Navistar International Corporation
Q4 2017 Earnings Call Transcript

Published: 20 Dec 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to Navistar's Fourth Quarter 2017 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to hand the conference over to call to Mr. Marty Ketelaar, Vice President of Investor Relations. Sir, you may begin.

[Marty Ketelaar:]

Thanks, Brian. Good morning, everyone, and thank you for joining us for Navistar's Fourth Quarter and Year End 2017 Conference Call. Today, we'll discuss the financial performance of Navistar International Corporation for the fiscal period ended October 31, 2017. With me today are Troy Clarke, our Chairman, President and Chief Executive Officer; and Walter Borst, our Executive Vice President and Chief Financial Officer. After conducting our prepared remarks, we'll take your questions. In addition to Troy and Walter, joining us today for the Q&A session are Persio Lisboa, Executive Vice President and Chief Operating Officer; Michael Cancelliere, President of Truck and Parts; and Phil Christman, President of Operations. Before we begin, I'd like to cover a few items. A copy of this morning's press release and the presentation slides has been posted to the Investor Relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalents and can be found in the press release that we issued this morning as well as in the appendix to the presentation slide deck. Today's presentation includes some forward-looking statements about the expectations for future performance, and the Company expressly disclaims any obligation to update these statements. Actual results could differ materially from those suggested by our comments made here. For additional information concerning factors that could cause actual results to differ materially from those included in today's presentation, please refer to our most recent SEC filings. We would 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'll turn the call over to Troy Clarke for opening comments. Troy?

[Troy Clarke:]

Okay, hey, thanks, Marty, and good morning, everyone. I'll provide a brief overview of our thoughts about the fourth quarter, the full year and the outlook for 2018. Then I'm going to ask Walter to walk us all through the numbers, the financials and our 2018 year guidance. And then we'll take your questions. This was Navistar's second consecutive profitable quarter, and it concluded a breakthrough year. We were profitable for the full year for the first time since 2011. We achieved our largest single-year market share gain in the last eight years. Our adjusted EBITDA increased for the fifth year in a row. In Q4, our adjusted EBITDA margin reached its highest level since the start of our turnaround. And we also managed a steady cadence of new product launches. And our global alliance with Volkswagen Truck & Bus hit the ground running, generating savings and speeding our progress on advanced technologies. 2017 started slow, but it finished strong, and we took advantage of the second half growth in the Class 6 through 8 truck market. Our sales for the year increased by 6%, and in Q4, sales were up 26% from the same period a year before. Our full year core market share grew by 1.5 points and we recorded share gains in all truck segments. 2017 was also the second-highest year on record for Parts segment's earning. We saw that customers like the new products we recently launched. And an important launch in 2017 was our new A26 engine, which is driving higher share in the 13-liter segment of Class 8. Third-party testing indicates that when the A26 is teamed with our long-haul LT series, it leads the industry in fuel economy by an average of 4%, and customers are noticing. In 2017, the A26 became available in both the LT and our regional hall RH Series. And in 2018, we will launch it in our heavy vocational HX and HV series. On top of these new engine offerings, our 2018 new product pipeline also includes a new medium-duty truck, an updated Lone Star, the gasoline-powered CE school bus and we are reintroducing the RE bus. Before the end of the calendar year, we'll also enter the Class 4/5 market. By the end of 2018, we will have an entirely renewed truck lineup. Our connected service offering, starting with OnCommand Connection, or OCC as we call it, are creating new levels of customer value. In Q4, we went live with the OCC marketplace, our open-architecture, cloud-based e-commerce platform for telematics and other driver support apps. The first app was our own electronic driver log, which automates federal hours of service compliance. OnCommand Connection leads the industry in helping customers improve uptime, with more than 370,000 vehicles transmitting real-time performance data several times per minute. Thanks to the strength of our connected service offerings, we are well positioned to lead the industry and making unplanned downtime a thing of the past. Our alliance with Volkswagen Truck & Bus is accelerating. The alliance is on track to deliver the $500 million in cumulative savings to Navistar over the first five years, with an annualized savings run rate of 200 million exiting that time period. We are working together on fully integrated next-generation diesel big-bore powertrains. And we're also collaborating on new advanced technologies, including the electric medium-duty truck and electric school bus we've already announced, and the convergence of our two connected vehicle, or telematics, platforms. Looking ahead to 2018, we see a stronger year. With growth of Class 8 market and steady sales in Class 6 and 7, we foresee is solid U.S. GDP growth of 2.5% to 3%, and history shows that growth above 2% translates to a growing Class 8 industry. Spot truckload freight rates have remained robust, and the latest freight transportation services index reached an all-time high. Other indicators of a strong 2018 economy include housing starts, which are expected to grow by 5%; and building permits, which will also grow another 5%. Retail sales are expected to grow by over 4%. And personal income is projected to grow between 4% and 5%. There are a few headwinds, but nothing like this time last year. These include the ongoing driver shortage and the large supply of used trucks. Yet even with these factors, we project the 2018 Class 8 market will increase by about 13.5% over 2017, making it the third-best year this decade. And we believe these headwinds will ease over the course of the year and we could see some upside to our projections. We have the production capacity required to take advantage of any upside that develops. We are well positioned to gain more share in 2018, thanks to our stream of new product launches and customers' favorable reaction. The growth in the industry and market share will contribute to higher 2018 profitability, which Walter will go into more detail. To sum it up, 2017 was a breakout year for Navistar, and I want to thank our employees for their hard work and dedication in making this possible. Looking to the future, we are now focused on growth, market leadership and sustainable profitability. We have the newest product lineup, renewed momentum in the market and additional cost reductions and efficiencies are already in the pipeline. With this and more, we believe 2018 will be the breakout year for Navistar. And with that, let me turn it over to Walter to go through the numbers. Walter.

