Navistar International Corporation
Q4 2014 Earnings Call Transcript

Published: 16 Dec 2014

[Operator:]

Good day, ladies and gentlemen. And welcome to the Navistar's Fourth Quarter 2014 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I’d now introduce your host for today's conference, Kevin Sadowski, Vice President of Investor Relations. Please go ahead, sir.

[Kevin Sadowski:]

Good morning, everyone. And thank you for joining us for Navistar's fourth quarter 2014 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 today, I'd like to cover a few items. A copy of this morning's press release and the presentation slides that will be use 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 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. I hope most of you have had a chance to meet Kevin Sadowski. He replaces Heather Kos, as our Vice President of Investor Relations, your new point of contact. On slide five, since our last call, we have had some other important leadership changes at the executive level here at Navistar. Last month, we announced that Jack Allen, our Chief Operating Officer is retiring. With Jack’s departure, Walter Borst, our CFO is taking on broader responsibilities. His portfolio now includes business development, strategic planning and merger and acquisition activity. We also elevated two proven leaders, Persio Lisboa, Navistar veteran, who previously was our Chief Procurement Officer. He is now President of Operations. His key areas of responsibility include product development, procurement, manufacturing and global operations. He will also lead our enterprise-wide lean effort. In addition, Bill Kozek, has been promoted to President, Truck and Parts. For the past year and half, Bill has led our North America truck activities, including sales and marketing and during this time he has lead our efforts to go-to-market with our new SCR product. Now, Bill’s leadership has expanded to include customer service, product planning, Navistar defense and global export. Actually, I am thrilled to work with these three leaders as we continue our journey to return to profitability. Let’s take a look at our agenda on slide six. This morning, I'll start with an overview of our progress in the quarter. Walter will go over our financial results with you. Then I'll be back to summarize before we move into Q&A. Bill and Persio will join us for the Q&A part of the call. Turning to our results for Q4 on slide seven. At high level I would summarize the quarter as one marked by continued progress. We maintained the steady focus on improving our core North America Truck and Parts business. Our performance is on track and trending in the right direction. This has been all year. Let me share some highlights. For the fifth straight quarter we were within our adjusted EBITDA guidance range. Truck sales were up quarter-over-quarter and they have been up sequentially each quarter of the fiscal year. Q4 was also another good quarter for used truck sales. All year sales were up 18% year-over-year. This performance contributed to a record used truck sales for the year. With higher new truck sales, we have seen our used truck inventory increase as we work through some tridents related to our legacy product. So increased used truck sales are important to manage the interest of many stakeholders. In fact, we believe Diamond renewed our used truck reconditioning program launched in the summer is a real game changer. It’s actually creating a lot of interest in the marketplace and has raise the bar by providing our used truck customers with many attributes of a new truck experience. In addition, we had record commercial parts sales for the quarter, capping off another great year of parts performance. Warranty spend continues to go down. It’s a result of declining cost of repair due to better repair practices, newer EGR engines in the warranty period and the better quality of both the EGR engine that remained under warranty, as well as outstanding new product quality. In fact, our ProStar quality is continuously improved. The quality of our 2015 model year truck is improved 30% compared to our 2013 model year. We continue to over perform in structural cost reduction. Our Q4 cost reductions were consistent with Q3 and we beat our $300 million target for the year. Significantly, we have taken out nearly $650 million in structural costs over the past two year. We achieved our manufacturing cost improvement goal of $50 million to $60 million. Our vehicle assembly plants continue to improve their efficiency, lower overtime and deliver better quality. In addition, we also announced yesterday that we are closing our Indianapolis foundry where we produce engine blocks and heads. Buying these castings will reduce our engine costs, improve our overall manufacturing capacity utilization and free up additional resources to invest in our core North America Truck and Parts businesses. This action is another part of our efforts to eliminate non-core operations as we continue to improve our cost structure and return the company to profitability. In addition, we achieved significant year-over-year material cost savings. As matter of fact, we have largely offset the add-on cost of SCR through these actions going into 2015. These savings were driven by outstanding cost functional collaboration between procurement, engineering and manufacturing. And under Persio leadership, our goal has declined even more opportunities for these functions to improve our business results in the year ahead. Many of these achievements can be attributed to the progress of our lean enterprise efforts. Meanwhile, the economic climate in Brazil remains weak. MWM's performance was a drag on our Q4 results. However, our team in South America has restructured the business to reduce costs and resize our operations. In China, our engine joint venture with JAC began production this quarter and a new state-of-the-art facility in Hefei, which also has a research and development center. We are very excited to partner with JAC to bring clean engine technology to China. As per cash, we feel good about our performance in our overall cash position. We had a number demand on cash in the quarter as we repay the remaining portion of the convertible debt that came due last year and as I mentioned earlier, we have drove an increasing used truck inventory. We cap further into our used truck facility available to us to NFC, but we have maintained the billion dollars in cash for two years now as we went through our turnaround. Given our progress and delivering improvements to our core business, we believe that we can now run the company at more historical cash balance levels and Walter will touch on this subject in his remarks. Now let’s turn to the Industry on slide eight. For our fiscal year just ended, the Industry came in above the top of our range. In 2014 Class 8 volumes reach the highest levels since 2006. Improved new truck fuel economy, combined with rising tonnage and improve transportation, company profitability contributed to higher demand for Class 8 trucks. Likewise, modest expansion in consumer goods spending and steady gains in construction point to a favorable growth conditions in the medium truck market as well. From a volume standpoint, we benefited from a now complete line-up of SCR products and a strong market. Our Class 8 chargeouts increased by 14% year-over-year in Q4 and they are up 12% for the year. We saw a strong whole year performance in Class 8 because this is where we’ve had SCR products in customers’ hand for longest and our trucks continues to gain success. In Class 6-7, chargeouts were up over 41% in Q4 year-over-year and up 9% fiscal year ‘14 compared to the previous year as we rolled out the various ISP configuration. We expect medium-duty to follow the same trend as heavy as we continue to launch additional body in chassis configurations, wholly completing this transition in the first half of 2015. We also finished the year with a strong backlog of orders. Our traditional markets were up 24% for the full year fiscal year ‘14 compared to fiscal year ‘13. Rebuilding sales and market share continues to be one of our highest priority and in our world, it’s about the customer. Customers are focused on uptime, fuel economy, weight, driver satisfaction and we think we have the right products to meet our customers’ needs. Our quality is the best that it has been in a decade and our fuel economy is at or near the top in the industry in getting better. Specifically on the product front, we recently announced a new fuel efficiency package for the ProStar, we call it the ProStar ES and it's available for order right now. Our engineering team studied and tested hundreds of vehicle powertrain and component combinations to develop an integrated package that maximizes fuel efficiency. And also this quarter, we started taking orders for the propane version of the CE Series school bus. And as we mentioned in our last call, alternative fuels would become more important to this market. And this is the first school bus specifically engineered to run on propane without sacrificing the power, performance or durability that our customers have come to know with the diesel engine. Bill and his team work hard to get on every deal every day, every channel where we compete, Class 8 leasing and rental, vocational deal in bus. And we've come a long way in strengthening customer relationship across these channels and we’re doing all of the right things to deliver value to our customers. We’re confident that these actions will drive higher volume and market share. However, we have realistic growth plan. Even though share hasn’t come back as quickly we’d hope, we lowered our breakeven points so that we remain on track to exit 2015 within our guidance of 8% to 10% EBITDA margin run rate. Before turning it over to Walter, let me say that I’m part of the Navistar team. Because of their hard work and commitment, we have accomplished about 10 years of change over the course of the last two years. Based on this, I feel confident that we’ll continue to deliver results needed to return Navistar to profitability. Now, let me turn it over to Walter.

