Navistar International Corp NAV
Q1 2013 Earnings Call Transcript
Transcript Call Date 03/07/2013

Operator: Good morning and welcome everyone to this Navistar International Corporation First Quarter 2013 Earnings Release Conference Call. Today's call is being recorded.

Now 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 - VP of IR and Financial Communications: 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'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 a 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 note disclaimers presented in today's material for more information on this subject.

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

Lewis B. Campbell - Chairman and Interim CEO: 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 position 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 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 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 will 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 six months and I'm 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'm thrilled that the Board and I have decided that he is just the right executive to lead the Company at this time.

Troy's been instrumental in implementing Navistar's drive to deliver plans, leading the Company's transition to a 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.

As I (told) 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 true points, that I'd 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 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 through evaluating non-core businesses and product programs for potential sale closing, or fixing.

On Page 5, you can see we made the following progress since our fourth quarter 2012 call. We submitted our 13-liter certification to the EPA ahead of schedule. We kicked off investment plans benchmarking initiative to further lower our cost and we're already seven weeks in that 12-week project. We completed the sale of our equity interest in Mahindra. We subleased the portion of our Alabama facilities of FreightCar America and we announced the sale of our Workhorse Custom Chassis brand.

As you will see on Slide 6, our Company continues to operating according to its six guiding principles, quality, reduce cost, a sense of urgency, leading edge process, great products as matter of fact, customer satisfaction and realizing the potential of our people, and our teams continues to be steadfastly aligned around our three priorities for 2013 continuing to make major improvements in product quality, hitting every one of our critical truck and engine launch base and finally delivering on our operating plans, while maximizing manufacturing cash flow.

Let me now provide more insight into our three 2013 priorities. Navistar supports its customers with many great products including our flagship International ProStar+, but we find to continue making major improvements in product quality in order to establish quality at the foundation for our Company culture. Troy and his team have started by improving the process is by which we design, engineer and build our products. All of our efforts are enhanced through the use of advanced engineering processes, so that all of our products go to market with the appropriate levels of test and validation.

We've also made a significant investment in manufacturing execution system, MES for short that will support high quality launches now and in the future, and that's thanks to Archie Massicotte, Jan Allman and their teams. They're installing new quality systems in our plants to provide consistent measurement of key quality characteristics and to ensure that every truck is built right the first time, and we're already seeing improvements at the plant level.

Since October, our first time quality at Escobedo, Mexico, has exceeded 90%, a significant improvement since the beginning of the year. I've got to stop here and give Troy the credit for making a key management change last summer in Escobedo. Miguel Garcia Rojas, our new Plant Manager at Escobedo has led the charge in improving quality at the plant. Over time, with accomplishments like these, we intend to become known as the quality leader in our industry.

Now, let me give you a brief update on the progress of our emissions programs. As I've talked about last quarter, we're in full production of our ProStar with the ISX 15-liter engine. We've engaged a number of customer fleets who are providing us with real-time quality data to ensure that our new engines exceed the quality of those being replaced. The bottom line, we've absolutely committed to meeting or beating our launch date with unprecedented levels of quality.

For the ProStar with our own 13-liter engine, testing is well underway and I can tell you that we're pleased with the performance data coming in so far. Denny Mooney and his engineering team are making significant progress across a wide variety of 13-liter launch activities. Early test results look very promising, for example, drivability for our ProStar with our new 13-liter engine with after-treatment is greatly enhanced due to significantly increased torque rise.

Additionally, fuel economy results are emerging that suggest several percentage points of improvement. Later in the call, Troy will give you some exciting news on the International ProStar+ with our 13-liter engine. Across the Company, we're building important new capabilities for Navistar and they will continue to serve us well in the ProStar 13-liter program and as a matter of fact every other program that we will undertake in the coming years. This is simply how Troy and our senior leadership team are going to do business going forward.

The final priority is delivering on our 2013 plans. We believe we can achieve significant improvement in financial performance, while beginning to restore our core North American truck engine and parts businesses back to market leading positions. We are resolutely focused on reducing our overall cost structure in order to lower our breakeven points.