[Walter Borst:]

Thank you, Troy, and good morning, everyone. I'm super excited about our return to annual profitability and our market share gains in all truck segments. Our new products and the alliance with Volkswagen Truck & Bus sets the stage for an even better 2018. This morning, I'll review the Q4 and full year results and provide our 2018 guidance. In the quarter, revenue grew 26% year-over-year to $2.6 billion. The improvement was driven by a 31% increase in core truck volumes. This outpaced the industry, which was up 19%, and led to our core market share growing to 20%. Net income for the quarter was $135 million or $1.36 per share versus a loss of $34 million or $0.42 per share last year. Adjusted EBITDA grew to $268 million, which excluded $11 million of charges primarily related to ongoing restructuring in our South American business. 2017 marks the fifth consecutive year we've increased adjusted EBITDA on both a dollar and percentage basis. Full year adjusted EBITDA was up 15% year-over-year to $582 million or 6.8% of revenue. 2017 net income was $30 million or $0.32 per share compared to a loss of $97 million or $1.19 per share last year. Our used truck operation took another step forward as it set a record by selling over 3,300 trucks in the quarter. As a result, gross inventory levels fell by 26% to $206 million. This level of gross inventory is in the range of normal operations. Reserves also fell, reflecting higher sales. This was partially offset by $9 million of reserve additions, reflecting industry-related used truck pricing pressures. This compares to $63 million of reserve additions in the fourth quarter of 2016. The net inventory balance fell to under $100 million at year end. Warranty expense continues to fall. In fact, 2017 annual warranty expense was at the lowest level since 2009, a reflection of our products' improved quality and reliability. Excluding pre-existing charges, warranty expense as a percentage of manufacturing revenue was 2.1% this quarter versus 2.2% a year ago. Cash warranty spend also continues to fall but is still running higher than warranty expense. Since October 2013, our warranty liability has declined by 53% to $629 million at year end. For the second straight quarter, all reporting segments were profitable. Truck sales grew 33% compared to last year to $1.9 billion. The sales growth was driven by higher volumes across the portfolio, reflecting strong industry conditions and market share growth. Higher sales volumes and improved used truck performance resulted in segment profitability of $112 million. Absent a legal charge in the third quarter, the Truck segment also would have been profitable for the year. In our Parts business, quarterly revenues and profits were comparable to last year, reflecting 25% growth from our private label brands, which include the Fleetrite and remanufactured parts businesses. This was offset by the gradual runoff of the Blue Diamond Parts business. In 2017, our private label brands generated more than $500 million in revenues, surpassing the revenue generated by Blue Diamond Parts. Our global team has done an excellent job maintaining breakeven performance in difficult economic conditions. Conditions in Brazil have begun to improve. And during the quarter, revenues grew to over $100 million as engine volumes grew. The segment reported its second straight profitable quarter, which included a charge of $6 million for restructuring in Brazil. In the Financial Services segment, higher truck sales in Mexico led to more financing opportunities that drove segment results. Revenues in the Financial Services segment increased to $63 million and profits grew to $26 million. Moving to cash. We ended the fiscal year with over $1 billion of manufacturing cash. We generated positive cash flow of $181 million in the quarter on strong EBITDA results, lower capital expenditures due to the timing of payments to vendors and improved net working capital results from higher truck volume. For the year, major cash uses impacting free cash flow, in aggregate, largely fell in line with the guidance provided for the year. Early last month, we completed two capital markets transactions, which raised $2.7 billion from a $1.6 billion term loan and a $1.1 billion senior notes offering. The proceeds were used to repay $2.5 billion of debt. The transaction also added $200 million of liquidity to our balance sheet, resulting in $1.2 billion of manufacturing cash on a pro forma basis. As a result of these transactions, we've extended our debt maturities by 4 years. We have greater financial flexibility to address the upcoming maturity of our 2018 for convertible debt, and we expect interest expense to decline to approximately $230 million in 2018. We also experienced a meaningful improvement to the underfunded status of our pension and OPEB liabilities, which decreased by over $550 million to $2.5 billion due to higher investment returns and favorable OPEB claim trend rates. Now let's shift our focus to 2018 and our thoughts on the year at hand. First, revenues. We see the Class 8 industry growing again, up 13.5% to 220,000 to 250,000 units. In Class 6 to 8 truck, plus bus, up 10% to 345,000 to 375,000 units, higher industry volumes, combined with market share growth and another solid year from our Parts segment, should set us up to achieve revenues in 2018 of $9 billion to $9.5 billion. Consolidated gross margin is expected to improve about 1 point. This is due to the combination of lower material costs, largely driven by procurement savings from the joint venture with Volkswagen Truck & Bus, manufacturing efficiencies from higher volumes and improved used truck performance. These items will more than offset the impact of higher commodity prices and unfavorable profit mix from relatively higher expected truck sales growth than part sales growth. Structural costs, which we define as engineering and SG&A expenses, will rise to approximately $1.2 billion. As we increase our engineering projects as part of the VW Truck & Bus alliance, increased sales and marketing activities in conjunction with volume growth and increased investments in new OnCommand Connection services, and upgrade our IT infrastructure. As a result, we expect adjusted EBITDA to grow to $675 million to $725 million in 2018. And we expect to be even more profitable at the net income level in 2018 than in 2017. In this regard, we have recorded in the first quarter of 2018, approximately $47 million of charges related to the extinguishment of unamortized debt issuance costs, associated with our previous debt securities as part of our refinancing activities. The first quarter will once again be seasonably weak. Over the past three years, Q1 adjusted EBITDA has represented approximately 10% of our annual results. Additionally, we'll have an extended Q1 shutdown period of about two weeks to upgrade our Escobedo paint facility to handle the expected higher Class 8 volumes. We forecast to end 2018 with about $1 billion of manufacturing cash after repaying the $200 million convertible notes due in October. We see the benefits of higher adjusted EBITDA being offset by cash outflows related to capital expenditures, interest payments, warranty spending, pension and OPEB contributions and used truck operations to support new truck sales. As we have experienced in the past, we expect to consume cash in our fiscal first quarter then rebuild the cash balance over the remainder of the year. 2017 was a breakthrough year for Navistar and we expect 2018 to be an even better year as we deliver improved results that will drive greater value for all our shareholders. With that, I'll turn it back to the operator to begin the Q&A.

