concludes our prepared remarks. Before we go to questions, I'd like to let you know that in addition to Troy and Walter, also joining us today is Persio Lisboa, our President of Operations; and Bill Kozek, our President of Truck and Parts. To be fair, we ask that each of you limit yourself to one question and including additional follow up. Operator, we're now ready to open the lines for questions.

[Operator:]

Thank you. Our first question comes from the line of Stephen Volkmann from Jefferies.

[Stephen Edward Volkmann:]

Hi. Good morning, guys.

[Troy A. Clarke:]

Good morning.

[Walter Gerhardt Borst:]

Good morning, Steve.

[Bill Kozek:]

Good morning, Steve.

[Stephen Edward Volkmann:]

I'm wondering – maybe just start with a little bit of a focus on the market share comments, Walter. I think you said something about grow market share with increased consideration, if I heard you right, and I guess I'm not sure what you mean by that?

[Bill Kozek:]

Why don't I take that one, Steve? You know, we have a – our plan is to grow market share in each one of our segments, and when we say increased consideration what we mean by that is getting in front of more customers, discussing the benefits of our vehicles, getting in front of more customers with our new products and negotiating with those customers and them giving us an opportunity to earn their business. And I would tell you in the last 12 months, we've grown considerably in that area versus where we were maybe two years ago.

[Stephen Edward Volkmann:]

Okay. Great. That's helpful, Bill. Thanks. And can I just sort of ask you to talk a little bit about the balance? I mean, it sounds like you expect your market shares to grow, but it also sounds like you're going to take fewer used trucks as we go through the year here, and it feels like those things are kind of mutually exclusive and how do you think about that?

[Bill Kozek:]

Well, it's important to note that not every Class 8 truck has a used truck associated with it. So we're – probably about a third of those, so now we're talking about a third of the market, and what we plan on doing, I thought Walter said it very well, we're going to manage those and it's a balance of how many used trucks can we take and have a balance between making sure the working capital is taken care of and making sure that the market share is there and we're taking care of customers as well. So it's a lot of work and our used truck organization is focusing on that, and we've done very well to date.

[Stephen Edward Volkmann:]

Okay. Thanks. And then maybe just one big picture question, maybe this is a Troy question, but you guys have obviously made a lot of progress here, but just as obviously you're not really earning your cost of capital at what is a pretty good point in the cycle. And I guess I'm thinking just big picture what are the next kind of sources of improvement that we're going to see here? I guess it's probably not going to be warranty because you're close to best-in-class, maybe there's a fair amount more to do on the cost side, maybe you need volume and market share to kind of come back to get to that cost of capital. But how do you think about the next few years? What are the kind of the key buckets of improvement that you're counting on?

[Troy A. Clarke:]

Yeah, Steve, you know. So I look at a – just a couple of things that I'm sure they're evident to all of you as well. From a cash basis, we have a couple of cash impacts to the business that run off even though our warranty expense is we think in the right ZIP Code today and improving, warranty spend is still elevated because of the previously accrued warranty. So, if you think about that over the next couple of years, a lot of that runs off or significantly runs off which significantly changes basically the cash – our cash position. Think of the used truck thing as the same way, over the course of the next two years that runs off, we believe, in a significant way. Again, that also – that impacts operating results, it also happens to impact working capital or cash for the business as well. The third item that I would highlight to you is our – is cost, and despite the fact that we have taken a lot of cost out of the business, the fact of the matter is we're pretty pleased, and I feel really good about how the leadership of this company looks at the subject of cost and waste, and we're just not done chopping wood there yet. And then last but not least, you think about all those things, we just keep lowering the breakeven point so that as the volume does come back, which it will because if we're making the best product in the market, if the marketing study show consideration is going up, at the end of the day we would just make the increased volume, I think, as a leveraged effect on the performance of the company. So, those I think are the kind of four major pieces of this going forward. If I had to add a fifth piece, it's kind of like we've had the perfect storm here with regards to the global markets kind of collapsing at the same time we have had difficulties in the United States. We would typically count on Mexico and Brazil in particular and the rest of our global organizations to deliver a couple hundred million dollars of profit on an annual basis into the coffers and unfortunately that's just not been the case. So that comes back as well, but that's a function of things that are somewhat out of our control. The other four things I talked about I think we study them, they're pretty well known to us, and we look forward to the days that a lot of those are behind us. Was that helpful?

