Navistar International Corporation
Q4 2016 Earnings Call Transcript

Published: 20 Dec 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Navistar’s Fourth 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 follow at that time. [Operator Instruction] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Jim Spangler, Vice President of Corporate Affairs. Please go ahead.

[Jim Spangler:]

Good morning everyone and thank you for joining us for Navistar’s fourth quarter and full year 2016 conference call. Today, we will discuss the financial performance of Navistar International Corporation for the fiscal period ended October 31, 2016. And 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 commentary, 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 topics. A copy of this morning’s press release and the presentation slides has been posted to our Investor Relations website for reference. The non-GAAP financial measures discussed in the call are reconciled to U.S. GAAP equivalent and can be found in the press release that we issued this morning, as well as in the appendix of the presentation slide deck. Also today’s presentation includes forward-looking statements about expectations for future performance. The Company expressly disclaims any obligation to update these statements. Actual results could differ materially from those suggested by our comments made today. 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 found 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. Thanks, Jim, and good morning everyone. I’ll start with the few overall highlights about the year and then turn it over to Walter for more in-depth discussion of the financials and then we’ll take your questions. The headline in the base of a top market, we’re demonstrating our ability to lower our breakeven point while making progress toward our goals of improving consideration and rebuilding share. And our ongoing product investments along with our new and exciting alliance with Volkswagen Truck & Bus are setting us up to win. Despite difficult market conditions, our Q4 results show that we’re moving closer to profitability. But the year as a whole, we lowered our cost of doing business, improved our operations and maintain total market share in North America. As a result, we recorded our fourth consecutive year of adjusted EBITDA improvement, significantly grew our adjusted EBITDA margin year-over-year and hit our year end manufacturing cash target all despite the challenging Class 8 market which decorated rapidly in the second half of 2016. Thanks to our continued investment during our turn around, 2016 also marked the beginning of occasions of major new product introductions that will extend through 2018. Our launches this year included the LT Series of Class 8 on highway trucks. The HX series of premium vocational vehicle and expanded powertrain options for the DuraStar, the WorkStar and CE school bus. We’re seeing improved consideration of our new products, which is reflected in higher gross order share for the year with by 6 to 8 trucks, and we’re starting to see progress in our retail share in the heavy market. During Q4, our market share in the heavy on highway segment improved by more than 2 percentage points compared to Q4 of 2015. We also post that our highest quarterly market share for Class 6 to 8 Truck & Bus since Q4 of 2014. Our Parts team achieved this third consecutive year of record profitability where our Fleetrite all makes Parts business at another year of double digit growth all despite a soft Parts industry. Our Global segment continues to streamline its operations as it addressed the ongoing difficult market conditions in Brazil and is primed for return to profitability when the market begins to recover. During the fourth quarter, we also announced our strategic alliance with Volkswagen Truck & Bus. We’re making good progress on completing this alliance as all the appropriate regulatory balance has been made. We’ve received approval onto the antitrust regulations of the U.S. and Poland and other regulatory approvals are pending. Other agreements between the parties that constantly closely conditions remain on track including final terms of the procurement joint venture and the companies' first powertrain collaboration, the first of several exciting product initiatives, we’re expecting to close in the first quarter of calendar 2017, and frankly we’re excited to get started. Our customers have reacted very positively to our announcement to this alliance and we expected to have a positive impact both operationally and in the market place. It will support all three pillars of our business strategy driving operational excellence, growing the core business and building new sources of revenue. Driving operational excellence is really about getting more done with less. We’ve already made major improvements in structural cost, material cost and manufacturing costs having taken off more than 1.2 billion in total costs over the last three years and we have more opportunities still ahead. For example, as we've developed and launched our cadence of new trucks and buses while the new product designs improve material costs, the procurement joint venture with Volkswagen Truck & Bus will allow us to obtain additional material savings based on economies of scale. The technology alliance with Volkswagen Truck & Bus will allow us to invest more efficiently in future technologies to include powertrain emission systems and advanced driver assistance systems that lead to well tuning in more autonomous truck operation. Overall, we believe that over the first five years of our alliance with Volkswagen Truck & Bus, Navistar will benefit by at least 500 million with an annual run rate of 200 million by year five and continued improvement after that. With the second pillar of our strategy growing the core business, we're building on the new product momentum we established this year. In 2017, we will be launching an LT Truck with our new 13 liter engine, as well as a new regional haul product a refreshed LoneStar and a new medium truck. The technology alliance with Volkswagen Truck & Bus will help us expand our future offerings more rapidly, more cost effectively and more profitably. With the addition of new proprietary powertrains, we will be able to offer customers greater choice on engines, and to generate new revenue and profit streams for our products business. Overall, the alliance will permit us to bring more products to market at a lower cost per product platform. The third pillar of our strategy building new sources of revenue includes leveraging our manufacturing, development and validation assets in order to drive incremental revenue. One good example is our relationship with General Motors. We are collaborating on the development of the new Class 4-5 products that will be manufacturing and launching in 2018. But even sooner next quarter in fact we will begin manufacturing GM's Cutaway G Van at our Springfield Ohio plant, and we're pursuing more opportunities like this. Our connected vehicle business on-command connection which has grown to 250,000 trucks being monitored is another major opportunity, as new tools and connected services continue to come online. And with this Volkswagen Truck & Bus looks like connective service is much the same way that we do, we see many opportunities to collaborate in this area. So as you look ahead to 2017, thanks to the major steps that we've taken this year, we are well positioned to further improve our results. We will continue to lower our material costs as we sustain our steady cadence of new product introductions. We plan to further reduce our manufacturing cost through better utilization of our plant capacity especially as our alliance with GM brand sub. Before seeing major benefits from our alliance with Volkswagen Truck & Bus and when you combine these improvements with our customers' positive reaction to the alliance, it confirms our confidence and our ability to grow our standing in the market. So in 2017, even despite industry headwinds which we anticipate will continue in the first half of the year, we expect to improve our adjusted EBITDA results for a fifth consecutive year, while further lowering our breakeven points, positioning us to return to profitability as industry conditions stabilize and begin to recover. So, let me now turn it over to Walter.

