Navistar International Corporation
Q1 2013 Earnings Call Transcript

Published: 7 Mar 2013

[Operator:]

Good morning, and welcome, everyone, to this Navistar International Corporation First Quarter 2013 Earnings Release Conference Call. Today's call is being recorded. And now for opening remarks and introductions, I would like to turn the program over to Vice President of Investor Relations, Heather Kos. Please go ahead, ma'am.

[Heather Kos:]

Good morning, everyone, and thank you for joining us for Navistar's First Quarter 2013 Conference Call. With me today are Lewis Campbell, Navistar's Chairman and Interim Chief Executive Officer; Troy Clarke, our President and Chief Operating Officer; and A.J. Cederoth, our 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 this call are reconciled to the U.S. GAAP equivalent as part of the Appendix in the slide deck. Finally, today's presentation includes some forward-looking statements about 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 Form 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 this subject. And with that, I'll turn the call over to Lewis Campbell for his opening remarks.

[Lewis B. Campbell:]

Thanks, Heather, and good morning, everybody. Thanks for joining the call. Before I turn to the quarter, I'd like to spend a minute on the other news we announced this morning. As you've likely seen, I'll be leaving my positions as Executive Chairman and Interim CEO of Navistar on April 15. At that time, I am truly delighted to hand the CEO reins over to Troy Clarke, who's served as our company's President and Chief Operating Officer since August of last year. Troy is going to also remain President and become a member of the board, and Jim Keyes, who's served as a board member since 2002, will become our Non-Executive Chairman. As you know, when I joined Navistar in August, my mandate was to serve on an interim basis and help lead the company through an important transition period. Since that time, we've made significant progress on many important fronts, and you'll hear updates on much of that as we talk about our performance on today's call. In short, our turnaround is well underway and is gaining momentum, which is why we're now ready to put a longer-term CEO in place. Suffice it to say, I couldn't be more pleased with our accomplishments over the past 6 months, and I am truly honored to have had the opportunity to work in partnership with Troy as we set the company on a clear path forward, and we have. Troy is a proven leader, and I am thrilled that the board and I have decided that he's just the right executive to lead the company at this time. Troy has been instrumental at implementing Navistar's Drive to Deliver plan, leading the company's transition to its clean engine strategy and taking the necessary steps to improve Navistar's cost structure. I'm very confident that under Troy's leadership, Navistar will continue to build on this momentum with a focus on improving performance and quality for our customers and creating value for our shareholders. Since I arrived last summer, I have often said I was honored to lead such an iconic American company, and that couldn't be more true today. Navistar is a great company with great products and great people. We've achieved a great deal in a short period of time, and this is in no small part the result of determined efforts of all of our employees, and I want to thank them today for their efforts. With that, let's now turn to the quarter and let me provide some high-level remarks. Overall, the numbers were in the range we expected. I would characterize the first quarter as one in which we made good progress in several key areas. In my mind, progress proof points that I would put at the top of the list include a strong first quarter ending cash balance, our structural cost actions are now reflected in the bottom line results and we have exceeded each of our clean engine launch milestones. A. J. and Troy will talk to you further about all of these in just a minute. Beyond the numbers, during the quarter, Troy and his team continue to make progress on strengthening our North American core businesses while taking a very disciplined return on investment capital approach to evaluating non-core businesses and product programs for potential sale, closing or fixing. On Page 5, you can see we've made the following progress since our fourth quarter 2012 call

[Andrew J. Cederoth:]