[Walter Borst:]

Thank you, Troy. Good morning, everyone. Let’s turn our attention now to the financial results. Fourth quarter revenue grew to $3 billion, up 9% compared to the fourth quarter of 2013 largely driven by the improvements in our core North America truck operations. Revenues from our North America truck segment grew 16%, reflecting a 23% increase in traditional truck chargeouts. Sales from our North America commercial parts operation increased 3% in the quarter. However, this increase was more than offset by lower military and Blue Diamond parts sales. As a result, North America parts segment revenues increased 4% year-over-year. Revenues from our global operations segment were essentially flat. This reflects lower engine volumes due to the economic conditions in Brazil, offset by higher truck volumes in Columbia. EBITDA for the fourth quarter was $66 million as compared to a loss of $227 million in the fourth quarter of 2013. The significant year-over-year improvement in our results reflects the increase in sales as well as the impact of lower warranty expense and reduced structural cost. As shown on slide 11, adjusted EBITDA for the quarter was $116 million within our guidance range. This is the fifth consecutive quarter we’ve met or exceeded our EBITDA guidance. There are few adjustments that I’d point out. One we reversed $10 million of prior period warranty reserves, primarily resulting from extended warranty improvement in our big bore engines. And two, we also had $60 million of one-time charges in the quarter, including $29 million principally against inventory related to actions to right size the Brazil truck operations and $27 million of restructuring, asset impairment and other charges related to yesterday's announcement of the closing of our Indianapolis foundry and other ROIC actions. In addition in the first half of 2015, we would expect up to $40 million of additional charges for accelerated depreciation to flow through our results, stemming from the exit of this facility and other related impact. These actions are expected to generate annual operating savings of $13 million. Turning to Slide 12, we continue to the improvements in our core North America truck business. North America truck segment lowered its year-over-year loss by $300 million. Contributing to the improvement in the segments results were higher truck sales, reduced warranty expense and lower structural costs, as well as the non-repeat of certain impairment charges. The North America parts segment profit of $143 million was essentially flat compared to a year ago. A loss of $33 million in the global operations segment was primarily due to the $29 million charge I mentioned earlier. The financial services segment continues to show strong results. Segment profit in the fourth quarter improved to $26 million, reflecting an increase in the net financial margin from higher average finance receivables balances during the quarter and an increase in interest earned on an intercompany loan. Slide 13 graphically depicts our key operating metrics. As you can see, all of the metrics continue to show strong year-over-year improvements. Manufacturing revenue in the fourth quarter was up 10% compared to last year. In fact, revenue grew each consecutive quarter of 2014. In 2015, we believe revenue will continue to improve as our new product gained traction in the market. In the fourth quarter, structural cost as a percent of manufacturing revenue were 11.4% compared to 15% in the fourth quarter of 2013. In 2014, structural costs came down $311 million compared to a year ago. Please keep in mind this in on top of the $330 million of structural cost we took out of the business last year. Warranty expense continues to be a good story as our new products continued to trend favorably. For the year, warranty expense as a percent of manufacturing revenue was 3.7%, achieving our targeted reduction of four percentage points versus 2013 ahead of schedule. Importantly, we were in a position to reverse $39 million of prior period warranty accruals during the second half of 2014 into more favorable warranty experience. The adjusted EBITDA margin for the quarter was 3.9% versus nearly breakeven in the fourth quarter of 2013. EBITDA margins were slightly lower than in the third quarter, reflecting lower volumes and inventory adjustment at our Brazil engine operations as well as an increase in our used truck reserve at year end resulting from higher used truck inventory levels of $300 million. Liquidity remained strong. As shown on slide 14, we ended the quarter with manufacturing cash, cash equivalents and marketable securities of $1 billion. During the quarter, adjusted EBITDA was more than offset by the cash used for capital expenditures, interest payments and pension and OPEB contribution. Also in the quarter, warranty cash payments exceeded warranty expense. And cash was negatively impacted by favorable foreign exchange rate fluctuations principally in Brazil. Meanwhile, net working capital was favorable with volumes. In October, we repaid the remaining $166 million of a 3% convertible notes that came due in the month and borrowed an additional $91 million from our captive finance subsidiary NFC to support our used truck activities. Importantly, free cash flow was flat in the quarter after adjusting for the repayment of the convertible notes and the incremental inter-company funding activity. Slide 15 depicts our historical first quarter manufacturing cash level. As we have previously stated, during the transition of our engine strategy in the past two years, we've been maintaining a cash balance well above the minimum level we feel as necessary to absorb quarterly and seasonal cash fluctuations and adequately run the business. Now as we near the end of the turnaround and our company cash flow both Q1 will be stronger, we no longer feel in any such high cash balances as necessary. We also don't have significant short-term debt maturities for which we need to hold cash. Therefore, we would expect manufacturing cash to return to more normal levels in Q1. As such, we expect manufacturing cash at the end of the first quarter to be in the range of $700 million to $800 million. Consolidated adjusted EBITDA is expected to be in the range of zero to $50 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 OPEB funding to be slightly lower than in the fourth quarter. Net working capital is expected to be unfavorable in the first quarter, due to lower volumes reflecting the lower number of operating days due to the winter shutdown, as well as higher used truck inventory. Cash flow is expected to improve by over $100 million in 2015, compared to the first quarter of 2014. Slide 17 provides a report card and how we performed in 2014 on certain key metrics established a year ago to improve EBITDA. As Troy previously mentioned, industry volumes came in just above the top of our range and were 342,000 units in 2014. We expect industry volumes to continue to grow to 350,000 to 380,000 units in 2015. During 2014, additional market share came in at 17.5%, not recovering as quickly as we had anticipated. Going forward, we expect continued market share improvements over time. Material costs continue to track in the right direction. After offsetting the majority of incremental SCR costs with prior year savings, we anticipate material costs savings to favorably impact the bottomline in 2015. We over delivered on our structural cost savings for the second year in a row and we continue to trend favorably towards our structural cost goal of less than 10% of manufacturing revenue exiting 2015. As I mentioned earlier, we hit our target warranty reduction this year with particularly strong performance in the last two quarters. In aggregate, these factors continue to trend favorably and adjusted EBITDA margin for the fourth quarter was almost 4 percentage points better than the fourth quarter of 2013. Turning to slide 18, we've included some additional information for the upcoming fiscal year. In 2014, the under-funded status of our OPEB plan increased by approximately $300 million, reflecting higher claim experience, while the funded status of our pension plans remained relatively flat. The discount rate used to determine the value of our pension and OPEB obligations increased to 3.7% from 4.1% in 2013. In 2015, we expect postretirement expense to be relatively flat compared to 2014 and pension cash contributions to be around $148 million lower than last year. We are forecasting capital expenditures to be approximately $150 million in 2015. While manufacturing interest expense is expect to be down about 5% compared to 2014. To summarize, our core operations continue to improve. In 2014, we had a number of notable accomplishments, which included growing revenue each consecutive quarter of the year, lowering our breakeven point by reducing structural costs and warranty expense, effectively managing our cash balances and extending our debt maturity profile. And we remain on track to achieve our EBITDA margin target of 8% to 10% exiting 2015. We look forward to sharing more specifics about our future plans at our Analyst Day in February. For those who attend you will hear more about our actions to further improve our business. You get the latest update of our product, a chance to see examples of our material cost improvements, a first-hand look at how we've improved quality and reduce warranty costs, tours of our facilities and a demonstration of on command connection, our remote diagnostic tool that is proving to be a real competitive advantage for us. I’ll stop here and turn it back to Troy.