[Walter Borst:]

Thank you, Troy. Good morning, everyone. Today, I'll walk you through our Q4 and 2016 fiscal year results and provide some initial thoughts on 2017 as well. Please note additional details can be found in the slide deck which we posted to the Investor Relations page of our website. Starting with our 2016 financial results for the fourth quarter, consolidated revenues were $2.1 billion, down 17% compared to last year. The revenue decrease was largely driven by an 18% decline in our core chargeouts to 13,000 units. This decline largely reflects further softening of the Class 8 industry in the U.S. and the Canadian markets. Our loss and diluted earnings per share from continuing operations were $34 million and $0.42 per share respectively. Adjusted EBITDA for the quarter was $112 million. Our cost management is helping to offset the impact of declining revenues. During 2016, we achieved over $350 million of year-over-year reductions coming from both products and structural cost savings. We were able to reduce the year-over-year warranty expense in part through our intense focus on quality. For 2016, warranty expense excluding pre-existing as a percentage of manufacturing revenue fell to 2.7% compared to 3% last year. Our warranty liabilities are down nearly 40% since a peak in 2013. We achieved our fourth consecutive year of adjusted EBITDA improvement up 3% year-over-year to $508 million, despite revenues following by 20%. Furthermore, our adjusted EBITDA margin was up 140 basis points growing to 6.3% as our cost management actions are lowering the Company’s breakeven point. If one excludes full year pre-existing warranty adjustments from continuing operations of $78 million and one-time restructuring and impairment charges of $24 million, we would have been slightly profitable in 2016. Now, let’s review the results of our operating segments. Our truck sales were impacted by the downturn in the Class 8 industry. As a result, sales during Q4 were down 20% year-over-year to $1.4 billion. We incurred a loss of $61 million. The savings from cost management actions helped to offset additional reserves to adjust our used truck inventory values, the impact of lower volumes and lower Mexico margin due to the strengthening of the U.S. dollar. Our Parts business once again delivered stellar results as it achieved its third consecutive year of annual record profits. For the quarter, Parts sales were $613 million down year-over-year largely due to softer Parts industry conditions as well as the gradual revenue decline in our Blue Diamond Parts business. Profitability was similar to year ago fourth quarter at a $162 million and segment margin grew to 26%, reflecting product margin improvements and cost savings. Our global operation segment continues to show resiliency in the phase of adverse economic conditions in Brazil. For the quarter, Global Operations once again achieved near breakeven results even as revenues were down 24%. The financial services segment delivered another period of solid results. Q4 revenues were flat at $58 million and profits were down slightly year-over-year to $23 million, largely due to the impact of higher interest rates and interest expense. As we discussed earlier in the year, we are addressing our used truck inventory levels by managing trade receipts and aggressively pursuing both domestic and export market sales opportunities. These initiatives are helping to drive our inventory balance lower. Gross inventory declined again this quarter and ended the period at $410 million down $20 million since the end of Q3. An increasing percentage of our used truck sales are going to export market, but these markets have a lower price points. This along with a weaker domestic used truck pricing environment results in addition to the used truck reserve of $42 million this quarter. Net of reserves, used inventories stood at $202 million at the end of Q4. Moving to manufacturing cash, we ended the year with cash of $800 million, consistent with our latest guidance and up from Q3 reported cash of $640 million. Q4 cash rebounded largely from networking capital performance that generated positive free cash flow in the quarter. For the year, major cash uses impacted free cash flow largely fell in line with guidance provided early in the year as we continue to invest in new products and address our balance sheet obligations. However, lower year-over-year volumes contributed to manufacturing cash balances declining for the year. Now let’s shift our focus to 2017 and our thoughts on the year ahead. First, let looks at revenues. We project 2017 Class 8 industry volumes to range between a 190,000 and 220,000 trucks. We see another solid year coming from Class 6, 7 and bus, resulting in total core volume of 305,000 to 335,000 vehicles. We expect new product like our LT, HX, propane bus and new powertrain applications will improve our penetration in the market. We also foresee another solid year from Parts. Notably, we have continued in our Fleetrite private label brand sales. As a result, we believe 2017 consolidated revenues will be consistent with 2016. We plan to take more cost out of the business next year though not at the pace experienced in the past two years, the majority of next year’s savings are expected to come from further actions to reduce material costs and improve manufacturing efficiencies. Material costs are expected to decline through ongoing design cost reductions as we introduced new products and some improved suppler footprint optimization, even in the phase of commodity headwinds. Also in 2017, we will begin producing General Motors Cutaway G Van which will help improve manufacturing efficiencies and increase capacity utilization. After several years of cost reductions, we expect our structural cost to be somewhat higher as we invest in our product of connective service offerings in our brands. We also forecast that the used truck market will begin to stabilize which should help improve our profitability year-over-year by requiring less additional to our used truck reserve. As a result, we expect adjusted EBITDA growth to continue in 2017. The tough industry conditions experienced in the second half of 2016 are forecasted to continue into at least the first of 2017. Therefore, our first half results will be challenged versus a year ago before seeing improvements in the second half of the year. Turing to cash, we forecast the end 2017 was about $800 million of manufacturing cash, which includes receipt of the expected equity injection from Volkswagen Truck & Bus alliance. For the year, we foresee the benefits of adjusted EBITDA growth and the equity injection being offset by cash outflows layer to higher capital expenditures, interest and tax payments, warranty spending, pension and OPEB contributions, working capital changes and other items. We've provided additional information for the major cash outflows in our slide deck. As we've seen in the past, we expect to consume cash in our seasonally weaker fiscal first quarter then rebuild cash balance as over the remainder of the year. Looking at our debt maturity profile, our next significant manufacturing debt maturities are our convertible notes, which come due in October 2018 and April 2019. We continue to assess our options which include refinancing of portion all of these notes over the next two years. As I reflect back in 2016, we accomplished a lot. We announced the major strategic alliance with Volkswagen Truck & Bus that once complete will provide significant opportunities for cost synergies and growth. We've launched new products resulting from our product development investments that have been very well received by customers as evidenced from improved order share that we believe will translate into higher retail share in the future. We delivered strong savings from cost reduction actions that lowered our breakeven point and improved margins, and we improved our operations as shown by our fourth consecutive year of adjusted EBITDA growth despite adverse market conditions that have impacted revenues. 2016 marks another year of remarkable progress and well positions Navistar to benefit from better operating performance once market conditions improve. With that, I'll turn it back to the operator to begin the Q&A.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Ann Duignan of J.P. Morgan. Your line is now open.

