Navistar International Corporation
Q3 2016 Earnings Call Transcript

Published: 8 Sep 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Navistar International Corporation Third 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'd now like to turn the floor over to call to Jim Spangler, Vice President of Corporate Affairs and Chief Communications Officer. Please go ahead, sir.

[Jim Spangler:]

Good morning everyone and thank you for joining us for Navistar's third quarter 2016 conference call. Today, we will discuss the financial performance of Navistar International Corporation for the quarter ended July 31, 2016. With me today are Troy Clarke, our President and Chief Executive Officer; and Walter Borst, our Executive Vice President and Chief Financial Officer. After concluding our remarks, we will take questions from participants. In addition to Troy and Walter, joining us today for the Q&A session are Bill Kozek, President of Truck and Parts; and Persio Lisboa, President of Operation. Before we begin, I would like to cover a few items. A copy of this morning's press release and the presentation slides has been posted to our Investor Relations Web site for reference. The non-GAAP financial measures discussed in this call are reconciled to US 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. Finally, today’s presentation includes some forward-looking statements about our expectations for future performance and the company expressly disclaims any obligation to update these statement. 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 SEC filing. We'd also refer you to the Safe Harbor statement and other cautionary notes disclaimer presented in today's material for more information on the subject. With that, I’d like to turn this call over to Navistar CEO, Troy Clarke. Troy?

[Troy Clarke:]

Okay. Hey, thanks, Jim, and thanks everyone for joining us this morning. I'll be covering the quarterly highlights, and then I will turn it over to Walter for a more in-depth discussion of our financials, and then as Jim indicated, we will take your questions. This quarter's results show that we continue to make progress in the face of tougher market conditions, particularly the softness in the heavy segment. And I’d like to take this opportunity to thank our Navistar team for making that possible. We are really a different Company today and it’s really due to their hard work. So let me briefly summarize where we finished the quarter on costs, cash, and chargeouts and where we believe we’re headed. We continue to make real progress in addressing all areas of costs, but particularly in the area of material costs where our engineering and procurement teams are exceeding our targets for the year. While our cash was a bit lower, we’re anticipating a stronger fourth quarter and we remain on track to finish the year within guidance. Our Q3 charge-offs were lower, as was the overall heavy market, but as we pursue our goal of increased market share, we do see some encouraging signs in our order share. Our share of new orders has been up for three consecutive quarters and we are confident that as the industry backlog comes down, our improvements in order share will translate to improve retail share as well. This order share improvement indicates that consideration of our products improving. This is good news as it validates our investment, new products, advanced technologies, and expanded partnerships that will strengthen our product line-up. Under new products, in the quarter we rolled out driver first, our driver focused product design approach, which builds on International's emphasis on uptime by sharpening the Company's focus on the driver's point of view. This approach was first introduced in our new HX series and will be more evident in the first vehicle of Project Horizon which will be introduced at the end of the month. We also announced the expansion of our medium duty engine offerings to include the Cummins L9 engine for our RE Series bus and this builds on the availability of the Cummins ISL engine for the DuraStar and WorkStar which we announced in March and is in production today. We completed major deliveries of our propane school bus and demonstrated the gasoline powered CE school bus which will add to our portfolio in the near future. Under advanced technology, we announced our GPS-based predictive cruise control, which goes beyond conventional predictive cruise control technology and we delivered greater fuel economy in our heavy offering. We continue to progress in connected services. Under the main connection umbrella we launched our Accelerator Write-Up tool, a first of its kind mobile application that takes the on-command connection diagnostic information and turns it into a service order before the truck shows up for service. This information streamlines the write-up and diagnostic process to improve uptime. Under expanded partnerships we’ve built on our partnership with General Motors in addition to our joint work on the class 4-5 vehicle. We will now be manufacturing GM's Cutaway G Van commercial chassis, which will go into production early in 2017. And the most recent news is that on Tuesday we announced a wide-ranging partnership with Volkswagen Truck & Bus. This includes a strategic technology alliance, a procurement joint venture, and an equity investment in Navistar by Volkswagen Truck & Bus. This partnership will do a number of positive things for us. The technology alliance will allow us to offer customers expanded access to leading-edge products and services through collaboration on technology and the inclusion of Volkswagen Truck & Buses products and components. This technology alliance will help us optimize our product development costs as we share the overall cost associated with future vehicle development. And the procurement joint venture will provide us with significant scale and economies in the short-term and represents a great growth opportunity for our supply base. The equity investment will strengthen Navistar's liquidity position and expand our financial flexibility. Last but not least, we will have a great strategic partner. This partnership with Volkswagen Truck & Bus will further strengthen our position in the market and marks another step in our journey to be a stronger more profitable Company. To sum it up then, we’re working effectively to address near-term conditions and to position the Company to capture considerable upside opportunities when the market headwinds subside, as the industry works through unsold inventory and as used truck inventories and pricing return to normal levels. But as important, we continue to make significant investments in new products, services, technologies, and partnership that position the Company for success today and well into the future. I will now turn it over to Walter.