Before I came on board, A.J. and Troy had established an annual cost reduction goal of $150 million to $175 million in SG&A and product development. This year, we intend to significantly exceed that target. We've also taken steps to improve working capital. As you know in 2012, we completed a voluntary separation program and a reduction in force.

Additionally, this year, as we shift to a more functional organization structure and we review our findings for benchmarking initiative, we expect additional reductions in the near future. Furthermore, we're on track with a closure of the Garland Assembly Plant this year and going forward, we will continue to initiate actions to adjust our manufacturing footprint.

With that, let me turn the call over to A.J. for details on our financial results. A.J.?

Andrew J. (A. J.) Cederoth - EVP and CFO: 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 operation. 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 fall outside of our core North American business strategy.

We previously discussed our restructuring and divesture plans for these businesses, plus they are no longer included in our segment results. Despite lower volumes our manufacturing segment from continuing operations improved by $98 million due to lower overall warranty expenses and reduced structural costs. I'll talk in more detail about this segment profit 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 show the details of the segment profit improvements year-over-year. Within the truck segment, profit declined by $31 million driven primarily by the decline in volumes, partially offset by lower structural costs. Included in the result is a portion of the costs associated with closing Garland, which was $12 million in the quarter. The engine segment profit improved $93 million, primarily due to lower warrantee 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, our NCPs have $10 million and accelerated depreciation on tooling related to the 15-litre engine of $10 million. Within the part 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've provided on our last call. We ended the quarter with manufacturing cash of $1,189 million significantly better than our forecast. Corporate EBITDA ended on the high-side of the range due to performance within 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 inventory. As we typically experienced growth in inventories during the first quarter, but the manufacturing and sales team continues 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. 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 the 13-liter conversion. We are ahead of our goal on structural cost reduction and are taking the steps to build upon the 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 Clarke - President and COO: Thank you, A.J. and good morning everyone. I'm truly honored to take on the role of CEO and join Navistar's Board, and I would also echo Lewis' comments about Navistar's progress over the past several months. We've made great strides in our turnaround plan and I'll address specifics in a number of areas in just 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 to have the opportunity to work closely with such a high caliber leader. Working together, we have taken many key actions that have established a strong pipeline to build upon going forward. 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 our organization, with 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 American core businesses, improve quality and customer satisfaction, drive future profitability and deliver value to shareholders.

Now let me give you progress updates and our drive to deliver turnaround plans. It will help to add some more color to the numbers that A.J. just shared. As we stated 2013 is a difficult year for us and we launched our drive to deliver, we said we will do whatever it takes to turn our business around. To do that, we are focused on the three near-term priorities that Lewis referenced; hitting our product launches, perfect quality and delivering on our 2013 operating plan.

The key takeaway from Q1 is that our plan is on track. Most important point about the quarter to me is that we did what we said we were going to do. Our product launches are on schedule. We're making strides in quality and we're on track to exceed our structural cost targets.

With regards to the product launches, Slide 15, a few points with partners. As you know, the ProStar with 15-liter ISX is in the market. We've built 1,035 order units and we have about 2,200 more orders in queue to build. ProStar ISX ran 21% of Navistar's big four production for both January and February and should ramp up to more than 30 plus percent in March and we expect those numbers to increase through Q2.

Test mileage on our captive leader ProStar ISX continues to accumulate with no major issues and fuel economy is outstanding.

Moving to Slide 16, on the Navistar's 13-liter SCR engine, we have submitted the test data to the EPA that demonstrates 0.2 compliance. On road testing and data gathering for OBD compliance is on track. So, we're on schedule to complete EPA/CARB certification in the end of March timeframe, to support our end of April shipments. This week we began to build the first 18 full production saleable ProStar 13-liter SCR trucks and the first seven of those trucks came off line and the (rest eight) are planned for earlier this week and production began as they were so ahead of schedule.

Each unit started and it drove off underlying just as we expected. They look good and we're going over them with a fine (indiscernible) as for R&D quality gauged process. With the exception of two units that you can see at the Mid-America Truck Show later this month, these trucks will go into Navistar and some customer fleet and begin to accumulate accelerated mileage.

