Navistar International Corporation (NAV)

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Navistar International (NAV)

Q4 2012 Earnings Call

December 19, 2012 9:00 am ET

Executives

Heather Kos - Vice President of Investor Relations

Lewis B. Campbell - Chairman and Chief Executive Officer

Troy A. Clarke - President and Chief Operating Officer

Andrew J. Cederoth - Chief Financial Officer and Executive Vice President

Archie Massicotte - President

John J. Allen - President of North America Truck

Analysts

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Mark Mihallo - Barclays Capital, Research Division

Jon A. Langenfeld - Robert W. Baird & Co. Incorporated, Research Division

Brian Sponheimer - Gabelli & Company, Inc.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Eric Crawford - UBS Investment Bank, Research Division

Robert Wertheimer - Vertical Research Partners, LLC

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Adam William Uhlman - Cleveland Research Company

Seth Weber - RBC Capital Markets, LLC, Research Division

Timothy J. Denoyer - Wolfe Trahan & Co.

Presentation

Operator

Good morning, and welcome, everyone to the Navistar International Corporation Fourth Quarter and Year-End Earnings Release. Today's call is being recorded. For opening remarks and introductions, I would like to turn the program over to Vice President of Investor Relations, Heather Kos. Please go ahead.

Heather Kos

Happy holidays, everyone, and good morning. Thank you for joining us for Navistar's fourth quarter 2012 conference call. With me today are Lewis Campbell, Navistar's Chairman and 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'll 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 Forms 10-K and 10-Q and our other SEC filings. We would also refer you to the Safe Harbor statement and other cautionary note disclaimers 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. Good morning, everyone, and thank you, all, for joining me on the call.

If you turn to Page 6 as a reference for my discussion this morning. As you all know, this morning we issued our fourth quarter and full year results. And as you saw, there was undoubtedly a lot in the ways of numbers, which I think you can expect from a company that's going through such a rapid transition. You can be sure that we'll take the time this morning to fully explain all the details and just as importantly, address each of your follow-up questions after we finish our presentation.

At a high level, I would characterize the fourth quarter as one in which we made good progress in many key areas, but unfortunately served us some of the last lingering quality issues which must be eliminated to make our turnaround more successful. Two points that I would put at the top of the list included a very strong ending cash balance and the start of our ProStar ISX launch 5 days ahead of schedule.

At the other end of the spectrum, relative to the quality issue I just mentioned, we discovered several weeks into November shortly after the quarter's end that warranty expenditures unexpectedly spiked up in October. In fact, a lot of today's call will be focused on what happened and specifically, what we're doing about it.

But let me say this. We aren't the first or the last company in this industry to experience something like this. And although I was surprised, I was not disheartened by this development. I was surprised because our dealers and customers would be the first to tell you that our quality performance has steadily improved this past year, and the trends are increasingly positive. I've talked to many of them in recent weeks and universally, they're very happy with our 2012 models. Their increasing satisfaction reflects the fact that our repairs per thousand are steadily decreasing. In fact, these numbers have improved by 35% in the past year and are nearly best in class. The fact is, while our quality is improving, the few issues that remain are much higher cost items.

Those of you that know me know that I've been steadfast throughout my career in my commitment to customer satisfaction and quality. We have to incur the expenses necessary to do what is right for our customers. By doing so, we believe that this is an investment that pays off handsomely over time for our shareholders. And remember, key point, every improvement we make today will be embedded in our new MaxxForce 13-liter SCR engines that we launch in April.

The size of our warranty reserve reflects our commitment to our customers, who comprehensively address these issues through specific actions, including newly designed parts put into production and replaced in various proactive fuel campaigns. In a few minutes, Troy will discuss our corrective actions in more detail.

The second big issue this quarter relates to the need for us to reestablish a valuation allowance against our deferred tax asset. Per accounting regulations, we're required to look back for 3, 7 and 10 years on our financial performance. As a result, we found our historical losses outweigh our positive outlook for the company. To be clear, this is a non-cash charge and does not reflect our future outlook on the business. A.J. will provide more details about this later in the call.

Beyond the numbers, during the quarter, we continued to make progress on strengthening our North American core businesses, while taking a disciplined return on invested capital approach to evaluating non-core businesses and product programs for potential sale, closing or fixing. We made the following progress since our third quarter call. As you know, we're closing our Garland manufacturing facility later this summer. We're moving forward on selling our stake in our truck and engine JV in India to Mahindra & Mahindra. And finally, we're discontinuing our 15-liter Engine.

As I mentioned earlier, we also strengthened our cash position ending the quarter with $1.5 billion of manufacturing cash. This reflects our strong focus on cash, and A.J. will give you more specifics later in the call. So overall, I'm very pleased with our efforts and results with respect to managing cash.

Turning to Page 7. All in all, we continue to make steady progress in our 6 key priorities including quality, cost, sense of urgency, great products, customer satisfaction and people.

Before we go to the details of our financial results and our drive to deliver planned milestones, let me turn the call over to Troy Clarke to talk about the warranty charge we're taking in the fourth quarter. Troy?

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