[Walter Borst:]

Thank you, Troy. Good morning, everyone. Like Troy, I’m very excited about the alliance we announced on Tuesday with Volkswagen Truck & Bus. This is a significant announcement that will provide a number of incremental benefits to Navistar. In the near-term, the capital raise will bolster our liquidity, strengthening our financial position and expand our financial flexibility. Starting immediately after closing, the procurement joint venture is expected to generate a pipeline of material cost savings as we benefit from greater scale in our joint procurement activities, discuss global sourcing opportunities with our suppliers. Over time, the alliance will allow us to optimize capital spend and development costs for next-generation powertrains, as well as collaborate on other advanced technologies. And finally, the integration of these new technologies are expected to create incremental parts sales, Our customers also win as they get expanded access to leading edge products and services at a competitive price. This is indeed a wonderful opportunity for us and I personally believe Volkswagen Truck & Bus will be a great partner. I hope you'll conclude as well that this alliance will make Navistar stronger, more competitive, and drive greater shareholder value. Now let’s shift our focus to the results for the third quarter. The results we reported this morning demonstrates that our cost-reduction actions continue to lower the breakeven point of the Company. This quarter, we faced a number of industry headwinds that significantly impacted year-over-year revenues. Nevertheless, we’re able to report essentially flat profitability year-over-year. We are benefiting from companywide cost management actions during a downturn in the Class 8 industry, while investing for the future as we renew our entire product portfolio over the next few years. With that overview, let me walk you through the results for the quarter. Please note that details for these results can be found in the slide deck which we posted to the Investor Relations page of our Web site. Consolidated revenues were $2.1 billion, down 18% compared to the third quarter of last year. The revenue decrease was largely driven by a 23% decline in our core chargeouts to 13,100 units. This decline can primarily be attributed to soft Class 8 industry volumes, which impacted our core U.S. and Canadian markets. Our loss and diluted earnings per share from continuing operations were nearly flat year-over-year with a loss of $34 million or $0.42 per share this quarter. As I mentioned, the results reflect considerable benefits from companywide cost management actions, achieved by reducing both structural and private costs. As we undertook actions before current industry conditions soften, I’m happy to report that we are -- we’ve well exceeded our $200 million cost reduction target for the year. In fact, we’ve already achieved over $300 million of cost savings through the first nine months of this year. Adjusted EBITDA was $132 million, also essentially flat compared to Q3 2015, as the adjusted EBITDA margin grew to 6.3% in the quarter compared to 5.1% last year. The results for the quarter were negatively affected by a $19 million adjustment to pre-existing warranty, which largely reflects higher than previously estimated claim frequency on certain components within our big bore engines. Nevertheless, warranty expense excluding pre-existing adjustments remains below 3% of manufacturing revenue and we continue to work to drive towards best-in-class quality levels. Also this quarter, we had $17 million of charges for asset impairments and restructuring, principally related to certain assets of businesses outside of our traditional core North American operations. It’s noteworthy that if one excludes pre-existing warranty adjustments and the aforementioned charges, we would've been breakeven for the quarter. Now let’s look a little closer at the results for our segment. Truck sales were $1.4 billion, down 24% compared to the prior year largely due to a 42% decline in Class 8 volumes, reflecting the general weakness in the industry. The volume headwinds were partially offset by a favorable product mix and cost management actions, resulting in a reported loss of $54 million for the truck segment. This loss includes $90 million of pre-existing warranty charges compared to $3 million in last year's third quarter. Excluding these warranty charges, the segment would have had flat results compared to last year's Q3 and lower volumes. Our Parts segment did well in a challenging industry environment. Parts sales at $597 million were down 4% year-over-year. While the parts industry as a whole was down roughly 10%. Our Parts group took advantage of margin improvements in the U.S and cost savings to achieve flat year-over-year profitability of $152 million even with lower revenues. The story is the same in Brazil. We’re in the face of weak economic conditions. Our global operations segment improved its cost structure to achieve nearly breakeven results and revenues that were down 22% from Q3 2015. Our Financial Services segment continues to perform well. Profits were flat at $26 million and slightly lower Q3 revenues. Turning to used truck inventory, gross inventory declined $18 million to $430 million. This is the first quarterly decline in the gross used truck inventory balance since Q3, 2015. Gross inventory decrease was largely driven by our efforts to sell used trucks in certain export markets. Reserves were also slightly lower with the increased sales activity. As a result, the net inventory balance was $264 million at the end of Q3. We are addressing our used truck inventory levels by managing trade receipts and aggressively pursuing both domestic and export market sales opportunities. Moving to cash, we ended the quarter with $640 million of manufacturing cash. Sequential volumes were down compared to Q2, which negatively impacted working capital. Additionally, this quarter, we made higher seasonal interest payments of $67 million. The higher payments are primarily due to the timing of interest payments on our outstanding debt principally the 8.25% senior notes were we make semiannual interest payments in May and November. Other primary uses of cash this quarter included capital expenditures of $29 million, pension and OPEB funding of $45 million, and warranty payments in excess of expense of $21 million. Looking forward, we expect to rebuild our cash balances in Q4 from improved volume that will benefit both EBITDA and working capital. As we guided last quarter, we expect to end our fiscal year with about $800 million of manufacturing cash heading into our seasonally weaker first quarter. As a reminder, the Company as previously indicated, a minimum cash need of about $500 million. The size of this minimum cash need is tied to our seasonally weaker first quarter. Whereas cash required to run the business during subsequent quarters of the year tends to be less. There is also no changes to the balance of the 2016 guidance that we provided last quarter. Looking ahead to 2017, we’re carefully monitoring several factors that could impact Class 8 industry volume, including industry inventory levels, and the used truck market, both of which Troy mentioned earlier. Our initial indications suggest that 2017 Class 8 industry volumes could be slightly lower than 2016. On the other hand, we expect Class 6/7 medium duty truck and bus industry volumes to remain solid. In summary, the Q3 and year-to-date results demonstrate management's efforts to drive down costs and improve our breakeven point. We remain committed to do more as we work through current industry conditions so that we can reap the benefits once conditions turn more favorable. This week's announcement of our strategic alliance with Volkswagen Truck & Bus is another great example of that. With that, I will turn it back to the operator to begin the Q&A.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Stephen Volkmann from Jefferies.