[Operator:]

[Operator Instructions] And our first question will come from Brian Sponheimer with Gabelli. Please proceed.

[Brian Sponheimer:]

A couple questions, more on the balance sheet. And first, on the pension OPEB. The decline in the year-over-year obligation, none of that was discount rate, correct?

[Troy Clarke:]

The discount rate's fairly consistent year-over-year, so it's really due more to strong pension returns.

[Brian Sponheimer:]

Okay. So if we're thinking about 2018 and if we see 100 basis points increase, that's another $550 million that, that'll come down?

[Walter Borst:]

Yes. We said in the past, and still about the same, it's about $500 million for each 100 basis points on pension and OPEB together. Principally pension, but pension and OPEB together.

[Brian Sponheimer:]

Got it. Okay, so we're on the eve of potentially corporate tax reform here. Have you seen -- just we'll start from the customer basis. Have you seen any change at your dealer level in any ordering activity or customers taking delivery ahead of the end of the year?

[Troy Clarke:]

No, it just -- because -- Brian, because it just came out, I think we and the industry are still kind of studying it. But we've seen no actions in anticipation of where they thought that the bill would be, would end up. So I do think that they will be processing that information over the course of this week and the next several, probably.

[Brian Sponheimer:]

And then obviously it's early, but if you thinking about some of the puts and takes in the bill as it relates to your own results, can you just talk about that quickly?

[Walter Borst:]

Yes. We've taken a look at it. Obviously, it's not been passed by Congress and hasn't been signed by the President yet. But based on what we see and given our specific situations as it relates to our balance sheet and income statement, we don't expect a material impact. We have a valuation allowance for accounting purposes on our domestic operations. And so we wouldn't need to run anything through our P&L related to the move of the corporate tax rates from 35% to 21%. And in terms of the other pieces of it, we'll see what kind of finally gets passed. But we don't expect any material impact as a result of individual provisions in the tax bill either. On the other hand, if it stimulates the economy, that's obviously great for the truck industry. And to your earlier comment, we would hope that our customers would react in kind.

[Troy Clarke:]

I think Brian, you go back to my -- you go back to our comments, anything that drives GDP growth above that 2%, 2.5% kind of range, really means -- in truck industry vernacular, it means sales in excess of replacement demand. And I think that's how most of the large fleets and players in the market view the prospects of successful tax cut.

[Operator:]

Thank you. Our next questions will come from the line of Ann Duignan with JPMorgan. Please proceed.

[Abdul Tambal:]

Hi, good morning, this is Abdul on for Ann. So I just had a quick question. If you could comment on the sequential market share gain in Q4 in the heavy-duty segment. So is that related to the year-end incentives? And just where do you see current orders and what do they imply about market share going forward, especially since it looks like Navistar lost some share in November there.

[Troy Clarke:]

I'd ask Michael Cancelliere to make a couple comments on that.