[Ann Duignan:]

My first question is regarding to backlog which according to the 10-K ended at about 1.1 billion versus 2 billion a year ago, so that's down 45% in the significant headwind as we step into fiscal 2017. Does this make your 2017 a stretch? Or how should we think about the weaker backlog? Is there anything there that we should be aware of?

[Bill Kozek:]

Hi, Ann. This is Bill Kozek. Really, the backlog decline really for two reasons obviously the market and the lower order intake for the past year, and we try to keep our production as high as we can and gain some share. And the second piece is, every year in the normal course of business we take a look at the backlog and clean up any deals that we don’t believe have a significant chance of being built. So, for us, there was one large multi-year deal that we cancelled due to this particular customer just his business softening and we felt it was the right thing to do, and interestingly this particular customer their business is improving, and we are quoting them again, but it was really one customer for the most part in the cancellations for the month of October.

[Troy Clarke:]

And in the end -- this is Troy. Our 2017 plan or as Walter reflected comprehends that. So, there is -- well, it re-comprehends that let me just say so. The adjustments are very real with looking.

[Ann Duignan:]

And then just on the first half to second half. Can you give us any sense from a modeling standpoint what we should be looking at?

[Bill Kozek:]

In terms of volumes, obviously, our first quarter is down because of it's November, it's December, it's January. So that’s just a natural thing. But in the second half of the year, I don’t have our number what we plan on…

[Troy Clarke:]

Ann, I don’t think we’re going plan to break it up around this call. But, the second half will be stronger than the first half.

[Bill Kozek:]

Yes.

[Troy Clarke:]

We’re not going to pick the inflection point here and during the year, we do see that things could improve, but they'll be tough in the first part of the year.

[Bill Kozek:]

But, Ann, what we do know is as we found and customers have been -- this business as well as we do. We found many customers spent the latter half of 2016, rightsizing their capacity to the real demand for freight that’s out there especially in light of that fact that a lot of new trucks were added to capacity and the trucking capacity in 2014 and 2015, which resulted in lot of used trucks which also represent capacity coming into the market in that same timeframe. So, customers have been forthcoming indicated that they were in the process of delaying scaling back or as Bill indicated in some cases cancelling those quarters. That said, we’re in constant contact with them and a number of them are now engaging their plans to get back and prefer to see trucks and the great thing is that we’re having those discussion. And we’re having a lot of more those discussion this year than we were at this time last year. So, a little more difficult for us there, as Walter indicates, forecasting the inflection point, but the good news is the quoting activity is higher. The level of considerations, we believe is higher some of that is in fact in reflected in order share albeit in a low order market. I think is really just a trough of the truck cycle and it will end, and it will correct. And our call is better correct as we go through 2017. The sooner, the better obviously not just for us, but everybody in the market, and we’ll able to give you guys more clarity as we work our way through the year.