[Stephen Volkmann:]

Hi. Good morning, guys.

[Troy Clarke:]

Hi, Steve.

[Walter Borst:]

Good morning.

[Stephen Volkmann:]

Walter, I’m wondering if I could just follow-up a little bit on your sort of preliminary 2017 thoughts. And I’m curious about sort of the flow-through of the cost saves that you’ve done this year. You said you sort of have this $300 million run rate. How much of that sort of falls into 2017, irrespective of volume? I guess, I’m just trying to figure out how much more you can control in 2017 and then sort of a follow on to that at the same time, is there anything else that we should be thinking about for 2017, irrespective of volume, like change in pension or executive comp or anything like that? Any kind of moving pieces that are sort of known today and not dependent on volume would be great. Thanks.

[Walter Borst:]

Okay, sure. I think Steve, the -- if we take a look at the results, our structural cost have been pretty flat quarter-over-quarter, so we’ve seen good improvements year-on-year, but we really took actions early in the year and we've been benefiting from that all year. So the year-on-year rollover that will not be that significant into '17. On the other hand, material cost savings have continued to improve over the course of the year. We’ve really been marching at that on a quarterly pace and it’s been pretty equally distributed over the course of the year. So we would see that benefit providing a roll-on effect to 2017. With respect to other funding requirements, we previously indicated that our pension and funding requirements would be increasing in the 2017 and 2018 timeframe. Contributions to the benefit plans as we’ve disclosed in the Q, you know about a $100 million this year than we are looking for those to increase to $100 million to $200 million over the next couple of years. But we will provide the group a better update of what that looks like on our December fall as we look to providing some more guidance relative to '17. And lastly, I surely hope incentive comp will be up next year, but too early to say.

[Stephen Volkmann:]

Okay. All right. Thank you.

[Operator:]

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

[Ann Duignan:]

Hi. Good morning.

[Troy Clarke:]

Hi, Ann. Good morning.

[Walter Borst:]

Hi.

[Ann Duignan:]

Just a couple of follow-ups. The $800 million in cash guidance, does that include the cash infusion from Volkswagen there?

[Walter Borst:]

It does not, Ann. We are -- we will report that when we have it. We obviously have to go through regulatory approval process and that would be incremental to that cash level that I mentioned.

