Navistar International Corporation
Q2 2015 Earnings Call Transcript

Published: 4 Jun 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to Navistar's Second Quarter 2015 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 Instructions] As a reminder this call is being recorded. I would now like to introduce your host for today's conference Kevin Sadowski, Vice President of Investor Relations. Sir you may begin.

[Kevin Sadowski:]

Good morning, everyone. And thank you for joining us for Navistar's second quarter 2015 conference call. With me today are Troy Clarke, our President and Chief Executive Officer; and Walter Borst, our Executive Vice President and Chief Financial Officer. Before we begin I'd like to cover a few items. A copy of this morning's press release and the presentation slides that we will be using today have been posted on our Investor Relations website for your reference. The non-GAAP financial measures discussed in the call are reconciled to the U.S. GAAP equivalent, as part of the appendix in the slide deck. Finally today's presentation includes some forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments made here. For additional information concerning factors that could cause actual results to differ materially from those projected in today's presentation, please refer to our most recent reports on Forms 10-K and 10-Q, and our other 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 his opening remarks.

[Troy Clarke:]

Okay. Hey, thank you, Kevin, and good morning, everyone. Today Walter and I are going to walk you through our results for the second quarter. Let me start with the headlines though if I could. First, we achieved positive manufacturing cash flow this quarter and our liquidity is improving. Next, charge-outs are up for the quarter and our market share is also improving. More importantly consideration of our new products continues to grow. We are achieving our cost objective, continue to take actions to improve capacity utilization and we also continue to invest in our core business. We remain on track to hit our EBITDA margin run rate goal exiting 2015. The good news in North America however was impacted by the business environment outside of the U.S. and Canada. I'll share some details on this point shortly but first lets just take a look at the industry. On Page 7, U.S. economic outlook remains optimistic so is the outlook for the transportation industry. Improving freight rates, lower engine costs, favorable business conditions, aging fleets and better new truck fuel economy and safety all translate into good demand for trucks. On particular note, medium duty sales have been the low replacement levels for several years. And the good news is we are seeing growth in this important segment in 2015 due to increase in business investment and extension in the housing market. We continue to believe that these conditions will remain favorable and we maintain our industry retail forecast for class 6 through 8 including bus to be in the range of 350,000 to 380,000 units this year. These industry trends are evident in our numbers. We're experiencing positive sales momentum across all product segments of our U.S. and Canada trucks and bus business. Last quarter we told you that we expected chargeouts in our core markets have increased by more than 20% in Q2. In fact chargeouts were up nearly 40% versus Q1 and 10% year-over-year. In addition our market share is up across the board versus Q1. Market share is also up in medium and bus year-over-year. In heavy, our sales are increasing but share has not yet increased year-over-year. Our order backlog for all products continues to improve. Let me give you some more color. In medium we're gaining share rapidly. Our market share is up six percentage points over Q1. We're up to 27% owing to deals in medium due to the strength of our product offering which includes the Cummins ISB and our industry leading chassis. In fact one of our major leasing customers recently shared some data with us that shows that DuraStar chassis and ISB engine combination delivers the best fuel economy and lowest cost of ownership across their entire fleet. Our leasing and rental customers are increasingly happy with our performance. Our share is growing with these very important buyers. Notably we've also seen a significant increase in dealer wide sales. That's key to our success in the medium-duty segment. In bus we're on track to hit our share target of 44% that we gave you on the Analyst Day. That's a 9 point gain over 2014. On the products side we'll begin delivering our purpose-built propane busses to customers this summer. Our partnership with PSI is an example of what we mean when we say best-in-class technology integration. PSI heavy-duty propane engine is a clean, quiet, user friendly alternative fuel engine that delivers great power, performance and reliability. Customer feedback on our propane bus has been positive. We're already wining orders. In the severe service segment, we started production of the popular WorkStar model with the Cummins ISB. This is our final severe service to get SCR and now that our SCR portfolio is complete we have the foundation in place to increase sales and build our market share. And now let's go back to heavy for a minute. We remain focused on building profitable market share. We are rebuilding customer confidence and sales by delivering leading-edge technology and more choice for the broadest range of transmission offerings, for the most advanced safety systems available today. We've also launched the ProStar ES. The ES features industry leading aerodynamic, most fuel efficient powertrain transmission combinations available in the industry and a number of other advanced technologies. Yet we have not recovered class A market share as quickly as we had planned. We restored our products to best-in-class industry levels of quality and components. And our warranty on used truck efforts along with other important initiatives reflects the extraordinary actions we've taken to better serve our customers. We believe the approach we're taking balances the need to restore market share with profitability. We think it is working. Here's why. The number of customers to whom we're selling heavy trucks to today has increased by over 50% year-over-year, a level slightly greater than 2012. Now that is in our smaller and medium-sized customers who have purchased only a few units giving us a chance to rerun their business in some cases. And some are even conquest customers. This is an important step of our confidence and performance of our products will lead to more sales and the result in the increase that we're looking for. Dealer led sales of heavy are up 36% year-over-year and you may recall we talked about the importance of dealer engagement in moving our share forward. And all of this corresponds to a 15% in heavy revenue year-to-date in North America. No doubt our ability to take in used trucks has impacted our heavy orders. We expect that we'll continue to manage our higher than normal used truck inventory over the next few years. That said, our used truck team continues to create opportunities to address the issue. One way is through our Diamond Renewed program that provides a new truck experience to used truck buyer. Diamond Renewed sales are growing and were up 150% in versus Q1. In addition, our dealers are increasing their activities in used trucks. We've also been successful finding some new markets for these vehicles globally. Its just a fact the faster we sell or turn our used truck inventory more used trucks we can take unlocking more market share and we're encouraged by our progress. Our parts business remains healthy. Sales and margins in our North America markets improved this quarter contributing to a strong first half, run course to grow in all mixed parts as well including our Fleetrite private label which grew double-digits in the first half compared to last year. In our global operations segment sales were negatively impacted by the continuing difficult economic environment in Brazil. Nevertheless we report approximately breakeven results there by resizing the business at current industry condition. Turning to Slide 8, since the beginning of the year we've talked a lot about uptime at International it's all about designing and building quality trucks to stay on the road longer and offering innovative tools and services that keep our customers moving. And we're fulfilling our uptime promise. Product quality continues to improve and we're getting a lot of good feedback from our customers. Second, we announced this quarter that we're making OnCommand Connection standard on every new international trucks and we're broadening the reach of OnCommand Connection outside of the U.S. and Canada. This summer we also will introduce a dedicated OnCommand Connection product for school bus. Today the number of vehicles we're monitoring in North America has more than doubled since last August and we now have 130 connected vehicles. And we're bringing more 130,000 connected vehicles and we've trained more than 100 dealer specialists on how to use OnCommand Connection to better serve customers. Third, we're working with some of the best suppliers in the industry to be first to introduce leading technologies. This includes the Bendix Wingman Fusion, the industry's most advanced safety plan. This uses advanced safety software to enhance and merge three component technologies, digital cameras, RADAR and brakes providing electronic stability control, collision mitigation and lane departure technologies to name a few. Turning to cost as the beginning of our turnaround we have looked closely at all areas outside of our core North American business, testing them both for their strategic fit and their current and anticipated returns. As part of that ongoing process we completed the sale of our Waukesha Foundry business in Q2 and we're on track to wind down our Indianapolis Foundry this summer. With those actions we will be out from the foundry business. Material costs are on track to plan. At the halfway mark we've achieved 50% of our targeted reduction and we feel confident we'll hit our full year plan. In manufacturing we remain focused on taking waste out of the system by launching lean initiatives. These are better quality and cost reduction. In addition, we're making investments to improve the capabilities of our manufacturing operations. This is particularly true at our Tulsa bus plant where we have begun to increase daily production due to high demand. We're reducing product development costs because our emissions transition is complete and we shift our focus to truck related technologies. At the same time, we are making products investments, including new product platforms that are in the pipeline as well as projects related to 2017 Greenhouse Gas Regulation. In addition, we recently acquired a new test track that will enable us to further improve product quality and performance. We maintain a steady focus on SG&A and we expect the second half reductions based on recent cost reduction activity. At the same time we are increasing spend on marketing initiatives that will bring our story to customers and help generate good sales. In summary, we continue to make progress this quarter and we acknowledge we have more work to do. We are confident that we are going to stay the course on cost, continue to improve sales, and share profitably, recent customer acceptance of our new products, excellent performance, great fuel economy and the outstanding uptime that we're delivering. Now let me turn it to Walter, who will provide you with more details on our financial performance for the quarter.