[Michael Cancelliere:]

So sequentially, our -- we look at the Class 8, we were up quarter-over-quarter and on a year-over-year basis. We had a strong finish to the year. It's -- a lot of the customer trucks that were ordered earlier in the year, the new product, particularly LT series, started to -- they start take delivery of those trucks, and that's really what accounted for the increase in market share. As we look out and we look at our order board, we're -- we believe that we're on a trajectory to continue to have positive momentum in our -- both order share and retail share.

[Troy Clarke:]

This is Troy. If I can just come back into that just a little bit. Fourth quarter -- actually, starting in the third quarter is really the buying season for major fleets, large rental and leasing companies. And then depending upon deliveries, depends on -- the market share will move around. Our fiscal year ends October 31st, and so these are the results that we're reporting. The fiscal year for our competitors really ends of the end of December. And so you can imagine they're basically pushing deliveries in that time period. So it is not uncommon that our market share looks like it slips just a tad here as we run into the fourth -- in the latter months of the fourth quarter. And so that's just the kind of pressure, given the dynamics of where our year closes and theirs do. Mike's comment about the order board is exactly right. We are on a trajectory to anticipate additional market share gains in 2018, largely off of the improved products that we have in the market. We got the newest product line up in there. We got a new 13-liter engine which is really carving back into the Class 8 segment, exactly what we had hoped that it would do. And we anticipate to build on that going forward.

[Operator:]

Thank you. Our next question will come from the line of Andy Casey with Wells Fargo.

[Jorge Pica:]

This is Jorge Pica on for Andy. Great quarter, the channel feedback from the dealers has been excellent on the new products and especially the predictive maintenance. The outlook implies a 7.5% margin on EBITDA, roughly, a little bit lower than the 8% to 10% long-term range or goal. Can you comment on that? And is this a little bit of conservatism? Or is there anything that's impacting the guide?

[Walter Borst:]

Jorge, it's Walter. The way we look at it, we're going to have another strong year in 2018. EBITDA margins will be up for a sixth year in a row. So happy to see that our guidance suggests both higher absolute EBITDA and adjusted EBITDA margins that'll be higher than '17 as well. We continue to march to 8% to 10% EBITDA margins. And we did over 10% in the fourth quarter of this year, we did over 8% in the third quarter. Our first quarter tends to be weaker due to the seasonality in our business, which covers the holiday period here in December. But we expect our margins to be up, and we're proud of that. And we'll keep building on that over time as we bring this new product lineup to market and keep tight control of our costs.

[Troy Clarke:]

Yes, I mean, George, this is Troy. We're just about halfway through launching all these new products. We'll get those out over the course of the year. And very similar to this year, you'll see the results will accrue, will accelerate even faster in the second half of the year. Nothing we're saying pulls back from our thought that this is a great business, and when we're looking at the same kind of EBITDA margins as we have always talked about in the past.

[Operator:]

Thank you. Our next questions will come from the line of David Leiker from Baird.

[Joe Vruwink:]

This is Joe Vruwink for David. I'll follow up on another EBITDA question. The structural cost forecast of $1.2 billion, how much discretion is there over that number in the budget for '18? So typically, there's been some incremental spending but you've done a nice job of limiting growth in the core, I'll call it, or maybe even reducing structural costs. And so is $1.2 billion kind of the gross forecast as you see it right now, and there might be opportunities for savings along the way?

[Walter Borst:]

Yes. Well, we're going to continue to keep structural costs tight, in particular in SG&A. But I think what you should read into our guidance is that we're going to invest in the long-term business. And for '18, that means a couple of things. One, engineering expense will be higher. It'll be much more efficient than it was in the past because of the alliance, but we'll be able to invest in some projects that we otherwise would have been able to do on our own. Secondly, if we see the kind of growth that is expected in the industry and our expectation to grow our market share, we'll put some additional SG&A monies towards sales and marketing activities. And if the industry doesn't move that way, then I think we've shown, demonstrated a good ability to curtail those costs in other times. And then thirdly, we want to continue to invest in OnCommand Connection, and those costs principally run through our SG&A expenses as well. We see this as a tremendous business for us going forward. It helps in all parts of our business. And we want to make sure that we continue to invest in that part of the business to keep our lead in that segment of the business. So that's really where the money is going. So it is higher year-on-year. The percentage of revenue, will continue to come down. And we're going to focus our spend on the right things while continuing to get leaner in our corporate functions as we've done over the last few years.

[Troy Clarke:]

So I mean, I think Walter summed it up very well. Two pieces. You kind of got the pieces that we've been managing that are additional efficiencies and reductions we'll be pulling through. But now is the time, given the market that we're in, to invest in electric vehicles, telematics, additional marketing expenditures to continue to drive consideration to the new products that we're going to be launching. And as Walter indicated, those are investments. Investments in accelerating the results that'll accrue next year and also into the future.

[Joe Vruwink:]

That's really helpful color. And I'll follow it up with a cash flow question. As revenues are in positive territory, the cash generation of the business obviously becomes much better. How should we think about free cash flow? I don't know if a conversion metric is the right way to think about it. Or incremental EBITDA, how should that convert into free cash? And then how you intend to use it? Can free cash cover the maturities that are on the horizon in '18 and '19, for instance?