[Troy Clarke:]

Okay. Hey. Thanks. As Walter just mentioned, 2015 another important year for us. We intend to continue our trajectory of performance improvement, while maintaining more than sufficient liquidity to run our company day-to-day. As we stated many times, we expect our -- to exit 2015 within our guidance of 8% to 10% EBITDA margin run rate. But let me make one thing clear, that’s not the stopping point for us, rather it's just the beginning of the next phase of our journey to becoming a great truck company. Our customer, that means being the uptime leader and keeping their trucks on the road, our shareholders just delivering a solid return on investment and for employees, it's a place where they can be a part of a winning team. So we really look forward to hosting you at our Analyst Day in February and give you more insights into our roadmap to achieve our goals for 2015. With that, let me turn it back to Kevin.

[Kevin Sadowski:]

That concludes our prepared remarks. Before we go to question, I would like to let you know that in addition to Troy and Walter, also joining us today is Persio Lisboa, our President of Operations; and Bill Kozek, our 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’re now ready to open the line.

[Operator:]

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

[Stephen Volkmann:]

Hi. Good morning, everybody.

[Troy Clarke:]

Good morning.

[Stephen Volkmann:]

I guess, I’ll take it off if its, okay, with the market share question and you talked about the fact that that’s been a bit below your plan this year? And I guess, I’m just trying to get a little more color and is the full line of product that you think you need sort of available now and if so, what are you hearing from your customers, why is this kind of slower than we expected? Is it something to do with trying to get reduce trucks? Is there some pricing issues? Can you just try to give us a sense of what you’re hearing out there, because it seems like with full availability and with the coming engine that people should be willing to maybe move a little more strongly there? So whatever thought you might have would be great.

[Bill Kozek:]

Sure. This is Bill Kozek. Excuse me, profitable market share really is one of our most significant and important goals for 2014 and 2015 and beyond. We saw last year in our -- in the heavy segment, we were up 1.4% from 2013 to 2014 and this is the segment that we’ve had the SCR engine of the longest. Severe medium duty and bus shares were down 2014 from 2013 and that was primarily due to the lack of the SCR offerings at the beginning of the year. So throughout the year, we continue to add SCR configuration to our product lines. We are not done. We are closer to being done but we are not done. We still have some segments that we don’t have an SCR product in, that would be completed in 2015. But really what’s approved of our performance is going to be is the quality of the product and the product quality is extremely strong as both Troy and Walter said. So we’ve seen increased uptime. We’ve seen increased fuel efficiency and our customers, all we have to do is get the truck into our customers’ hands, and we expect that our market share will increase. And so again that’s both Cummins’ product and our Navistar engine as well.

[Stephen Volkmann:]

So maybe this is another way to look at it. And I assume you guys have some sense of your market share in backlog, the order number I guess is public. And you guys know what your orders are. So is your market share of the order book higher than today’s retail share?

[Bill Kozek:]

It’s hard to say from the order numbers because you don’t know from the particular orders whether or not those are build immediately or those are build throughout 2015 and beyond. So it's hard to make a correlation between those two numbers. What I can say is that our share in the second half of 2014 was better than our share in the first half of 2014. So we’ll be able to increase our share as we continue to roll out our product -- our SCR product line.