Turning to quality on Slide 17, in the last quarter we discussed some quality issues as service-related to our 2010 (indiscernible) engine launches and what we're doing to pick them. 2010 emission system issues are not unique to Navistar. The entire industry is experiencing that. What I believe that sets apart is how we're responding like we have to reiterate what we said last time. The repair incident is in line with industry performance and continues to improve for its best-in-class. The repair cost per engine also continues to improve.

Similar to our competitors, we experienced some issues with components of the EGR system and we told you about those on our last call. These issues have been addressed on engines being produced today and as a result, will not be part of our 13-liter SCR engines as we launch later this month.

On our last call, we also discussed potential field campaigns to address the engines that our customers have. One of these campaigns has started it is progressing as per the plan. We have not made plans for second campaign, but I want to highlight that, that is still a possibility. One thing is for certain, we have made a lot of progress in a short period of time and our customers will invest to that.

I was visiting a large fleet customer a few weeks ago and I was loaded with data and quality issues we've seen and what we've done and how we're addressing them, half-way through my (pitch), the customer complimented our service efforts but said they really haven't seen these problems and in fact they were very satisfying with their 2011 and 2012 trucks. We have more than turned the quarter on quality but quality is a journey that never ends and I would like to reiterate that we will do whatever it takes to improve quality and customer satisfaction.

Moving to cost improvements on Slide 18, Lewis mentioned earlier that we establishing an annual cost reduction goal of $150 million to $175 million, as well on track to exceed the $175 million target and we're not done. On our last call, we told you how we realigned our organization to focus on functional excellence and it is outgrowth of our more functionally aligned organization we have launched a best-in-class benchmarking initiatives, which Lewis referenced earlier.

It supplements the actions already into way to right size our business and improve our cost structure. This benchmarking effort will help us understand, how we compare to industry norms on a function-by-function basis. We've already compiled data from the key functionalities of our business and we're cutting the data in a lot of different ways to see how we compare to the 15 industrial peers and heavy manufacturing.

This is helping us to tier business in new ways and identifying more opportunities to become leader and further improve our cost structure and we're confident that this will resulted additional saving yet this year and help offset potential risk to our plans.

Moving to Slide 19, you recall that our plan intensely focused on North America forward truck engine and parts business. We're looking at our non-core businesses to assess their strategic fit and their current and anticipated ROIC.

Let's talk about progress last quarter we did announce that we would exit our truck and engine joint ventures with Mahindra in India, and since then, we have completed the sale of our stake of JVs to Mahindra. The deal has received regulatory approval and Mahindra has now taken complete ownership of operation.

But this effort is not just about selling stuff. It's also about fixing our businesses. So, take our operations in Brazil for example. MWM had an outstanding first quarter. By taking out fixed costs and reducing SG&A, they made year-over-year improvements of $14 million in the quarter.

Looking ahead, the Brazilian market seems to recover. We believe there's an opportunity for this to contribute more to our results for the year. Yes, we've made a lot of progress, and I couldn't be prouder of how far we've come, but realistically, we've made some headwind. The biggest challenge to our plan is the volume forecast for the year you know there's two pieces to that, the market itself and the market share.

For our fiscal year, the truck industry itself is down year-over-year. We've previously stated that we anticipated the Class 8 truck market will be down from 230,000 in 2012 to 250,000 in 2013. We haven't changed our forecast and it appears that our competitors' published forecasts are now more in line with ours.

With regard to market share, Slide 20, we'll play in this one quarter at a time. Q2 is the transitional quarter in a transitional year. We expected it will be the quarter where our sales of the ProStar with ISX will ramp up. There is a lot of interest out there and the winning combination of the ProStar was the 15-liter ISX and this interest has allowed us to talk with important customers who really haven't considered us for a while.

The results of our quality improvement efforts will become more evident to customers, and it's the quarter, where we introduced the Navistar 13-liter SCR engine in the ProStar. Interest is building in the performance and availability of the ProStar 13-liter SCR and we'll show more of this as we get closer to customer shipments.

Marketing surveys indicate Navistar and in particular international truck enjoys significant brand loyalty. I've got a lot of customers who want to be committed to us and to our products, and during the next quarter, we will rebuild our market share by committing to them. We'll do this by committing to deliver best-in-class quality, superior performance in drivability and fuel economy, and the rapid availability of our Clean Engine products.