Thank you, Lewis, and good morning, everyone. Turning to Page 8 are the results for the quarter. Manufacturing revenue decreased by $372 million or 12% for the quarter versus first quarter of 2012. The majority of this decrease was in our traditional Truck business, where vehicle shipments were down 24% or 4,200 units from the first quarter of 2012. Beginning in the first quarter, we have changed the basis of our financial presentation to include Workhorse and Monaco RV as discontinued operations. Earlier this week, we announced the sale of our Workhorse brand and assets. The treatment of Monaco RV as discontinued operations reflects management's decision to put this business up for sale. This is a great brand with a viable future, but falls outside of our core North American business strategy. We previously discussed our restructuring and divestiture plans for these businesses; thus, they are no longer included in our segment results. Despite lower volumes, our manufacturing segment profit from continued operations improved by $98 million due to lower overall warranty expenses and reduced structural costs. I will talk in more detail about the segment profits on the next slide. Corporate EBITDA improved year-over-year by $163 million, primarily driven by better performance at the operating segments, but also bolstered by lower overall corporate spending. Additionally, we reached a legal settlement that created a $35 million benefit in the quarter. Despite the improvement in EBITDA, the loss from continuing operations only improved $30 million versus 2012. This reflects the impact of our tax position as a result of reestablishing the valuation allowance in the U.S. Last year, we recorded a tax benefit in the quarter of $76 million, while this year, we recorded a tax charge of $15 million. On Page 9, we showed the details of the segment profit improvement year-over-year. Within the Truck segment, profit declined by $31 million, driven primarily by the decline in volume partially offset by lower structural costs. Included in the results is a portion of the costs associated with closing Garland, which were $12 million in the quarter. The Engine segment profit improved $93 million, primarily due to lower warranty costs of $83 million for prior-period adjustments. Engine also benefited from the improvement in South America at MWM and lower overall structural costs. Included in the Engine results are NCPs of $10 million and accelerated depreciation on tooling related to the 15-liter engine of $10 million. Within the Parts segment, profit improved by $36 million, primarily driven by volume and pricing strategies and supported by the benefit of lower structural costs. On Page 10, we have reconciled our actual ending cash against the forecast we provided on our last call. We ended the quarter with manufacturing cash of $1.189 billion, significantly better than our forecast. Corporate EBITDA ended on the high side of the range due to the performance within the segments and lower overall spending. Capital spending was lower than our guidance, primarily due to the delay of any additional investment in the China project, which has been deferred into the second quarter. Net working capital was better by $10 million despite lower volumes. The improvement here was primarily attributed to managing inventories, as we typically experience growth in inventories during the first quarter, but the manufacturing and sales teams continue to effectively manage the throughput of units better than we have in the past. Finally, cash payments for restructuring items were lower than anticipated. Turning to Page 11. Here we are providing our cash outlook for the second quarter. We expect cash at the end of the second quarter to range between $1 billion and $1.1 billion. During the second quarter, our production will expand. And with that, margins will improve, and working capital will become a benefit. At the segment level, we expect results to improve; however, these will be tempered as we do anticipate finalizing some field service actions to further improve our product quality. This may result in a charge in the quarter. Corporate expenses will have the appearance of increasing, but this is attributed to the absence of the benefit from the legal recovery that we had in the first quarter. Capital spending will be higher in the second quarter as we anticipate completing our agreements in China. And finally, we will have some timing differences that will flow through as well. Overall, we remain confident in our overall liquidity. We have a strong cash balance and additional liquidities available from NFC should that become necessary. From here, we anticipate cash to improve as market share improves in the second half of 2013. So in conclusion, the first quarter results were generally in line with what we expected. The ISX Engine launch went as expected, and we are progressing as planned on our 13-liter conversion. We are ahead of our goal on structural cost reduction and are taking the steps to build upon this success, and as I stated previously, we're pleased with our cash position. From this point forward, our plan is about improving our market share as 2013 unfolds and continuing to improve our earnings. With that, I'll stop, and I'll let Troy put more color around the first quarter accomplishments and our path forward in 2013.

[Troy A. Clarke:]

Thank you, A. J., and good morning, everyone. And I'm truly honored to take on the role of CEO and join Navistar's board. And I would also echo Lewis's comments about Navistar's progress over the past several months. We've made great strides in our turnaround plans, and I'll address specifics in a number of areas in just a few moments. But first, I'd like to thank Lewis for his guidance and leadership during a critical period for Navistar. I feel very fortunate that I've had the opportunity to work closely with such a high-caliber leader. Working together, we have taken many key actions that have established a strong platform to build upon going forward, and on behalf of everyone at Navistar, we appreciate and thank Lewis for his valuable contributions. I would also like to reiterate what Lewis said about organization. We have a great leadership team and a talented group of employees, and I look forward to continuing to work with them in my new role as we take further steps to strengthen our North America core businesses, improve quality and customer satisfaction, drive future profitability and deliver value to shareholders. Now let me give you a progress update on our Drive to Deliver turnaround plans, and then I'll help add some more color to the numbers that A. J. just shared. As we've stated, 2013 is a pivotal year for us, and when we launched our Drive to Deliver, we said we will do whatever it takes to turn our business around. To do that, we're focused on the 3 near-term priorities that Lewis referenced

