Navistar International Corp NAV
Q2 2013 Earnings Call Transcript
Transcript Call Date 06/10/2013

Operator: Good day, and welcome everyone to the Navistar's 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 - VP of IR and Financial Communications: 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 equivalents 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 note disclaimers 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 - President and CEO: Thanks, Heather and good afternoon everyone, and thank you for joining our call. I recognize the call was 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 go right. 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 we 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 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 on 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. 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 worked with Jack, I found him to be a results-focused and industry savvy leader, a right leader to strengthen our North America core business. You are 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 introduce this back in Q3 of 2012 with a solid plan, one we've consistently said will take us 12 to 18 months to execute. I believe this quarter's performance reflect continued progress on our near-term proprieties, 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 includes, 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 costs. Example of this include higher than planned reductions in structural cost and SG&A. Last summer, we set tough targets for the operating costs of our business. Through aggressive benchmarking we continue to find more opportunities for improvement, and that should drive us well passed 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 two great powertrain options for our ProStar and heavy truck line up. 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. 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 additional 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 the respective roles is the latest steps in an efforts I call 'One Navistar'. This is the effort you've heard we referenced 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.

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

As for sales and share, we knew that Q2 would be the quarter where we would transition 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. At that's really part of what we saw in the quarter. We have said share would increase in the second half of the year or sales volumes would increase throughout 2013 and share would increase in the second half of the year. Frankly we have never exceeded so many goals we have set for ourselves, we thought that progress would have come faster, it didn't, but it is coming.

Now that we have two great products to sell with great fuel economy and much improved quality we are re-doubling our efforts with dealers and customers to (both) confidence and accelerate sales. Jack in the North America Truck & Parts leadership team has spent the last few months working with our dealers to reinvigorate our sales processes. They have introduced disciplined planning with an emphasis on execution similar to the gated program management process we used to launch the ISX and the MaxxForce 13-liter SCR in record time. As a result we have already begun seeing the benefits. Our market share bottomed out in the fiscal Q1 timeframe and I am confident that we will improve share through the remainder of the year.

With regard to our cost of quality; we have a statistically significant number of 2010 trucks that are now out of base warranty. So we are (worried) more about potential warranty claims of the EGR system at high mileage levels. This has shown us that we need to make some additional provisions. However, I would note that it also lets us be more precise about understanding the warranty exposure for the remaining population of EGR engines. The 2011 model year engines actual warranty costs are better than the 2010 at comparable mileage, but not as low as we had planned, thus requiring an increase in the warranty reserve. Also, even though the 2012 and 2013 EGR engine warranty costs are much better, but at lower similar mileage, we felt it prudent to increase the reserves across these years as well. The improvements especially seen in the model 2012 and 2013 engines are a function of several design and validation efforts that have taken the form of running changes during production.

To get at the engine in the field, we advised you on the last call that we began a major field campaign at the beginning of the year to upgrade the engines of previous model years. We're making good progress and the campaign is running ahead of schedule. Jack is going to talk more about that in just a minute. But as the trucks are in for repairs, we're taking advantage of that time on the truck to do other things to make sure it does not come back again and these efforts add to our warranty and policy costs. Quite frankly, they are hard to estimate, but they are important for customer satisfaction, and we think of it as an investment in future sales.

I don't want to forget the progress we're making in manufacturing as well. Through the implementation of our MES system, first time quality has improved 15% year-over-year. Not only did we successfully launch our MaxxForce 13-liter ProStar with SCR in time, we did so with over 1 million miles tested. There've been no major failures, and as Jack will note shortly, the data indicates we won't see the issues that drive higher warranty due to lower levels of EGR in our new engines.

In the same field test, mileage accumulation is true for the ProStar with ISX, launched at the end of last year, which also now has over 1 million test miles. Customer and fleet feedback on uptime and quality has been positive, from between the two launches and our quality efforts we have conducted over 4.5 million miles of engine and component specific testing, which incidentally is more testing than we've done in previous two years combined. I think this reflects our dedication to engineering excellence.

The trucks we're building today are the highest quality trucks we built more than a decade and may also have improved fuel economy. I hope that explanation is helpful. Although we're not satisfied, we are making progress. And we know we are doing the right things and we will stay focused. And this is where Bill Osborne in his new position will help. Bill was a seasoned truck executive who has extensive experience and knows how to bring together the parts of the business necessary to manage the cost of quality and to create customer satisfaction.

I'll reiterate something I said previously, we're standing behind our engine and do what it takes to satisfy our customers. We intend to be the quality leader.

Before I turn it over to A.J. let's turn to Slide 7.

I'd like to point out that much has been accomplished since we started this turnaround. As a matter-of-fact we have met or exceeded every target or benchmark we set for ourselves with the exception of market share and cost of quality. Both of which are improving but not as fast as we thought when we made our plans last august.

I recognize both our key proof points to our turnaround efforts. Yet there is more to do we know, and we continue to work with a sense of urgency and we will not rest, until that job is done.

So with that let me turn the call over to A.J. Cederoth for the details of our financial results.

Andrew J. (A. J.) Cederoth - EVP and CFO: Thank you Troy and good afternoon everyone. Turning to Page 9 of the results for the quarter, revenue for the quarter was $2.5 billion, down $735 million or 23% from 2012. The primary driver of this was lower overall industry demand, which was down 14% year-over-year.

Lower industry combined with market share declines resulted in lower overall shipments from North America of 6,900 units versus 2012. For the quarter loss from continuing operations was $353 million, which is $215 million worse than 2012.

Here again I think the impact of the volume and the warranty are overshadowing some very positive changes in our business.

Turning to Page 10 here we are showing what has changed in our business and while the results of the quarter are not satisfactory, several positive trends are developing in our business. Structural costs, primarily SG&A and engineering spending are $81 million lower than last year. Material costs and manufacturing efficiencies have improved year-over-year by $25 million. Service parts margins have improved by $22 million. And our focus on return on investment has improved the bottom line by $53 million.

As I mentioned before, the overall industry was lower by 14%. During the Engine transition, our market share has also suffered. As we complete the product change over to SCR, we expect our market share to recover. But year-over-year industry, market share and mix had a negative impact on the business of $109 million. As we all know, we continue to experience higher warranty costs.