[Walter Borst:]

Thank you, Troy, good morning everyone. Let's turn our attention to the results for Q2. Consolidated revenue was $2.7 billion in the second quarter of 2015 slightly down year-over-year. This reflects an increase in sales from our truck segment that were more than offset by 52% reduction of revenues from the Global Operations segment. During the quarter, we continue to demonstrate EBITDA growth both year-over-year and compared to last quarter. Second quarter EBITDA was $85 million compared to a loss of $119 million in the second quarter of 2014. The significant year-over-year improvement in our results reflects an increase in truck segment sales, favorable product mix, as well as the continuation of lower warranty expense and cost reduction. Additionally, the prior year results included $149 million of asset impairment charges related to our South American engine operations. Adjusted EBITDA for the quarter as shown on Slide 11 was $102 million. We had a few adjustments this quarter that included $80 million charge to preexisting warranty and merely composed of charges related to the recently announced field campaigns and other routine warranty expenses and $1 million net gain from one-time items. Overall it was a relatively clean same the quarter from a one-time items perspective. Turning to Slide 12, let's take a look at the results for our segments. Revenues from the truck segment grew 4% compared to a year ago. The growth was primarily driven by a 14% increase in our core truck markets which included a 1700 unit increase in chargeouts. Upsetting the growth in the core markets were lower sales in our export and Mexico businesses. Sales continue to remain strong in our North American commercial parts business and grew 2% year-over-year. This improvement was more than offset by lower sales from export parts business in Blue Diamond Parts. As a result our segment revenues decreased 3% in the quarter. Revenue from our Global Operations segment decreased 52% compared to the second quarter of 2014 impacting lower engine volumes due to the challenging economic conditions in Brazil and the impact of a large government truck order placed in 2014. Shifting our focus to segment profit, the results of our truck segment improved by $78 million compared to last year. Contributing to this improvement were higher truck sales in North America, lower warranty expenses and cost reduction. These improvements were partially offset by losses from our used truck operations. The Parts segment profit was flat compared to a year ago. The margin improvements from our commercial markets were offset by declines in Blue Diamond Parts and our export parts business. The Global Operations segment reported a profit in the quarter affecting the actions to right-size the business in an environment of declining revenues. Also contributing to the year-over-year improvement was the 2014 asset impairment charges that I mentioned earlier. The Financial Services segment continues to perform in line with our expectations. The slight year-over-year decline in the segment’s profit was primarily due to an increase in loan loss reserves in Mexico, partially offset by an increase in segment revenue as average wholesale notes receivable balances increased. As you can see on Slide 13, our key metrics continued to trend favorably. Chargeouts were up 10% versus Q2 2014 reflecting increases of 1300 units in Class 6 to 7 and 800 units in the Class 8 truck segment. The increase in medium-duty chargeouts reflects growth from dealer led sales activities as well as rental and leasing customers. The increase in Class 8 reflects growth in the heavy market from dealer led sales activities and the introduction of focused Spec trucks such as the ProStar ES and the availability of additional applications for severe service customers. The growth in chargeouts during the first half is consistent with our 2015 full year expectation. We continue our focus on uptime and our customers are recognizing the excellent performance of our new products and services. Our trucks are built to last, built to perform and supported with best dealerships and after sales network in the industry. Structural cost remained a priority as well. During the first half of the year the continued benefits from cost savings activities have been offset by higher post retirement healthcare expenses. In the second quarter of 2015 structural cost as a percent of manufacturing revenue were 12%. We continue our effort to lower our structural cost towards our goal of 10% to 11% of revenues. The quality of our new products has improved significantly and warrant expense continues to trend towards industry benchmarks. For the second quarter of 2015 warrant expense excluding preexisting adjustments as a percentage of manufacturing revenue was 2.9% compared to 3.1% in 2014. The decrease reflects quality improvements and more recent model years and continued efforts to reduce overall repair costs. The adjusted EBITDA margin for the quarter was 3.8% versus 3% in the second quarter of 2014. The improvement reflects increased unit volume, better product mix related to increased medium and bus sales as well as continued cost improvements. Turning to gross material savings, we're looking to reduce costs by 1.5% to 1.8% of manufacturing sales in 2015. The key initiatives that will get us here includes further consolidating our supply base, increasing spend in best cost countries, and design cost reduction activities. During the first half of 2015 we achieved half of our annual savings target and we remain on track towards our material cost savings goal for the year. We are further ahead of our annual plan and are identifying cost savings projects that we were at this time last year when we achieved 1.7% cost reduction. Manufacturing is another area where we expect further improvements. We expect to benefit from cash utilization efforts as in the recent announcements related to the discontinuation of our foundry operations as well as our continued focus on manufacturing efficiency gains with lean initiatives. We're on track to reduce manufacturing cost by $40 million to $60 million in 2015. Turning to Slide 15, gross used truck inventory at quarter end was slightly higher than at the end of the first quarter, we ended the second quarter with $375 million of gross used truck inventory including inventory held at our finance company versus $365 million at the end of Q1, 2015. The slight uptick was due to higher receipts of late model units as we foreshadowed previously. Additionally, our used truck reserve increased $80 million as we mark-to-market the used truck inventory at the end of each quarter. Higher reserve is the function of the length of time it will take to sell the higher level of used truck in inventory. We believe used truck inventory will continue to increase peaking