[Lewis B. Campbell:]

Thanks, Troy. So let me summarize by quickly reminding you of our key guiding principles for 2013. I don't think you can stress them enough, and I hope you can see that we are beginning to see concrete progress in each of our 3 top areas

[Heather Kos:]

This concludes our prepared remarks. [Operator Instructions] So operator, we're now ready to open the lines.

[Operator:]

[Operator Instructions] And we will hear first from Steve Volkmann with Jefferies & Company.

[Stephen E. Volkmann:]

I'm wondering -- just a quick one, A. J., just to make sure I heard you right. Are you suggesting[ph] That the cash balance in the second quarter will be sort of the low point of the year and 3Q or 4Q will be higher? I just wanted to confirm that.

[Andrew J. Cederoth:]

Steve, let me repeat that because you broke off a little bit. But I think you asked if Q2 would be the low point for cash and if cash would improve from there. Yes, we expect our market share will improve in the second half of the year, and that will be the key driver to improving our cash in the second half.

[Lewis B. Campbell:]

You have to admit, though, Steve -- this is Lewis. $1 billion is not too low.

[Stephen E. Volkmann:]

Great. I just wanted to make sure we set the trajectory right.

[Operator:]

We'll now move to David Leiker with Baird.

[David Leiker:]

Just in terms of the cash, the directional cash commentary. It makes sense with higher volumes that working capital should swing around and be positive for you. But, I guess, just trying to reconcile the EBITDA guidance, because that's plus or minus breakeven with higher revenues, higher profits. I'd kind of expect that to move higher sequentially. So what, I guess, are the costs that are popping up in Q2 that gets you to the Q2 EBITDA guidance?

[Lewis B. Campbell:]

I do expect margins to improve in Q2. But as Troy talked about and the things that we talked about on our fourth quarter call, we continue to develop field campaign strategies to improve our quality, and we are in the process of analyzing a potential fix for the second quarter, and that's factored into our guidance.

[David Leiker:]

Okay. And is there an order of magnitude you can put on the field campaign? I know some in the past have been in kind of the $25 million to $50 million range.

[Troy A. Clarke:]

That's the right way to look at it.

[David Leiker:]

Okay. And then, just one quick follow-up. Troy, with the numbers you gave for Cummins, and if I just kind of compare that against your Class 8 order intake during the quarter, it looks like Cummins was around 40% of your overall heavy truck orders. Is that a good way to think about mix going forward? And then maybe steps lower as you get the 13-liter engine into the mix?

[Troy A. Clarke:]

Yes, that's a very good way to look at it. I mean, I think, by the time we get to the end of the year, it will probably look like -- whatever the mix of 13-liter and 15-liter in the market is today, I think it will stabilize like that for us as well, and I think that's probably in that 50-50, 45-55 kind of range. So I think that is the right way to look at it.

[Operator:]

And next, we'll hear from Andy Kaplowitz with Barclays.

[Andy Kaplowitz:]

If I could ask you about your military business. So you kept your guidance at $750 million. I mean, we all know about sequestration. How's the visibility into that business right now? How did you do in the first quarter? And how is the visibility for the next few quarters in the business?

[Lewis B. Campbell:]

We had a very good first quarter with military. Particularly on the Parts side of the business, we had strong revenue. And then, I'll let Archie speak to the path forward.

[Archie Massicotte:]

Yes, we -- sequestration, really, I mean, is it going to affect us? We're not sure yet. But right now we're on path, we're staying with that plan we've submitted, and we have a path to get there. So I'm confident that where we're at and the guidance we've given is -- we're okay.

[Andy Kaplowitz:]

A.J. or Archie, could you tell us how much you did in revenue? And do you disclose that, or...

[Archie Massicotte:]

Oh. I don't have that number.

[Andrew J. Cederoth:]

Yes, military revenue for the quarter was just about $225 million.