[Ann Duignan:]

Okay. That’s great color. And I do appreciate calling the trough and the inflection point and truck growth is not an easy for anyone. If I could just sneak-in one kind of more strategic one, is there any risk to your called development agreement with GM particularly on that Class 4-5, now that you are signing an alliance with Volkswagen? Is there any conflict there? Or any discussion going on?

[Bill Kozek:]

We obviously with our key partners when we could, we explain the nature of the alliance that we have Volkswagen. And at this bigger point of in time, we'll full speed ahead with our Class 4-5 venture with General Motors. And as Walter noted in his commentary, we are full speed ahead with starting production in the first calendar year quarter of next year with that Cutaway Van business coming to us out of one of the GM facility. So, I would say, we’re continuing to work together very well, and I don’t see that on the horizon or an issue around that on the horizon. And again, we’re encouraged by this working relationship we have with them and hope to continue to build on it.

[Troy Clarke:]

And due to the two great projects that we have with General Motors, and they're great partner for us, and if you saw our Springfield facility, there is a lot of activity going on there right now getting ready for this G Cutaway Van. So, we continue to be very excited about that business as well.

[Operator:]

Thank you. And our next question comes from Brian Sponheimer of Gabelli. Your line is now open.

[Brian Sponheimer:]

Walter, if you could just help me out with some math from the cash needs. You highlighted about 640 million or so in needs on your slide deck, but given where you expect cash to be next year that implied about a $250 million burn. Is there some working capital adjustment in there that wasn’t all called out, that would -- is that $150 million between the cash needs and where you expect to end up that seems like the EBITDA expectation might be a little low?

[Walter Borst:]

The guidance that we provided Brian in the slide deck is consistent with the line items we’ve provided in the past. We haven’t provided working capital guidance in the past because you guys all your models in terms of the way the industries going, where our shares going, and that obviously impacts working capital. So, working capital would be an element of that as would any NFC related items in our EBITDA amounts as well as any additional repayment of financing items that fit in the financing portion of our cash flow statement. And that goes our additional drag on the cash uses.

[Brian Sponheimer:]

Okay, that’s very helpful. Thank you. And just Troy and Walter, from a jurisdiction standpoint, can you kind of walk through your expectations for the filings for the VW alliance as we get through the next couple of months in Brazil in particular?

[Walter Borst:]

All those filings have been made. Again, as I've indicated in my comments, the U.S. antitrust approvals have been obtained. The Poland has been obtained. The two jurisdictions outside the United States that we’re still working through and all those fillings have been made as you indicated is Brazil and the other one Mexico. And so those are proceeding, and those are proceeding as we speak, and we’re advised as they're proceedings as appropriate. And so, we're very confident that those will continue to work through. Probably, the other full side of it is the fact that there are two contractual provisions for closing. One of them is the purchasing joint venture or procurement joint venture. And the other one is the technology collaboration agreement. And in fact, as we worked our way through those and are vertically complete with those, we’re very-very excited about the opportunities that those provide. And quite frankly, I know the folks around this table and I can’t speak for our partners, but I certainly -- their body language would indicate that we're all very excited because started on this. And so, we won’t let it they go by without making sure that these approvals aren't prodded for the right conclusion.

[Brian Sponheimer:]

So, if I get, just one more. Does the 2017 EBITDA expectation include any expectation for the benefit from the close of the JV in the purchasing agreement?

[Walter Borst:]

As we indicated on the call when we announced the alliance Brian, we would expect the transaction to be accretive in the first 12 months after closing. So, we’re anxious to get started as through our indicated, it is a function of when the deal does close and in particular on the purchase thing side where we’re ready to jump right in as soon as that -- as soon it’s closes. So, small amount probably in our '17 fiscal year related to it, but on track to see the overall benefits that we have eluted to previously as well as those that we mentioned in Troy's remarks earlier.

[Troy Clarke:]

Yes, I mean obviously as we start this year, I think we are in the same situation many others just a lot of moving pieces. And for us, there is just additional moving piece very exciting when with regards to the Volkswagen alliance and the opportunity of the full savings into that and improvements into that full month period of time as Walter indicated. So, as we get a little bit further in the year because it is clear for us, we get on the other side of the venture getting or closing will be a little more forthcoming, Brain, with what our expectations might be. Okay.

[Operator:]

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

[David Leiker:]

I guess two different items here I want to just talk about. If we look at the cost actions and you've obviously still have some gains that rolls through next year for actions you've already taken. Is there a way to quantify what the level of savings that are already achieved that haven’t flow through the numbers yet?