[Stephen Volkmann:]

Okay…

[Troy Clarke:]

Steve, this is Troy. Let me just give you kind of how I look at it just real quickly. I think the Class 8 on highway stuff, those plans worked well for us. And I think we see those orders, kind of as we had forecast. Now the market ran away from us a little bit as it was a little bit stronger. So we may have to reindex ourselves there in specific with regards to the midrange product, we are still launching configurations in particular the low cap version of that. And those configurations will be finished launched through the first half of 2015. So there is some additional market. I think coverage there that we are looking to get and that particular type of product is very important in the leasing and rental fleets, which is a real opportunity for us. And also, it's really important for our dealers. On the bus stuff, we are a little different than everybody else because we toss the bus numbers in with ours. We did real well this year. So we are very confident the bus stuff is moving in the right direction. I don't see that we have a real issue with regards to pricing in the market. It really is a function I think of just -- and then the other part is the severe service. We did just launched the SCR product in the severe service just this past summer and those orders are starting to come. But kind of like we experienced some of the clasping of immediate duty there seems to be a gap, right there seems to be a gap, but they are starting to come. So I think from what I look beyond the board, I think I’d see some very encouraging signs and basically across all segments.

[Stephen Volkmann:]

Okay. And finally just because I asked it maybe [Technical Difficulty]. Is the used equipment a hurdle trying to find the new home for used equipment, is that sort of naturally a headwind on market share do you think or not?

[Bill Kozek:]

This is Bill again, Steve. No I don’t think so. We do have conversations. We’ve been selling used truck from the mid-70s. So with the EGR engines coming out, it is part of the conversation. But is it holding its back from market share, I don't think so. And we do expect -- as we improve our share, we expect our trade receipt to go up and the use in inventory to grow. But as Troy mentioned, we had a record year and we expect 2015 to be a record year in terms of sales as well. It helps that the used market is still very strong. But we’ve taken actions to increase our capability, increase the capability of our dealer network. And that includes Diamond Renewed, which is -- think about that as a certified pre-owned program. And then adding on-command connection and the used truck warranty, so we are doing all the right things to move our used truck inventory. And I don’t see that is a huge impediment to our market share.

[Stephen Volkmann:]

Okay. Thanks guys. I’ll pass it on.

[Bill Kozek:]

Thank Steve.

[Operator:]

Thank you. Our next question comes from Jerry Revich of Goldman Sachs. Your line is open.

[Jerry Revich:]

Good morning.

[Troy Clarke:]

Good morning.

[Jerry Revich:]

I know you’ll say more at the Analyst Day. But I am wondering if you just give us a big picture overview just a bridge between 4% EBITDA margin this quarter versus 8% to 10% you expect at this point a year from now. How much of that is manufacturing cost savings? How much of that is lower trading costs? Can you just give us broader buckets?

[Troy Clarke:]

Yeah, Jerry let me do that and you're right. We will talk more about it in February. But the pieces are the same year, we mentioned on the call a little earlier that we’d hope to get more the material cost savings down at the bottom line as we complete our rollout of the SCR product that those costs were a headwind for us last year couple of years but we’re largely passed that now. So we should be seeing more of the material cost performance falling to the bottom line. We’ve announced a couple of things on the manufacturing side, including yesterday's announcement in Indi as what we've previously announced regarding the move of some of our Huntsville operations up to Melrose Park. And so we’ll see the benefits of that in 2015 and beyond. Structural cost is still at 11.4% of sales. We want to get that below 10 ultimately. So there's no more work to be done there including getting our sales up which helps with the denominator of that equation. So this is going to be both a sales and a cost led approach to get to that 8% to 10% margin by the end of 2015. And we hope that some of our other operations will continue to do better as well. Parts has been a real strong segment for us and we’ll continue to do well there in ‘15 based on our plan. And warranty continues to be a good story. We've had a couple of really good quarters there. So hopefully we’ll be able to hold those kind of levels or continue to improve on them.

[Jerry Revich:]

And Walter on the related note, where are you folks now on the progress on the first trade-in cycle and how much of a tailwind are you counting on just in terms of different types of vehicles being traded and hopefully 12 months to 18 months from now versus today. Can you just update us where you stand?

[Bill Kozek:]

Yeah, this is Bill again. About 20% of the MaxxForce 13. There have been -- have changed stands into a second owner. And now we have some in inventory as well. So we are kind of through that -- through the initial number of trucks that we build in 2010 and early 2011. And that puts us, like I said about 20% through the issue. And I think moving forward we are going continue in this year, next year and really into ‘17 at least to make sure that we can sell those used truck and fix used trucks and then sell the used truck into the market.

[Jerry Revich:]

Thank you.

[Bill Kozek:]

Thanks Jerry.

[Operator:]

Thank you. Our next question comes from David Leiker of Baird. Your line is open.

[Joe Veruwink:]

Hi. Good morning. This is Joe Veruwink in line for David.

[Troy Clarke:]

Hey Joe.

[Joe Veruwink:]

Wanted to start on profitability this quarter. So on sequentially higher revenues, EBITDA declined. Now it sounds like a lot of that and then beyond on the used inventory side. So wondering maybe if you strip out that or you don’t then just look at operationally truck revenue sequentially versus truck EBITDA sequentially. What sort of contribution are you delivering on incremental revenue dollars at this point?

[Bill Kozek:]

Well, I think, you asking about kind of what are the margins on the trucks looking like maybe period-over-period is that the fact that what you are getting it.

[Joe Veruwink:]

Yeah.

[Troy Clarke:]

Yeah. So we did take additional reserve on used trucks at the end of the quarter as I mentioned in my remarks that brings down the overall margin for the quarter a little bit. If we strip that out, we probably would have run similar margins as in the third quarter. The other piece that impacted our fourth quarter results is that we did do some inventory adjustments in Brazil, as well as the economic situation there is continuing to impact volumes. I think if you strip out those two elements Q4 would look pretty similar to Q3.

[Joe Veruwink:]

Okay. That make sense and then, clearly different OPEB. If I look at your inner company engine sales, it looks like Navistar engines are about 40% of your own volume right now. Is there are a number that you think of either vertical integration share levels of utilization that’s necessary for the engine operation to meet its targeted ROIC.