[Andy Kaplowitz:]

Okay, great. I appreciate that. Maybe, Troy, we could step back. Orders for Class 8 have looked quite good over the last few months; actually, really, for the last 4 or 5 months. And it kind of feels a little bit like last year where we had very good orders at the end of the year and in the beginning of the year, and it was maybe leasing guys and freight guys sort of buying what they needed for the year. What are you seeing this year? Do you have any concern that orders would fall off, or does it feel different this year where maybe there's a little more confidence, the fleet age is up there, we know we've got to replace. I mean, what are you seeing as you go into Mid-America?

[Troy A. Clarke:]

Yes, Andy, let me -- I'll just take a couple of set of comments. And Jack Allen is with us, and then I'll ask Jack to make some comments as well. But coming to the first part, what we have learned, and I think the industry observes, is there are some large program buyers who make some of their decisions in the fall of the year, and basically, those trucks go into our production schedules throughout the balance of the year. We certainly had noticed that. And I think the second point that I'd highlight, though, is we had always anticipated that we would run into a period of time, principally in this quarter, where we would experience some softening in our -- in order intake and, ultimately, market share, because we are in the process of making that transition. There is a lot of interest in the new engine, the 13-liter SCR engine, and they're just not available, obviously, until the end of April. So we're in that kind of time period where, I think, people have an option to wait. And in some cases, that's what we're seeing. On the other hand, in some cases, we're seeing customers step forward to say, "We really like the EGR engine and where it's at today." Very satisfied with it, it works great in their applications, and they're actually placing orders for those type of engines throughout the balance of the year. Maybe a little more color, Jack, that you could provide on our orders?

[John J. Allen:]

Yes, I think, Andy, on the industry side, we just came back from the Truckload Carriers meeting. And the mood there, in my view, was pretty darn optimistic. Freight is good, freight rates are good. But there is -- there are clouds on the horizon for these guys and that's making them tentative on their outlays with capital. Hours of Service, if this goes into effect on July 1 as is currently planned, is going to be a 10% to 11% immediate reduction in productivity, and the driver shortage is not getting any better. So there was a -- they like the business they're seeing right now in terms of freight and rates, but there's no one going to step out here and make any big purchases beyond what their replacement needs are. So the Class 8 industry is actually coming in as we had anticipated. If you take the last 6 months' order receipts and annualize them, you come in at 212,000. We've anticipated 215,000 against 230,000 last year, so it's kind of the way we had expected the year to unfold.

[Troy A. Clarke:]

I do think, Andy, one of the things that I learned from spending the time with Jack and a number of the big fleet customers is the influence that driver availability has. I think if there was not a driver shortage in the industry, we would probably see a smoother flow of orders. There wouldn't be this kind of lumpiness to it that I think we have experienced over the course of the last year.

[Operator:]

We'll now move to Brian Sponheimer with Gabelli & Company.

[Brian Sponheimer:]

Lewis, just wanted to take a step -- first of all, congratulations on the decision. It's certainly a big change from where this company was 6 months ago. But I guess, with the real -- and I don't want to say end of the road, but the real goal being the 13-liter production bogey at the end of April, what made you make the decision now to hand the reins over to Troy?

[Lewis B. Campbell:]

Well, a couple of things, actually. First of all, I am totally committed to this company. I've often used the phrase, I've really "fallen in love" with this company. I'm very devoted to Navistar. I care so much about it. And so it was kind of a bittersweet thing that I recommended to the board that we put Troy in place now. I did that because our turnaround is evident. We can see the end of the runway, and it looks very good. We understand what we need to do, and some of those actions are going to be pretty tough. And my experience with turnarounds, which goes back to my Textron days, is that if you're going to have tough decisions you need to make, you ought to put the long-term leader in place so that he can say to the team, "Follow me. I'm with you 100%." And obviously, I had this doggone interim moniker on my shoulder. I have worked 24/7. It's been a very -- a labor of love for sure. But it was just the right time. And Troy is totally ready. I mean, there's just no doubt about -- in my mind at all that this company will become even stronger under his leadership than under mine. So it was a piece of cake. And remember, this was a unanimous choice by me and the board. So our major shareholders supported it, which is also a key thing if you think about it. So they know the company well themselves. So this is just the right thing to do right now.