[Ann Duignan:]

Okay. Thank you. And then, two quick follow-ups. Could you give us more color on the subpoena from the Department of Defense? Is that pricing related or quality related? You know as much color as you can give us that would be great. And then, can you talk about any impact of your alliance with Volkswagen on your General Motors alliances?

[Troy Clarke:]

Yes. With respect to this -- I saw that was picked up in the press this morning per our disclosures in the Q. There is really nothing additional that we can provide you at this point on that matter. We’re fully cooperating and providing them the information that they've requested. With respect to GM, we’re very much looking forward to doing those two projects for them. They’re great projects for us and we see no change in those plans as a result of any of the announcements this week.

[Ann Duignan:]

Okay. I will leave it there and get back in queue. Thanks.

[Walter Borst:]

Thank you.

[Operator:]

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

[Brian Sponheimer:]

Hi. Good morning, Walter. Good morning, Troy.

[Troy Clarke:]

Hey, Brian.

[Brian Sponheimer:]

A couple of things here. One, stick with GM. Can you talk about some of the cost leverage you’re going to get by having these volumes [scoped into, I guess factories] [ph] for 2017?

[Walter Borst:]

Well, the '17 project is around their G Cutaway Van and that’s going to provide us significantly improved capacity utilization of our Springfield facility. We are not putting any numbers on that publicly at this time, but great project for us, great project for them as they continue to have strong sales of their products, but it’s a very good project for us and that it improves our capacity utilization.

[Brian Sponheimer:]

Okay. And just an update on some of the filing questions regarding HSR that were asked on the last call levels that Volkswagen may or may not be [indiscernible]?

[Troy Clarke:]

Yes. I mean, that’s probably -- really a good question for them, but we did follow-up with the VW Truck & Bus after this and we believe that they will seek approval for the lower threshold commensurate with their investment. There is a category that’s between a $156 million and $781 million, I guess it is these days [indiscernible] levels or COLA or something. So we do expect them to seek approval under the lower threshold.

[Brian Sponheimer:]

Okay. And then finally if I may, once you get this cash injection are there any particular components of your financial structure that that you might want to go after first, whether it's the converts or perhaps the higher coupon debt?

[Walter Borst:]

I’m sorry Brian, you -- I couldn’t really hear the question.

[Brian Sponheimer:]

What might you do with the cash injection from Volkswagen?

[Walter Borst:]

Yes. Well, I think that’s too early to say. I mean, we are -- again, we’re going to make sure we get through the approval processes, get the cash, which we would expect either later this year or the first part of 2017. And we will take a look at what to do with that. The first thing we will do is bolster our liquidity, which has been a keen focus of the Company and we will continue to invest in these products that we've been talking about that we're really excited are now coming to fruition and coming to market. So that will be the first couple of places that we focus on.

[Brian Sponheimer:]

Perfect. Thank you very much.

[Walter Borst:]

You’re welcome.

[Operator:]

Thank you. And our next question comes from the line of Steven Fisher from UBS.

[Steven Fisher:]

Thanks. Good morning.

[Walter Borst:]

Hi, Steven.

[Steven Fisher:]

To what extent do you think the industry is increasingly pursuing volumes at the expense of price in the last few months? I’ve heard some rumblings of that in the industry, but not sure how pervasive it is, so curious what you're seeing there?

[Troy Clarke:]

Bill Kozek, you might want to take a shot at that?

[Bill Kozek:]

Sure. For the industry, obviously we’ve got a lot of capacity out there. And the Class 8 specifically has slowed and I -- so I would say on the heavy over the road piece, everybody is getting more aggressive in their pricing. 2015 was a nice year for all of our pricing, but to get some capacity utilization, everybody is more aggressive right now. That's just the way the industry is, that’s the way the industry has been for at least 30 years. So, yes everybody is getting a little bit more aggressive, but it's nothing out of the ordinary and we’re not seeing anybody, any of our competitors do anything that that makes -- that hurts the entire industry, I guess, I would say it that way.

[Steven Fisher:]

Okay. That’s helpful. And then, based on your share gains in orders, in which categories do you expect to see some market share improvements in the next few quarters, if you do expect that?

[Bill Kozek:]

Yes, we’ve seen share gains across the board. And certainly there the Class 8, both the vocational and the over the road, the last -- this quarter was very strong. In fact, the last two months were over 18% for us granted on a smaller base, but still 18% eventually that's going to turn into detail share as our competitors and us work through some of the backlogs that we’ve -- we built up in the last couple of years. So heavy and vocational for sure, medium as we continue to introduce new products. We are going to continue to get some gains there and then bus as well with both propane and gasoline, we see some growth there as well.