[Troy Clarke:]

That’s -- this is Troy. That -- we are going to probably talked to you guys more about that at our Analyst Day. So I want to answer that with regards to a specific number, but I will answer it with regards to what we expect. We still sold a number of mid-range engines this past year with EGR and we see those mid-range engines continuing to diminish and drop-off eventually as the ISB fills a larger portion of the portfolio. So that's on the mid-range. So you will continue to see that mix drop. On the other hand, you'll see the mix of 13 liter versus 15 liter, or our homemade engine versus the ISX made by Cummins continued to increase as we go through the year, probably on a unit basis at, we will give you more detail on how that worked out, but that’s what we expect to be able to see. One other things that I have commented on in the past is that, we really just made this investment to get the 13 liter at basically SCR and one of the things, I think, we highlighted is that, we've now re-engineered the engine to take off lot of the EGR components with this reducing the cost of engine about $1400 a copy. So we’ve kind of made all that investment and so we just need to write that for a while anyway until we see what the next major investment hurdle might be that’s either driven by in a regulatory or performance improvement. So we are in a good spot, I think, we are just in the good spot today, we really don’t have any announcements to make, but certainly we are cognizant of what the variables are and what the root of the question you're asking is.

[Joe Veruwink:]

Okay. I’ll leave it there. Thanks guys.

[Operator:]

Thank you. Our next question comes from Andy Casey of Wells Fargo Securities. Your line is open.

[Andy Casey:]

Thanks a lot. Good morning and happy holidays everybody.

[Troy Clarke:]

Hey, Andy.

[Andy Casey:]

Couple of questions, I guess, around 8% to 10% EBITDA margin, you’ve answered these, I just want to make sure that my old brain is clear on these. In order to hit the 8% to 10% EBITDA margin, just again clarify the envision your breakeven work as likely to compensate for the slower NAFTA truck share gain in Brazil weakness or do you need some of that other stuff to kind of reverse meaning incremental NAFTA share gain or improve base Brazil activity?

[Troy Clarke:]

Yeah. We’ll hope that, Brazil would improve. That’s been an up and down market over the years. So it will come when it will come. It will come some point again. But we’ve really redoubled our efforts on the cost side as we saw the share improvements not coming as quickly as we had anticipated. You may recall, we started this year with the target of structural cost reduction I think it goes $175 million and we did over $300 million. So we are not backing away from the 8% to 10%. We will get there different way than what we had planned to do initially. We do expect both sales and costs to contribute to that and really all of our operations to do a little bit better in 2015. But we are surely not relying on a full recovery in Brazil to get there.

[Walter Borst:]

Yeah. Andy, we do count on some incremental volumes this year, okay. But that’s not the main driver of the plan. As Walter has indicated, there is probably a couple of points of margin associated with structural costs and manufacturing variable costs like associated with the foundry closing and plus the engine plants that we announced closure of last year we’ll get the full savings of that this year. There is a couple of points with regard to material costs, because now we can bring material costs to the bottomline because we were kind of just making up for SCR and we have the pipeline loaded with a lot of those, but there is just -- there is some execution risk there, but it’s the kind of thing that we've done very well. And then with regards to how warranty trending, certainly, we anticipate a point or two, now the point in that kind of range as well. So when you start adding it up. You can see the pickup of four or five, the real question is, with a little bit of tailwind from more volume that we’ve anticipated in the plan or a better turnaround in Brazil, kind of to my mind makes a difference between do we come in in the lower range or do we come in the higher range of the plan for the year.

[Andy Casey:]

Okay. Thanks for that, Troy and Walter. And then one additional question, it’s with the orders strengthened particularly Class 8 NAFTA markets? Presumably, we would start to see some pricing but it doesn’t seem like there's a significant amount of pricing out there and does that have to do with the timing of the orders being put into the production slots or is there something else going on?

[Bill Kozek:]

I think, I’ll take that. This is Bill. I -- the market is extremely competitive. I think, I have been in the industry for 28 years and I will tell you, there it’s a competitive today as it’s ever been. The trucks are better. You would think as we move forward and the growth in the industry really across the Board in heavy, severe and medium that we would still -- we will start to see more pricing. But, again, in the competitive nature that’s can kind of hold it down and today the orders you see are some of the large customers, large fleets putting in their orders and they typically have buying power, so you’re impacted by that. But, overall, I agree with you, we should see some improve pricing into 2015.

[Troy Clarke:]

Yeah.

[Andy Casey:]

Okay.

[Troy Clarke:]

Yeah, Andy. This is Troy. I think the market didn’t take a lot of price last year and I personally think it is just the timing think. All of us have basically been in the market and we’ve kind of somewhat rewarded our customers for giving us orders that stretch out and help us fill our order boards for longer periods of time and there is real value in doing that. And now I think order boards are returning to more normal flow rates not just for us but I think for everybody, our normal backlogs, I think, it's just a timing issue. I think we will see some positive movement on price over the course of 2015 top of the forecast what it is, I know what we baked into our assumptions, but I think that will some movement this year.

[Andy Casey:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from Jeff Kauffman of Buckingham Research. Your line is open.

[Jeff Kauffman:]

Thank you very much. Hi guys.

[Troy Clarke:]

Hi, Jeff.

[Jeff Kauffman:]

One detail question and kind of the broader question on the pre-existing warranties? The detail and I know, Walter, you were kind a hedging around this? But what was the amount of the increase in the used truck reserve?

[Troy Clarke:]

Of the, I wasn’t hedging around it, the increase is from a little lower around $265 million to a little over $300 million is the used truck reserve at the end of the year.

[Jeff Kauffman:]

Okay. Thank you. And..

[Troy Clarke:]

Hold on, hold on. That’s the inventory, right.

[Walter Borst:]

Yeah.

[Troy Clarke:]

Right. Okay. Right. Inventory.

[Jeff Kauffman:]

And the little bit on pre-existing warranties, I saw the $10 million reversal this quarter, but I guess, I was thinking it there might be a larger step down in that because the units in that population are down and the warranty experience is down? So can you help me through that calculation a little bit?