With this commitment and the availability of our new products, we will improve market share throughout the year. The foundation for this has already been laid, and I'm confident that you will see the results.

In closing, we've been saying that 2013 is our transitional year, but with everything we've accomplished so far, from our product launches to our structural cost improvements, to our benchmarking initiatives it might be more accurate to say that this is a year of transformation and Q2 will be an important part of this transformation and a quarter where we will continue to buying even more ways to improve our business.

With that, let me turn it back over to Lewis for some closing comments.

Lewis B. Campbell - Chairman and Interim CEO: 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 three top areas; dramatically improving product quality, a real focus inside the Company, hitting every one of our SCR-based engine launch dates, we've exceeded on almost everyone and delivering on our operating plan with an emphasis on manufacturing operating profit and you heard the big numbers that A.J. talked about manufacturing cash flow.

As we do so, you can be sure we will remain unwavering in our focus on the six key guiding principles of quality, cost, a sense of urgency, great products, customer satisfaction and most importantly, the people that make all that happen. Now we know despite the work we've done there's much more to be completed but we believe and I firmly believe that turnaround at Navistar has started and the drive to deliver plan has all the right elements to make significant progress during this year in transformation.

People of this organization are committed to turning Navistar around and they are taking out unnecessary cost and fixing the core business with resolve and purpose. As I've said before, if you could see what I'm seeing you would have the same confidence that I do in the future of Navistar. We're a proud company, proud people. We've been around for over 100 years, so I believe that Navistar's best days are yet to come. Thank you.

Heather Kos - VP of IR and Financial Communications: This concludes our prepared remarks, but before we go to questions to be fair we ask that each of you limit yourself to one question, including an optional follow-up. So, operator we are now ready to open the lines.

Transcript Call Date 03/07/2013

Operator: Steve Volkmann, Jefferies & Company.

Stephen Volkmann - Jefferies & Company: I'm wondering just a quick one A.J. just to make sure I heard you right. You said that the cash balance in the second quarter will be sort of low in the year and 3Q and 4Q will be high, I just want to confirm that?

Andrew J. (A. J.) Cederoth - EVP and CFO: Steve, let me repeat that because you broke up a little bit, but I think you asked if Q2 would be the low point for cash and that 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 - Chairman and Interim CEO: $1 billion is not too low. Go ahead.

Stephen Volkmann - Jefferies & Company: Very good, I just wanted to make sure, we've been trajectory, right. I apologize the line does seem to be great because I'm going to stay (off the line).

Operator: David Leiker, Baird.

David Leiker - Baird: Just in terms of the direction on cash commentary, it make sense with higher volumes, the 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 can't 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?

Andrew J. (A. J.) Cederoth - EVP and CFO: 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 - Baird: Is there 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?

Andrew J. (A. J.) Cederoth - EVP and CFO: That's the right way to look at it.

David Leiker - Baird: Then just one quick follow-up. Troy, what's the numbers you gave in your Cummins and if I just 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 maybe step slower as you get 13-litre engine into the mix?

Troy Clarke - President and COO: That's 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-litre and 15-litre 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: Andy Kaplowitz, Barclays Capital.

Andrew Kaplowitz - Barclays Capital: If I could ask you about your military business, you kept your guidance at $750 million, we all know about sequestration, how's the visibility into that business right now? How'd you do in the first quarter and how is the visibility for the next few quarters in the business?

Andrew J. (A. J.) Cederoth - EVP and CFO: 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 - President, Navistar Defense, LLC: Yeah, sequestration – really, I mean, is it going to affect us? We're not sure yet, but right now, we're staying with the 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.

Andrew Kaplowitz - Barclays Capital: A.J. or Archie, could you tell us how much you did in revenue? Do you disclose that or…?

Andrew J. (A. J.) Cederoth - EVP and CFO: Yeah, military revenue for the quarter was just about $225 million.

Andrew Kaplowitz - Barclays Capital: Maybe Troy, we could step back, orders for Class 8 were quite good over the last few months, actually really for the last four or five months and it kind of feels a little bit like last year where we had very good orders at the end of the year than 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 or maybe there's a little more confidence, the fleet age is up there. We know we've got replace. What are you seeing as we go into Mid-America?