[Steven Fisher:]

So do you think this is the inflection point in share this quarter or could it take a little longer?

[Bill Kozek:]

You know we talked about that as a group here fairly recently and we think from this point moving forward, I mean, I haven't seen retail yet for the month of August, but I expect right around our fiscal year that's really the point that we are going to start to see those share gains.

[Steven Fisher:]

Okay. Thank you.

[Operator:]

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

[Andy Casey:]

Thanks. Good morning, everybody. On the guidance you expect the implied Q4 sequential revenue improvement and if I look at the backlog similar to last year, it kind of declined in all segments except Class 8. So, for Q4 what segments do you expect to drive the incremental volume?

[Bill Kozek:]

This is Bill. I will handle that one. What we’re seeing is the big guys, the top of the Class 8 market, those guys are still planning for 2017. Last year they had already purchased it. So we expect that to be driven a little bit later in the cycle, but the segments where we expect to grow or to get our 2016 numbers are certainly the leasing segment, and then we’ve just recently for production of our HX so the vocational segment and then we've also just introduced the ISL. So that’s a combination of medium duty and vocational. So those are the three or four key segments that we expect to hit the 2017 -- 2016 guidance in volumes.

[Andy Casey:]

Okay. Thanks, Bill. So there's no expectation that Brazil operations kind of come back in Q4? I think we will have Persio, I think needs to answer to that one?

[Persio Lisboa:]

Hi, Andy. This is Persio. Yes, while we don’t have -- although we’re seeing some of -- some movement in the industry, some better levels of inventory, we are still not bullish on the return of the business in Brazil. We are prepared for that. I think we've made all the adjustments that we had to make in the size of the company there, and we are prepared for growth, but we are not counting and that's going to happen in the next quarter.

[Andy Casey:]

Okay. Thank you, Persio. And then, if I could, I'd like to take a step back to the VW alliance and ask a couple of specific questions related really to the powertrain collaboration part of it. At the time -- on Tuesday, it didn't really sound like you had a detailed product plan for the powertrain rollouts. So I’m just wondering how do you want us to think about the priorities related to the 2019, in general, given the industry is going to be facing some new emission standards a couple of years later, really are you looking to replace your internal engines first and is it likely that she would displace external engines prior to that 2021 emissions transition?

[Troy Clarke:]

Yes, Andy. This is Troy. Look we’ve only had a couple of days since then as we indicated we really are prepared to share our detailed product plan at this particular point in time. So we are just going to have to ask you to stay tuned as we now have larger groups of people in both our organization and in their organization who can now work together openly and freely to figure out what we’re going to do and when. So anything we might indicate to you is premature. I would tell you though, I have asked us to refocus just a little bit here. I want to put a plug-in for the fact that later this month we launched the product we’re really excited about, and that's our first product out of the Project Horizon. Obviously, that product is going to be launched with the Cummins engine. They’re great partner for us and their product and their engine in our product seems to be gaining a lot of traction in the market, and we’re going to continue to build on that as we introduce this product at the end of the month. So, stay tuned.

[Andy Casey:]

Okay. Thanks. If I could just [multiple speakers] …

[Walter Borst:]

No, we are going to have to touch off their and launch the next question. Thanks, Andy.

[Andy Casey:]

Okay.

[Operator:]

Thank you. And our next question comes from the line of Nicole DeBlase from Deutsche Bank.

[Nicole DeBlase:]

Yes. Thanks. Good morning, guys.

[Walter Borst:]

Hi, Nicole.

[Nicole DeBlase:]

So my question is around the used truck inventory trends from the quarter. So you mentioned that you had some opportunities to sell used trucks within the export market. I’m just curious if that kind of window of opportunity is still open in the fourth quarter? And if your view is, are you trying to hold used truck inventory flat in 4Q or could we see an increase again given that you've been selling some trucks in the export markets?

[Troy Clarke:]

Yes, maybe I will start and then Bill can jump in. Our trucks are doing great in the export market. So those customers that we've been selling the product to keep coming back to us, we keep talking to them about additional opportunities. So that's going to continue I think to be a -- an avenue for us to sell those units, that’s I’ve kind of stopped predicting exactly where the balance is going to go, because it is a function of receipts and sales and we try to find the right balance between those two. But we’re excited that the third quarter showed lower inventories for the first time in a year, so that's a real testament to the effort that our team is putting into that and what we've been able to realize in the export markets in particular. Bill, do you want to add anything to that?