Finally, the year-over-year results are skewed by the release of the Canadian tax valuation allowance that occurred last year, resulting in $181 million one-time gain that ran through the tax line.

Turning to Page 11, let me spend a moment on the warranty charge. As we discussed on our December call, given the level of expense we recorded in 2012, we expect that cash spending on warranty repairs to be higher in 2013. This was factored into our planning and our cash forecasting.

As Troy alluded to earlier, we are now starting to receive more end-of-life data on the initial builds of 2010 emissions vehicles, and we've experienced an increased level of repair activity driven by our field campaigns. It's important to understand, that even though the actual data from the field is driven by a limited population, it has a large influence on the estimated liability for the entire population, until such time that we have sufficient data to support that the design changes implemented into production have effectively reduced the frequency and cost of repairs. Jack will share with you later that our build quality continues to improve quarter-over-quarter and we believe a significant number of these field repairs are corrected in later builds. But, given the data that we have, we believe it's appropriate to increase the warranty reserve related to pre-existing vehicles by $164 million.

On Page 12, we've reconciled our actual ending cash, manufacturing cash against the forecast we've provided our last call. We ended the quarter with manufacturing cash of $1.164 billion, which exceeded the high-end of our guidance. As we discussed, corporate EBITDA was adversely impacted by volume and warranty.

On this page, we've isolated the warranty true-up for vehicles in the field that I previously mentioned, to illustrate the EBITDA result of the business, net of the warranty impact. We did have an out-of-period adjustment in the quarter to correct revenue recognition on certain sales that were financed by GE Capital. This is further outlined in our 10-Q.

The net income impact of this adjustment is immaterial to the bottom line and does not impact cash, but it does impact EBITDA favorably for the quarter by approximately $62 million. This should be viewed as a one-time adjustment. From the range we provided on our previous call, EBITDA on a comparable basis came in closer to the low end of the range. The reason for this was primarily lower volumes.

Charge-out volumes for the quarter were slightly below our internal goal. We expect to recover these sales in May and June. Capital spending was lower than our guidance, as we are closely managing investments during this transition period. An example of this was the deferral of the second investment of our China project until May. Finally, as we've discussed before, working capital management has improved, and those actions continue to have a positive impact on cash flow.

Turning to Page 13; here we are providing our cash outlook for the third quarter. Recall, the third quarter is typically a challenging cash flow quarter for our business due to the traditional summer shutdowns. We expect cash at the end of the third quarter to range between $1 billion and $1.1 billion. I expect EBITDA to improve in Q3, primarily driven by volume.

Through the first half of the fiscal year there has been a significant amount of noise running through the P&L. We have taken action to improve the business and to eliminate issues that have been a drag on earnings. Most of this is behind us now. We expect Q3 to be the quarter that we begin to demonstrate improved core business performance. Thus, we expect to generate positive EBITDA during the quarter. While we anticipate EBITDA to improve, it will still fall below the fixed charges for the quarter, primarily interest and pension, as these cash flows are seasonally higher in Q3 versus Q2.

We are judiciously managing capital spending, but anticipate an uptick in spending as we invest in programs that drive our cost reduction targets for 2014. And as I mentioned before, we made the second investment into our China project during Q3.

Production volumes will increase in the quarter. Our forecast is built around the assumption that the overall market will strengthen during Q3 and our market share should begin to gradually recover. Thus, volume will grow and working capital will continue to have a positive impact.

As I mentioned earlier, I'm forecasting cash payments for warranty to exceed expense. This will manifest itself through working capital.

We continue to remain confident with our overall liquidity position. We are carrying a large cash balance in order to demonstrate to all of our constituents, vendors, customers and shareholders that we have adequate liquidity to support our turnaround strategy. In addition to our existing cash, we continue to have additional liquidity available from NFC.

So in conclusion, the second quarter presented some challenges. While we are not satisfied with the results this quarter, I believe we are taking action to put the Company on a better path going forward. We are carefully managing our spending, while taking action to satisfy our customers. We are ahead of our goal on structural cost reductions. We have launched the 13-liter engine with SCR and we expanded the number of vehicles that offer the Cummins ISX Engine. From here, we expect volumes to expand and our results to improve.

I will stop here and let Jack put more details around the actions we are talking to drive continuous improvement in our business. Jack?

Jack Allen - EVP and COO: Thank you, A.J. and good afternoon everyone. This is my first time joining you as Navistar's Chief Operating Officer and I have got to know many of you over the years in my previous positions with the Company and I am honored to working with you in my new role.

Let me kick off my portion of today's remarks with a little more color on the leadership change, Troy mentioned. We are enhancing our organizational capabilities and we are thrilled that Bill Kozek is joining Navistar as President of our North America Truck and Parts business, the job I held prior to being COO. Bill joined us from PACCAR, where he most recently headed up Peterbilt and before that held a similar position with Kenworth. His insights and perspectives on the industry and customers will help us improve the business and it's really critical to our turnaround.

So turning to Slide 16, today I will focus on the three key elements of our Drive to Deliver plan; quality, our product launches and delivering on our 2013 operating plan. As you heard, we've made a lot of progress. So we've had another priority, building our sales momentum to improve our market share.

On Slide 17, let's start with quality and warranty. As you know, we had a handful of EGR related quality issues with our 2010 engine launches that resulted in higher than anticipated warranty expenses and we're fixing them. We launched a field campaign earlier this year. We thought it would take about 18 months to complete. For customers (totals) we needed to move faster and it was impacting our ability to sell trucks. So we refocused our plan. We put more resources on it and we accelerated our response.

Now, five months into the process, the EGR valve campaign is more than 68% complete. We focused on getting this done and we anticipate it will be largely behind us by the end of this summer. So here is the positive, customers are seeing the benefits, vehicles are operating well, uptime continues to improve and the trucks are not coming back for repeat issues.

The warranty charge that Troy and A.J. talked about earlier is specifically related to this process. As we upgraded the EGR systems, we uncovered other repairs related to EGR components, and as Troy said earlier, the higher EGR rates stressed some components, particularly in tougher applications. So we said back in December that additional field campaigns could be required to ensure that each and every customer knows they have the latest and best components available.