around $425 million before trending lower. We able to pinpoint when the balance will peak in terms of used truck receipts and the timing of used truck sales. Used truck sales increased 26% in the second quarter compared to the first quarter of the year, we’re seeing traction in the market with our Diamond renewed program and finding success selling our used trucks in certain export markets. Moving to cash, we reported positive manufacturing cash flow from operating activity, we ended the quarter with manufacturing cash, cash equivalents and marketable securities of $784 million. Adjusted EBITDA largely offset the cash used for capital expenditures, interest payments and pension OPAB contribution. Working capital turned positive this quarter due to the lower inventory balances in our efforts to manage our balance sheet. Additionally, warranty cash payments exceeded warranty expense but continue to decline year-over-year. As shown on Slide 17, we expect manufacturing cash at the end of the third quarter to be in the range of $750 million to $850 million. Consolidated adjusted EBITDA is expected to be in the range of $125 million to $175 million which excludes pre-existing warranty accruals and one-time items consistent with prior quarters. We expect cash used for capital expenditures, interest and pension OPAB funding to be higher versus Q2, the increase is primarily due to the timing of interest payments in our outstanding debt primarily the 8.25% senior notes while we make semi-annual interest payments in November and May. We expect networking capital to be positive again next quarter despite higher used truck inventories and warranty cash payments being greater than expense. Additionally in the third quarter of 2015, we expect capital expenditures in investments to be higher due in part to acquiring 25% ownership in Blue Diamond Truck joint venture as that joint venture comes to an end. Now let’s turn to our EBITDA goals for 2015 on Slide 18. In the second quarter, our adjusted EBITDA margin was 3.8% up 160 basis points from Q1. In the third quarter, we expect an adjusted EBITDA margin of 4.3% to 6.3%. Looking ahead to the second half of 2015, we see higher margins coming from the combination of lower cost in higher revenue. As previously communicated, this year’s plan is more dependent on continued cost reductions than a large pick up in market share. In order to achieve our Q4, 2015 target EBITDA margin 60% of the improvements will come from continued cost reductions and 40% from increased volume, price and mix in our truck and parts businesses. A significant portion of the cost improvements will come from gross material and manufacturing, cost saving initiatives. As I’ve stated earlier we plan to duplicate our material cost savings from the first half to the second half of the year, we expect to recognize the benefits of our previously announced manufacturing rationalization plans as well. Keep in mind that a majority of these savings will fall through the bottom line as the incremental material cost associated with implementing STR are largely behind us, the other portion of the cost savings will come from structural cost reductions in our North America and global operations as our next set of cost cutting initiatives take hold stemming from further efforts to resize the business. As for the revenue drivers of EBITDA growth, they will be driven a large part by our core North America trucks and parts operation, as we head into the second half of 2015, we expect additional EBITDA improvement from increased volume, price and mix in our truck businesses as well as lower reserve adjustments for our used truck operations. In the third quarter, we expect charge outs to be up 88% compared to the same period a year ago even as charge outs are lower in absolute terms versus Q2 due to less operating days in Q3. We also expect increased revenue, favorable mix and pricing in the North American commercial parts business compared to the first half of the year. The Blue Diamond Parts, export parts business will pick up well as the fourth quarter in particular is typically stronger. To summarize, our results continue to improve in the second quarter of 2015, did a number of notable accomplishments including one increased core truck charge-outs, two higher market share sequentially, three additional cost reductions and four improve working capital and lastly we have positive manufacturing cash flow as well. In closing, we continue to demonstrate good progress towards our goal with the actions we’ve taken to improve the business and the continuation of a strong industry, we plan to build upon our first half progress and the second half, increase our EBITDA margin in excess of 8% actually in 2015. I’ll stop here and return the call back to Troy.

[Troy Clarke:]

Okay. Hey thanks, Walter now. Let me wrap up the former part of our remarks to look ahead. Turning to Slide 22, our assumption is that the industry remains strong for the rest of 2015 and through 2016 in fact based on anticipated growth in medium and preliminary industry guidance for 2016 please add it will be similar to this year. The second half of the year is typically stronger for us in terms of charge-outs and EBIT, we expect that will be the case this year, we’re also forecasting improved share in the second half, we remain focused on increasing sales and are gaining market share. To that end, let me also tell you about a new addition to our team. As we may have seen, Jeff Sass as our new Senior Vice President of North America Truck Sales and Marketing, Jeff joins us from PACCAR, where he has spent the last 20 years in various roles of increasing responsibility in sales and marketing, development, customer service with the parent company as well as Kenworth Truck Company and Peterbilt Motors. His experience and respective leader in the industry and has a strong track record in developing new business, generating sales and supporting customers. So bring new insight, high energy and excellent leadership for our truck sales and marketing. We will continue to invest in new products, our manufacturing processes and our product development activities. Cost improvement will remain a priority for us, we expect the positive impact of reduced spending in engineering and SG&A will continue to pay off through-out the year, we also expect to achieve additional savings in material cost, manufacturing in the second half. Half the year is behind us as we take stock, we find ourselves in a better position in terms of year-to- date accomplishments and performance to plan when compared to last year. I think we’ve laid the foundation for the second half of the year as a result we remain on track to accomplish our EBITDA margin run rate goal everything for 2015. With that let me turn over to Kevin and we will go ahead and get it opened up for questions.