[Stephen Edward Volkmann:]

Yeah, that's great. I appreciate it. I'll pass it on. Thanks.

[Troy A. Clarke:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Brian Sponheimer from Gabelli & Co.

[Brian C. Sponheimer:]

Hi. Good morning, guys.

[Troy A. Clarke:]

Good morning, Brian.

[Brian C. Sponheimer:]

I guess on the used truck side, the conscious decision to add the $50 million given the lack of, I guess, outlet on the resale side, was this – why is the decision going forward to take fewer receipts, I would imagine that, as Stephen pointed out, that really hampers you from a market perspective. And what do you think your new ceiling is on this – on the used truck inventory?

[Troy A. Clarke:]

Yeah, let me – before we get to – before I turn it over to somebody to answer the question on a more technical basis, Brian, let me highlight to you that, first off, when it comes to used trucks, you negotiate a deal that the units potentially are built over the course of a year. We don't take the used truck until we deliver the new truck or some combination of that. So typically we're making a commitment when we make a deal for a larger fleet to take a series of used trucks over a series – over a period of time. So, a lot of the used trucks that enter our system over the course of last quarter were deals that were actually made in the June and July timeframe of last year. So that said, we have a very clear line of sight given our delivery schedule of the intake or receipt of used trucks that we see. So, that's the one point I'd like to make. So there's a couple of variables there. One is the deal. The second is the timing of the deal, okay, and then the third is the timing, I think, of when we make deliveries, all right? So I don't want anybody to think that this is – again, as I indicated in my comments, this is something we can control the intake of the units, and as we're able to turn units more out of the inventory through sales or whatever, this then allows us to – again, to lean forward or kind of lean backwards a little bit. So that's the – so the main driver of the rise in the inventory for this quarter isn't that the receipts were higher than we thought. It was that the sales fell off for about a two month period of time for the industry as a whole. So, just to give you a little bit of background on kind of how that works. I don't know, Bill, if you'd like to add (28

[Bill Kozek:]

The only thing I would add to that is, we're not saying we're not taking back used trucks, we're just going to do a better job of managing it and that we're going to take a look at a couple of different outlets as well, one of them being our dealer network to take back more of the used as well and then working with them to sell and dispose of the units. So it's not – I don't want you to go away thinking we're getting out of the used truck business. It's just we're going to focus on it and figure out how to manage it well to take advantage of our working capital.

[Walter Gerhardt Borst:]

Yeah, we think of this as a dial, not as an on-off switch, and we've committed a portion of our balance sheet to used trucks. We're at the higher end of what we'd like that to be and so we need to dial that back a little bit. But we're over halfway through the amount of trades that we think we're going to need to take anyways, and so it's an appropriate time to consider dialing that back a little bit and pursuing other initiatives that we have to continue to help us with our sales. And the order share statistics that we're seeing are one good indicator of that, as are lower dealer stock inventories, as you can see in the appendix of our materials.

[Brian C. Sponheimer:]

I did see that. Troy, just...

[Troy A. Clarke:]

Part of our...

[Brian C. Sponheimer:]

Sorry.

[Troy A. Clarke:]

I'm sorry – part of our comments this quarter are really aimed to – attempt – in an effort to answer some your questions. Nothing that we've said here is new. These are things that we have been doing for a period of time, but as we listen to you guys' questions there has been some thought that says, man, can you help dimension this problem for us or this issue for us, and how long you think it's going to be around, and how you're managing it. So, now I hope the comments we've contributed are helpful in how we think about it

[Brian C. Sponheimer:]

They certainly are. Just one small one, the impact of the Caterpillar business, and then Troy, you were quoted in the press this week, I think, just talking about the organization in general as being a good partner, going forward. Maybe you can take a couple minutes just to elaborate on the message that you were conveying at that point?