[Walter Borst:]

I'm sorry, David, I didn't -- I thought you're talking about the class actions. [Multiple Speakers] Alright, I think I can take that is, David, we still think I think as we normally work with our cost reductions program, what we are doing really is almost machine is non-stop process where we develop activities and we keep introducing improvements every month. So, as to your point, I think there is all is that carryover that seem to the following year. But, if I have to stop and say, what are the biggest opportunities for us. I really thank our launches and I think Troy alluded to that in his comments. Now, we are launching new products and every time we launch a new product, that's an extraordinary window of opportunities for us to bring new designs, new materials, new system integrations, and actually deliver a better products with a better product. We have the most competitive cost and that's what I think the launches will do for us in 2017. So, when you put that and the carryover, I think that's where I think we see the trend up, a continuous trend up across reductions now impacting our platforms. And that's going to happen in most of the platforms that we have. So, I don’t think we're giving specific guidance on how much is carrying over to 2017 because honestly that is a piece one of the elements of a bigger pie that is the total cost reduction that we have throughout the enterprise on a material side.

[Brian Sponheimer:]

So, it sounds like some of those savings that might approve in 2017 are going to be used up on class to launch and develop some of these trucks that are coming to market, is that fair?

[Walter Borst:]

I think the accurate -- actually, the cost reductions that we have in the pipeline that are now going to be carryover for 2017. On top of those, we have the new product launches that carryover those changes.

[Troy Clarke:]

I mean I think maybe the way to look at it is. The majority of the development expense of those new products has already taken place. Okay, so we don’t have large engineering bills left out there yet to pay. So, now the savings that Persio referenced come to us a little more clearly than we might have been able to see them in the past because the engineering spends starts to fall away.

[Brian Sponheimer:]

And then just one last item here on the pensions, I see the comments that you made there in terms of your the cash contributions about the expense. But with the pension and the OPEB with year-end and the revaluation of those with were rates are. Is there a high level characterization of -- I haven't had kind of those your K -- but high level characterization on how that all shook out for you?

[Walter Borst:]

So, the balances are slightly higher for our pensions, 1.7 billion. I think there is the net unfunded amount for pensions and OPEB is about 1.3 billion. So, together, there is still about $3 billion on the balance sheet which is consistent with where it's been in the last couple of years.

[Brian Sponheimer:]

Okay.

[Walter Borst:]

That we marked at the end of October. So, interest rates have been higher since then. We’ll continue to be interesting I think on the balance sheet. To me is for every 100 basis point that interest rates move up, our liabilities go down by about 500 million for pension and OPEB combined by two-thirds pension and one-third OPEB. And it relates to funding, we’ve taking advantage of the various smoothing opportunities. So, we don’t see much of the change there as a result of higher interest rates, but as usual we baked that into our projections on the cash outflows and we provided to some guidance on outflows in excess of expense via materials.

[Operator:]

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

[Chris Larson:]

Hi, guys. This is Chris Larson on for Andy this morning. Thanks for taking my questions. Just couple of on the cost reductions that you guided to 2017, can you give any color on the exit rate for 2016 in the magnitude of the decline and the cost reductions to be achieved next year as well as whether that derived is related to footprint, headcount, and if there are any purchasing synergies from the Volkswagen partnership included in that?

[Walter Borst:]

Yes. So, let me take that and then Persio can jump in as appropriate. But more I was going to repeat what we had in our remarks as well as what we said in response to prior question already. We do anticipate additional material cost savings next year that will be a function of our product launches as well that give us opportunity to make design improvements, which also going to reduce material cost in our vehicles. We’ll have the benefit on the manufacturing side from better efficiencies and our plans related to the General Motors project that we’re ramping up in our Springfield facility. We have taken into consideration as part of our cost savings as there are some commodity headwinds that we'll be facing. So, we factored that into our thinking, and that we are investing on the structural cost side, some additional money. So, we would anticipate structural cost higher next year than in 2016 as we continue to invest in our products and things like our connect-to-service offerings and continuing to improve our brand consideration. So, we continue on our lean journey in cost reductions and so that’s never going to stop here, and we’ve had tremendous progress on that front over the last several years. But we’re also taking the opportunity to invest some of those monies to improve our brand and our long-term longevity of the Company.

[Chris Larson:]

And can you give any color on the effective price versus currency or mix embedded into the top line guidance for 2017? And any color that you can provide geographically within that top line guidance number?

[Walter Borst:]

Yes, pricing continues to be very competitive out there. It’s been competitive. Those have been in the truck industry. It sounds to me, it's always been competitive. So, we’re not factoring a lot of price improvements into our results, but we’ve done a good job of balancing that with new volume opportunities. Every deal ultimately is its own deal. And geographically, we indicated, we obviously would expect another strong year from Parts. We've done a good job on the global side on getting to results to effectively breakeven. You tell me when the Brazilian economy is going to improve and will be well positioned to take advantage of that, we’re not calling that inflection point either another. And on the truck side, we will continue to do what we've been doing. Mexico, I guess maybe would be one other one to mention. I alluded to it in my remarks; the weaker peso is having an impact on our results there. And so, we’ve seen some weakness as that goes through to the bottom line, and exchange rates haven’t move much since year end in terms of the peso haven't strengthened. If anything, it’s weakened post the election. So, that’s providing a little bit of a drag on our results in Q4, and probably in the first part of 2017 as well at this point.

