Navistar International Corporation (NAV)

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Navistar International (NAV)

Q2 2013 Earnings Call

June 10, 2013 4:30 pm ET

Executives

Heather Kos - Vice President of Investor Relations

Troy A. Clarke - Chief Executive Officer and President

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

John J. Allen - Chief Operating Officer and Executive Vice President

Analysts

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

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

Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division

Andy Kaplowitz - Barclays Capital, Research Division

Jerry Revich - Goldman Sachs Group Inc., Research Division

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

Brian Sponheimer - Gabelli & Company, Inc.

Robert Wertheimer - Vertical Research Partners, LLC

Patrick Nolan - Deutsche Bank AG, Research Division

Seth Weber - RBC Capital Markets, LLC, Research Division

Timothy J. Denoyer - Wolfe Research, LLC

Joel Gifford Tiss - BMO Capital Markets U.S.

Presentation

Operator

Good day, and welcome, everyone, to the Navistar Second Quarter 2013 Earnings Results Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the program over to the Vice President of Investor Relations, Heather Kos. Please go ahead.

Heather Kos

Good afternoon, everyone, and thank you for joining us for Navistar's second quarter 2013 conference call. With me today are Troy Clarke, our President and Chief Executive Officer; Jack Allen, our Executive Vice 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 the 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 the subject.

With that, I'll turn the call over to Troy Clarke for his opening remarks.

Troy A. Clarke

Okay. Hey, thanks, Heather, and good afternoon, everyone, and thank you for joining our call. Hey, I recognize the call is later than we would like or normally do for this quarter. We had to take some time to work out an accounting issue that we wanted to make sure that we got right, and A.J. will give you some more color on that in his comments. But for my part, I would like to apologize to all of you for any inconvenience we may have created in your schedules. And in addition to that, to assure you that we'll work back to our regularly scheduled time when you might expect it at the end of our next quarter.

Our agenda today will follow the same process we've established several quarters ago. I'm going to lead off with a high-level overview of our second quarter performance and our progress in our strategic objectives. A.J. will provide a deeper dive on the financial results; and Jack Allen, our new Chief Operating Officer, will discuss the latest warranty and quality developments, as well as provide more specific direction regarding our second half sales and share initiatives. And then I'm going to wrap up with some closing remarks on long-term EBITDA goals, and that will lead into then Q&A.

Before I begin, however, I just want to reiterate how pleased I am to have Jack joining me on the call as our COO. Many of you know him from past earnings calls and some of you have even met with him in person. As I have worked with Jack, I found him to be a results-focused and industry-savvy leader, the right leader to strengthen our North America core business. And you're going to hear directly from him in a few minutes.

Turning to Slide 6. You will notice that this is the same roadmap we have been using since we embarked upon our turnaround last August. The point I would make, there is no change to our strategy or our guiding principles since we introduced this back in Q3 of 2012. We have a solid plan. One we've consistently said will take us 12 to 18 months to execute. I believe this quarter's performance reflects continued progress on our near-term priorities, while pointing out that we still face a few significant yet solvable challenges.

So regarding our results, let's get right to it. Positives for the quarter include: Our cash performance exceeded our guidance for the second straight quarter. As you know, cash is a major focus of our efforts during this turnaround year.

Two, we are overachieving in our efforts to reduce cost. An example of this include higher-than-planned reductions in structural cost and SG&A. Last summer, we set tough targets for the operating cost of our business. Through aggressive benchmarking, we continue to find more opportunities for improvement, and that should drive us well past the $175 million goal we shared with you before.

Three, during the quarter, we received EPA and CARB approval for the MaxxForce 13-liter engine with SCR. We began shipments to customers in April, like we said we would do. We're now back in business with 2 great powertrain options for our ProStar and our heavy-truck lineup.

Four, we've made more progress in our efforts to shed non-core assets that don't provide an appropriate return on invested capital, and Jack will provide more specifics in his update.

And five, I would round out this list by highlighting that we continue to make progress building our leadership team to reinforce key areas of the business with the addition of Bill Kozek as the President of North America, replacing Jack Allen in that position; and announcing Bill Osborne as our new Senior Vice President of Quality. Adding Bill Kozek and Bill Osborne to their respective roles are the latest steps in an effort I call, One Navistar. This is the effort you heard me reference before, to organize more effectively, to create focus and functional excellence, resulting in a more capable Navistar enterprise, and it all starts with the right leaders in the right jobs.

We're pleased with the progress we are making, but there were 2 areas where our progress fell short of our goals for the quarter. We were disappointed with our sales and share performance, as well as with continued increases in our pre-existing warranty cost.

As for sales and share. We knew that Q2 would be the quarter where we'd transition to our new engine emission strategy. We knew we could get to a point where a potential customer might not want to buy the last EGR product or the first SCR product, and that's part of the reason we added ISX at the beginning of the year. And that's really part of what we saw in the quarter.

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