[Brian Sponheimer:]

All right. A couple other questions, or just one other question, and then I'll hop back in queue. As you close Garland, what are the puts and takes on the balance sheet that we should be expecting? Any working capital issues? Can you talk about that, A.J.?

[Andrew J. Cederoth:]

Sure. I expect the Garland decision to be cash flow positive this year. The working capital is actually going to improve as we close that facility. We did take some accelerated depreciation as we marked the assets to fair value this quarter, but I think overall, you'll see cost-neutral this year from Garland with the benefit flowing through next year. And then the cash impact will be positive this year.

[Brian Sponheimer:]

Right. And then -- I'm sorry, just as far as 13-liter orders for the SCR engine, when do you think we'll have a better idea as to what we can expect initially there?

[Andrew J. Cederoth:]

I'll let Jack handle that one.

[John J. Allen:]

Well, we've just opened the order book. As Troy said, we've begun production here this month. We'll begin shipping on April 30. Our coming-out party is at Mid-America. This will be the showcase in our display will be -- the ProStar with the ISX and the ProStar with the 13-liter SCR. So we'll have a much better feel after the Mid-America Trucking Show.

[Troy A. Clarke:]

I think, today, we have hundreds of orders, not thousands of orders. We have -- several fleets have stepped forward for several hundreds of trucks so that they could get a feel for the fuel economy improvement and the drivability improvement that, that build's turning in.

[Operator:]

Now we'll take a question from Jeff Kauffman with Sterne Agee.

[Jeffrey A. Kauffman:]

Maybe a longer-term view here, Troy. You're making progress, you're getting the company to where you want. Let's go out 1 to 2 years and assume that you're successful in doing what you want to do. What types of margins should we be thinking about, longer-term, for the different businesses, with more focus, obviously, on Engine and Truck? And what time frame do you think is a reasonable expectation for thinking the business is keeping to those levels? Because you seem to be so far ahead on, at least, the cost-cutting portion right now.

[Troy A. Clarke:]

Yes, well, no -- that's a great question. And I hope every quarter, we can talk about that we're ahead, basically, in the plan. Let me kind of ground that, if I could, that -- I think different today than maybe any call that we had prior, the path forward for us with regards to how to restore our margins is extremely clear, and it's really just about executing and time, okay? And so part of what we need to do is stay focused on the run rate that we have currently established and make sure that we deliver the numbers that we have in plan and in queue for this year. And certainly, our goal would be to exceed those. But what that really does is it kind of gets us out of this year, which is really a turnaround year, so there's obviously puts and takes -- gets us out of this year, I think, with a good run rate. So what can we look forward to going forward? I think we can look forward to at least another tranche of SG&A improvement that will be material, and we'll see the main benefit of that in 2014. So with regards to getting the business right-sized and lean, I think that we'll see the cost, the kind of final tranche other than continuous improvement across there, for 2014. Material cost, which is a significant opportunity for us both in Engines and Trucks, will take us, probably, over the course of the next 2 years to realize. So we'll see those benefits in 2014, I think, and 2015. More Trucks in the early phase, and then more Engine as we're able to take the EGR components off the engines and then net out the savings versus the SCR systems that we've added. Of course, a piece of this is NCPs, the non-conformance penalties, go away by the end of the fiscal year and basically -- so that's a pickup for 2014. Manufacturing costs, per our plans, I kind of see 2 more tranches of savings. So that's the savings that A.J. already referenced that we'll see that are significant in 2014, and we'll see another tranche of savings that are probably a similar note in 2015. And again, that's just from building it right the first time, getting the terms right, allocating the product to the right spot. And then, last but not least, I think we'll see this continually, will be quality. Okay? We do have our accruals set for this year so far. As we improve quality, we could have some expectations that those accruals will be adjusted per the warranty model, and I believe we'll see significant savings in the 2014 timeframe and again in the 2015 timeframe as our goal is to not go backwards on quality, but continue to go forward even in these launches. So those are the things that I would advise you are the kind of the big buckets. Those are -- there's obviously smaller items, but those are the bigger buckets that you could put double -- at least double-digit numbers to, and those would be the timings of those. So I would tell you that we have a good 24 months of initiatives. And I think in that time frame, we'll be in a margin realm in that 8% to 10% kind of rate, which is where we want to be. And I'm really referencing North America core truck, Engine and Parts. Pull all those together, that's kind of the margin kind of range. A little bit of puts and takes.