We elected to make repairs related to the EGR componentry now during the current campaign and we revised the cost to complete this existing campaign. We're also addressing later-in-life EGR issues on big bore engines, and on medium duty engines, but to a lesser extent. The good news is a limited number of vehicles that need repairs. We know where they are and we know the upgrades that we need to make and we strongly believe that the newer EGR engines won't have these same issues, because the fix has been made in production. And our data indicates SCR engines won't have them either due to lower levels of exhaust gas in the system.

Meanwhile, the trucks we are building today are the best we've ever built from a quality standpoint. For reasons said are on better design and manufacturing processes. For one we've implemented our manufacturing execution system at our Escobedo truck plant and now we are rolling out MES in our other plants.

As our plants get better our trucks get better too. Our three months in service repair rates have decreased by 40% across medium and heavy product lines since October 2011. The results are evidenced in our new product launches.

If you go to Slide 18 we launched the ProStar with ISX 15-liter on time and we have over 5,800 orders to-date. The results about 3,200 of these customers like what they are seeing with the ProStar ISX and we've gotten very positive reports from them on up time and fuel economy.

This was pretty much a flawless launch and we applied the same discipline in quality and focus to our MaxxForce 13 SCR launch, with the 13-liter. We started running our cab and test fleet back in January. We conducted a very thorough testing and validation. Our goal is to put 400,000 miles on our vehicles before launch and we had twice that number. Today we are at more than 1.3 million miles and these miles are an indicator of quality. The uptime we are experiencing is what enabled us to get more miles. The trucks didn’t break down. And that bodes well for our customers who are experiencing these trucks as they come forward.

We started taking orders in March and today we have over 2,200 orders. Right now there's only a few of these 13-liters that are out in the market. So it's too early for any initial quality data, but we don't expect any notable issues.

Recently we did a ProStar 13-liter ride-and-drives with industry trade media and the response was outstanding. One reporter tweeted from the event, 'my initial impressions of the SCR, MaxxForce 13 are all positive, which is more powered than the EGR version; smooth throttle response, very quiet.' And we know our customers are going to feel the same way. We're confident we have the right products and we're working hard to convince our customers. So now that we're through the product launches and quality is improving, our next biggest challenge is to gain sales momentum and recapture market share.

So turning to Slide 19. Last quarter we said we anticipate the Class 8 truck industry would be down about 7% from 230,000 in 2012 to 215,000 this year. And today our forecast remains the same.

So now let me give you a little perspective of our market share. Back in 2009, Navistar Class 8 market share was in the mid-20s. And I might point out that back then our main product was the ProStar with the ISX as well as the ProStar with our 13-liter. Share bottomed out in the first quarter of this year at 14% and we finished Q2 at 15%. So clearly we have work to do. But we're headed in the right direction.

We've made significant business improvements over the past few years; all aimed at enhancing our market position. For example, we have new dealers in key markets. In fact we've transitioned 21 markets since 2009. From the Bay Area in California to Atlanta, Salt Lake, Indi, Toronto just to name a few. Some of this has been organic, but we've also attracted many new dealers who have experience with other OEMs like Volvo Mack, Peterbilt and Freightliner. And our dealers have invested more than $100 million in facility improvements in just the past few years alone, resulting in a 22% increase in service hours in 2012. So, if you take all of this, combined with the quality improvements and our investments in the ProStar line, these all show we have a solid foundation to regain market share.

We didn't lose share for a whole multitude of reasons. It happened because of a very narrow set of reasons. Number one, we didn't have a product in the 15-liter market. And our customers lost confidence in our emission strategy and in some cases our company. So, we will work to gain this back one quarter at a time.

The biggest factor in boosting sales momentum is having 15-liter and 13-liter product coverage, and our coverage is rapidly increasing. We launched our 15-liter in Q1 and the 13-liter SCR during the last week of our Q2. So, it's no surprise that our market coverage of SCR products average less than 15% in the first quarter and grew to 50% in Q2. But this will quickly rise to 80% in Q3 and 95% in Q4 and will be at 100% as we enter 2014.

So to see how we're doing, let's turn to Slide 20. As I said, our market share bottomed out in the first quarter of 2013 at 14%, and was just up a bit in Q2. But we will build 25% more Class 8 trucks in Q3 than we did in Q2. And our order book for Q3 is nearly full. And it's our intention to build 18% more Class 8 trucks in Q4 than we did in – that we will in Q3. So, how are we doing this?

Well, let me share some information with you about incoming orders. So, the total orders from May, which is our first month of Q3, were 39% above average order intake in Q2 and for on-highway trucks, so trucks built with a 13 or 15-litre engine, we were up 83% or the average order intake in Q2. So, clearly, we're gaining momentum. But as we've all said, we just thought it would be sooner.

So, if the industry forecast hold, we expect full year Class 8 market share to be at least 15%, and our end of the year run rate will be in the range of 18%. As for medium duty, we've taken a market share hit and is primarily related to our challenges in Class 8. Purchases from leasing companies account from 35% to 40% of all Class 6, Class 7 trucks sold each year. As we improve our Class 8 share with these customers, the spillover effect will help us on the outside just like it hurt us in the past few years.

And speaking of medium, we have an important announcement this afternoon. We will introduce SCR in our medium duty engines at the beginning of calendar year 2014. And we selected Cummins as our aftertreatment supplier. For past nine months, our engineering efforts are centered on adding SCR to our big bore engines. Now, this effort shifts medium duty and we're going to move as quickly as possible, but we won't compromise any of the quality gains we've made. And with this plan, we expect to avoid NCPs on medium duty engines, and it's likely we even have credits leftover.

Now on Slide 21, let's turn to the financial performance from an operation standpoint. In many areas, things went very well in the quarter. As Troy and A.J. mentioned, we continue to make progress on the controllable items of our operating plans. With SG&A and overall structural costs, we stated our 2013 goal is $175 million, but we are on track to deliver $200 million, and (it is done) by reducing spending and headcount and driving efficiencies. This will carry into 2014.

Our Parts business has been a real success this quarter. Revenue was up 7% in Q2 and profit is strong. It's due to controlling costs and spending and through better pricing strategies and we expect that trend to continue.