[Kevin Sadowski:]

Great that concludes our prepared remarks. Before we go to questions, I will like to let you know that in addition to Troy and Walter also joining us today is Persio Lisboa, President of Operations and Bill Kozek, President of Truck and Parts. To be fair, we ask that each of you limit yourself to one question including an optional follow-up. Operator, we are now read to open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of David Leiker with Robert W. Baird. Your line is open.

[Unidentified Analyst:]

Hi good morning this is Joe [indiscernible] for David. If I go back to the chargeout guidance, you provided at the Analyst Day and just kind of back into what Q3 and Q4 might be, it kind of seems like April, July and October are all going to be plus or minus 18,000 chargeouts levels, if volumes are more or less flat. I'm just wondering what some of the confidence, I understand the cost sales and the material sales but kind of from a capacity utilization standpoint, what are you seeing in the operations that's allowing you to drive margin improvement on what seems like flat volumes?

[Persio Lisboa:]

I can take that, I think what we’re seeing overall for operations we’ve been – this is Persio Lisboa by the way. We've been improving our capacity and the movement that we made with the foundries for instance is a good example of that, we are really not focusing on a core, we have both lines in our Escondido plant being right now rebalanced. We have ProStar operating at high level of capacity for next two quarters and we also see that our Springfield facility will be able to take more medium-duty trucks as we increase our share in medium-duty. So, we see the capacity utilization positive in the next two quarters.

[Unidentified Analyst:]

Okay. That makes sense and if I can just follow-up. So it does seem like absolute volume leaving share aside volume is stabilizing here. Do you think this is kind of a good run rate going forward and then when the new truck platforms get introduced maybe next year, you see another step up in volumes you can realize?

[Bill Kozek:]

This is Bill Kozek. I think as you look at volume, certainly medium year heading in the right direction and positive year-over-year but the heavy, we’re still in that earn the business through our product which have been operating very, very strong and then having to deal with the used as well and we anticipate that situation will continue to be better quarter-over-quarter as we go through the rest of this year and certainly into 2015. So, yes, I think heavy is where we’ve got the most opportunity and as Troy mentioned, we’ve got a lot of good thing on the book and we’re preparing to grow, we’re ready to grow.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

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

[Brian Sponheimer:]

Hi. Good morning everyone. Just talking about the used process during the quarter, you obviously had to take a reserve adjustment there. If you’re kind of handicapping where you are now versus where you thought you’d be at the start of the year? What have been the biggest changes?

[Troy Clarke:]

Well you’re talking Brian in terms of the reserve adjustments or volumes or?

[Brian Sponheimer:]

The pricing of your equipment that you’re taking back in along with secondary customers acceptance to take the product.

[Bill Kozek:]

Yes, this is Bill. I’ll take that. You know, the values, obviously values are dependent on - expect in mileage and our volumes are little bit higher. So, if you look at pricing year-over-year, we’re down slightly in heavy and then in terms of medium-duty size that we’re up, our pricing is up year-over-year but our confidence level because of Diamond renewed and we add on maintenance and we add confidence warranty levels, our numbers in the first quarter were I will call them sluggish but it really rebounded in the second quarter and about where we thought they would be for the full year at this point and we think they’re going to grow and we’re going to have a record 2015 in terms of sale.

[Brian Sponheimer:]

All right. And just thinking about the addressable market of vehicles still out there from a warranty perspective usually give that, kind of bell curve which is in this deck. Where you think we are in that? Are we past the peak?

[Troy Clarke:]

Yes. This is Troy. Certainly we’re past the peak. We’re about, we’re on track with exactly where the bell curve we said would be, so about in terms of volumes of units covered under warrant, we are about the halfway point right about 50% of the total. If you remember that curve where that point in first follow up little more steeply now. Almost all of the big bore, the 30 meter MaxxForce engines are out of base warranty until what’s running off there is the extended warranty over this period of time and now we’re beginning to see the medium-duty engines start to run off at a quicker rate as well. So, we are actually on track with that. We expect to end this year about 65 to 70 of that volume run off. So, and then it runs off rather quickly after that.

[Brian Sponheimer:]

All right. Thank you very much.

[Operator:]

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

[Jerry Revich:]

Good morning. I’m wondering if you could just say more on the material cost out opportunity relative to the targets that you laid out. How much of that is with material cost coming down versus the cost out that you highlighted at the Analyst Day and elsewhere. And just help us understand the coverage on Telematics product that you’ll be offering. Obviously that has a cost to it. How do you offset that content? Are you able to change price realization at all?

[Persio Lisboa:]

Jerry, this is Persio. Well, as we mentioned in the Analyst Day, we have several actions on the material side that now drive the improvement for 12th year. As Walter mentioned, we are well into half of that target for material right now. And we have a pretty good line of sight. Actually for the second half we are in much better position than where we were a year ago in the first half of 2014. So we feel good about the material cost and we think that there is huge potential for us to hit the total number for the fiscal year, so that’s on a material specifically. Then we have a strong action taking place on manufacturing as well, as you know. And the foundry business that we just - the announcement that we just made in Waukesha. I think as I mentioned, we are rebalancing our lines. We are going more to a focused production of our platforms in our plants. And we are just in the supply base a the same time. So we feel good - very good about the manufacturing and adding that to the material. And on top of that we have the structure of actions that Troy mentioned here that are also important for us for the second half. But we feel now very confident in a plan that we shared with you during the Analyst Day. And in regards to on command connection, the cost is relatively minor, but its certainly worth it to; one, take care of customers; but two, to have access to the data to allow us to make continues improvements on a product. So we’re able to cover that and for us really.

[Jerry Revich:]

Okay. And then, on the product breadth can you talk about where you stand now? Do you have the ISB rolled out across the bulk of applications, or is there still an opportunity in front of us? And can you talk about the opportunity for additional, may be one-off products, any interest like the Eaton deal clutch, AMT, is that something that could increase the range of your products at all. Is that under consideration? Can you just lay that out for us?