[Troy A. Clarke:]

Sure. Bill, do you want to comment on the Caterpillar?

[Bill Kozek:]

Sure. Yeah, just real quick. The Caterpillar announcement that they will not be manufacturing their own vehicle, I can't speak for what was going on in Caterpillar's mind, but it was a very small percentage of our business, about 1,200 at its peak a year. We see this as an opportunity for us with our new HX vehicle, get into those customers that buy construction and vocational equipment. So, overall, it won't impact our results from the Caterpillar side, but it will impact favorably on the international side of our business.

[Brian C. Sponheimer:]

All right. Thanks.

[Troy A. Clarke:]

Yeah, and on the other comment, Brian, you know, hey, it's actually – at least the words were really the same words as I've answered, I think, that question a number of times, even on this call. We continually look for the opportunities of a partner. That's been something we've done for a while. Most recently we've announced partnership with General Motors on the development of a Class 4-5 product. I think that's going to be a terrific program for both us and them. We have previously partnered in a strategic manner with Ford. Walter referenced the Blue Diamond venture and Caterpillar that Bill just talked about is kind of coming to a close. We have JVs in China and we have had JVs in India as well in the past. I think, all the progress we're making – all the progress we're making just makes us a better potential partner at any level for any company. I won't speculate about what that next partnership opportunity might be, but that's the nature of the comment, and I think that again that should not be new news to most of you on the phone.

[Brian C. Sponheimer:]

All right. Thank you very much, guys.

[Operator:]

Thank you. And our next question comes from the line of Ann Duignan from JPMorgan.

[Ann P. Duignan:]

Hi. Good morning.

[Troy A. Clarke:]

Morning.

[Walter Gerhardt Borst:]

Morning.

[Ann P. Duignan:]

Morning. Just on the notion of partnerships, could you comment on the issue of dealers and distributors? Would they benefit from a partnership with the European company that might have like a small-medium duty cab-over truck that might complement your medium duty trucks?

[Troy A. Clarke:]

Yeah, Ann, that tough to speculate on. So, I think, we'll – your thoughts around that are probably as good as mine.

[Ann P. Duignan:]

Okay. It was worth a try. And then just taking a step back and looking at the weakness in orders year-to-date on the Class 8 side, can you talk about what you're seeing out there in the marketplace versus the medium duty side where we seem to still have some strength? I'm just curious what you're seeing out there from a fundamental standpoint?

[Troy A. Clarke:]

Well, if you looked at what – where we're doing well as an industry and where we're not doing as well, I feel pretty good in a number of areas. Municipalities, state and local governments are still doing well. Construction is still strong. Our TEM business is doing well. As you mentioned, medium duty business we expect medium to be up year-over-year and the early indication is that it's going to continue to be that way. And then bus as well is going to be up for 2016. Where we're seeing the negatives are really oil and gas and the energy segments. Anywhere where there is – that is the primary business has been slow, and then where we're mixed is really over-the-road. I think there's a lot of customers in a wait-and-see mode although we've seen some recent strong activity – not strong, better activity. And then leasing, we see some positive signs but to-date at least through this fiscal year, order intake has been a little bit lower than where we anticipated it. But, there's a number of people predicting a truck recession. But tonnage is still good, unemployment is low, housing, automotive production, commercial construction are all pretty strong, so I'm still very optimistic concerning 2016.

[Ann P. Duignan:]

Okay. I appreciate the color. I'll get back in line. Thanks.

[Operator:]

Thank you. And our next question comes from the line of David Leiker from Baird.

[Joe D. Vruwink:]

Hey, guys. It's Joe Vruwink for David.