[Walter Borst:]

Well, the units are coming down. It’s far more precipitously over the balance of 2015, if you take a look at that warranty curve that we have provided you previously and that’s still a good at the situation and the costs are coming down. There is a lag a little bit on the expense side with cash, so we tend to focus internally on how the cash levels moving first. And so, we have seen those come down really every month since the warranty cash levels have come down every month since the beginning of the year. So hopefully that will continue to work for us overtime here.

[Jeff Kauffman:]

Okay. And one last question, what was the amount of the foreign -- foreign currency translation hit in the quarter?

[Walter Borst:]

I think it was somewhere between $10 million and $20 million.

[Jeff Kauffman:]

$10 million, $20 million. Okay, guys. Thanks so much and good luck.

[Walter Borst:]

Thanks, Jeff.

[Operator:]

Thank you. Our next question comes from Ann Duignan of JP Morgan. Your line is now open.

[Ann Duignan:]

Hi. Good morning, everyone.

[Troy Clarke:]

Hi.

[Ann Duignan:]

First question, just can we walk through the closure of the foundry business, the total cost of that closure, because I think, you called out that $13 million annual savings rate, but it seems like the cost to closure is going to be significantly higher than that? Can you just walk me through at the rationale for that closure?

[Walter Borst:]

Yeah. Ann, it’s Walter. We had a fair amount of excess capacity in that foundry. We have other sources both from the -- from suppliers, as well as machining tooling that we have in Brazil in-house and so, we felt that was -- it was time to move forward on that. The charges that we will see in the first half of 2015 are accelerated depreciation, so those are really non-cash amounts. So when you exclude the non-cash elements surely ten-folds well for us to take this action.

[Ann Duignan:]

Okay. That’s helpful to understand that. And then, since taking a step back, there is a lot of controversy out there in terms of the North America heavy-duty market being at peak or past peak of the cycle? Could one of you just comment on what you are seeing out there? What’s your expectations are, not just for ’15, but going forward and what your customers are saying, is this cycle sustainable for longer than prior cycles?

[Bill Kozek:]

Hey, Ann. This is Bill. We think 2015 will -- there will be 5% to 10% growth in the market both heavy and severe service and medium. Most of our customers are having very good years, fuel is down, rates are up, their utilization is strong. So they are expecting 2015 to be a good year and really it gets a little fuzzy after that, but we anticipate 2016 to continue to be a pretty decent year. We have get greenhouse in 2017 that not 100% sure what that’s going to do to the market, but we don't anticipated a huge increase in the costs of the vehicle. So it probably isn’t a lot of impact on 2017 greenhouse gas. And frankly, it might be a good thing, because fuel economy will continue to get better. So, overall, the markets, we are pretty bullish on the market.

[Ann Duignan:]

And are you seeing any or hearing anything in the oil and gas sector or you just didn’t really participate in that sector and you made so, maybe there is less downside risk there?

[Bill Kozek:]

Yeah. From a heavy standpoint we don’t really participate in the oil and gas sector, and this whole reduction in oil is going to came on pretty quick and haven’t seen a whole lot of impact on at least our medium or severe business, but certainly, the price of oil good at the pump and exploring not as good.

[Ann Duignan:]

Okay. I will pass it on from there. Thanks. Appreciate it.

[Bill Kozek:]

Thank you.

[Operator:]

Thank you. Our next question comes from Ted Grace of Susquehanna. Your line is open.

[Ted Grace:]

Good morning, guys.

[Walter Borst:]

Hi, Ted.

[Ted Grace:]

Firstly, I was hoping to follow up on one Andy Casey’s question on pricing and I guess, anecdotally we’ve heard comments that even though pricing might not have improved as much as expected, discounting has improved and it all that’s to margin, but could you just talk about kind of the discounting side of pricing, was that -- were we talking about gross pricing before or net pricing?

[Walter Borst:]

I was talking about net pricing.

[Ted Grace:]

Okay. And so would you expect kind of the first thing to happen will be a reduction in the discounting or do you think, I am just wondering how that dynamic works, because it maybe doesn’t matter kind of ultimately the net pricing that we want to gain margins?

[Walter Borst:]

Ted, I think, that’s it. Ultimately, it’s the net of that pricing.

[Ted Grace:]

Okay. Thank you for that point of clarity. And then the second thing I was hoping to ask is and I am sure you will talk about this at the Analyst Day? But if 2015 proves to be kind of a cyclical peak in the North American market? Could you give us at least some framework for how to think about margins in 2016, I know, you haven’t given 2016 guidance, but if we were to exit at the 8% to 10% target rate, just any kind of framework you could at least kind of sketch out for us would be helpful at this point?

[Troy Clarke:]

Yeah. Probably little early to be doing that, Ted, I guess, that comes up between now and end of February. But, I think, at a high level, we want to make sure that we are making hay here when the industry is strong and lowering our breakeven point has been a real focus in internally, because ultimately this industry does go through cycles. We don't know where the end of that cycle is going to be but, we need to be prepared for when ever it comes. So maybe as we talk about the building blocks here in February we can try to lay a little bit more out around that.

[Ted Grace:]

Okay. And I recognize a hard question. I could just sneak a different one in, because I would be. Could you just walk through the restructuring actions in Brazil, I know you highlighted the $29 million of costs you took, it sound like most of that was inventory, but there were actual changes in the operations we should think about or was it really just kind of inventory write-off or write-down?

[Walter Borst:]

Yeah. This quarter was principally inventory write-off particular in our truck operations. We felt we had excess inventory there and needed to mark that down. In prior quarters this year we had taken some actions around our engine operation in Brazil and there was cost-cutting associated with that to lower the breakeven point of those operations. But year-end it was principally related to inventory levels in our truck operations there.

[Ted Grace:]

Okay. So incrementally nothing really operational in 4Q just the inventory dynamic?

[Walter Borst:]

That’s correct.

[Ted Grace:]

Okay. Great. Thanks a lot guys. Good luck this quarter.

[Walter Borst:]

Thanks, Ted.

[Operator:]

Thank you. Our next question comes from Andrew Kaplowitz of Barclays. Your line is open.

[Andrew Kaplowitz:]

Good morning, guys.

[Troy Clarke:]

Good morning.