[Walter Borst:]

Yes. So, I didn't mention the numbers in my remarks, but on Page 14 of the presentation materials, we've provided some guidance on specific cash flow items, consistent with what we've done in the past. So on the one hand, the way we think about it is how much EBITDA can we generate, and we expect that to grow again in 2018. On the other hand, we do have cash uses in the areas of interest expense, capital expenditures. We still expect warranty spend to be greater than expense for a couple of years, although the difference between the two is narrowing. And pension and OPEB contributions that we plan to make to keep eating into this unfunded pension liability will result in higher cash contributions than expense as well. So that obviously impacts our free cash flow. But on balance, we expect to end the year with a strong cash balance again of about $1 billion. And that's after repaying our convertible debt that comes due in October of 2018 of $200 million.

[Operator:]

Thank you. Our next questions will come from the line of Mike Baudendistel with Stifel. Please proceed.

[Mike Baudendistel:]

You mentioned that structural costs are going to rise to $1.2 billion. I mean, where do you think that's going to be sort of longer term over the next few years? At least sort of can you give us some guidance directionally?

[Walter Borst:]

Well, I think we will continue to grow it a little bit with sales, but we surely wouldn't plan to put dollar-for-dollar in there. But we'll continue to manage it very tightly, other than in the areas that -- where we want to invest in the business.

[Troy Clarke:]

I mean, I think as a percentage of revenue, we still anticipate structural cost to come down. Okay? Now a part of that is revenue growth, but underlying that is, as Walter indicated, lean enterprise and efficiency initiatives which now, we have the ability to invest in some of the core capabilities like IT systems, manufacturing systems that led us -- that we haven't had the ability to work on in the last couple of years. But it's something we're good at. We're going to watch it. As a percentage of revenue, we expect it to continue to come down.

[Walter Borst:]

Yes. We worked very hard to lower our breakeven point and so we don't want to start spending unwisely.

[Troy Clarke:]

Yes. And we know the benchmarks out there and who the best are at this kind of stuff. And we intend to be the best here, not too distant future.

[Mike Baudendistel:]

Also just wanted to ask you, I mean, you're getting into some new sort of product categories that you haven't been in, in a while. Are any of those product any higher or lower margin that could create a mix impact?

[Troy Clarke:]

I think you're kind of referencing the, like the RE bus or the gasoline bus, for instance and/or the Class 4/5 product. What -- think of this in my mind is, at minimum, there's an opportunity cost there. We need to follow these segments because these are the segments where, when you think about last-mile delivery, when you think about the regulatory impact beginning over the course of the next decade, these segments are going. And if we don't participate in these segments, then certainly, we can anticipate revenue pressure potentially in other segments of the market. These segments do have their own characteristics, and they tend to be a little more, I think, sensitive to volume than some of the traditional stuff that we do. Thus, in the Class 4/5 segment, we have this partnership with General Motors in the product to make sure that between the two of us, we sell a volume that keeps us in the right kind of cost zip code to be able to be competitive. So it's all incremental.

[Walter Borst:]

And the real opportunity here in '18 is that Class 8 volumes are going to be increasing. And as we've said a couple of times on the call already, all of our product is new. So we have new heavy product, we have new vocational product. We'll get new medium product next year in addition to the product categories that Troy talked about. So the whole product category -- whole product portfolio will be new by the end of 2018.

[Operator:]

Thank you [Operator Instructions] Our next question will come from the line of Jerry Revich with Goldman Sachs. Please proceed.

[Ben Burud:]

This is Ben Burud on for Jerry. Just wanted to spend a minute on OnCommand. I was wondering if you guys could discuss your expected customer renewal rates that will come into play at the end of the new truck promo period. And whether you guys think you can get above a $20 monthly subscription fee based on your projections for the system.

[Troy Clarke:]

Yes. And so as you know, OnCommand Connection is based OnCommand Connection which is really aimed at improving the uptime of our customers' vehicles. Whether they're international trucks or some other brand truck, that's a service that, basically, we provide to our customers for free. It's really -- there's really not a revenue base associated with that. It's really part of our brand proposition. And one of the reasons why, I think, we're getting far more traction in the market is this is how we live up to our uptime promise. One of the most exciting things, however, is the introduction of what we call the OnCommand Connection Marketplace and our own telematics device. Now that happens to be -- that device launched over the course of the summer. You can buy it on Amazon, you can buy it at a TA truck stop. Sales of that are launching, and there is a monthly fee associated with that particular product. When you talk about renewal rates, it really applies to that segment of our product offering. And we're really too early to tell you. We're still at the point, it's just initial activation. So we've had nobody get to a point where there's a renewal, basically, required. So that's a great question, but that's a question for a little bit when we're -- I think that particular product segment is a little more mature for us. However, I would highlight there are other sources of revenue. And as we continue to grow this business, we'll be more forthcoming with that. We kind of look at OnCommand Connection as kind of having three service pools. So first pool is support uptime and our brand promise around uptime. The second is in fact -- to become the digital backbone for things like insurance companies and load providers. And those are the kind of things which are also coming to the market and will also be revenue generators. And then the third thing is this marketplace, which really gives us the opportunity to not only sell the telematics product, but sell other apps through the marketplace and ultimately gain access to segments of the market where we're underrepresented for the purpose of selling things like Fleetrite parts and all makes branded parts and our renewed series of remanufactured parts. So it's a great question, I think it's a little nascent at this particular point in time, but we're pushing into those directions.