[Troy A. Clarke:]

Good morning, Joe.

[Joe D. Vruwink:]

Hi. If I look at your 6-7 truck orders during the quarter, you reported a 15% increase, and it looks like the other OEMs if I just subtract out your intake, were down 15% to 20%. So wondering, can you comment on maybe accounts or segments where the share is being recaptured and then maybe a broader comment on what the rest of the industry is seeing?

[Troy A. Clarke:]

You know, in terms of the medium market, you're right. We've seen an increase. That's primarily in the biggest segments in the medium duty, which is the leasing segment. We've also seen small construction, municipalities, those have been very, very strong as well. And then the TEM business or the truck equipment manufacturers, those that put some sort of body on top of our chassis, has been very strong. I think we're getting into accounts – as I said earlier about consideration, we're getting into accounts that a few years back we weren't getting into. Having discussions, negotiating about what they need in their products, and how we can take care of them come from a customer uptime standpoint, so we're earning back the business that we've lost in recent years, is how I would put it in just a quick synopsis.

[Joe D. Vruwink:]

Okay. Great. That's good to see. And then just shifting gears a bit, on the product renewal, Troy, you mentioned that goes through 2018, is it possible to frame timing for when some of the more meaningful volume platforms might become available for order and ultimately delivery? I'm thinking the ProStar would probably be the most material, but just any cadence or sense of timing on when those might benefit the financials?

[Troy A. Clarke:]

Yeah, it's probably not appropriate for us – well, we've – let us go back and think about how we might be able to do that without giving away some level of competitive intelligence. I don't what to pre-announce launch dates and advise our competitors when they should be prepared with some kind of marketing initiative to thwart our launch so to speak. So – but I understand what you're saying, and let me flip that to my IR community to think about if there's a way we can be more forthcoming with some of that, but it's not something that I really want to talk about on the call or speculate on the call about. I think, we'll just – we'll take that as to do, if you don't mind.

[Joe D. Vruwink:]

Sure. Understood. Thanks, guys.

[Troy A. Clarke:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Jeff Kauffman from Buckingham Research Group.

[Jeffrey A. Kauffman:]

Thank you very much. Good morning, guys. Congratulations.

[Troy A. Clarke:]

Thank you.

[Jeffrey A. Kauffman:]

Real quick, Walter, I just want to make sure I got a number right because it looked different in the handout than I think you said in the commentary. You mentioned the prior-year change in the inventory reserve, but for the current year I think you said $5 million in your comments, and in the handout it says $35 million, which number is correct number?

[Walter Gerhardt Borst:]

We added $35 million to the used truck reserve.

[Jeffrey A. Kauffman:]

Used truck reserve. Okay, so let me just work through some math here and tell me if I'm thinking about it wrong. If I take the reported truck segment profit of $18 million, and adjust for the benefit in the prior year, and then I take the current year of $51 million and I adjust for the $35 million, the $15 million one-time receipt and the miscellaneous restructuring impairment charges that you noted in your release, it looks like segment profit for North American truck improved about $55 million. Is that the right way to think about it, kind of, brushing away all the odd items that don't have to do with day-to-day operations?

[Walter Gerhardt Borst:]

What I had indicated is when you take out the one-time items for truck, the truck segment improved $12 million year-on-year, I did not adjust for the used truck reserves, those were $35 million this year, and I seem to recall they were a little over $20 million in the first quarter of last year. So...

[Jeffrey A. Kauffman:]

Okay. $20 million, okay.

[Walter Gerhardt Borst:]

– I'd like to show that nice improvement, it's probably a little bit less than you suggested due to the addition to the used truck reserves in the first quarter of 2015 as well.

[Jeffrey A. Kauffman:]

Okay, guys. That's my one question. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Ted Grace from Susquehanna.

[Ted Grace:]

Good morning, gentlemen.

[Troy A. Clarke:]

Ted, good morning.