[Danny Oney:]

This is Danny Oney, by the way. Relative to the ISB we are just completing the launch of the ISB in our work start, our vocational trucks. In fact that truck is launching this month. So all models will have the ISB in them as of this month. There are many, many smaller configurations still to come, but the majority are already launched. And relative to the Eaton AMT, more to come on that. We’re not ready to make an announcement today, but more to come on that later this year.

[Jerry Revich:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Steven Fisher with UBS. Your line is open. Please go ahead.

[Steven Fisher:]

Great. Thanks. Good morning. Just curious to what are your expectations for trends and end market price for used Class 8 trucks over the next several months? I know you talked about it a little bit earlier on the call, but I guess I’m just wondering if the higher market tells that happened in 2011 and ‘12 might start to put more trucks in the market and pressure pricing further if that’s already sort of baked into your expectation.

[Walter Borst:]

Yes. We see the - going forward, we anticipate slight increases in pricing in the use. We don’t think 2011 and ‘12 is as impacted as that - too much because while the markets were up, they weren’t up at 2006 levels. But yeah, we anticipate things to continue to be strong in terms of the use. And that’s mainly because we see the economy continuing to be strong and the truck that were built in 2011 and ‘12 are - get better fuel economy, so we think there’s going to continue to be demand there.

[Steven Fisher:]

Okay. And then on the parts business, can you just talk about the trajectory is being in part sales going forward. I mean, it was down little this quarter and you’ve got some cross currents in this segment with pure engines, but would you have charge-offs growing and then on command helping. Should there be a defined trajectory over the next year or two on that business?

[Walter Borst:]

We anticipate growth. We continue to anticipate growth into parts business, certainly in North America, like U.S., Canada. Yeah. It’s going to continue to be strong. Rest of the world and the Blue Diamond part are both challenged right now. But we anticipate that flat America and Mexico will have a better second half.

[Steven Fisher:]

Okay. Thank you.

[Operator:]

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

[Stephen Volkmann:]

Hi. Good morning, guys. Sorry if I missed this, but did you say what the warrantee adjustment this quarter were for and how we should think about that going forward?

[Walter Borst:]

Yeah. We did mention it. Steve, it’s Walter. A good part of it, the majority of it actually was related to field campaigns in the quarter. And we had one particular field campaign that accounted for half of the $18 million adjustment that we made in the quarter, which was one-time item which we wouldn’t expect to repeat and probably reserve for in the quarter. So as I look at warrantee for the quarter, it’s really pretty stable quarter and things have stabilized here in terms of our warrantee adjustments, $8 million with more than half of that related to a few field campaigns doesn’t leave much else left for warrantee adjustments in this.

[Stephen Volkmann:]

Okay. Great. That’s helpful. And then I wonder if I might just ask I don’t know Bill or Troy or somebody, your initial comments for 2016 sort of being flattish. I guess I’m just curious you’re thinking behind that and whether you have any sort of visibility vis-à-vis discussions with customers, or where you might sort of base that and any additional thoughts that would be great.

[Troy Clarke:]

Yeah. I mean, I think, let me just start. This is Troy, and I’ll toss it over to Bill. But its a little bit of all of the above. What I think we’ve all seen here over the last several years is an extreme - I don’t know, extreme lumpiness, right, on how orders coming from the market. I think one of the - through some of the marketing tactics that all of us now have began to use, there is an extreme timing of the [indiscernible] begins here in second half of year, which then typically culminates in what seems to be a very high order run rate in the last calendar quarter and the first calendar quarter of the coming year. So, a lot of that is associated with very specifically trucking companies that have their capital allocation plans and certainly like to lay that out for the entire year as they get their budgets approved closer to the end of the calendar. So, we’re already into that part of the cycle really, having those discussion with large fleet that have large capital outlays who are really looking for that opportunity to reserve a portion of my or somebody else’s capacity. This year was kind of different because some of those discussions lead us to believe that not only is it - was it replacement volume, but we began to see I think the first time this year in some time we began to have some companies have been able to do through I think some innovative tactics through drivers and increase durability to put truck on the road. As we start those same discussions this year going in and build little closer to it than I am we’re seeing the same type of dialogue, if not a little bit more than we experienced this time last year. And so, may be its a little anecdotal, but there are significant inquiries that has significant impacts obviously to our backlog, and I’m sure by contemporaries as well that are already coming into play as we line up for 2016. I don’t know Bill if you want to add something there.

[Bill Kozek:]

Sure. If I look at it across the segment, we anticipate medium duty is going to be up. Thanks to pure medium duty as we’ve been asked for place the lower pace of demand. So there’s going to be growth there. But we anticipate growth as school districts have flow to add vehicles or to replace it. But here we’re thinking to grow as well and because municipalities are spending, it need to spend for new vehicles. On heavy duty we think it’s down slightly, but again the conversations we’re having today with customers lead us to believe that it stay actually to be flat or up slightly because customers are talking, adding versus the past at that risky place. But right now our forecast is down slightly. But overall, we think that the forecast is relatively flat.

[Troy Clarke:]

Is that helpful, Steve?

[Stephen Volkmann:]

Yeah. That’s great. And I wonder if I can just sneak in a follow up here? If you’re willing can you just give us any sense of how to think about the relative margin between medium and heavy that might be helpful.

[Walter Borst:]

Yeah. It’s Walter. Glad you asked. Because I think a lot of times we get questions about that and obviously for competitive reasons we can’t provide too much on that. But we’re bullish that medium and bus are going to do better because our margins are strong there. And that’s good for Navistar. So with this part of the cycle, moving to medium bus that’s good for us. We have more manufacturing type efficiency that we can bring to bear on medium and bus just given the fewer number of build combinations. That’s more likelihood that it’s a more standard look for us from the rear to forward, going out the door. So us and for everybody who is in the medium truck business really like that. Its easier to run that on a lower cost per unit basis because you really can leverage scale across smaller volumes through a more efficient manufacturing network. So medium is good business for us and I’m sure it’s good business for other folks as well.

[Stephen Volkmann:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Ann Duignan with JPMorgan. Your line is open, please go ahead.

[Walter Borst:]

You there, Ann? Are you on hold?

[Unidentified Analyst:]

Sorry about that. This is [Mike Koman] [ph] on for Ann. Can you hear me now?

[Troy Clarke:]

Hello, Mike.