[Bill Kozek:]

Sure. Yes. We don’t see any areas of the world that have slowed in terms of being able to take and utilize our vehicle. So, certainly Asia, Latin America, South America continue to be strong and we are seeing some other parts of the world that there is some opportunity as well. So we're pretty bullish on the opportunities that we’ve got in the fourth quarter and beyond.

[Nicole DeBlase:]

Okay, got it. Thanks. That’s helpful. And then, just a question around next year. So, with the Class 8 market down slightly again, medium duty kind of flattish. I’m curious can manufacturing cash flow be neutral to breakeven or are we still probably facing another year of cash burn?

[Walter Borst:]

We are looking to get cash flow positive, but we are not providing any guidance on '17 today. That is the goal of the Company as to get cash flow positive as quickly as possible and we will give you some more details around that on our fourth quarter call.

[Nicole DeBlase:]

Okay. Thanks. I will pass it on.

[Operator:]

Thank you. And our next question comes from the line of Robert Wertheimer from Barclays.

[Robert Wertheimer:]

Hi. Good morning, everybody. My question here is on used trucks and all the good work that you’ve done to fix and etcetera, specifically the primary [ph] warranty this quarter. What vintage was that on? And are you seeing used truck pricing do better on the current management since vintages [ph] versus the other one or is there still sort of a pall over the brand that needs to come off as you continue this work?

[Persio Lisboa:]

This is Persio, and as discussed by Walter in his comments, the $19 million pre-existing warranty adjustment we made in the quarter that relates primarily to a higher than estimated claims that we had and previously no identified failures within our big bore engine families. So these failures they’re basically confined to a very discrete population of engines, and we believe that this is failure more that is consistent with what the industry experience with the early vintages of the SCR products. So it's important to note that our current model year and all the productions that we had last year most of it have already the corrective actions and improvements related to the specific rate.

[Troy Clarke:]

With regard to the used trucks and maybe Bill could comment a little more than I have -- than I can, but our used truck pricing seems to have stabilized and we would anticipate getting through a lot of actions stabilized and we think was going to stay there. Whereas I think given the oversupply or the high supply, I don’t want to say oversupply of other brand of used trucks in the market, there still seems to be some movement. So, relatively the used truck pricing gap seems to be closing between us and our competitors. But for us it’s stable and I think it gives us good planning base going forward. Bill, would you add to that?

[Bill Kozek:]

Sure. Definitely agree with you that these truck values did stabilize for the international product during the third quarter and really where we stay in the degradation has been in the EGR -- our EGR population, and the newer vintage is returning to normal. If you say normal was five, six years ago. So obviously that’s our biggest problem is the EGR and now there is not a whole lot SCR trucks coming back today, but we anticipate that the values will be in line with where they’ve been historically.

[Robert Wertheimer:]

Wonderful. Thank you. If I can ask a simple one, that you’re able to answer it, what was the steel [ph] benefit this year total costs? Are you able to provide a sense of what the headwind might be for end of year, next year?

[Bill Kozek:]

Yes, we normally don’t disclose the benefit, but we had traditionally what we do with our suppliers we have some periods of locks that we try to manage through. So we don't really shrink as much as the market does when prices go up and down. So we had some benefit to the beginning of the year. We start to know kind of offsetting some of them in the latter part of the year, but in general, we manage the commodity side of our business in a very stable level. So with locks and some financial hedges in some cases.

[Robert Wertheimer:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Jeff Kauffman from Aegis Capital.

[Jeff Kauffman:]

Thank you very much. Hi, everybody.

[Walter Borst:]

I got to get [ph] used to that new one, Jeff.

[Jeff Kauffman:]

You and me both. So, Bill had mentioned that you were starting to get a more favorable reaction from customers buying trucks with the Cummins engine. Could you give us an idea, if I look at the truck sales you saw this year in the third quarter, maybe versus truck sales you saw last year in the third quarter, how many of those trucks -- what percentage of those trucks are going out with Cummins engines versus your own?

[Bill Kozek:]

We’re still at about 60-40.

[Jeff Kauffman:]

Okay. So that hasn't changed a whole lot over the last [multiple speakers].

[Troy Clarke:]

Yes, that -- yes, Jeff that’s the heavy number. It's 60 and change and 30 and change actually on heavy. But on a medium duty, basically everything else is over 80% of our product have Cummins engines in them. And it's just a little bit, I would say, it's over 80%. So it’s a mid-teens with regards to in the other spaces and a 100% of our buses. Yes, a 100% of our buses, right. And that actually works into the average that I gave and so on.