[Ted Grace:]

I don't know, if it's Troy or Walter, but could you maybe walk through the used parts – or the Parts business a little more specifically. I know you talked about cost reductions being a big tailwind offset by North American volume, Blue Diamond and exports, but I guess the revenue was kind of as we expected, but the profitability was great and good to see. I was just wondering if there's any more perspective or color you can share on the nature of the cost reductions, are there any other kind of items one-time or otherwise that we should just be cognizant of?

[Bill Kozek:]

Well, let me – this is Bill, let me talk about the Parts business. First and foremost, we had a great 2015. And we really had a great start to 2016, while revenue is down in the U.S., the revenue was up, but we were impacted by Canada, Mexico export market, all the things Walter said and Blue Diamond Parts. But yeah, the group is aggressively – the parts group has done a great job of aggressively managing cost, using a lot of lean practices and then growing our private label, Fleetrite brand. So, there – I guess, I'll let Walter talk about any one-time stuff in terms of parts, but there isn't – certainly isn't any plans for any one-time things in parts, it's just continue to grow the business and continue to grow the bottom line.

[Walter Gerhardt Borst:]

Yeah, and I wouldn't highlight any one-time items. It's just strong performance in our Parts segment.

[Ted Grace:]

Okay. So (40

[Bill Kozek:]

Now we haven't provided any real guidance for parts, but we do expect to improve our results year-on-year, over the course of the year. We're off to a good start.

[Ted Grace:]

Okay.

[Bill Kozek:]

We'll see how the rest of the year progresses.

[Ted Grace:]

Great. Thanks. My follow-up question would be on – just the cleanup on used truck inventory. Just – obviously you've reviewed how the dynamics have changed. Can you talk about how people should think about a peak balance now? Is there any change in that framework? And when we think about the $35 million increase on the reserve, is that simply mark-to-market kind of dynamics, or is there some presumption there will be fading in the future on used truck values?

[Walter Gerhardt Borst:]

Yeah, so we do take a look at every quarter, as I've indicated on prior calls, that – how does the used truck market look? Pricing is weaker in the market as a whole, not only for ourselves, but our competitors, from what I read. And secondly, when you take a look at our holding periods and since the sales have been a little weaker than we had hoped, those holding periods are longer as well. And so we've adjusted for that in the quarter as we've done in prior quarters as well. So that's how we do the accounting. We need to do that every quarter, and we take our best call at it and that's what we've done this quarter again. In terms of how much of the balance sheet this will use, it's at an elevated level. We'd like that to be lower. We're higher than where we ended last year and we'd like to work that down over time again. So that's what we'll look to do here. Obviously used truck inventories are a function of sales and receipts, and so those don't necessarily always move together, and I thought, Troy did a nice job of describing how that works for us on the receipt side, and on the sales side, I think, we're doing as much as anybody between Diamond Renewed, looking to our export markets, working with our dealers to move these used trucks on as we try to selectively work with our customers to take these back. So elevated levels currently, we'd like them to be lower. We'll work on that over the balance of the year and the rest is consistent with our remarks early on the call.

[Ted Grace:]

Okay. Well, that's helpful. Best of luck this quarter and for the remainder of the year, guys.

[Troy A. Clarke:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Andy Casey from Wells Fargo Securities.

[Andrew M. Casey:]

Thanks a lot. Good morning, everybody.

[Troy A. Clarke:]

Good morning.

[Andrew M. Casey:]

On the Class 8 industry, can you talk about the pricing environment for the new truck industry? Are you seeing any increase in the competitive nature?

[Troy A. Clarke:]

Well, as we've said in the past, there's still a lot of capacity in the Class 8 industry, but with today's products in terms of reliability, durability and the fuel economy, we think there's a slight growth in pricing for 2016. But like I said, it's a really competitive market and it's down a little bit from 2015. So, how our competitors are going to react, our plan calls for just a moderate pricing for 2016, and in line with our share goals as well. So, just a slight increase, but certainly not – it's not going to be gangbusters, as we've discussed in the past.