In Purchasing; we started an aggressive cost reduction goal. We are driver for year-over-year material cost improvement and we are ahead of our plan for the first half of the year. In manufacturing we have transitioned out of Garland. We moved production to Springfield and Escobedo. This will enable us to lower fixed and variable manufacturing costs and we will see these benefits in 2014. The used truck market continues to be strong. We sold 14% more this quarter than we did in Q2 last year. Our used truck inventory value went down by $27 million versus the first quarter. All of this progress continues with the backdrop of declining defense revenues.

So on previous calls we told you how we are improving our organizational capabilities, we are focused on functional excellence. We had some hard work to do. But things are getting done better today than before and to achieve this functional excellence we recently completed a benchmarking effort and helped us to see our business in new ways. We know what it takes to be best in class in all functional areas and that's our goal. We are making changes to further improve our efficiency and effectiveness and our cost structure and as a result will be in a stronger position in 2014 and beyond.

Turning to Slide 22; since the very beginning of our turnaround we said we would do whatever it takes to win and that includes shedding non-core assets. Our most recent proof point is the sale of Navistar RV to Allied Specialty Vehicles. Add this to the actions we've already completed over the last nine months, we've exited our truck and engine joint venture with Mahindra in India. We eliminated our own 15-liter engine, closed Garland, sold Workhorse, and sublet a portion of our Alabama manufacturing facility.

So in summary on Slide 23, we're not pleased by the incremental warranty expense we incurred this quarter, but we put our customers first and we believe that's going to pay-off with their increased satisfaction and repeat business. We continue to make progress this quarter on our new product launches, quality gains and across the board business improvements. We know we still face headwinds, but we're executing our plans to regain customer confidence and market share and we're already seeing the results in our increased order intake. I couldn't be proud of the men and women at Navistar and our dealer personnel for everything we've accomplished so far. We remain focused on building our momentum in the second half of the year.

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

Troy Clarke - President and CEO: Thanks Jack. As we stated, 2013 is a pivotal year. It's really our turnaround year. When we launched our Drive to Deliver plan, we said we're going to do whatever it takes to turn our business around and for us that means targeting an EBITDA run rate in the 8% to 10% range by the end of 2015. We have more to do but this is the right target. We're excited about the progress we're making.

So let me elaborate a little bit by laying out the major building blocks you'll see towards this goal. First, our vision is not based on a large market recovery. We believe the market will improve but we need to be more profitable in our core businesses at times in a cycle like today. To get to our EBITDA goal, we see the ability to make additional progress in the following areas; one, in the area of fixed costs, our benchmarking efforts indicate that we can further SG&A and product development costs through efficiencies we've identified with our co-located enterprise and engineering center. Additionally, manufacturing costs will reduce as we become leaner in our manufacturing processes and practices and as we have noted in the past we will plan to consolidate engine operations like we have with assembly into fewer more highly utilized facilities.

Two in the area of variable costs we see even more opportunity to reduce material and logistics cost across the entire truck to include harvesting the savings from the elimination of the EGR hardware on the engine and the truck that is no longer needed. We expect our cost of quality will become less as we proceed on our journey to quality leadership and with quality and product performance we believe it becomes easier to hold on to price in the market. And last but not least we anticipate further growth in earnings from regaining our market share as well as our businesses like service parts, MWM and our paired down but profitable global business. These are the areas of our businesses where you will see significant progress in the coming years.

In closing we said 2013 is our transitional year and I'll admit hey it feels good to have these product launches well underway and the results look so promising.

In all areas of plant we continue to improve and gain momentum yet we are not satisfied with our overall financial results. We are already implementing the right leadership and business changes however to effectively solve the issue of market share and cost of quality.

The second half of the year remains an important part of our drive to deliver. Thank you very much for your time this afternoon let me turn it back over to Heather.

Heather Kos - VP of IR and Financial Communications: That 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 ready to open the lines.

Transcript Call Date 06/10/2013

Operator: Stephen Volkmann, Jefferies & Company.

Stephen Volkmann - Jefferies & Company: I am wondering if you guys might be willing to address what's going on with pricing. I guess I'm trying to figure out vis-a-vis the kind of miss on the top line here, how much of that was things like market share and how much might be something like pricing and what we should expect in your order book? As you kind of give guidance for 3Q and 4Q, how does pricing look in that environment as well?

Andrew J. (A. J.) Cederoth - EVP and CFO: Steve, it is A.J. I think the year-over-year decline in revenue is really driven primarily by volume, which is really market share and mix. I think when I look at our data year-over-year, our pricing hasn't materially changed. So the change in revenue is driven by that. Also in the quarter the accounting correction also reduced revenue by approximately $100 million as well. So those are the big pieces in the year-over-year change. I'll let Jack comment around our strategies going forward.

Jack Allen - EVP and COO: Steve, what we're really trying to do here, and we've said this on numerous calls, is in a very measured way gain back our market share one quarter at a time. The market is very competitive right now. There is excess manufacturing capacity in the market. We expect the Class 8 industry to be actually down year-over-year by 7%. So the opportunities to drive pricing are really limited and probably just limited to the most part collection of the commodity increases that all of us have experienced. On the other hand, we are very comfortable with our product line and our quality and the performance, and we are presenting a very strong value proposition to our customers.

Stephen Volkmann - Jefferies & Company: But it sounds like what you are saying is, you do expect to capture the increase in commodity costs?

Jack Allen - EVP and COO: In our experience, yes.

Stephen Volkmann - Jefferies & Company: Then just finally on the warranty, gift that keeps on giving I guess. When do we get some kind of comfort level that we've kind of got all of this under control? I mean, it feels like we've been through this a couple of times, so maybe it's not even answerable. But how do you know that we're not going to see another one of these in the next couple of quarters as we continue to work through the backlog here?

Troy Clarke - President and CEO: Steve, this is Troy. So, let me take a shot at that. Now that the 2010 engines – a significant number of the 2010 engines are out of their base warranty period, we think that gives us a really good idea as to what the total exposure would be if we made no improvements on the quality of the engine in the succeeding years. Yet we know we have. So, we believe that we don't – not just believe, but the numbers for 2011 and 2012 and 2013 are lower. We're trying to be a little conservative with regards to not making assumptions if they go significantly lower. The second thing is, is that we have these field campaigns, and when you have these field campaigns, there is just a lot – there is a lot of spending that's really related to making sure that the customer who kind of didn't want a truck in there to begin with is satisfied when he leaves. So, between those two factors, we believe we're getting arms around the big bore warranty spend. One of the things that now, I think, does maybe present some risk to us is our mid-range engine spend. Those are still EGR engines and although to a different scale, nowhere near the magnitude of the cost around the big bore engines, those engines experience similar issues and we're trying to get ahead of those, so that we don't incur this seemingly unending pre-existing adjustment. So, if we can manage those three things well, we're pretty confident that we have a trapped population so to speak of these engines and those numbers should start coming down.