[Ben Burud:]

Got it. And then I know it's a smaller piece of the pie, but can you spend a minute on school bus and maybe give us an idea of what inning of cycle you think we're in? And then could you just touch on what you think the main drivers were of the retail share loss you had during the year?

[Mike Cancelliere:]

Yes, this is Mike Cancelliere, let me take that one. So yes, school bus continues to be an important part of our business, and we have a terrific distribution network dedicated towards the success of it. It's a business that we've recently ramped up investments in product. So we've introduced the propane, we've expanded our profane offerings. We've recently introduced gas. Got a lot of engines for gas -- a lot of orders for the gasoline engine. We've invested in additional configurations to the product, all to meet the demands of the market. So it's a fairly stable, fairly small industry. So market share could tend to sway by just a handful of different deals or customers. So with our renewed focus on product investment and alternative fuels in that segment as well as our connected services strategy to be better and different than the competition with our ongoing focus on safety, and all the other investments we've made in product, we're -- we have confidence that the school bus share will head in the right direction.

[Troy Clarke:]

Yes, and this is Troy. So some years ago, to be very honest, we've just took a strategic point of view that we're just going to be a fast follower from the product side. And so that's a little bit what you see with regards to the market share. We weren't the first with propane, we followed the year after. We weren't the first with gasoline, we're following the year after. We weren't the first with regards to saying we'll have an electric vehicle, although we may be the first to have the electric bus out there. Our goal is not to be first, but in fact, to be the best. And so we believe, in each of those categories, we do have the best product offering. And in fact, the market has responded favorably to those product offerings. So this has told us we shouldn't really be worried about not having that first-mover advantage. It's a small market, as Michael indicated. There's only three players. We have very solid relationships. And in this particular segment, we really need to make sure, when we say that soup is ready that the soup is ready, okay? Because we're carrying most precious cargo that you could possibly carry. That's our brand promise in buses. The advent of our telematics applications and the new Edulog thing that we're doing with regards to automated inspection and a whole bunch of other features, that's part of our brand promise. And so the future of this business is bright because we basically have never violated putting the best product out there for those purposes. So we're real excited. And I think you'll see those market share numbers begin to reverse this coming year.

[Ben Burud:]

And just following up, any -- oh, sorry.

[Persio Lisboa:]

Just adding to the comment here. Max, in '18, we will have the full line, just like on the truck side, we'll have the complete new full lineup of alternative fuel products on the bus segment, which honestly we didn't have now completely ready in '17. So we'll participate with full presence on that on the alternative segment of the market that wasn't as strong for us in '17.

[Troy Clarke:]

Thanks, Persio. Those are good...

[Ben Burud:]

And then any color on where we are in that cycle? Of the school bus cycle, specifically?

[Troy Clarke:]

We continue to expect that to be strong.

[Michael Cancelliere:]

Yes. I mean, it kind of goes with municipal funding. And I think as the economy goes up and more tax dollars are generated or a that are shared in the municipal level, then they tend to want to change over their fleets. So I think that as with the GDP growth that we've talked about earlier, I think we're looking at a couple of good years for this particular market.

[Operator:]

Our next question will come from the line of Joe O'Dea with Vertical Research. Please proceed.

[Joe O'Dea:]

First question is on 13-liter and share there. And you talked recently about 3% share, I think, in U.S. and Canada in 2017. And just as we think about some of the mix shift happening in 2018 and some of the sleeper demand that we're seeing in the order boards right now and on top of your own initiatives, what kind of share expectations you have for the 13 liter in 2018? And what kind of progress we can see along those fronts?

[Troy Clarke:]

Persio, can I ask you to kick us off on that 13 liter question? And then we'll pass it over to Mike.

[Persio Lisboa:]

Yes, sure. Well, first of all, we are really, really super excited with the performance of the product. And you know that we launched our A26 at the end of June. And then honestly, what we saw in terms of performance for the product in the first three, four months of units in the field, we have more than 2,000 units in the field right now, more than 4,600 in order. And that is really, I think -- just actually, this market share is going up even faster than we thought in the early adoption of the product in the marketplace. That was basically just on the LP, and then we launched the RH, the regional haul truck, and now the A26 gets into the severe service, the HV, that we just announced at NACV. So we really see that product, first, initial acceptance is phenomenal. Second, I think that the other important data point is we went through an independent fuel economy performance test. And with the results that came back are that when you pair one A26 with the LT day cab, you get close to 4% better fuel economy than the competition. And honestly, that's what I think is being reflected already in the growth of market share. I don't think we're going to be specific on the guidance, but if you think that in the 15-liter market now today, we have close the 17% share, we shouldn't expect that in long term, the A26 will drive us to the same place. I don't know, Mike, if you want to complete this thought here.