Andrew J. (A. J.) Cederoth - EVP and CFO: Yeah 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 will 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. 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 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, really like the EGR engine and where it's at today, very satisfied with it. It works great with their applications and they're actually placing orders for those type of engines throughout the balance of the year. Maybe a little bit more color, Jack, you can provide.

Jack Allen - President of North America Trucks & Parts: I think, Andy, on the industry side, we just came from a Truckload Carrier meeting and the move there, in my view, was pretty darn optimistic. The freight is good. Freight rates are good, but there are costs on the horizon for these guys and that's making them tentative on their outlays of capital. Hours of service, if this goes into effect on July 1, it is currently planned. It's going to be 10% to 11% immediate reduction in productivity and the driver shortage is not getting any better, so there was a – the likely visits they're right now in terms of freight rate, but no one is going to step out here and make any big purchases beyond what the replacement needs are. So, the client base industry is actually coming in as we had anticipated. If you take a last six months order receipts and you annualize them, you're coming at 212, we've anticipated 215 against 230 last year. So, it's kind of the way we had expected the year to unfold.

Andrew J. (A. J.) Cederoth - EVP and CFO: I do think Andy one of the things that I learned from Spain – in a number of the big three 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 that I think we have experienced over the course of the last year.

Operator: Brian Sponheimer, Gabelli & Co.

Brian Sponheimer - Gabelli & Co.: Lewis just wanted to take a – first of all congratulations on the decision, certainly a big change from where this company was six months ago. But I guess with the real – now at the end of the road, but the real goal being the 13-liter production bogie at the end of April. What made you make the decision now to hand the reins over to Troy?

Lewis B. Campbell - Chairman and Interim CEO: Well, a couple of things actually. First of all I'm totally committed to this company. I have often used the phrase that I've really (fallen loans) of this company, I am very devoted to Navistar I care so much about it. So, it was kind of a bitter sweet 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 run way 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 (indiscernible) say 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 a 100% and obviously, I had this (indiscernible) on my shoulder, I've worked 24x7. It's been a very – labor 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 - Gabelli & Co.: Couple other questions. Just one other question and I'll hop back in queue. As you closed 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. (A. J.) Cederoth - EVP and CFO: 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 mark the asset 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 - Gabelli & Co.: As far as 13-litre 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. (A. J.) Cederoth - EVP and CFO: I'll let Jack handle that one.

Jack Allen - President of North America Trucks & Parts: 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 and 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 at the Mid-America Truck Show.

Andrew J. (A. J.) Cederoth - EVP and CFO: I think today, we have hundreds of orders, if 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 improvements and the drivability improvements that (indiscernible).

Operator: Jeffrey Kauffman, Sterne, Agee & Leach.

Jeffrey Kauffman - Sterne, Agee & Leach: Maybe a longer term view there Troy, you're making progress, you're getting the Company to where you want, let's go out one to two 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 timeframe do you think is a reasonable expectation for thinking the business to those levels because you seem to be so far ahead on at least the cost cutting portion right now?

Troy Clarke - President and COO: I hope every quarter we can talk about – that we're ahead, basically is the plan. Let me kind of ground that if I could, that I think the different today than maybe any call that we've had prior, the path forward for us with regard to how do we slow our margins is extremely clear and it's really just about executing in time, 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 complete 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. It 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 kind of final tranche and continuous improvement in costs 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 two years to realize, so we'll see those benefits in 2014, I think and 2015, more trucks in the early phase and then more engines as we're able to take the EGR components off the engine and then net out of savings versus the SCR systems that we've added. Of course, a piece of this is NCPs, the amount of performance penalties go away by the end of the fiscal year and basically, so that's a pickup for 2014. Manufacturing costs for our plants, I kind of see two more tranches of savings and 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 similar to those in 2015 and again that's just from building it right the first time, getting the terms right, allocating the products for the right costs. 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 for the warranty model and I believe we'll see significant savings in the 2014 timeframe and again to the 2015 timeframe, as our goal has been not to 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 bucket. Those are – there is obviously smaller items but those are the bigger buckets that you can put at least double-digit numbers too and those would be the timing of those. So I would tell you that we have a good 24 months of initiatives and I think in that timeframe we'll be in the margin realm in that 8% to 10% kind of range, which is where we want to be. I'm really referencing North America core truck engine and parts, pull all those together that's kind of the margin kind of range, with a little bit of puts and takes.