[Andrew M. Casey:]

Okay. Thanks. And then following in on that, your dealer stock inventory for your dealers came down for the third consecutive quarter, so good job there. What are you hearing from your dealers pretty much as a whole related to their inventory intentions? Is it to continue to reduce into this year a little bit further or are you seeing a likelihood that there'll be any form of restock?

[Bill Kozek:]

Yes. Our dealers are very optimistic with our new product. They're very optimistic how the markets are reacting to international truck. So yeah, we feel very good about where our dealer inventory is today and the plan is to, as we get into the spring selling season, to increase specifically vocational products and medium-duty products because that's a time when you sell the majority, or a good percentage of them. So, our dealers are feeling very good about international and they're feeling very good about where their inventory is today, but they will be restocking here, and as a matter of fact that's happening right now.

[Andrew M. Casey:]

Okay. Thanks. And then last question, I guess for Walter. You took down (46

[Walter Gerhardt Borst:]

Yes, you're right. We did expand the range on our cash guidance for the year, really two elements that could impact that. One is used truck inventories, although as we indicated, we're going to try to work those levels down over the balance of the year. And the second is, we did take our revenue guidance down for the year and there's some related working capital impacts associated with that, but on the $900 million to $1 billion range, we'll still end the year very strong from a liquidity perspective kind of preparing for the first quarter of 2017 similar to what we did here preparing for the first quarter this year, which tends to be the low point of our cash for the year and we'll be looking to grow cash over the balance of the year now to those levels at year-end.

[Andrew M. Casey:]

Okay. Thank you very much.

[Walter Gerhardt Borst:]

You're welcome.

[Operator:]

Thank you. And our next question comes from the line of Adam Uhlman from Cleveland Research.

[Adam William Uhlman:]

Hi. Good morning.

[Walter Gerhardt Borst:]

Good morning.

[Adam William Uhlman:]

I guess maybe to follow up a little bit on that Walter, could you maybe walk through the revenue guidance reduction, I think you had mentioned that you're targeting industry sales coming at the lower end of the outlook, maybe you could talk about – did you change your market share assumptions across the various segments? And just in general when we think about the industry order trends maybe through the rest of the year how much of a pickup that we need to see across the industry to hit your updated guidance?

[Walter Gerhardt Borst:]

Well, it's a mouthful there. So, we did take down the revenue guidance to $9 billion to $9.25 billion. We did highlight a number of things, a couple of which you mentioned, including potentially being at the lower end of that industry volume. We did have a couple hundred million dollar lower revenues in the first quarter than we had guided to on our prior call. So that's going to find its way through the year and we also indicated with Caterpillar's recent announcement, we had planned to sell them some severe service trucks, so that will come out of the revenue balance as well. So those are the principal drivers as well as any impact from trying to manage through the used truck situation, as Bill discussed earlier.

[Adam William Uhlman:]

Okay. Does your forecast include any type of recovery in the global markets and then could you just tell us what you're seeing down in Brazil from your OEM customers, have we hit a bottom yet or are there any signs of life down there? Thanks.

[Persio V. Lisboa:]

Hi. This is Persio and we continue to see the economy in Brazil very weak and the markets pretty much down. So it's hard to say that we reached bottom, but it's pretty close to that we think. To that sense, we've made all the adjustments we had to make in a company down there to make sure that once the market rebalances that we'll be able to benefit from that. But we are not seeing any short-term improvement and we don't have any forecast, any upside coming from the Global Operations at this point.

[Adam William Uhlman:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Alex Potter from Piper Jaffray.

[Alexander Eugene Potter:]

Hi, guys. I had a quick one there following up on the Brazil question. I think it was last quarter or two quarters ago you mentioned that the expectation was that Brazil or MWM, I guess, could be breakeven by the end of this fiscal year or in the second half of this fiscal year. Is that still on track? And I guess just remind everybody or remind me about what the profitability expectations are?