[Operator:]

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

[Steven Fisher:]

You talk about your expectations for the used truck market in 2017 and Walter you mentioned the expectation of stabilization there. How confident are you that you've captured all the trends and expected conditions in the used market in the next few quarters?

[Bill Kozek:]

I go first on the used market. Obviously, this is a key focus area for us and has been for the last two to three years and certainly will be in 2017. You know the market for over-the-road vehicles, it is currently challenged. So, what we call the heavy piece of it and there are just higher supplies than demand for domestic consumption, we think that all continue into 2017. But we believe, our inventory is appropriately valued today. And on the other part, the medium duty and vocational on used market is still pretty good. And I anticipate that will be the bright spot in the used market for 2017 and demand is exceeding supply. So, we think there will be some upward pricing or ability to make some gains on medium and vocational. So, again, there is a heavy pieces is challenged, but we think we’re in position to take advantage that in 2017.

[Steven Fisher:]

Okay, that’s helpful, Bill. And just on the actual reserve in the quarter. Was that more a function of weaker than expected pricing in the export markets or a bigger percentage of mix going to the exports markets or both really?

[Bill Kozek:]

Yes, so, it’s visually two components to it. I think you answered the pieces there. We did take an additional reserve for the export markets. That is a function of what portion of the mix we expect to go there as well as prices that we’re seeing in that market for those markets. And then secondly, domestically, we took a look at that as well and with what we’re seeing in the overall industry for used truck price declines, we thoughts that we needed to add to the reserves. And actually, it's probably more of a two-thirds domestic versus one-third exports with in terms of the additional reserves that we added in this quarter. That said, we we've seen used truck prices decline for the industry as a whole, but our rate of change has been less than what we're seeing for some of our competitors. So that gives us some confidence that these used trucks rates are stabilizing.

[Operator:]

Thank you. And our next question comes from Nicole DeBlase of Deutsche Bank. Your line is now open.

[Nicole DeBlase:]

On the EBITDA performance for the quarter was definitely -- for year was improved year-on-year I guess, but in first year it was a bit weaker than your implied guidance. And so, I'm curious it seems to me like the bulk of that came through the truck segment and I guess what was the breakdown of the negative surprise between just top line being little bit weaker and the residual value write-downs and the profit line?

[Walter Borst:]

Yes, I think you've got two to three pieces there. So, revenues were a little weaker where close to the bottom end of our guidance range for revenues. The big item really is the incremental used truck reserves that we decided to book at year end, that was $42 million and it really explains the shortfall versus our EBITDA guidance. And then the third piece I alluded to you earlier is weakness in Mexico, and as a result of the weaker peso and the impact that it had on our profitability versus what we initially anticipated.

[Nicole DeBlase:]

Okay, got it. That's helpful. Thanks Walter. And then on the market share, I guess looking at your guidance for 2017 Parts revenues, and you've provided an idea of what you expect for each of or for just overall industry shipments. So, it definitely implies that you are baking market share growth into your outlook for 2017. Is there any way you could quantify like the magnitude of market share growth that you are projecting for next year?

[Walter Borst:]

Yes, I don’t think we typically provide a guidance on market share, but as we've said in the comments, our Class 8 share was over 13% for the quarter, and our total share was the highest since fourth quarter 2014. And with our new products, we certainly anticipate growth in our market share moving forward. And for us getting the customers, these trucks in the customers hand are the key piece of that so all of those things we believe will contribute to 2017 market share growth.

[Operator:]

Thank you. And our next question comes from Adam Uhlman of Cleveland Research. Your line is now open.

[Adam Uhlman:]

I guess first, Walter. Can you back to the structural cost growth that you expect in 2017? How much growth should we expecting for the year?

[Walter Borst:]

We haven’t broken out the cost piece this year at this point of the year. I guess I said it's really going to go into the three areas into our products, which we extensively will see in the engineering area into connected service offerings as we look to continue to grow in that space given that with that over 250,000 units on our on-command connection system now. And additional money sets for our brands and particularly as we launch some of these new products that we’ve been talking about on the call here. So, we’ll be year-on-year, but we’re going to hold up giving any additional details there for the time being.

[Adam Uhlman:]

Okay. And then you’d mentioned that cash flow is going to be under pressure in the first quarter like it always is. But it would seem, if you have more on your plate this year, and the markets are quite a bit weaker. How much should we expect the cash balance to slip in the first quarter?

[Walter Borst:]

Yes. Again, I’m not going to go into details on that here, but if you can take a look at what the burn has been in the prior years. We still think we need on the order of $500 million to run the business. We’re ending the year at $800 million so that sets up for the first quarter here. A piece of it is always related to working capital and what’s happening there, and we have a weaker fourth quarter and so we anticipate a weaker first quarter. But some of that working capital related activity is been part of what we’ve been seeing here on our business. So, you have to look at kind of quarter-over-quarter. And we’ve signal that we think the first quarter will be weaker, but the fourth quarter was weaker as well.