[Jeffrey A. Kauffman:]

Follow-up, looking out and ahead, you have some debt that needs to be defeased or financed coming up over the next, say, 12 to 15 months. A.J., can you talk a little bit about where you are in that process right now?

[Andrew J. Cederoth:]

Sure. I mean, as you said, we've got plenty of runway on that. We've got 12 to 15 months to work on that. And I think, kind of building off the success of this quarter, I think as we gain momentum and we take doubt away from the company's ability to recover, we'll have plenty of opportunity to refinance that debt in a timely manner.

[Operator:]

And now we'll move to a question from Jerry Revich with Goldman Sachs.

[Jerry Revich:]

Troy, I'm wondering if you could talk about your progress on rightsizing the International franchise. When you took full control of the NC2 joint venture, losses were running at about $90 million per year. Can you just tell us where you are in the process of cutting overhead and, perhaps, reducing the product range across the International franchise and the former NC2 business, in particular?

[Troy A. Clarke:]

Yes, and Jerry, part of this will sound anecdotal, so we may have to get -- if there is something more specific you want, certainly, we'll volunteer to provide that to you. So some of this may sound a little bit anecdotal, but -- okay, so what we did was we established in our turnaround plan that we really wanted to focus on our North America core business. So let me just jump quickly to the global stuff. We kind of retrenched ourselves on the global around, basically, the type of products that we export out of the United States. We have very successful businesses in Central America and the Andean countries. It's profitable for us. It's been profitable for a while. It uses engines that are already in the stable and well known because they are previous emission levels, and we really kind of doubled down our efforts there just to make sure that, that continues to be a solid contributor in our global portfolio. The second thing on the global thing is -- I would highlight to you is that we've doubled down on MWM. The team down there did a great job of kind of picking a profit target and then going and -- the kind of profit target that you'd want to have for that business, and then going and adjusting their cost structure to make sure that it'd fit within our business model down there. So 2 big successes in that regard. The third thing, from a global standpoint, is we decided to continue to invest in our joint venture efforts with JAC in China. Those are still nascent. They're not a drag but they're not an add, so to speak, at this point in time to our results. But we do see a lot of possibilities there. The type of product that they have are the type of products that we think we can use in Mexico and Latin America and, when combined with our MWM Engine portfolio, could give us some opportunities to find some good business down there. With regards to NC2, we're kind of stepping back from saying, "Look, we're going to play in a big way everywhere with our global capital and products." We haven't made any announcements on that, but I know that in prior news, we had emphasized that as one of our aspirations. And just quite frankly, we've pulled back from that. We have not been able to find a path forward at a meaningful cost and return level to suggest that we can go into markets that are heavily cabover kind of European-type markets and make a lot of headway there. So that's really the biggest piece of what NC2 was lined up to do. And so since we now are the owners of NC2, it is no longer a joint venture, those are just some decisions that we've made. That leaves the question, a couple of outposts that we've got out there and that we're working through what the right thing to do is, but they're not businesses of material consequence for us.

[Jerry Revich:]

Okay. And Troy, in terms of, I guess, the product development path, can you frame for us your action plan on the medium-duty franchise? When do you expect to shift the R&D focus on that part of the portfolio? And can you give us a sense of the timeline on the transition?

[Troy A. Clarke:]

Yes. Actually, we've already begun. And Denny Mooney, the head of our Product Development activity, is here with me. And I'll let Denny just step up here just in case I miss something. But we've already begun. We have, I believe, announced on previous calls that we will use SCR in a midrange engine. We have credits that get us into, let's just say, the mid-2014 kind of timeframe. And so you can expect that transition to take place between now and then. Stay tuned. We think we'll have a lot more to announce on that. But it is -- but our midrange engines will continue, maybe that was part of your question, and they will have an SCR system on them next year.

[Operator:]

Next question will come from Justin Ward with Wells Fargo.