Jeffrey Kauffman - Sterne, Agee & Leach: You have some debt that needs to be defused 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 the process right now?

Andrew J. (A. J.) Cederoth - EVP and CFO: Sure. I mean, as you said we've got a 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: Jerry Revich, Goldman Sachs.

Jerry Revich - Goldman Sachs: Lewis and Troy congratulations. Troy, I'm wondering if you could talk about your progress on right sizing 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 in the former NC2 business in particular?

Troy Clarke - President and COO: Jerry part of this will sound anecdotal, so we may have to get for you something more specific if you want, certainly, we'll volunteer to provide that to you. So some of this may sound a little bit anecdotal, but, so, what we did was we established in our turnaround plant that we really wanted to focus on the North America core business. So, let me just jump quickly through 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 a very successful business in Central America and the Indian countries is profitable for us. It's been profitable for a while, uses engines that are already in the stable and well-known, because they are previous emission levels and we really kind of double down our efforts there to just make sure that continues to be a solid contributor on our global portfolio. The second thing on the global thing I would highlight to you is that we doubled down in MWM. The team done there, did a great job kind of picking a profit target, 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 fits within our business model down there, so two big successes in that regard. The third thing from a global standpoint is we decided to continue to invest in our joint venture efforts, which JAC in China, they were 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 products that they have and the type of product that we've introduced in Mexico and Latin America, when combined with our MWM engine portfolio could give us some opportunities to find some good business down there. With regard NC2, we're kind of stepping back from saying look, we're going to play in a big way everywhere with global capital as a product, we haven't made any announcements on that, but I know that in prior certain math, but I know that in prior years we had emphasized that as one of our aspirations and just quite frankly we pulled back from that. We have not been able to find a path forward, have a meaningful cost and return level that suggest that we can go into market that are heavily (tab-over) 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 system decisions that we've made. That leads to the question, a couple of outposts that we've got out there that we're working through what the right thing to do is, but they're not businesses of material consequence for us.

Jerry Revich - Goldman Sachs: Troy, in terms of, I guess throughout 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 Clarke - President and COO: Yeah, actually we've already begun and Denny Mooney is the Head of our Product Development Activity, he's here with me and I'll ask Denny to 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, mid-range engine, we have credits that get us into, let's just say the mid-2014 kind of time frame and so you can expect that transition to take place between now and then. Stay tuned, we've got a lot more to announce on that, but it is – our mid-range engines will continue. Maybe that was part of your question and they'll have an SCR system on them next year.

Operator: Justin Ward, Wells Fargo.

Justin Ward - Wells Fargo: Justin Ward with Andrew Casey. Can you guys walk us through the cost savings for Q4 to Q1 for the trucking engine segment?

Lewis B. Campbell - Chairman and Interim CEO: Justin can you speak up? You're real soft.

Justin Ward - Wells Fargo: Sorry about that. Can you guys walk us through the cost spreads from Q4 to Q1, the cost savings bridge from Q4 to Q1 for the truck and engine segments? They're just kind of calling out the big buckets there maybe any swings in the warranty cost as well from Q4 to Q1.

Andrew J. (A. J.) Cederoth - EVP and CFO: 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 two biggest elements of that from Q4 last year to Q1 this year. There is 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 - Wells Fargo: Then in terms of the further potential cost savings you guys have identified, forgive me if you already gave it, but what sort of order of magnitude you guys thinking by the end of 2013?

Andrew J. (A. J.) Cederoth - EVP and CFO: I don't know that right now again I think Troy summed it up better to take this quarter-by-quarter. We established a goal to take out $175 million of structural costs. We put plans in place to achieve that. What we're working on now as Lewis alluded to is kind of 12-week analysis in 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 - Wells Fargo: Then real quick the EBITDA guidance for Q2, you guys called out the fuel campaign is baked into that. Are there any other one-time items either positive or negative baked into that?

Andrew J. (A. J.) Cederoth - EVP and CFO: 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: Adam Uhlman, Cleveland Research.

Adam Uhlman - Cleveland Research: 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 one-time catch up in the quarter and then we go back to the normal?