[Adam Uhlman:]

And then just lastly, what was the earnings impact from the peso in the fourth quarter?

[Walter Borst:]

We didn’t break that out, but it was meaning to enough for me to mention.

[Operator:]

Thank you. [Operator Instruction] And our next question comes from Joe O’Dea of Vertical Research. Your line is now open.

[Joe O’Dea:]

On the pricing front, you talked about how it’s always competitive. But could you talk about experience through your fourth quarter, and what we've seen seeing over the past couple of months, and whether or not you’ve seen some incremental pressure there whether it's efforts to reduce inventory or tighter volumes, but just what the pricing experience has been like recently?

[Walter Borst:]

It’s been relatively stable over the last quarter. There hasn’t been any pressure or anybody out there trying to make a pricing war of things, but it's certainly challenged within the heavy piece medium, and vocational is holding up fairly well as is bus. But, again it's a competitive market and we're all out there trying to earn some business from the customers that are willing to buy right now, but nothing unusual for this time in the business cycle.

[Troy Clarke:]

And the market does not seem to be exhibiting a lot of elasticity on the subject to price. It's really more in line with what the customers' needs are with regards to their capacity and their operating costs. I would say those are still kind of dominant factors that determine whether the people are purchasing at this time or not.

[Joe O’Dea:]

Okay. And then just in terms of volume expectations next year and specifically on Class 8, wide range of outlooks that we’ve seen from industry experts since no of your competitors. And just kind of the confidence that you have around your expectations for what it look like kind of mid to high single-digit declines in volume at this point as we come off of that’s been a pretty depressed order pattern and we see backlog where it is, and whether that just influence by conversations with customers recently and how that builds your confidence and your outlook?

[Walter Borst:]

Yes, I think the last 30 days or maybe 45 days customers’ outlook have improved significantly and there is more activity out from the market talking to our customers and over the road segment, the medium and the vocational really has never taken as really there has never been an opportunity or thoughts of reduction for 2017. So, I’m fairly optimistic now and sometimes I’m paid to be optimistic, but I’m optimistic for 2017 and certainly the latter half of the year when customers determine what’s going to happen with this business following the winter.

[Troy Clarke:]

I think overall the indicators of these last 45 days, right, I mean there has been handful of kind of good news items coming at the market, not the least of which is where economic growth in the U.S. seemed to be trending in the third quarter of the year. And I know people are very optimistic about where that will continue to trend. One of the quickest ways to kind of address this excess capacity, too many trucks chasing to the low side of they chose is just underlying economic growth. And so, as those indicators seem to be pointing in the right direction, it’s interesting and I think very heartening for the entire industry, how quickly people began to talk about and making plans to anticipate in what fundamentally is just a growing economic cycle. So, I think there is a lot of background defined numbers you could put your head around that correlates of why we think the market will look like it does next year strengthening in second half.

[Operator:]

Thank you. And our next question comes from Robert Wertheimer of Barclays. Your line is now open.

[Robert Wertheimer:]

Could you please estimate if you can, how large headwind or an effect still another raw material is for next year if any?

[Persio Lisboa:]

Bob, this is Persio. Robert, we don’t provide a breakdown, but I think what we do internally on the raw material side and commodities, we take a portfolio approach on how to manage it. So, we try to balance the usage of hedges and contractual locks, so we can reduce the impact of the volatility in the market. So, we see that there is price in the series. One of the commodities that now we see is up and we have that in our forecast. But we don’t see that as a major impact throughout the year basically because of all the mechanism and because of the lagging timing that we have within the change in the market and the impact to our component cost or raw material usage. But we feel very good about it, I think it is stable from forecast standpoint. I think that's factoring to the numbers that we’re sharing with you. And overall, we’re still seeing the cost going down by all the other actions that I mentioned before. So, we have that factoring to our plant, it is one of the area that now we see some uptick next year, but it's not impactful enough for us to say that this is going to help that to take a pull on us or this is going to impact us meaningfully. So, for our cost is to going down with all the actions that they have in place and with the usage of portfolio and the management on the commodity side.

[Robert Wertheimer:]

Okay, thanks Persio. And just mechanically, can I understand on the cancelation. Was it I maybe said 5,000 or 6,000 trucks, it seems like a rather large order, was it just wondered did you take the opportunity to push a couple others out or was it really dominated by one order?

[Persio Lisboa:]

It really was dominated by one order in a multiyear order that was placed, but I don't know if I want to say the exact time of place. But, yes, it was really one order predominantly.

[Robert Wertheimer:]

Okay, thanks.

[Persio Lisboa:]

We did take a look at the total backlog as part of that activity. So, we didn’t just look to that one or we look that our orders.

[Operator:]

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

[Seth Weber:]

In the carryover, you kind of called out market pressures contributing to the decline in the products sales. I'm wondering, is there something specifically that's changed from the competitive environment in Canada and Mexico? Or is that really just the currency Walter that you referenced earlier?

[Walter Borst:]

Yes, in those markets, it's the currency.

[Seth Weber:]

Okay, it's nothing from a competitive environment that's changed in those regions?