[Michael Cancelliere:]

Yes. No, I think Persio covered a lot of the key points in that. Remember, it's not just the A26, it's the A26 in combination with the LT series. And that's just been a product that, together, have helped us get in some fleets that we haven't done business with in many, many, many years. The combination of the fuel economy, the driver centricity, the lighter weight and the overall focus we have on uptime has really ramped up our order intake share as well as our retail share in the 13-liter segment. Persio talked about that 4% improvement in fuel economy, that equates to about $1,500 a vehicle. So if you think about it, on a 100-truck fleet or so, that could be $150,000 per year in savings. And it's one of the largest costs that our customers face, so we're pretty excited about the performance to date, in all aspects of the AT, of the A26 and the LT series.

[Troy Clarke:]

And I think Persio, you were talking to me earlier about the June versus September penetration of the 13-liter segment.

[Michael Cancelliere:]

Yes. I have the latest numbers in that. So early on in the year, we were tracking in that 3% to 5% range. And remember, we just introduced it in about the June, July timeframe of last year. Because as -- Troy, to your point, as we look at the last 90-day run rate, August through October, for our penetration, it was almost 9% share. So really, more than double what we'd been running at in the early part of the year. And again, as we look at the orders, that would be consistent with what we believe the future outlook will be for the success of the A26. And remember, we haven't launched it yet in severe service. When we put it in the HX, the HV series in early next year, we believe that it'll have equal acceptance in that market and with the reliability, durability and fuel economy, the severe service segment in combination will be on-highway segment will really be very positive trajectory for the A26.

[Joe O'Dea:]

And a clarification, I believe when you're gaining share in the 13-liter, that's not at the expense of your 15-liter share. These are buyers that have a preference for a 13-liter, and so this would be incremental to Navistar share.

[Michael Cancelliere:]

Yes, no. That's a great follow-up question. I was looking at the trajectory of our success in the 15-liter segment as well as the 13-liter segment. And as I look at the fourth quarter, for example, the number that I said earlier, it's also the -- we've also had success in the 15-liter segment and growing share in that segment as well, which tells me it's not coming at the expense of 15-liter.

[Joe O'Dea:]

And then just on the Parts segment and I don't know if you're willing to say kind of expectations for parts revenues in 2018. When we try to look at the Blue Diamond decline curve, I mean, it looks like those revenues have roughly halved over the last several years. So just trying to appreciate some of those declines you could be facing on top of gains that you would see elsewhere. So the question is really, what kind of declines do you expect in Blue Diamond Parts over the next few years? And then overall, what the Parts segment revenue growth should be in '18.

[Walter Borst:]

Yes, so it's Walter. I'll start and then Mike will maybe want to add some color commentary. We've talked a long time about Blue Diamond Parts continuing to decline over time and have a runoff. It's a long runoff period. We've seen that, and that will continue for some years yet. I think the key item to take away from our call today, which we -- first time we've shared it, is that our private label brands, Fleetrite and the ReNEWed business, now do more revenue than Blue Diamond Parts, over $500 million of revenue this year from of those entities. So even as we continue to have the runoff in BDP over time, that slow runoff, we continue to look to grow our Fleetrite and ReNEWed remanufactured brands. And they had double-digit growth for the year and even higher growth, which Mike will probably comment on, in the fourth quarter. So we are looking to continue to grow our Parts business over time. There are some puts and takes there, but very, very proud of what the team in the private label business has been able to accomplish this year again.

[Mike Cancelliere:]

Yes, thank you, Walter. Again, Walter really hit the high points. The important thing is our Parts business remains strong. 2017 was our best year on record. The private label business is just, we continue to invest in it, add new products, reach that -- not only reach our customers, but reach competitive mix as well. So that's part of the overall growth strategy.

[Operator:]

Thank you. Our next questions will come from the line of Seth Weber with ABC Capital Markets.

[Brendan Shea:]

This is Brendan on for Seth. I was wondering if you could give some color on the source of your recent order strength, whether that's coming from kind of the bigger fleets or some of the smaller owner operators or some combination of the two?

[Mike Cancelliere:]

Yes, Brendan, this is Michael. So we have been receiving orders from all different segments. So our dealer business on a year-over-year basement -- basis was up in every truck segment. They, of course, tend to hit the small to midsize customers. And really, it's part -- our dealers have never been more enthusiastic about the products we have to offer. We recently received feedback from the American truck dealer survey that indicated the highest year-over-year dealer sentiment overall franchise value, as a result of the investments we made in both product and in technology, that we're all benefiting from, and most importantly, our customers. In the large fleet segment, the leasing industry, the general freight industry, as a result of the -- as I talked about earlier, the products we have, the LT, the RH, the A26, we're selling to customers and increasing our consideration with fleets that haven't -- we haven't done business with in many years. So to answer your question, it's really coming from all different segments of the truck industry.

[Brendan Shea:]

Okay. And then running back to VW, so you said that you're on track for the savings there. I was wondering if you could give an update, sort of where we are in that, getting towards that 5-year savings plan.