[Jeff Kauffman:]

Okay. And then just one more detailed question. I know that you would put out a recall announcement just a short while ago on some of the trucks sold more recently in the last couple years. Can you talk a little bit about the recall and was any of the cost of that recall in the numbers that were reported for the fiscal third quarter?

[Troy Clarke:]

The -- actually it’s -- all recalls are important to us, really evidence of I think the enhanced and improving quality, customer satisfaction that we are managing. Recalls by definition and funding for those are included in the prior - as a prior period warranty adjustment in the quarter where the recall is announced. So within the number that you saw any recall activity would've been located in there. To be very honest with you, I think it was $1 million or it was a …

[Walter Borst:]

Yes.

[Troy Clarke:]

… very small percentage of that. It was not a very large -- it wasn’t a very large recall item.

[Jeff Kauffman:]

So the number is captured inside of our results [multiple speakers]

[Troy Clarke:]

So the number is inside of there.

[Jeff Kauffman:]

Okay. Very good, guys. Thanks a lot.

[Walter Borst:]

Thanks, Jeff.

[Operator:]

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

[Neil Frohnapple:]

Hi. Good morning, guys.

[Walter Borst:]

Hi, Neil.

[Neil Frohnapple:]

Could you elaborate a little more on Parts segment revenue decline in the quarter. I think it was driven by soft market conditions in your core in Mexico markets and I guess this is a follow-up how long would you expect that to stay down? Is it more a transitory nature, just any thoughts, that would be helpful? Thank you.

[Troy Clarke:]

Sure. Sure. I will take that one. Yes, our Parts business was down 4% year-over-year. The total industry, at least from the intelligence that we get is down roughly 10% in the industry and that's really across all geographic area, U.S., Canada, and Mexico. Canada and Mexico little bit deeper than the U.S. So our Parts team has done an outstanding job. More importantly, the segment was able to produce EBIT slightly better than last year on lower sales. So that that's a positive as well. So moving forward, it's tough to predict Parts, but as the trucks and the freight is rolling, they’re going to be consuming parts. So it's been a soft rate environment or rate and volume environment recently and that's impacted that the volumes for total parts in the industry. So it's hard to predict what's -- where it's going to go in the future, but the economy is pretty good, so we anticipate that trucks will continue to be moving and ultimately consuming Parts. So if this is really the law point, certainly our expectation is that it will continue to grow as the Parts business typically does.

[Neil Frohnapple:]

Okay. That’s helpful though. And then, just a quick follow-up, I mean, would you guys expect to continue to outperform the industry growth rate going forward like you did in the quarter. Just with some of the initiatives that you guys have laid out.

[Troy Clarke:]

We certainly do.

[Neil Frohnapple:]

Okay, great. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Mike Shlisky from Seaport Global.

[Michael Shlisky:]

Good morning, guys. I wanted to ask about your first Project Horizon trucks coming out here as they rollout the line. Can you give us some sense of the margin improvement that you expect to get on these trucks compared to what they’re replacing, directionally or some broad brush there would be helpful?

[Troy Clarke:]

Yes. Well, certainly when will put a lot of energy and effort into a major redesign of our product. We have a lot of goals in mind, right. Trucks will have higher -- a better uptime in the tracks replaced and the trucks replaced have pretty darn good uptime. So have better quality, both off the end of the line and as our customers receive them and again I think our trucks are pretty good today. I mean, more than pretty good today. We will have more improved fuel efficiency and lower total operating costs and last but not least we anticipate that the margin on these products improve, because we’re just that much smarter as we’ve designed them. But with regards to directionally, it's improved. You'll have to stay tuned and I think as Walter has indicated, when we come back to guys in December and give you some insight into our -- what we think '17 looks like you will see some of that in there. I would just remind everybody in the short-term, however, we’re in launch. We talk about these products to come off the line, they’re actually -- some of them are coming off the line, as we speak and so we will be in a large transition here for a several month period time.

[Michael Shlisky:]

Is there a chance there will be a disruption on your production lines with your old trucks as you kind of mix in these newer ones with different assembly methods, but more robotic. So let's labor. Is there any chance that you have to adjust your production schedules to mix in and how a new kind of truck. But we think we created the right plan for winding down the old and ramping up the new, it’s a very deliberate plan that is designed to avoid just those disruptions. So if we execute against it, I think will be just fine.

[Michael Shlisky:]

Okay. Fair enough. I will leave it there. Thanks.

[Operator:]

Thank you. And our next question comes from the line of Kirk Ludtke from Cowen & Company.

[Kirk Ludtke:]

Good morning, everyone.

[Walter Borst:]

Hi, Kirk.