[Walter Borst:]

No. And overall, we're very happy with the performance of our group and as we indicated record profits to the third year and I think based on the industry information that we see for the year, it was a little soft at the industry level, but we had better performance and average. I shouldn’t call Parts average because Parts has been outstanding for us. But we did better than the industry.

[Seth Weber:]

Okay. And looking to next year you kind of characterize the businesses solid or strong or something. I mean would you expect Parts revenue to be up in 2017?

[Walter Borst:]

We do anticipate Parts revenue to be up in 2017.

[Seth Weber:]

Okay. And then with just maybe one last one. Do you expect the global ops business to be profitable next year?

[Persio Lisboa:]

Yes, I think, this is Persio. We, as I think Troy mentioned, we have our global operations stable today at a breakeven level and for planning purposes as we can really predict what's going to happen predominantly in Brazil. We are not considering any of the major slow growth in that area specific and we are ready for it. And if it ever happens, as some analysts are starting to discuss that potentially the second half could be positive that will benefit from that, but that's not what we are considering for planning purposes right.

[Seth Weber:]

Okay.

[Walter Borst:]

The key for us in Brazil is really just to make sure that it's not a drag to our operations, and Persio and his team in Brazil have just done an outstanding job of that. I guess I think there is under the whole category. I mean I think we have so many Parts of our business that are really poised for that really provide upside when something very simple like the volume or the economy changes. I mean I think that really the circumstance that we have in our global operations and certainly the circumstance we have in North America with are much lower breakeven points back toward launching new products into the market. And that our consideration is evidenced by our higher order share, which we've been able to sustain the majority in last year, really pertains a higher interest in our product in doing business with the Navistar. And I just feel really good about the fact that we are like the sprinter on the lines as we begin to go off, and I think in many cases was really as we we've ever been and looking forward to that.

[Operator:]

Thank you. And our next question comes from Mike Shlisky of Seaport Global. Your line is now open.

[Michael Shlisky:]

I know it's early, but can you tell us if the LT orders are progressing ahead of the ProStar at this time last year?

[Walter Borst:]

They are and matter of fact we've got over 4,000 LTs in our backlog and that number continues to grow. Well that as of last Thursday so even higher than that now. And I think as you know we commence production last month, and we’re going to more than double the production this month in December. And our team in Escobedo has done a great job of dealing with and resolving some of the normal early issues. But the initial qualities of the first deliveries are certainly exceeding our expectation. So, I’ve been waiting for someone to ask that question, so thank you so much for asking it.

[Michael Shlisky:]

You’re very welcome. I also want to ask about EBITDA margins as well. In the past, you’ve discussed the 8% to 10% EBITDA margin range, and you gotten there a few quarters here and there over the last couple of years. I was wondering, if you could maybe share with us, but that’s verification for 2017 or maybe possibly 2018 as you get some more cost down the business.

[Walter Borst:]

Yes. It will be a function Mike really of the top line as well. So, the top line is by 1 billion and we’re expecting that to be a similar in 2017. So, that does challenge the margins a little bit, but we’ve been able to show good growth year-on-year and our margins not only for one particular quarter, but for the year as a whole. So, we’re looking to continue to expand on that as we drive cost reductions through the business even on similar revenues for 2017. 2018, a little bit is a really be a function of where is the market go and is it turn we expect that to turn, but as I mentioned earlier we’re not going to make projection of exactly when that’s going to be it.

[Operator:]

Thank you. And our next question comes from Brian Sponheimer of Gabelli. Your line is now open.

[Brian Sponheimer:]

My question was answered. Thank you very much.

[Troy Clarke:]

Okay. All right, thanks, Brian.

[Jim Spangler:]

I think that’s it for questions for right now. And obviously we’re available throughout the rest of the day in both our Investor Relations activity as well as any number of us to help answer your question.

[Troy Clarke:]

Look, I think in closing, look things that have big impact that we’re looking at right now is really the market. But given the fact that there is a little bit of uncertainty of where the market goes. We believe it does recover the truck cycle does end at least the bottom part of it. And it will be into be recover as the industry needs new and very well performing trucks number. Our trucks today are much better performing from economy and still operating cost than they were just handful of year to go. We as a company we’ve got brand new product, we’ve got more consideration, we’ve got more opportunities to improve our margins, we were exciting our alliance here that’s going to contribute more through our offerings and our ability to influence the profitability of this company going forward. Look the underlying denominator kind of the market. I think we’re reflecting a reasonable outcome for 2017, based on what we and other see at this particular point in time, but that said we’re very excited, we are very excited to get into 2017. And some of the issues that are playing out us for sometime are getting further and further behind us. We’re excited. We’re going to provide updates on our progress as we go. And we’re going to provide a little more clarity just as soon as we can announce Volkswagen alliance. And we’re going to stay focused on again returning the Company to our rightful standing in the industry and profitability. So, we appreciate very much for your questions, I think they’ve helped really clarifying. And we’d just like to highlight, Merry Christmas and happy holidays to all of you. Look forward to seeing you early in the next year.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Have a great day everyone