Stephen Volkmann - Jefferies & Company: If you have improved the population a little bit, is there a scenario where some of this actually reverses at some point?

Troy Clarke - President and CEO: It’s certainly possible. And we would certainly hope that's the case, but that's kind of not how the accounting process works. So, we really are booking what we think is the realistic costs that these engines will experience in their life.

Andrew J. (A. J.) Cederoth - EVP and CFO: Right. I think that would be difficult to forecast something like that, Steve. But I think, to Troy's point, there is a lot of good changes that have gone into the products in order to come up with these estimates.

Operator: Andy Casey, Wells Fargo Securities.

Andrew Casey - Wells Fargo Securities: Couple of questions there. We realize this is a turnaround situation, and so far the actions seem to be good. I'm just wondering about the profitability and, A.J., you may have talked about it. Is Navistar still in a position to generate positive earnings in Q4?

Andrew J. (A. J.) Cederoth - EVP and CFO: Well, I don't think that we've gotten into that granular level of detail for Q4. I think going back to the last quarter, Andy, we talked about taking this one quarter at a time. When you look at the changes that occurred in the business from Q1 to Q2, obviously, the warranty kind of overwhelmed the quarter. We did see lower defense revenue in Q2 versus Q1. We had a little bit of restructuring one-time charges that flow through this quarter. As we look into next quarter, we don't expect the warranty to repeat itself. So the warranty costs improve; volumes starts to come back into the equation in Q3. We are also seeing very nice improvement in our business in South America. That continues to improve. As Jack alluded to, we don’t have a high expectation for the defense business to show a lot of signs of recovery this year, given what’s going on in Washington. We will start to see less of these one-time charges flowing through. So it will be a much pure play on the business as we come through Q3, and then I think that starts to build momentum for Q4.

Andrew Casey - Wells Fargo Securities: Just a follow-up on that question. If I look on Slide 34, it looks like your dealer stock inventory has been creeping up over the last several quarters and it seems if I am reading the chart correctly to be at the highest since Q2 '08. Is all of that EGR related engines and is there any expectation that the dealers may need help to move that?

Jack Allen - EVP and COO: Our dealer stock inventory turnover is at normal levels. What we are really – you are really seeing from building up here in the last couple of months is some of it is in new products. So ISX Engines coming forward into the marketplace is one, along with just the anticipation here as we said all along of the second half of the year being stronger than the first half of the year. So this is a building in inventory in anticipation of a stronger market in the second half of the year. If you go back in time, on this chart, boy, it goes all the way back to 2003, our dealer stock inventory levels by any historical measure other than the throes of the recession, our inventory levels are in fine shape.

Andrew Casey - Wells Fargo Securities: Then on a longer-term basis, this 8% to 10% margin goal has been interpreted a few different ways. It's very clear now it's an exit rate 8% to 10% EBITDA margin goal. What sort of volume improvement – I know Troy, you indicated not much, but what sort of volume improvement do you think needs to occur to hit that goal because when we're looking at the revenue year-to-date and there's a lot going into this comment, but it's approximately $1.1 billion last year. So I'm just asking it in the context of what is the earnings' promise potential when we look out to 2015?

Troy Clarke - President and CEO: Yes, Andy. So thanks for asking the question because a large part of what we're doing here with regards to pulling costs out of running the business is to lower our breakeven point so that we can take advantage when the market does come up. But the market doesn't have to go back to where it was in years past. Basically, when I kind of lay that 8% to 10% out in the groupings that you saw, we're thinking about an industry that's 240 to 250 for heavy and a market share that's in the 20s, not over 25%, but over 20%, between 20% and 25%. That's kind of the range that we're thinking about as our kind of planning sweet spot. Then as the market cycle is up, obviously we think we are going to do a little bit better, as the market cycle is down, it will shave a couple of points off. But we think that kind of EBITDA margin in that kind of volume and share makes our business a lot more robust than it has been in the last couple of years. Is that helpful?

Andrew Casey - Wells Fargo Securities: It is. I was wondering, since you gave the heavy, is there a consideration for the medium duty?

Jack Allen - EVP and COO: The overall industry would be in the – this year, we're anticipating 306, last year it was 317. So the 8% to 10% EBITDA is in the 3.25 to 3.35 ranges would be as high as it ever been.

Troy Clarke - President and CEO: We are thinking in the medium our share would be between 25% to 30%. So there is modesty or so conservatism and are trying to plant for that.

Operator: David Leiker, Baird.

Joe - Robert W. Baird: This is Joe on the line for David. Just with the commentary on orders just to get detail if the order rates are running up 39% but the plan is to build 25% more sequentially is the expectation that the order progression slows in to June and July is it a case that the order books and you are in capacity. So any incremental orders you get late in the quarter helps fill out the fiscal Q4 schedule.

Andrew J. (A. J.) Cederoth - EVP and CFO: When we receive orders some are for immediate build. Some that customers ask for them to be spread out over the near term months, and that’s really the phenomenon that you are seeing here, relative to your calculations.

Joe - Robert W. Baird: Do you happen to know in terms of plan how much is left to go or how much of your planned production still needs to be filled by orders?

Andrew J. (A. J.) Cederoth - EVP and CFO: I don’t have that in front of me as I said we are, our third quarter ends in the end of July and for all intend and purposes we are gradually fall through July and we have orders on the books for August, September and October but also plenty of capacity to accept additional orders and build them in first quarter.

Troy Clarke - President and CEO: The majority of the book is not filled over 50% of the book is not filled for Q4 yet.

Joe - Robert W. Baird: If I can just sneak with a quick one do you happen to know the mix of the orders you have been getting in recent months between 13 and 15-liter?

Jack Allen - EVP and COO: I do. The last number of months the order intake has been about 50% ISX's. And the ratio between the EGR and the SCR, the SCR just keeps going up every month. But there's still a number of customers that continue to order the EGR engines as we wind down that transition.