[Justin Ward:]

Justin Ward in for Andy Casey. Can you guys walk us through the cost savings bridge from Q4 to Q1 for the Truck and Engine segments? Just kind of calling out the big buckets there, and maybe any swings in the warranty cost as well, from Q4 to Q1, that is?

[Andrew J. Cederoth:]

Obviously, the biggest movement from Q4 is going to be the warranty. And then, the next biggest bucket would be the SG&A savings. Those are the 2 biggest elements of that from Q4 last year to Q1 this year. There's better volume in the Parts business. But overall, volume is about flat from quarter to quarter. The improvement would really be in the warranty and in the SG&A.

[Justin Ward:]

Okay. Okay, and then in terms of the further structural cost savings you guys have identified, forgive me if you already gave it, but what sort of order of magnitude are you guys thinking by the end of 2013?

[Andrew J. Cederoth:]

I don't know that right now. Again, I think, Troy summed it up best. It's better to take this quarter-by-quarter. We established a goal to take out $175 million of structural cost. We put plans in place to achieve that. What we're working on now is, as Lewis alluded to, is kind of a 12-week analysis and benchmarking process to identify what those next buckets are, and then we'll begin to take and address those. So right now we haven't really quantified what those opportunities are.

[Justin Ward:]

Okay. And then, real quick, the EBITDA guidance for Q2. You guys called out the field campaign is baked into that. Are there any other onetime items, either positive or negative, baked into that?

[Andrew J. Cederoth:]

No. We'll continue to pay NCPs in Q2. We will continue to have some cost associated with closing Garland. We do expect, with the sale of Mahindra, to record a benefit from that in Q2. But those are the big puts and takes.

[Operator:]

And next, we'll hear from Adam Uhlman with Cleveland Research.

[Adam William Uhlman:]

I guess, first of all, A.J., just a clarification on the accelerated depreciation that we saw this quarter. Is that a cost that carries forward until we sell those assets, or is this just a onetime catch-up in the quarter, and then we go back to the normal level?

[Andrew J. Cederoth:]

Let me break that into pieces. The 15-liter is finished. We completed production of the 15-liter, actually, in December. So those were really November and December costs. Those are gone. And as I just answered, we'll continue -- we'll have a few costs next quarter associated with the closing of the Garland facility, and then those will go away after Q2. Then, we'll actually start to see some benefits flow through the bottom line as our manufacturing costs will be lower as the year progresses on.

[Adam William Uhlman:]

Okay, great. And then, could we begin for the medium duty business a little bit here? Why were the orders so soft there? And the retail share fell a lot, and then, broadly speaking, what sort of magnitude of recovery are we expecting in the second half of the year, both with the medium duty and the bus business as well as the heavy-duty truck business, if I can lump those all together?

[Troy A. Clarke:]

Well, on the medium duty side, our business has been -- from a share standpoint, it's been really just impacted by the overall challenges that the company's had as kind of the spillover impact with many customers and many segments from our heavy-duty quality issues. But clearly, that cloud is lifting now. The biggest segments that have impacted are leasing as well as government, and we've taken very serious corrective actions here over the last couple of months in order to turn that around. The other area has been on the dealer side. Our dealers have had a lot of concerns and a lot of issues with the success that's been laid out here on the phone today. We have put a program together with our dealers to replenish medium duty inventory here, and that will happen in the second and third quarter. But our inventory has fallen almost 40% at the dealer level. So the actions we have in place will work, and we'll be growing share here, certainly, in the remainder of the year on medium duty.

[Unknown Executive:]

And then, actually, on bus, I think we had a pretty good quarter on bus. I think we actually -- I'm just flipping through my notebook here trying to find the numbers, but we held our own, I think, or maybe picked up a little bit on bus. We had a very full quarter. A lot of good orders, and that's why I think we've kind of turned the corner on that.

[Lewis B. Campbell:]

Your question on Class 8, it's very difficult, with all of the little pieces right now, to predict the shares. As A.J. and Troy mentioned, we're just looking at this 1 quarter at a time. But I will tell you this

[Operator:]

The next question will come from Eric Crawford, UBS.

[Eric Crawford:]

You touched on it earlier with Justin's question. But I was hoping we could talk a bit more about the warranty expense. It looks like you had a $40 million adjustment to pre-existing warranties. Really nice progress there, but could you give some more color on what contributed to that adjustment? I see in the Q there was a supplier issue there.