[Walter Gerhardt Borst:]

Yes, we are pretty much on track, actually in the first quarter we completed the majority of the restructuring changes we had to make in Brazil. We closed our engine facility down in the South of the country. We combined production in Santo Amaro which is in São Paulo and actually we ended up doing that through productivity management that we put in place. We ended up going down from two shifts in Santo Amaro to one shift which allowed us to rebalance the operation down there as well. So if you just take a look at the end of Q1, we will have a total reduction that is close to 40% in headcounts in our operations in South America by the end of January. So that starts building up as we go through the year, so we are still seeing that by the end of the year we'll be positioning the operation there to be pretty much at a breakeven level.

[Alexander Eugene Potter:]

Okay. Great. And then I guess just one – I guess another follow-up question on a question that was asked a couple of speakers ago; specifically regarding inventory levels, of new truck inventory levels, in the retail market. I know it looks like you guys are in pretty good shape, but the industry overall I guess potentially because of one OEM in particular is still running at I guess higher inventory levels than what we'd like to see. And I guess any sort of commentary around the threat or a potential competitive action on the pricing side as those guys try to work through their excess inventory, whether you see that in the risk or not? Thanks.

[Troy A. Clarke:]

Well, when we put our plan together for the year we knew that there was a significant amount of inventory in the dealer channel, or the entire channel, the OE channel. And so we knew that was going to impact our production, and our competitors are working on selling that and reducing their inventory. So there's naturally going to be some reduction in pricing. It hasn't been significant to-date so we're optimistic that we're going to make good decisions. Yeah, we expected that to happen, and like you said, we're in a decent situation with our inventory and now it's getting it in the hands of our customers, so.

[Walter Gerhardt Borst:]

If I could add to that, I mean, I think given the fact that that inventory is at dealers, what we see is that it's a regional or localized phenomenon, not every region or every dealer of our competitors. They all have different inventory conditions and so if we see anything, we see I think a regional or a dealer-by-dealer kind of impact on that. And I got to say we have great dealers and they're really aggressive and they're looking for 2016 to be a very good year and I know that our dealers are – they're very cognizant of what's taking place in their marketplace, and again they feel good and which makes us feel good that we have the ability to work through that competitive dynamic.

[Alexander Eugene Potter:]

Okay. Very good. Thanks.

[Operator:]

Thank you. And our next question comes from the line of Seth Weber from RBC Capital Markets.

[Seth R. Weber:]

Hi. Good morning. My questions have been asked and answered. Thank you.

[Walter Gerhardt Borst:]

Thanks Seth.

[Troy A. Clarke:]

Okay, thanks.

[Operator:]

Thank you. Our next question comes from the line of Neil Frohnapple from Longbow Research.

[Neil A. Frohnapple:]

Hi. Good morning, guys.

[Troy A. Clarke:]

Good morning.

[Neil A. Frohnapple:]

As a follow up to the parts margin question earlier. What's your outlook for North America parts revenue for the remainder of the year? I think your comps get easier next quarter, so wondering if you can begin to deliver year-over-year growth starting in Q2? Or should we still expect that business to be down due to the impact of Blue Diamond Parts? Thank you.

[Bill Kozek:]

Blue Diamond Parts is just a smaller percentage of the total. And as I mentioned the U.S. we've had growth in our Parts business. We anticipate some growth in Canada and Mexico as we move into the second quarter, third quarter and fourth quarter. So, we do anticipate growth. Like Walter had said in his comments, the comp from Q1 2015 to Q1 2016 was pretty tough for Q1 2016. But still there's been modest growth and we anticipate that for 2016 and we anticipate continuing to take all the actions that we have to improve on our margins as well.

[Neil A. Frohnapple:]

Okay. So just to clarify, Bill. You would expect North America Parts segment sales to be up year-over-year?