Operator: Andrew Kaplowitz, Barclays.

Andrew Kaplowitz - Barclays Capital: Troy, maybe if you can just talk about this market share run rate guidance for the end of the year or your goal. Navistar has given out these goals in the past and we know what's happened with them occasionally on the market share goal. And then I always worry, when you give that market share goal that it's a focus on market share versus profitability. I know you are going to tell me otherwise, but maybe you could talk about your confidence level in market share sort of reaching these rates and I know it relates a little bit to the previous question, but just how you feel about it? I'm a little bit surprised that you've given a goal, I think that's a good thing, but at the same time you know the history of the Company?

Troy Clarke - President and CEO: No, no Andrew. That's a great question. First off let me just kind of restate. What Jack said in his presentation was, he said we would have a market share of 15% for the year. So we kind of ran that in the second quarter, right. So that implies that in the third quarter. We pick up a little bit more or between the next two quarters we pick up another point or two just to be able to get the math to workout. So, I don't think that's really overstating that we would be able to expect to get into the 16% market share range, especially with the product offering that we have. And then, I think the more important thing that Jack said though is that, we think we have an improving trend as we exit the fourth quarter. Let me give you a little background. Number one, we think we got some great product here. We've not really made any superiority claims or claims at all yet with regards about the improved fuel economy. But the SCR systems on the truck does give fuel economy improvement and we're getting a lot of great feedback from the folks who have had had – who have some of these trucks in their fleet. So, we really do think we have something special to sell. All the proper attributes of the ProStar and the drivability, and all that good kind of stuff, so we still think we have something to sell there. And then these major fleets, these are – this is we're tipping in in that fourth quarter for the period of time where you start getting the larger fleet buys come through. Now as Jack said, some of those are spread out. They will make the orders in the fourth quarter. You deliver some in the fourth quarter and a lot of them you deliver in the other quarters as well. But I think that suggest that we go from a 15% average to an 18%. That's pretty doable, especially with regards to the markets share coverage you have now. If I had told you that we were going to go to 22%, you might say I don't know how the math works on that right. It's kind of like you are bowling average, right. The longer you go through the year, without bowling games over 200, the higher it is – the harder it is to get your bowling average up. But I think with the order intake rate that we have right now and where we see the market going for balance of the year, we're pretty good. We're pretty good with our estimate and I'm not – I'm not really – I don't want to say I'm not concerned. Obviously we're looking at selling trucks every day, but I don't think we're overstating what we can do yet this year. And it's really important for us to get the run rate going. We need the momentum going into 2014, because even in 18% run rate, it is not where we want this company to be and not where this Company will be.

Andrew Kaplowitz - Barclays Capital: So, maybe I could ask you about the overall market. I mean, you've alluded to it at a couple of times in the presentation that you expect the market to improve in the second half of the year here, and we all can see the order numbers for the market and they've looked pretty good over the last few months, especially as we enter, what can be a seasonally slower time. So, maybe you can talk about that? Do you expect sort of industry order rates to sustain or even improve from today's levels and why?

Jack Allen - EVP and COO: Joe, this is Jack. Our plan was built on increasing market for the third quarter and fourth quarter, not dramatically over the first and second quarter, for just a steady increase and it really is what we are seeing. So order intake grades, we expect them to stay where they are maybe uptick a little bit as we get to the end of the summer, as you know, typically in June, July time period order seems to be a little softer and they kind of pickup near the end of our fiscal quarter and that's what we expect to happen. If that does happen we will hit our industry forecast for the year. If you track the averages, they are tracking very consistent with what our plan has been. Kind of the reasons why, there is on the positive, there is positives and negatives. Clearly, there is still a lot of concern about what's going on in the economy, concern about drivers, concern about the new hours of service regulation. But on the other hand, fleets see better performance on newer vehicles, better fuel economy and lower maintenance costs, whether those are our trucks or our competitor's trucks. As they see that those that are well-capitalized and well run, they are the ones that are buying the trucks right now.

Troy Clarke - President and CEO: There is – I mean in a macro level there is a tick up in construction and there is a tick up in industrial activity, both of which are key indicators that drive, I think the overall market.

Operator: Jerry Revich, Goldman Sachs.

Jerry Revich - Goldman Sachs & Co.: Troy, I am wondering, if you could just flesh out for us the cost savings opportunity from engine manufacturing consolidation now that we are another quarter in, and if you could just talk about timing? Clearly, you have got a lot of capacity in that business, and just if you could step us through how we should think about when you actually move forward with those efforts?

Troy Clarke - President and CEO: So, Jerry, here is the deal. We make engines in three different facilities today. The fact of the matter is we probably need one facility to make those engines. The problem is that the vintage of manufacturing technology in each of those facilities is different. Our older, more traditional products tend to use captive transfer line kind of technology, which is big and hard to move and underutilized. Then, of course, when you get down to some of our operations in Huntsville, we are able to use agile, flexible machining centers. So we have a handful of proposals that we've developed internally. That, depending upon how much money we want to spend, will tell us that we could pull the trigger on that consolidation next year and be done in 2015, or we could do it in pieces and be done in – actually into 2016. So it's important that we get this done in order to get the – to the cost rate that we are trying to get to, and we are not making any announcements today. We obviously have to – we have to select the technical route we are going to go down and we have to go talk to the right folks about it as well. But I would say before the end of the year we will have selected that path and laid out the timing, and then you guys will hear about the announcements as we are ready to make them. But, look, we don't make any money with underutilized manufacturing facilities. It's just a given for our business, and the kind of circumstances we really want to be in is where we always need the capacity to build one more as opposed to having the capacity to build one extra.

Jerry Revich - Goldman Sachs & Co.: Troy, just order of magnitude of the savings, are we talking multiples of what you're going to save on Garland or comparable levels? Can you just calibrate us?

Troy Clarke - President and CEO: So if you think about the Garland thing, let's just say it's probably in the same zip code, it's in the same ballpark, and again it depends on how we view it, but it's in the same ballpark.

Jerry Revich - Goldman Sachs & Co.: Lastly, A.J., on the EBITDA guidance for the third quarter on 25% higher production rate, so I think that implies under 10% incremental margins and you folks typically have high absorption when you ramp production. I am wondering, if you just step us through what are the sequential headwinds that we should be thinking about, or is it just the function of, hey, we've got a new product cycle here, so we want to make sure we can execute?