[Andrew J. Cederoth:]

Yes, let me take that in some pieces. And some of that is just the way that we characterize the expenses. We actually had a very sizable vendor recovery as one of our warranty issues was relative to a purchased component. During the quarter, we reached agreement with that vendor, and we had a fairly substantial recovery from the vendor. Actually, more than we had expected the expense to be. As a result, we trued up the expense to reflect the size of the recovery. Unfortunately, the expense shows up in pre-existing warranty, and the recovery is blended against normal warranty expense. So they net out, but the optics make it look like pre-existing warranty was higher than we had been -- really, it truly was. So that's the big moving part there. We did true up a couple of field campaigns in the quarter. But overall, there was no real significant change in the warranty accrual for the quarter. The noise you're seeing there, really, just reflects the accounting.

[Eric Crawford:]

Perfect. You'd cited improved repair cost per engine. I was wondering if you could give us any metrics for us to frame or quantify that improvement.

[Troy A. Clarke:]

I'll tell you what, why don't we get back with you on that? Let us figure out how to answer that question. We really just don't share that, and I don't think anybody else in the industry does as well. But obviously, I don't want to walk away from your interest in the subject or the magnitude of the improvement we've made, because it's pretty substantial. As we've talked about last time -- actually, our customers don't see a higher repair incidence on our vehicles than they do with some other people's vehicles. But what really brought this whole quality issue to the forefront -- and arguably, I think we tried to be more transparent with it than we may have been in the past, was the fact that we had a key component or 2 that turned out to be very expensive to fix. And in fact, those repair costs are what's reflected in the field campaigns that I've indicated where we're currently underway and the field campaign that could potentially come or that we might consider at some point in time that A.J. referenced to earlier. So the data itself, maybe, is not as significant as the fact that it's kind of skewed by kind of 2 parts that, again, we warrant the parts. So we're going to do what we've got to do to support our customers, but they're not cheap parts. They're 2 rather expensive parts. That said, all the improvements that we've made, and the majority of those things are actually underway prior to the end of last year, our fiscal year, we are really seeing the benefit of having kind of taken those actions in that time frame and putting that behind us.

[Eric Crawford:]

Understood. And one last one. I know Andy had asked earlier about the defense business, and sorry if I missed it, but did you address -- or could you address cadence in military revenues in the year? Is that still expected to be pretty evenly spread?

[Andrew J. Cederoth:]

Yes. We -- typically, we see a big increase in our military business in the fourth quarter. Kind of given that we had -- we've taken our revenue slide down to about $750 million, we had -- I think I said 225,000 -- the number was really more like 215,000 in the first quarter. So I think you'll start to see military revenue go down in Q2 just a bit. But we feel, as Archie said, we feel very confident about the $750 million for the year.

[Operator:]

And we have time for one final question coming from Seth Weber with RBC Capital Markets.

[Adam Nielsen:]

Adam Nielsen on for Seth here. Just a question on ICT+ transition here. It sounds like you're pretty pleased with the initial feedback from customers here. How are you feeling about early indications on pricing? And how are you thinking about attacking market share versus margin and pricing there?

[Lewis B. Campbell:]

Well, the initial feedback, as you said, has been positive on the ISX. And with the MaxxForce 13, the initial vehicles are being built in our test fleet. We intend to be competitive on pricing. We don't see any nasty price wars going out in the marketplace right now. We've met with a lot of customers who -- they like our company, they like our brand, they like our dealers. They want to do business with us, they're just waiting for us to demonstrate to them that we've got this right. So as that confidence builds, we think we'll be able to get our market share back. We don't intend to do that by sacrificing margins.

[Adam Nielsen:]

Sorry if I missed it, but did you give a guide to expected market share for the full year for Class 8?

[Lewis B. Campbell:]

No, we did not.

[Operator:]

And that will conclude today's question-and-answer session. I'll turn the call back over to your host for closing remarks.

[Heather Kos:]

Okay. I'd like to thank everybody for joining us today. And if you have any follow-up questions, you can contact myself, Heather Kos, or Randy Diaz. We'll be around all day. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude today's call. Thank you for your participation.