[Andrew Kaplowitz:]

Troy, can you step back and update us on what major structural changes that Navistar might still need to get done? Ultimately, I guess, what I'm trying to figure out is, when you think the noise in each quarter might die down a little bit? You’ve talked about some lasting into the first half of next year, but you announced the closing of foundry yesterday? Ted, asked the question about Brazil, does -- do you still need to go through major structural changes there or anything else internationally when it comes down to it?

[Troy Clarke:]

Yeah. Hey. Great question, Andrew and so, let me answer it from an overall standpoint. We anticipate that kind of background noise and allow the restructuring kind of stuff that you’ve seen with regards to impairments and write-downs and stuff like that will diminish as we go through the fiscal year of 2015, okay. So, yes, there is more that we need to do in Brazil. We’re not announcing anything today. We will talk to you more about that in our Analyst Day. There is also some more that we need to do internal to North America with regards to capacity utilization. We are not announcing any that -- of that yet today either. But these things become smaller as we go forward. I think we picked up all -- most of the big pieces have been picked up and worked through as we speak. So companies get pretty lean, companies get pretty simple, companies get very straightforward and that’s -- that kind of company we meet so that we can really point to these margin targets that we’ve established especially as we go pass the end of ‘15 and really move to the -- move up into the range that we really need to get the company. So stay tuned. I can’t give you too much on the call but we rescheduled the Analyst Day for a reason. We have an intention to share some more insight with you all. And I think you’d be satisfied with a better understanding of our direction.

[Andrew Kaplowitz:]

Okay. That’s helpful Troy. Maybe if I could ask the 2% to 10% question in a different way. Can you talk about your utilization across your businesses in FY ‘15, especially given the strength of the market here in North America. You should experience better absorption. So when do you think your North American truck business should be breakeven or better and stay breakeven or better. Is that sort of second half or so for that particular part of the business?

[Troy Clarke:]

You should expect that for the truck business in the second half, yes.

[Walter Borst:]

Yes.

[Andrew Kaplowitz:]

Okay. It’s enough. Thanks guys.

[Operator:]

Thank you. Our next question comes from Nicole Deblase of Morgan Stanley. Your line is open.

[Nicole Deblase:]

Yeah. Good morning guys. So just a question on 1Q. Most of mine have been answered. I don’t think you have given it yet. Can you just give us a sense of what you are baking in for Q-on-Q or year-on-year production chargeouts, however, you want to give it within your 1Q guidance?

[Walter Borst:]

Don’t know that we normally do that actually. So stay tuned, I guess.

[Nicole Deblase:]

Okay. So no comment on whether sales will be up Q-on-Q within the guidance?

[Troy Clarke:]

Well we usually -- we have not at least for last couple of years provided a sales forecast as part of our guidance.

[Nicole Deblase:]

Okay. Understood, I’ll pass it on then.

[Troy Clarke:]

All right. Thanks.

[Walter Borst:]

Thanks.

[Operator:]

Thank you. Our next question comes from Alex Potter, Piper Jaffray. Your line is open.

[Winnie Dong:]

Hi. This is Winnie in for Alex. I just want to touch upon your parts revenue and parts profit. What are you expectations for, I guess, the parts revenue in 2015? There was a nice sequential uptick in Q4. Do you think that revenue can continue at this run rate or even grow? And then just on the margin side, we saw margin increasing over 20% for the past three quarters. Can you comment on what drove the 100% -- 100 basis point Q-over-Q increase in 4Q and then is the margin level sustainable?

[Walter Borst:]

Yes, in terms of the market, the parts business continues to be strong predominantly because overall the market is very good for our customers. We anticipate next year to grow rate at double digits in terms of the revenue line. Margins is really just kind of a lot of a hard work in blocking and tackling and making sure we’re doing the right things from our suppliers and for our customers that don't know that there's any magic to it. We anticipate pricing to continue to be strong in 2015 and expect another record year.

[Winnie Dong:]

Okay. And then just a follow-up, you gave a brief update on the Chinese JV with JAC. Do you guys expect this JV to start ramping and have you seen good interest in the engines as a result of the new emission standard, that’s coming up?

[Troy Clarke:]

Yes. This is Troy. There has been an interest in the engines as a function of the new emission standards. As you know, in China, they have some real needs over there in everything but it just seems we have the right product at that particular point in time. We are in production today and will be in ramp-up over the next quarter or so. And then we’ll get a real good look at how that new engine does at the market. In the mean time, there is a smaller displacement engine that JA seek and attribute it to the joint venture as part of it. That engine had in its Euro 4 version had very good sales this past year. So this is a joint venture that is really getting off to a very, very fast start. And then there is -- as a byproduct of that, you may have noted, we didn’t really make any money there but we haven’t lose any money there either. So the fact that we’ve hit the timing just right. This is a joint venture that does not place a drag while it’s -- basically while it’s accelerating on our results.

[Winnie Dong:]

And do you guys have growth or volume expectations going forward in the immediate quarter?

[Troy Clarke:]

I’m sorry, I didn’t hear the question.

[Winnie Dong:]

Do you guys have visibility into the growth and volume expectations in the next few quarters?

[Troy Clarke:]

Yeah. We certainly have volume projections, the one engine or actually the engine we’ve already introduced certainly will grow in the market. And then we have another engine that will introduce next year that we anticipate we’ll have growth in the market as well. Again, we’ll provide a sale forecast on that but since they are new engines, they will grow. And we’ll take share away and plus we can grow or basically add some opportunities to the market.

[Winnie Dong:]

Okay. Thank you.

[Troy Clarke:]

Thank you.

[Operator:]

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

[Neil Frohnapple:]

Hi guys. Thank you. Just another drilling on the first quarter EBITDA guidance $0 to $50 million. Meaningful stuff consequentially, just kind of wondering what the puts and takes we should be considering there? And is it just you guys being conservative, yeah, just any color you can provide that will be great? Thank you.

[Walter Borst:]

Yeah, Neil. Maybe I’ll take that one. It is down sequentially. For the first quarter, it tends to be lower EBITDA for us. So that probably guides you take a look at how we’re doing year-over-year and our adjusted EBITDA basis in the first quarter of 2014 we actually have a loss. So the sizes ranges probably two to three point higher EBITDA margin than we would have had a year ago in the first quarter. So that’s probably the more appropriate comparison for you to make to -- as you think about our performance over time.