Andrew J. (A. J.) Cederoth - EVP and CFO: I think there's a couple of things that are influencing us this year, Jerry. First, there is quite a bit of moving around within manufacturing. So we've got some startup costs factored into that quarter as we ramp-up production in Springfield and realign manufacturing. The second thing we've talked about is with the addition of SCR to our products, we are adding material costs to our products during this transition. We've talked around the timetable that it will take to properly design the SCR system and to optimize that integration into the truck. We won't have that done in Q3. That will be things that come in 2014. So during this transition period our margins will be a little bit lower, because we've got added material content on the truck.

Operator: Ann Duignan, JPMorgan.

Ann Duignan - JPMorgan: Troy, can you just talk us through what exactly happened that caused the disappointing market share at this point? And then what is Plan B if we turn around a quarter from now, two quarters from now, and the market share has stalled out at the 18% or whatever?

Troy Clarke - President and CEO: I guess I referenced and I said that up in my comments, we had expected our market share to ramp up faster. In the heavy, quite frankly, we thought the take rate on the ISX would have been much faster in the ramp up than it really was, if I could just be extremely candid. We recognize that we were in the process of changing that 13-liter, and so you kind of either like EGR or you don’t like EGR, but that was going to kind of be what it was going to be. What our plan really was, ISX and ProStar, I have had fleet managers tell me they think that’s probably the best trucks that they've ever had. So kind of on that anecdotal evidence, we thought the take rate would be higher. Quite frankly, maybe this is a good thing. As Jack noted, orders are still coming in kind of 50-50, 15-liter and 13-liter. So I guess those who say really there is no 13-liter segment of the market, it's really a 15-liter segment, then you are pricing down for 13, that may not be true. It turns out there is a lot folks out there who like the 13-liter, so I would tell you that’s kind of at the beginning of that. With regards to the, what's Plan B if the market share on our heavies doesn't increase? Well, I guess, Plan B, the first part of that is, we're going to go figure that out. We think we have a product that's extremely competitive, and if it's not selling, then we're probably not doing something right, okay. Then the second thing is, I think this probably gets maybe to what your question is, can you successfully run the business at an 18% market share over 240,000 or 250,000 unit heavy market? That's probably tough to do. I mean, that's probably just below where we think are in the breakeven range that we're at. So, haven't fully studied that up. I mean, obviously, it's just numbers, but I think we'll keep focused for the time being on getting our market share back. Jack referenced this process that the guys have put in place to make the sales process little more visible for us. Quite frankly, it's a great process and I'm very encouraged by the opportunity for us to get in front of the folks and tell our story.

Operator: Brian Sponheimer, Gabelli & Company.

Brian Sponheimer - Gabelli & Co.: One of the positives in the quarter was the Parts segment. Just talk about how repeatable this is, is this kind of mid-teen profit margin and what you are thinking about going forward?

Jack Allen - EVP and COO: This is Jack, Brian. Our Parts business was very good in the quarter, really so far in the first half of this year. There's been an uptick in the military parts on the revenue side, on the North American side although the sales are not as may be as robust as what we'd like. As part of our overall structural cost reductions, we've gotten extremely lean in the parts business. And we've also employed some very sophisticated pricing strategies and the combination of that has improved our margins and lowered our cost. And we absolutely believe that's sustainable going forward into the third and fourth quarter.

Brian Sponheimer - Gabelli & Co.: A.J. just for a second talk about the out of period adjustment with GE, and if this is something that we should expect in Q3 and Q4 and the first quarter of next year?

Andrew J. (A. J.) Cederoth - EVP and CFO: Well, I'll answer the second question first. No, we don't expect to have any out of period adjustments. What this is really related to our fleet transactions that get financed through GE Capital with a lease. And the complexities of lease accounting really dictate that we should amortize that and not treat that as a true sale, even though we did sell the truck to the fleet, who subsequently financed it. So, that's really what's driving that. It's kind of – as we've gained momentum here, this volume of financing has really risen to the level that we checked it a little more carefully this quarter and found that it's probably more appropriate that we amortize those transactions over the life of the lease, rather than book the sale at the time of the sale. Again not a big impact to the bottom line, but it is corrected and we'll treat it correctly going forward.

Brian Sponheimer - Gabelli & Co.: Okay, and not to beat this into the ground, but just on the warranty side, should I be reading correctly that we're going to be looking at a medium duty engine campaign at some point in 3Q or 4Q?

Troy Clarke - President and CEO: No. We've made no announcements with regards to field campaigns on the medium duty, and at present we're managing through the normal warranty system. By the way, let me just say there are small campaigns that probably affect most of our products on minimal kind of items. So, not a large field campaign that we have yet to announce, okay.

Operator: Rob Wertheimer, Vertical Research Partners.

Robert Wertheimer - Vertical Research Partners: Let me circle back to the GE financing. Was there any change in commercial practice that led to this, I mean I guess A.J. mentioned the volume got bigger. But was there some sort of a different practice and then does it related to either an enhanced trading price and/or change in residual values that would make that whatever trading price was offered more relevant?

Troy Clarke - President and CEO: The answer is no. There was no change in any of our commercial practices. It was really just the volume of the business reaching a level that we did some further investigations. It's really driven by our overall commercial agreement with GE Capital, not any specific transaction of a deal.

Robert Wertheimer - Vertical Research Partners: Then, I just want to make sure, I understand when the 2010 is go out base warranty, does that mean the exposure that you have is over or I'm not sure I understand the things between not and some of the campaigns you might do to keep customers and customer attention et cetera. I don't know whether you are out of the woods on those or continuing to fix family even though they are out of warranty?

Andrew J. (A. J.) Cederoth - EVP and CFO: So, Rob, we have kind of two things we do. One is, we do have some extended warranties on a portion of that population, and which is industry conventions. So, you have a normal warranty and extended warranty. The customers pay for that extended warranty. So, we just have to extend the warranty period and that ends up getting netted against what we end up having them paid for that. Then the second thing is, in the vehicle industry as a whole, there is think called policy. Look if someone is 1 mile or one week over their warranty period and the truck breaks down and comes into the dealership that's the kind of thing where we would use discretion and probably cover that under the original warranty. The important thing about what I said though was, we have a statistically significant sample of 2010s that are through their base warranty period. So given the volume of that product and the failure modes that we have observed, we believe we have a very good view of the potential failure modes and at least through that base warranty period through the probability of failure for any one of those major systems.