[Troy Clarke:]

Yes. I mean, obviously, there's a couple of pieces to that. The first piece that we designed or intended to be more short-term or immediate focus is our procurement joint venture. The procurement joint venture is actually ahead of schedule. We had thought to ourselves we would be able to book or contract in the neighborhood of about $50 million of the savings in the first 12 months of operation. It's been in operation about 10 months, we're actually ahead of that. We've actually revised about 75 different agreements and are in contact with about 250 suppliers. So the purchasing or procurement joint venture is on track moving forward, and we're very excited about the progress that we're making. The second piece of that is the integrated technology and some of the engineering, additional engineering spend that Walter talked about, is the transition cost to be able to enter the market. And I think we've made an announcement, I think, in the 2021 timeframe, beginning of launching new integrated powertrains into our -- big-bore diesel powertrains into our product. That's actually on track as well. And then the third thing is we're finding opportunities we really were not on the board this time last year, and things like the electric vehicle announcements that we've been able to make. We couldn't do those things if it wasn't really for the opportunities that we find as we interact with our Volkswagen Truck & Bus colleagues. So I would say from my standpoint, and I think they would say the same thing, the relationship continues to grow, the progress continues to accelerate. I think we're going to all be pleasantly surprised with the results of this alliance.

[Operator:]

Our next questions will come from the line of Justine Fisher with Goldman Sachs. Please proceed.

[Justine Fisher:]

The first question I had is on the EBITDA guide. Is there anything noncash in that guide that we need to be aware of, like a charge for an inventory reversal? Because we were surprised that, that guide was reasonably below where the Street was. And it seems as though a lot of that is the structural spending and the spending on sales and product as you mentioned. But I just wanted to clarify whether there was anything else kind of noncash that you guys were including in that guide as well.

[Walter Borst:]

We did mention for the first quarter that as part of the refinancing, about $47 million of charges that we've booked. We would add that back for adjusted EBITDA purposes, but that's really the only thing that comes to mind at the moment.

[Justine Fisher:]

Okay. And then the next question is just on the impact of tax reforms. Some of the other companies that we've covered that have large NOL balances has said that the lower tax rate may allow them to extend their NOLs for longer so that they're not a cash taxpayer for longer. Is that something that might affect Navistar?

[Walter Borst:]

I don't see that at the moment, but let us see the legislation get passed first. And then when we come back in our first quarter call, we'll give you a more in-depth view of any impact. As I said earlier, we don't expect any material impact as it relates to the NOLs and the like. There will be some footnote disclosure that I'm sure we'll need to do as a result of that. But that'll come in our first quarter because our year is over and the legislation's not passed yet.

[Justine Fisher:]

Okay. And then the last question is just on the balance sheet management as we head through the cycle. We're obviously heading into a very good year for the truck cycle. And as some of their credit investors that we've talked to have pointed out, the Company recently did refi the balance sheet but didn't repay any debt. And so I'm wondering how you guys are approaching preparation for the turn in the cycle, which is going to come even though it's obviously not going to be 2018. Is the Company at all thinking about issuing equity with the stock price where it is? And additionally, if you guys are going to spend more on the business over the next year, does that ramp back in 2019 as the cycle turns, or 2020, whenever it is?

[Walter Borst:]

Yes. I mean, I think we've done a great job over the last couple of months of preparing for the future. We just refinanced $2.7 billion of debt. We've pushed our debt stack out four years and that we've significantly lowered our interest cost. So I think personally, I think we've done a great job on balance sheet management. And we've done a pretty good job of that over the last few years as well. We'll continue to watch the markets to see what kind of opportunities it might present for us. So I'll just stand by our track record and what we did here in November and over the last few years.

[Troy Clarke:]

And with the restructuring of the debt that Walter had indicated, our ready ability to take out the first tranche of converts in 2018. And then with the improving fortune of the Company, I mean, I think what we've really done is we've created flexibility that gives us several pathways to address this, largely dependent upon the level of cash flow and what other options might be available to us in that timeframe. I don't know, I sleep a lot better tonight than I did -- or last night than I did a year ago this time with regards to how we manage the debt on our balance sheet going forward. So I would endorse Walter's comments. We're -- it's like night and day, where we're at today compared to where we were in this time last year.

[Operator:]

Thank you. There are no further questions in the queue, so it's my pleasure to hand the conference back over to Mr. Troy Clarke for some closing comments or remarks. Sir?

[Troy Clarke:]

Okay. Hey, thank you very much. I really do just want to thank everyone for joining us today. Obviously, your questions are -- hopefully, we're able to answer your questions and give you some more insights, but also your questions are helpful for us, right. And our team is very excited about the year we've just completed. We're probably more excited about what's coming for 2018. We sincerely believe we have the right strategy, new product offering, the right team in place, to make 2018 a breakout year for Navistar. Thank you very much to those of you who follow us. We want to wish all a happy and joyful holiday season. And we look forward to talking to you again in the early March timeframe of next year. Thanks.

[Operator:]

Ladies and gentlemen, thank you for your participation on today's conference. This will conclude our program, and we may all disconnect. Everybody, have a wonderful day.