Navistar International Corporation (NAV)

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Navistar International (NAV)

Q3 2013 Earnings Call

September 04, 2013 9:00 am ET

Executives

Heather Kos - Vice President Investor Relations

Troy A. Clarke - Chief Executive Officer and President

Walter G. Borst - Chief Financial Officer and Executive Vice President

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

Dennis M. Mooney - Group Vice President of Global Product Development

Analysts

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Stephen E. Volkmann - Jefferies LLC, Research Division

Brian Sponheimer - Gabelli & Company, Inc.

Andrew Kaplowitz - Barclays Capital, Research Division

Jerry Revich - Goldman Sachs Group Inc., Research Division

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

Eric Crawford - UBS Investment Bank, Research Division

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

Joel Gifford Tiss - BMO Capital Markets U.S.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Navistar's Third Quarter 2013 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Ms. Heather Kos. Ma'am, you may begin.

Heather Kos

Good morning, everyone, and thank you for joining us for Navistar's Third Quarter 2013 Conference Call. With me today are Troy Clarke, our President and Chief Executive Officer; Walter Borst, our Executive Vice President and Chief Financial Officer; and Jack Allen, our Executive Vice President and Chief Operating 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 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

Thanks, Heather, and good morning, everyone, and thank you for joining our call. Our agenda today will follow the same process we established several quarters ago. I will lead off with a high-level overview of our third quarter performance and our progress on our strategic objectives. Walter Borst will provide a deeper dive on the financial results. Jack Allen will provide more specific direction regarding our Drive to Deliver initiatives. And I will wrap up with some closing remarks on long-term EBITDA goals leading into Q&A.

Moving to Slide 6. Before I begin, I'm extremely pleased to introduce Walter Borst, our new CFO. Before joining us, Walter was with GM for 33 years in a wide array of key executive roles. His past experience as the head of GM Asset Management, Treasurer of GM and CFO of Adam Opel makes him the right person to lead our financial operations here. Although he's been here only a month, he's already made significant contributions, especially as it relates to our 2014 strategic plan. And you're going to hear directly from him in a few minutes.

Turning to Slide 6, you will see our roadmap. We remain focused on our Drive to Deliver and our guiding principles. We've referenced in the past that it'll take us up to 18 months to execute our plan. We're 1 year in, and we've made significant progress. As I pointed out last quarter, we still face a few significant challenges, but we have laid the groundwork to solve them and obviously we want to accelerate our rate of progress.

Slide 8, summarizing our results. Our EBITDA was less than we hoped for in the quarter. I consider the challenges that impacted our performance to fall in 3 buckets: first, we continue to experience onetime costs and charges related to our ROIC divestitures and restructuring efforts; second, we encountered some significant reversals in our results in Brazil and Latin America due to social issues that developed during the quarter; and third, we fell short of our sales volumes, primarily due to medium-duty market share erosion.

Positives for the quarter include: Our cash performances at the top of our guidance. For fourth straight quarter, we have delivered this goal. As you know, cash management and working capital reduction remains a major focus of our efforts during this turnaround year. Two, we continue to overachieve in our efforts to reduce structural costs. An example of this is our targeted reductions in SG&A. On the last call, we stated we would like to achieve over $200 million in year-over-year savings, up from the $175 million we talked about before. And despite a few onetime unexpected items this quarter, we showed $236 million improvement year-to-date. And just this week, we took more actions based on our best-in-class benchmarking initiatives to further reduce costs and Jack will talk to you later about these actions, which will benefit 2014. Point three, Class 8 orders received increase from 12% of the industry in Q2 to 20% in Q3. And customer feedback continues to be excellent on our new products. Fourth, just yesterday, we announced another key initiative in accelerating our turnaround: the 2014 product strategy that focuses on bringing SCR offerings to our medium-duty vehicles as quickly as possible. We announced that we will now offer to Cummins ISB 6.7-liter engine for international DuraStar and the IC Bus CE Series vehicles. The ISB engine will provide customers with an expanded engine offering and an additional engine choice. Importantly, it will allow us to get an SCR offers -- SCR offering into our medium-duty truck segment faster than we had previously indicated. We're taking truck orders now and we're going to begin shipments in December. And last, we continue to work through our noncore assets that don't provide an appropriate return on meaningful cash flow. These are smaller initiatives now and some of the true-ups and charges impacted in our quarter, but the right thing to do as we focus on our core North America truck business.

While we're pleased with the progress we're making, we fell short in our traditional and global volume assumptions, so let me come back to this. Our Class 8 market share continues to show improvement, but not as quickly as we had hoped. That being said, we are encouraged by a substantial uptick in orders and this will eventually materialize into retail sales in the next few quarters. Our medium share situation, however, has become similar to what we experienced in Class 8. As we are switching technologies, some folks are waiting in the sidelines, so we felt we needed to take action as quickly as possible. And by launching the Cummins ISB into our medium duty products, we believe we can more quickly grow our market share.

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