Operator: Patrick Nolan, Deutsche Bank.

Patrick Nolan - Deutsche Bank: First question is for Troy. I just wanted to revisit the variable cost savings and particularly the material costs that you referred to. Does the redundant – or however you want to describe, the EGR components that ultimately will come out of 13-Liter engine, does that come out on a model year basis? Is this something that will be done gradually over time and it takes several years? How should we think about how that cost comes out over time?

Troy Clarke - President and CEO: I think right now we are planning on taking two slugs at it. The first – let me put it this way. There is some truck pieces and there is some engine pieces. So, on the engines they are in effect EGR coolers that we no longer need to – that we no longer need. When we reengineer those off of the engines those are a significant emissions component and so we have to recertify the engine with the EPA. So that piece – we've already embarked upon that process and in fact, I would anticipate that next year, early next year, first half of next year, let me put it that way, we will recertify the engine and be able to pull those pieces off. After we pull those pieces off, there's pieces on the truck like an additional radiator, which really exists to service those coolers and some other things. Then so then after that, then we will engineer that off and so that will be kind of a second tranche that I'll anticipate we will get done by 2015 or early in 2015. So from an engineering workload right now and having to certify the engine with EPA again, we decided to do it in two pieces.

Patrick Nolan - Deutsche Bank: If I could just ask one follow-up for Jack. The overall Class 8 share actually improved versus Q1 but the severe-service took another dip down in Q2. Did that have to do with the leasing companies, it's kind of similar to the trend that we've seen in medium duty or is there some other trend going on there?

Jack Allen - EVP and COO: First of all, it's not really related to the leasing companies. It's really – primarily more driven by municipalities. Our severe-service market share traditionally has been very strong in the government business and as you would imagine with what's going on in state and local budgets, the municipality business is off a bit. I will say though that our order intake in the severe-service side has recovered a bit here during that quarter and in the month of May. So we think we will get that back. The other thing, you have to remember the severe-service portion of overall Class 8 is small, so it doesn't take many sales to really move up or down what your market share is.

Operator: Seth Weber, RBC Capital Markets.

Seth Weber - RBC Capital Markets: Most questions are asked and answered. But on the medium-duty transition to comment that procurement, do you expect any disruption or hiccup gaining customers away for that again that's the seamless transition?

Troy Clarke - President and CEO: I think it's a pretty seamless transition. We've been in the market with our EGR version going to SCR, this has been expected by the industry we've alluded to it before. So, we expect that will just be a smooth transition.

Seth Weber - RBC Capital Markets: Then just – as you look forward into next year, I think previously you talked about to '13, '15 mix being kind of like a 50-50, is that still the right way to think about it?

Troy Clarke - President and CEO: We don't see anything different today that would make us feel differently.

Seth Weber - RBC Capital Markets: Just lastly, did I hear correctly, no NCPs in the third quarter?

Troy Clarke - President and CEO: I think if you refer to my comments what I said was that we – due to the plan we put in place on medium-duty. We don't anticipate that will have any NCPs on medium-duty engines.

Operator: Tim Denoyer, Wolfe Research.

Tim Denoyer - Wolfe Research: Just one more quick one on the accounting the revenue recognition. On the cash flow statement there was a $263 million in proceeds from finance obligations. Can you explain was that related to the accounting change and can you explain what that cash inflow was?

Andrew J. (A. J.) Cederoth - EVP and CFO: It's not really – it's an accounting statement, Tim. So, it's not truly a cash inflow that's recording the deferral. There's an offsetting cash flow in up above that. So the true cash flow is zero.

Tim Denoyer - Wolfe Research: Can you give any timing on the medium duty transition over to SCR at this point?

Jack Allen - EVP and COO: Well, we'll start in the first quarter of calendar 2014.

Operator: Joel Tiss, BMO.

Joel Tiss - BMO: I just had one big question. It looks like the structural costs for the last quarters had been running about $100 million below year-over-year between the SG&A and the engineering cost. And I just wondered, obviously, that's a $400 million annual run rate, and I just wondered if you could give us any – like what am I missing when the GAAP between that and the $200 million that you guys expect of a full cost savings?

Troy Clarke - President and CEO: That's because what you are seeing there is the quarter-over-quarter where costs were higher in Q1 and Q2 last year, we had a pretty significant cost reduction effort in the second half of last year. So that run rate will slow, because we've reduced costs in the third quarter and the fourth quarter. But we do expect to exceed our target.

Joel Tiss - BMO: Right. Yeah, because there's lot of add-ons on top of that closing down businesses and things like that. And I didn't know – I didn't catch it if you mentioned….

Operator: I apologize, it will be just a moment we'll get that gentleman back online.

Troy Clarke - President and CEO: I think that's what happened to Ann too. Joel, you are back. Didn't catch the second question.

Joel Tiss - BMO: Sorry, I got cut off to early. The cost to complete the field campaigns, I don't know if you mentioned that or not?

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

Troy Clarke - President and CEO: Yeah, we did not.

Andrew J. (A. J.) Cederoth - EVP and CFO: One of the things we tried to emphasize was the accounting is a little difficult to handicap because it's very driven by how we spend the money and where. But the amount of money that we are spending has been incorporated into our forecast and we have a forecast for Q3 that we don't reveal it in that level of detail. But we are spending it the way we thought we would spend it.

Operator: That concludes today's questions question-and-answer session. At this time, I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Troy Clarke - President and CEO: Again, I certainly appreciate you hanging in there with us, this particular quarter with regards to the rescheduling of the call. Again, I apologize for having made you disrupted your agendas. For those of you who did not get an opportunity to ask a question and you got something burning, please call Heather. We're hanging around and we're available throughout the weeks. So, we can make an opportunity to chat with any of you with regards to the questions you maybe didn't get to ask or anything you need to clarify. Thanks a lot and look forward to seeing you on person in the near future.

Heather Kos - VP of IR and Financial Communications: Thank you.

Operator: That concludes today's presentation. Thank you for you participation.