[Bill Kozek:]

Yes

[Neil A. Frohnapple:]

Okay. And then another one on used truck, I know a lot have been asked and answered, but just given the used truck market backdrop with the high industry inventory levels and declining used truck prices. If we assume that the pricing on ProStars with MaxxForce engines have found a bottom in the market, and if the price spread between your competitor brand trucks and these vehicles is actually narrowing, does that in theory hurt the value proposition for buyers of these ProStar trucks with the MaxxForce engines? And takes longer to work through those population of vehicles in the market?

[Bill Kozek:]

Yeah, I know what you are – I understand the question. We have done – with the Diamond Renewed, these vehicles are performing very well. And matter of fact I'd even will say excellent based on the data we receive from OnCommand Connection. So that's our job now to get those in the hands of the customers to prove that data. Yeah, the price has gotten – the gap has changed here in the last couple of months, but with export markets and some of the lease finance programs we've got, we feel in just overall managing the used truck inventory and the used truck sales, we think we're in a pretty good shape here moving forward. But again, it's going to take a lot of focus and work very closely to manage.

[Troy A. Clarke:]

My two cents. I think these Diamond Renewed trucks and what we've done with them, they're a tremendous deal target.

[Neil A. Frohnapple:]

All right. That's helpful. And I guess just one final follow-up. I mean are you guys planning to utilize the auction channel more so than in past to help manage through some of this inventory, or just any thoughts on using that channel? Thank you.

[Bill Kozek:]

Yeah, the auction process in terms of revenue per unit is the lowest particular channel or avenue to dispose of used trucks, so we use that very, very limited and it's more for older trucks. So our plan is not to full scale participate in the auction process.

[Neil A. Frohnapple:]

All right. Thanks very much, guys.

[Operator:]

Thank you. And we have time for one more question. Our final question for today comes from the line of Jerry Revich from Goldman Sachs.

[Jerry Revich:]

Hi. Good morning, everyone.

[Troy A. Clarke:]

Good morning, Jerry.

[Bill Kozek:]

Good morning.

[Jerry Revich:]

I'm wondering if you could talk about the timeframe of when the higher order share you expect to flow through into your production and retail shares that are as early as 2Q? And on that note your revenue guidance looks to be more back-half weighted this year than what we've seen over the past couple of years. Can you just talk about what's getting better in the back half versus the first half compared to normal seasonality?

[Troy A. Clarke:]

Yeah, the first quarter is always our slowest quarter in terms of revenue, both volume and total revenue dollars. Second quarter we're going to see growth, and the order intake we've seen in medium, the increase in medium, you'll see that beginning right now. With heavy, as we talked about, the over the road and some of the leasing guys, that will be a little bit later in the year, but medium is right now and severe with our new products, that's happening right now as well. Those products won't go into production until next month for delivery starting in May, but we're seeing the order intake there will turn into production here beginning in April and May.

[Jerry Revich:]

Okay. Thank you. And, Bill, can you give us some context on used inventory sales seasonality? Looks like in the first quarter you were able to sell out of your inventory roughly half of the intakes of new trade-ins this quarter. Is there a seasonal pickup in 2Q? How should we think about the pace of used sales from here? Can you calibrate us?

[Bill Kozek:]

Yeah, the November, December, January timeframe is always the slowest for used trucks. It's just the seasonal nature. This year it was down a little bit more than in previous years. So yeah, beginning in February, we've seen an increase in used activity and sales across all of our channels. So Diamond Renewed channel, the export channel and the lease finance program, and then used sales through our dealer network as well. So it's increased throughout now as the weather warms up in most of the U.S.

[Jerry Revich:]

Okay. Thank you.

[Operator:]

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Navistar management for any additional comments.

[Troy A. Clarke:]

Okay. Hey. I think as we indicated, first quarter results on track. Thank you very much for your time and interest on Navistar and our performance this morning. If you have any additional questions or insights you're looking for, please feel free to call Kevin Sadowski and he can track us down later during the day and we can have additional conversations. Thanks.

[Operator:]

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.