[Unidentified Analyst:]

Hi. Just I wanted to quickly follow on those, the preliminary view on ‘16. Seen cancellation rates move higher in the last couple of months. Is that affecting your backlog at all or your order rates?

[Troy Clarke:]

Our backlog is up year-over-year and we are not seeing a large number of cancellation. Typically in our industry when we get in a cancellation is - they just cancel it and then they reorder what bus they really want. So we’re not seeing any cancellation activity at all really. And we always net any cancellations that we have in our reported numbers. So it can’t be for what others are doing, but that’s how we do it.

[Bill Kozek:]

I think this is like - this is Bill. This is like the second year in a row that what we’ve seen is we’ve seen an extremely high order intake rate for the first couple of quarters of year. That would imply a huge market. And then in the second half of the year there is - I think there’s some timing rebalancing that takes place. That’s what I think is reflected in. I don’t know for sure, but I think reflected. We don’t do it that way but that’s probably think I would give.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Neil Frohnapple of Longbow Research. Your line is open. Please go ahead.

[Neil Frohnapple:]

Hi. Good morning. Troy, you mentioned in your closing remarks that your forecast improved market share in the second half of the year. Is this within all the businesses including the heavy duty, and can you just comment on whether your confidence is based on recent order activity or anything else you can point to?

[Troy Clarke:]

Yeah. I’ll maybe flip it over to Bill, but as we kind of look through the market, we’re extremely confident in our bus share largely because we’ve built I think every production [indiscernible], very confident in our medium duty and largely because of what we see in back order and line of sight. There is - we’re maybe a little less sure, but we’re certainly optimistic now that we have a full product portfolio of severe service trucks, but I think we’ve - let’s say handicapped that, conservative numbers into plan for the rest of the year, and how long it takes some of that stuff to get traction. Bill, I don’t know if you want to comment on heavy. Heavy is always - but I think that we’re - we put our best planning efforts forward on that. And again, we do have a backlog so, backlog is any indication that’s what we’re basing our forecast on.

[Neil Frohnapple:]

Great. That’s helpful. And then strong global operations profit performance in the quarter. Just placed a large trucking revenue. Can you just comment on what you’re seeing on in Brazil from an order standpoint. Is it your volumes are starting to stabilize there?

[Persio Lisboa:]

Yeah. This is Persio, Neil. And while we are unfortunately not seeing the economy really now getting back in the second half and we are planning for that. So we see in all segments in the market there from trucks to agricultural tractors, all the industry is significantly down in first half. And the actions that we took really were meant to plan for that. So we see that a second half is going to be probably in the same place where we are in the first half. If there is some uptick its going to be just upside for us. But right now we are not planning to have any recovery coming from Brazil at this point.

[Troy Clarke:]

So just stable with no recovery planned in our outlook for the year. Hopefully something does happen that’s kind of part of the plan.

[Neil Frohnapple:]

Great. Thanks very much, guys.

[Operator:]

Thank you. Our next question comes from the line of Jeff Kauffman with Buckingham Research. Your line is open, please go ahead.

[Jeffrey Kauffman:]

Thank you. Hi guys. I wanted to dive a little deeper into what’s going on in Mexico. It seem like kind of relative to the progress you made. That was the one area that was little more of a surprise of the downside. Could you - you mentioned you expect Blue Diamond parts to be a little stronger in the second half. And I think in financial services you mentioned higher loan losses that you took on the Mexican portfolio. Could we dig a little deeper in both of those and help us understand kind of what was more transient or timing versus what may be more structural whether it’s currency related or otherwise?

[Bill Kozek:]

And again, on the first part, on the Blue Diamond parts, anything that we anticipated at the beginning of the year as the population of vehicle gets more aged and the number comes down, we anticipated Blue Diamond part to come down. So from that standpoint that was anticipated. And we don’t know that - we don’t see that’s growing because of the population here in the short term. But that’s something that we have planned for and we are able to manage around.

[Jeffrey Kauffman:]

Okay. But you do anticipate that contribution to be hold stronger than second half.

[Bill Kozek:]

I would say it would probably be flat.

[Jeffrey Kauffman:]

Okay.

[Walter Borst:]

There’s seasonality to it, but that’s the only thing that you see. Yeah, the seasonality should help. The seasonality helps a little bit. We tend to sell more in the second half of the year into that same population as Bill said. But year-over-year, we’ll see that population of vis-à-vis the old four power stroke engines and some of are very old in the market. This is what the parts do to that population.

[Jeffrey Kauffman:]

Okay. And then the second half, the loan losses in Mexico.

[Bill Kozek:]

Yeah. I mean Mexico generally has also has some economic headwinds the industries kind of been waiting for, some incentives and so on from the government. Those are picking up there. But we do particularly well in the government segment and that hasn’t picked up as much yet. With respect to the loan losses that’s just taking a look at how things are developing and I wouldn’t anticipate that brand necessarily continuing to increase.

[Jeffrey Kauffman:]

Okay guys. Thank you very much and contributions.

[Troy Clarke:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Nicole Deblase with Morgan Stanley. Your line is open. Please go ahead.

[Nicole Deblase:]

Yeah. Thanks. Good morning guys. So, my first question is on dealer inventory. It looks like from the slides that it did step up a bit during the second quarter. I’m just curious what was going on there, and if you think dealer inventory levels are healthy or high. How would you characterize those?

[Persio Lisboa:]

I think dealer inventories are where they need to be. We were a little bit low as we entered this year and we had a couple of programs out for our dealers to increase their inventory to levels that they can service the market. And the other part of that is we’ve got a lot of new product and to sell those new products we have to have them on our dealers lot and they need to be showing them to our customers. So that’s been planned. I always think dealer inventory is too low. But yeah, its certainly grown this quarter and we don’t anticipate that growing the rest of this year though.

[Nicole Deblase:]

Okay. Got it. That’s helpful. And then my follow-up is on the bus business. Why were the charge out still weak this quarter? And is it just municipal spending a little bit slower than anticipated? And then what’s the outlook for the rest of the year there?

[Persio Lisboa:]

Well, as you know, the third and - our third and fourth quarter are the strongest time for charge out in the bus business because that’s when the school districts want the busses. So it was really just the timing issue. We had extremely strong first quarter bus activity. And it took a little bit of a pause in the second quarter just because of timing. We planned for that. We knew it was coming, but we see, as you see every year, the third and fourth quarter will be extremely strong in terms of charge outs.