[Kirk Ludtke:]

The VW investment clearly derisk the credit story now -- big rally in the bond. Can you talk about any other benefits from a commercial angle that the enhanced creditworthiness of the company might imply the expected -- extend trade support, are there any other more immediate impacts of the deal that we can quantify.

[Troy Clarke:]

Well, I’m trying to understand the question. The two most immediate impact they’re going to be the liquidity improvement from the equity injection and then the procurement JV once that gets up and running after close, we expect that to produce results for us immediately to be additive to our other efforts that we have on an ongoing basis. So those are the two most immediate benefits that we would see coming out of the alliance.

[Kirk Ludtke:]

Right. But …

[Troy Clarke:]

Plenty more over time.

[Walter Borst:]

Did you get more trade support, I mean, the people extend credit to you, it's more attractive terms. Those -- and if so, it’s meaningful. Yes, I think you should -- you’re going to need to wait. Let us get through the regulatory process, and we will once we get into the procurement JV, that will be another potential opportunity for us. So, thinking about the opportunities the right way, but we need to get an opportunity to work together with our new alliance partner here and see what those opportunities exactly will be.

[Kirk Ludtke:]

Great. Thank you. That’s helpful. And then do you continue to have a nine member Board?

[Troy Clarke:]

We currently have a nine member Board.

[Kirk Ludtke:]

And you will stay with nine?

[Walter Borst:]

There will be some changes to the Board though over time. We did announce and Troy, you might want to jump in here, but we did announce that a couple of our Board members are going to be retiring as this transaction closes and there will be two representatives from Volkswagen coming onto the Board.

[Troy Clarke:]

And so the size and the composition of the Board will be taken up at the next Board meeting. And there will be future filings announcements after that.

[Kirk Ludtke:]

Okay. Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Jamie Cook from Credit Suisse.

[Jamie Cook:]

Hi. Good morning. Just another follow-up question on the Volkswagen transaction and following up on sort of Andy's question, Troy do you have any current plans to displace the Cummins Engines before 2019, and if so, would you have to or have you told Cummins that, is my first question. And I guess, just more important in longer-term, I’m trying to understand how Navistar views Cummins in the longer term, are they still importing an important supplier or over time, today become less relevant to Navistar. Thank you.

[Troy Clarke:]

Yes. Jamie. I guess, I will just answer this question. I think where everybody on the line, probably learn further than I would have otherwise, given that it seems to be on everybody's mind. We’ve no plans to displace Cummins engines between now and the 2019 date. Quite frankly, I wish we hadn't said now since there is not as much substance behind that as a lot of people seem to have -- seem to consider. We will develop our product plan in a very logical and deliberate fashion, make the right decisions for our Company going forward, okay. So, but no, for this specific question on displacing engine. Second, Cummins is a great partner for us and their engine in our product is helping us right today to create outstanding vehicles that are getting a lot of traction in our market. We were closely to them. They were important to us. We are including their products in all of our new product launches which will take place over the next 18 months. And so we expect to collaborate with them and I think will be in business to come in.

[Jamie Cook:]

And over time is a more important that the customer makes the decision or do you feel like it's more important for you guys to sort of push which engine would be the preferred engine.

[Troy Clarke:]

Where I’m sitting today, I just got to tell you, the customer is the center of everything that we do. So, we talk internally. We think we are the most customer centric truck company and I think it will just live by that for a while.

[Jamie Cook:]

Okay. Thank you. That’s very helpful. I appreciate it.

[Troy Clarke:]

All right, Jamie. Thank you. And that concludes our question-and-answer session for today. I’d like to turn the conference back over to Navistar management for any closing comments.

[Troy Clarke:]

No, actually we thank you very much for your time today, obviously the quarter was a less little volume than we had originally anticipated, part of that is in the market and part of it is just the fact that we continue to recover, but there are some really good times, we believe in the reception of our product by our customers. We continue to rely upon it. I think the best doing that work to get those products and service our uptime strategy is gaining traction and followers. Our market share -- our order share would indicate that we should look forward to increased market share and the timing that Bill talked about. We expect a stronger fourth quarter than third quarter and we’ve maintained our guidance. So with that thank you very much for your interest and we’re kind of excited at the end month we’re going to be launching a new product and we got a new partner and I think there's a lot of stuff to do and we are anxious to get at it. Jim?

[Jim Spangler:]

I want to thank everyone for taking part in the call today. For anyone investor that has a follow-up question, please reach out to Ryan Campbell. His phone number is 331-332-7280. Any media follow-up, you can call me at 331-332-5833. Again, thanks for taking part in the call today. Have a good day.