Andrew J. (A. J.) Cederoth - EVP and CFO: 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, and we'll actually start to see some benefits flow through the bottom line as our manufacturing costs will be lower as the year progresses.

Adam Uhlman - Cleveland Research: Then to move again to 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 trucks if I can lump those all together?

Troy Clarke - President and COO: Well, on the medium-duty side, our business has been on the share front or share standpoint, it's been really just impacted by the overall challenges that the Company's had and 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 we've been 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 areas been on the dealer side, our dealers had a lot of concerns, a lot of issues, but the success it's been laid out here on the phone today would have programmed together with our dealers to replenish medium-duty inventory here that will happen in the second and third quarter. But in our inventory follow-on was 40% at the dealer level, so the actions we have in place will work and will be growing share here certainly in the remainder of the year on medium-duty.

Andrew J. (A. J.) Cederoth - EVP and CFO: I think we had a pretty good quarter, in parts. I think we actually I am just looking through my notebook here trying to find the numbers, but we held our own I think or maybe picked up a little bit on parts -- fourth quarter lot a good orders and so I think we kind of turned the corner on that.

Lewis B. Campbell - Chairman and Interim CEO: Your question on Class 8 is very difficult with all who increases right now to predict the shares, as A.J. and Troy mentioned we are just looking at this one quarter at a time. But I will tell you this we know that we're going to build and charge out more trucks, more Class 8 trucks in the second quarter than we did in the first quarter. So, we know that form our standpoint, we'll deliver more trucks in the second quarter.

Operator: Eric Crawford, UBS.

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

Andrew J. (A. J.) Cederoth - EVP and CFO: Yeah, let me take that in some pieces. Some of that's just the way that we characterize the expenses. We actually had a very sizable vendor recovery, and that 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 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 - UBS: You'd sighted improved repair cost per engine. I was wondering if you could give us any metrics for us to frame or quantify that improvement?

Andrew J. (A. J.) Cederoth - EVP and CFO: 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 through your interest in the subject or the magnitude of the improvement we've made because it's pretty substantial. As we talked about last time, actually our customers don't see a higher repair incidence on our vehicles then they do on some other people's vehicles. What really brought this whole quality issue to the forefront and arguably I think we've tried to be more transparent with it then we may have been in the past with regards to that we had a key component or two that turn out to be very expensive. Those repair costs of what's reflected in the fuel campaigns that I indicated that we're currently in a way in the fuel campaign that could potentially count more that we might consider at some point of time that A.J. referenced it earlier. So, the data itself maybe is not as significant as the fact that it's going to skew back kind of two parts that again we want apart, so we're going to do what we got to do to support our customers. But they are not cheap parts, they are two rather expensive parts. That said, all the improvements that we've made and the majority of those things were 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 timeframe and putting that behind for us.

Eric Crawford - UBS: One last one, I know Andy had asked earlier about the defense business, I am 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. (A. J.) Cederoth - EVP and CFO: Well, yeah, typically we see a big increase in our military business in the fourth quarter, given that we had – we've taken our revenue slide down to about 750. We had, I think, I said 225, the number was really more like 215 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 for the year.

Operator: Seth Weber, RBC Capital Markets.

Adam Nielsen - RBC Capital Markets: Hi, guys. (Adam Nielsen) on for Seth here. Just a question on ICT cost transition here sounds like you're pretty pleased with the initial feedback from customers here. How are you feeling about early invitations on pricing and how are you thinking about attacking market share versus margin and pricing there?

Andrew J. (A. J.) Cederoth - EVP and CFO: Well, the initial feedback as you said has been positive on the ISX and the MaxxForce 13, the initial vehicles are being built in our test sales fleet. We intend to be competitive on pricing. We don't see any nasty price force 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 demonstrates, we've got this right. So, as that confidence builds we think we will be able to get our market share back. We don't intend do that by sacrificing margins.

Adam Nielsen - RBC Capital Markets: Sorry, if I missed it, but did you give a guide to expected market share for the full year for Class 8?

Andrew J. (A. J.) Cederoth - EVP and CFO: No, we did not.

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

Heather Kos - VP of IR and Financial Communications: 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 will be around all day. Thank you.

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