[Walter Borst:]

And municipalities and bus companies, but municipalities in particularly well-time their orders so that they receive delivery in the summer, just prior to the beginning of the school year. So we know they are going to order. They have kind of talked to us about it, but won’t submit order until they get the timing of their delivery. So that’s what we always see in second quarter.

[Nicole Deblase:]

Okay. It makes sense. Thanks. I’ll pass it on.

[Operator:]

Thank you. Our next question comes from the line of Michael Shlisky with Global Hunter. Your line is open, please go ahead.

[Michael Shlisky:]

Good morning, guys. I wanted to get your thoughts on margins after 2015. Now this was touched on, on last quarter’s conference call. I know there is some seasonality between the first quarter and other quarters, but is an 8% EBITDA margin range before we expect after the fourth quarter of this year into 2016?

[Troy Clarke:]

So directionally that’s what we would want the full of year of 2016 to be, our first quarter tends to be a little weaker, so you shouldn’t see us necessarily coming out of the gate with that kind of margin but as we had said back in our Analyst Day that directionally what we’ll be looking for the full year.

[Michael Shlisky:]

Great, and then secondly I want to ask about your propane bus business, could you tell us broadly what kind of penetration that might have on this season business and are there any differences in propane and pricing versus diesel as well in margin versus diesel?

[Troy Clarke:]

Yes the propane is a slightly up charge versus standard diesel but certainly not out of range for our customers. In the first part of that question, how much was…

[Michael Shlisky:]

How much of – what do you say propane percent maybe as a percentage?

[Troy Clarke:]

It really depends on region of the country in the south, in the south west, it’s a little bit higher but we’re talking below 10% in total as we stand here today. But we anticipate that growing but this year it will be for us 300 to 500 vehicles not a huge number. It’s kind of running in the 12% to 15% range in the Southern part of the United States, so I don’t know what that kind of averages across the portfolio, we can get to that detail on follow up if you like, this year I think the real factor to matter is that we are just launching the vehicle to date, we will sell [indiscernible] and we’re looking to grow more capacity income.

[Michael Shlisky:]

Got it. Thanks so much guys.

[Operator:]

Thank you. Our next question comes from the line of Ted Grace with Susquehanna. Your line is open. Please go ahead.

[Ted Grace:]

Good morning guys. The first thing I was hoping to ask is a question that kind of bringing together bunch of the margin questions has been asked earlier so if you look at charge-outs increasing 8% year-on-year that implies charge-outs down by the 1000 sequentially if I’m not mistaken. And so I was just wondering can you bridge us I know EBITDA supposed to up $25 million to $75 million, you’ve talked about some of the manufacturing initiatives, we’ve talked about some of the recent initiatives should help SG&A. But can you just help bridge us sequentially how you get 25 to 75 more the million of EBITDA when charge-outs are down a 1000 is that lot of used truck kind of reversal or that global offs, or just any handholding on the sequential progression would be helpful.

[Troy Clarke:]

Okay. Let me see if I can help, when you hit the number of the pieces and they’re important pieces I talked about material performance and manufacturing performance of cost performance some of the things we have done I think a great job and repeatedly shown results on you touched on the volumes but parts results are big portion of our business and we expect parts to do better in the second half of the year as I alluded to in my remarks and as it relates to used truck reserves, we’ve taken reserves there the last two quarters, we wouldn’t expect those to be as high in the balance of the year, we’re taking up of our results.

[Ted Grace:]

Order of magnitude, could you foresee what the biggest positive contributors will be sequentially?

[Troy Clarke:]

Materials are very large portion of our cost, so you should expect that to be one of the bigger contributors, not the biggest.

[Ted Grace:]

And then on a related basis and I don’t want to get caught in Symantec but in the press release you talked about in excess of 8% operating margins on the exit rate basis, so my recollection is the frame kind of 8% to 10% is there any change there you’re signaling is at the lower end or is there anything just to interpret in that comment?

[Troy Clarke:]

Well we have discussed on Analyst Day kind of how we thought about the 8% to 10% and really we showed your plans, if we go back to those presentations which are in line probably we would get to 8% and then we said that would be upside from there depending on how the markets develop and I guess that really stand by that, it will be a function of first on the industry as second half of the year and whether our market share picked up from what we’ve seen, we need a little bit of a tailwind there in order to get to the higher portion of that range. But what we want to signal today is that we’re still on track to 6% to 8%.

[Ted Grace:]

Okay. And the last thing if I could just squeeze it in, you have given us 2015 targets for market share, you’ve given us a pretty good framework from the macro perspective on how to think about 2016, relative to the 2015 market share targets you set for yourself, could you just give us some handholding on how you think 2016 shapes up or what you are targeting?

[Troy Clarke:]

In terms of bus, we think it’s obviously I will go ahead. I mean I think at this point we that our 2015 targets and I don’t know where you’re ready to disclose specific share targets for 2016, so we think the industry is going to be flat and we are going to continue to move forward and try to grow share. We recognize we have some headroom there. So we will continue to push on market share.

[Ted Grace:]

Did you say headroom or headwind?

[Troy Clarke:]

Headroom.

[Ted Grace:]

Headroom, okay. Great. Best of luck for the quarter guys.

[Troy Clarke:]

But I said headroom.

[Ted Grace:]

Okay. Thanks so much. Good luck this quarter.

[Troy Clarke:]

You bet.

[Operator:]

Thank you. Our next question comes from the line of Patrick Nolan with Deutsche Bank. Your line is open. Please go ahead.

[Unidentified Analyst:]

Hi, this is actually [indiscernible] for Patrick Nolan, how are you?

[Troy Clarke:]

Good, how are you.

[Unidentified Analyst:]

Good. Just wanted to ask broader question I don’t think was really discussed yet, how do you guys think about the minimum cash balance at this point in the cycle and more importantly what is the minimum cash balance should look like going forward to over the next five years in down cycle in the industry?