[Neil Frohnapple:]

Okay. And then just, I guess, a follow-up to Nicole’s question, I understand you are not providing sales guidance. But I believe last quarter, you guys did provide vehicle shipments for traditional markets, expectations on a year-over-year basis, just wondering if you can provide any sort of color there?

[Walter Borst:]

Don’t have that at hand here right now. You kind of stumped us on that one. I didn’t realize we did that. That must have been -- was that in a question or was that in our comments?

[Neil Frohnapple:]

Yeah. I think you guys had indicated that you expect the traditional markets to increase 20% year-over-year. Can’t remember if it was in the slide deck or if it was in Q&A. But yeah I believe…

[Troy Clarke:]

Why don’t we do this, why don’t you give us a chance to go back and check that and then maybe you can talk to Kevin. Kevin, you can reach out little bit later today to Neil and provide the clarification that he is looking for. Again not trying to hide anything, we’ve provided information in the past. We’re certainly happy to provide the similar type of information going forward.

[Neil Frohnapple:]

Sure. Thanks a lot guys.

[Troy Clarke:]

Very good. Thanks Neil.

[Operator:]

Thank you. Our next question comes from Scott Group of Wolfe Research. Your line is open.

[Reena Krishnan:]

Hi. Good morning guys. This is actually Reena Krishnan sitting in for Scott Group.

[Troy Clarke:]

Hi Reena.

[Reena Krishnan:]

Hi. So I know that this has been asked couple of times maybe just another way to ask it because not sure how the market dynamics might change that much between now and February. But when you talk to your customers, especially larger fleets here in, looking at what’s demand seems better but the utilization in rates have also induced devise some other events this year, including the West Coast port situation in the [indiscernible] network. But, I guess, again, to kind of hone in on some of the other questions around the margin targets and the market share target. Wouldn’t it seem, I guess, from the customers from your large fleet perspective that they might have better sense of visibility on how much they would grow their fleet or what demand looks like at the end of first quarter or maybe 2Q kind of post-weather and seasonal issues and assuming the West Coast port situation comes to some resolution? I guess, when would you guys maybe have better visibility on your margin or market share targets with that, just assuming that February might be a tough time to kind of look at that given where we are just from a seasonal perspective with some of the larger fleet?

[Troy Clarke:]

Yeah. Actually, so we do have a lot of insight in that regard and we are kind of correlate that input and coming to conclusions. And kind of how the market works is a lot of those decisions are especially with larger companies. They make their capital decisions, typically in the third and fourth quarter of the preceding year, calendar year quarters of the preceding year. So this is a season of that last into the month of January at least of the high degree of interaction between us and our best customers and our largest customers and even probable customers, as we get a better idea as to that. So we exit the first quarter with a pretty decent idea as to where those opportunities are and what the magnitude of some of those are. And then the kind of things that we picked up already is, there is maybe not in a wholesale way, but there are people adding capacity, which is different than what they can place in the past. There is a substantial amount of replacement demand because the average age of the fleet are still kind of high and the new trucks both, ours and even our competitors do provide lower operating costs, partly to fuel economy and enhanced reliability over the trucks that they're replacing. So as long as economic activity continues to be favorable, they’re just seems to be this buoyancy in the market and even our largest customers are kind of sorting out still, I think, some of what that means for them. But it becomes real clear for us, I think, between now or more clear let me put it that way between now and the end of the first quarter. So when we come to that February kind of timeframe, I think, we will have insights that you'll find will be valuable and will be very directional, not just for ourselves but for the industry as a whole. I don’t know Bill, would you add to that or?

[Bill Kozek:]

No. Nothing, that was very well said. Yeah. We do expect the market to grow. We do expect our share to grow and our plans are to grow in every segment that we participate in.

[Reena Krishnan:]

Okay. Thank you.

[Bill Kozek:]

Thank you.

[Operator:]

Thank you. And our final question comes from Rob Wertheimer of Vertical Research. Your line is open.

[Rob Wertheimer:]

Thanks. Good morning, everybody. Could you help me just understand what the inventory charge in Brazil truck was? Maybe just what the vehicles were or does that an indication that you think the volume of inventory was less than selling price for truck. I’m just curious why it was an inventory charge?

[Walter Borst:]

Yeah. There is two elements to that, one is, we have -- we built up a fair amount of inventory there, and secondly, you indicated the holding value of that inventory we felt was too high relative to what it would bring in the market, given the economic conditions there currently.

[Troy Clarke:]

Yeah. And to put color behind that, by the way is effective issue recall by year ago. Brazil went from year three markets to year five market and there was a way -- they allowed for a certain number of vehicles to be built, if they were built or partially built, they could be sold pass that time. You get every year a three vehicle that would be sold pass that time. So the industry itself kind of stocked up on inventory because there was a lot of demand from the customers that the economy kind of started to head down. And so the industry was left with a bunch of inventory that just not turning, okay. It’s because there is just not enough economic activity that generated. In addition, we all thought there would be higher activity for trucks because of the building around the World Cup and the Olympics and all that kind of stuff. And quite frankly, that demand just has not materialized. And so that inventory just been sitting down there in various forms and there is some accounting guideline to say, we really need to -- we need to really assess it for what it's probably worth and that’s really what we did.

[Rob Wertheimer:]

Okay. That’s perfect. So some of was not missions to your, nothings discontinued particularly, its just slow market and…

[Troy Clarke:]

No. Just a slow market that just didn’t materialized like us and everybody else I think in Brazil had anticipated. And given that we are relatively small player who had just reentered the market, we had some pretty aspirational growth plan. So I would say proportionately, larger companies who have been established for a longer period of time. It’s done a better job or been able to work through their inventory and we’ve not been able to capture the growth that we originally anticipated during that timeframe with the pressures -- the economic pressures down there.

[Rob Wertheimer:]

Got it. Yeah. Thank you very much. Helpful.

[Troy Clarke:]

Thank you.

[Operator:]

Thank you. That is all the time we have for questions today. I’d like to turn the call back over to Kevin Sadowski for any further remarks.

[Kevin Sadowski:]

Okay. If there any additional questions, feel free to reach out to myself or Ryan Campbell for the rest of the day and have a great holiday everybody.

[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.