[Walter Borst:]

It’s Walter, let me take a shot at that. My answer is we are consistent with what we have said in the past, we need about $500 million we think to run the business so that is kind of minimum cash level that we look to have globally and that we that kind of through up cycles and down cycles. So we’ll see how that develops over five years that’s a long period of time but what we’ve discussed in the past is several uses of cash that we have, that we plan for first and foremost obviously capital expenditures related to continuing to invest in the business and new technologies. Secondly, we’ve had higher warranty spend than expense, we also have pension in OPAB expenditures or cash outlays that have been and expected to be higher than expense. Used truck inventories are increasing, we don’t expect those to get higher than $425 million but that is something that we plan for and reserve some space for on our balance sheet as well. I think those are the main items but as we kind of past forward a couple of years, we wouldn’t expect those outlays to be as significant. Over time we wouldn’t expect any incremental increases in our used truck inventories out there seeing a big year at some point, warranty spending has continued to trend favorably every month this year versus last year and as we get through some of these EGR, engine population that we cited earlier those expenditures should continue to come down over time. So our kind of lead in terms of what EBITDA would need to be in order to break even will come down over the next couple of years versus levels that we would see this year and I think we had discussed previously something on the order of about 700 to 750 EBITDA to breakeven from a cash flow perspective that wants to be couple of hundred million dollars less in the couple of years out as we see it today and even two years out is long way away but hopefully that gives you some feel for what we need to run the business and how you would see our cash needs progressing over the next quarters.

[Unidentified Analyst:]

Now thanks this is helpful. And just on the cost savings kind of looking forward again through 2016 on lot volumes, could you give us some more color on to opportunities for cost reduction in material manufacturing other areas as well.

[Walter Borst:]

We’ve not done yet but we should expect us to continue to make progress on all of those brands but right now we’re focused on close not the second half of the year as strong as we can and so that will give us a good base to start-off New Year with.

[Unidentified Analyst:]

Okay. Got it. All right, thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Joel Tiss with BMO. Your line is open. Please go ahead.

[Joel Tiss:]

How are you guys?

[Walter Borst:]

Good Joel.

[Joel Tiss:]

So, I’ll just glue both of them together because there are more sort of nuances but I just wondered if you could talk a little bit about how all the changes at GE affect your financing business and then for Walter, I just wondered if you could give us a quick sense of why the inventories are down going into what looks like a stronger second half?

[Walter Borst:]

With respect to the first question GE, based familiar on the call that GE is looking to sell off a good portion of the GE capital assets and we work closely with one part of that business on retail financing in the U.S. in retail and wholesale financing up in Canada. So, we are in conversations with them as that sale progresses but we fully expect given that this is a very strong business that will be successful in factoring that to a new probably financial services partner that currently will have little impact on our liquidity competitive position or ability to support the sale our financing. But we have to see how that goes and we’ll stay in close contact with them. We are large customer for that business. And so we’re important customer to them and they’ve given us as well as our dealer body the time that we deserve during this process and continue to fully support our activities as they go through this process. With respect to the inventories, what you're looking for there?

[Joel Tiss:]

I just wondered why they were down if the second half of the year looks like it’s going to strengthen a little bit, it seems to put you in a little bit of a tougher spot unless you’re just manufacturing more efficiently. So, I just wondered a color on that?

[Walter Borst:]

This is the working capital, the working capital question. We see that as good news not bad news by the way. Couple of years ago you might have looked at that and said well this is a kind of high number, today the fact of the matter it is pretty just straightforward. Everything we have build in the day, by enlarge we are shipping in a day, today. I mean we don’t run repairs, a lot of repairs, we’ve done a lot of lean project so that we’re transiting to write the TEMs right through our technical specialty centers. We are really focused on throughput. When I referenced in my comment that we’re continuing to see cost savings and benefits and goodness from lean projects, it’s just that kind of stuff. Right just that when you visit our plants today, you won’t see many truck sitting outside, you won’t see a lot of inventory screwed up because we’re not kind of selling out of inventory we’re selling every truck we build as a customer and we give it to customers as quickly as we can. And hopefully you see more of that, I’m not thinking of it was anything special other than the combination of a lot of hard work by our manufacturing and operations folks. We really feel good about that.

[Joel Tiss:]

All right, awesome. Thank you so much.

[Operator:]

Thank you. And our last question comes from the line of Seth Weber with RBC Capital Markets. Your line is open, please go ahead.

[Seth Weber:]

Thanks. Good morning and thanks for extending the call.

[Walter Borst:]

That’s the last here.

[Seth Weber:]

So, as think about a flattish 2016, can you maybe just characterize what you think the pricing environment might be in a sustained strong truck cycle North America? I think everybody would agree pricing hasn’t been as strong as we would might have thought at this point of the cycle?

[Walter Borst:]

Right. It’s always a competitive industry. Pricing is always one of those items that you work on every day and you just have to show the value of your vehicle to the customers but we anticipate in the next year that there is going to be an opportunity for improvements in pricing but again it is the competitive industry and that’s always one of the struggles that us and all the OEMs have.

[Troy Clarke:]

I think in years past, right I mean, why this question comes off, I think the way that it does is that, pricing was driven by capacity constraints. Even though the market is running better, it’s not running like it did back in 2006 let's say, or prior to those emission breakpoints where there was actually shortage of capacity which is driving pricing and on top of that real emissions equipment, hardware that you are adding that you had the whole industry had to take price for. Today even though the industry is running at a higher level, it is not running at capacity. There is still additional capacity, I think for most manufacturers even some supplier so that prefer has moved and there is not a lot of hardware than we are putting. So, emissions are regulatory requirement. So the pricing that really is out there is based on the better performing truck and the better performing company. We are bullish that it's out there but its not, it's not that way to complete, its something you got to go out and work for basically deal by deal. And I think that's not a whole industry use at this point.

[Seth Weber:]

That is helpful, thank you. And just a clarification or follow-up on the Brazil, the global ops business. Do you expect that to be profitable in the second half of the year at kind of the current run rate?

[Troy Clarke:]

No, we are considering profitability on this global operation right now, Seth. We are keeping at a level that we saw in the first half.

[Walter Borst:]

But we also then see that being a big drag on our results and that was our target for the year.

[Seth Weber:]

Right. Okay, great. Thank you very much guys.

[Operator:]

Thank you. At this time, I’d like to turn the call back over to Kevin Sadowski, for any closing remarks.

[Kevin Sadowski:]

Great. Thank you everyone and if there is additional questions feel free to reach out to myself or Ryan Campbell throughout the remainder of the day.

[Troy Clarke:]

This is Troy. Myself and my staff we’ll make our self available if we can be helpful. Thanks a lot everybody for tuning into the call today.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect. Everyone have a great day.