Navistar Earnings Call Insights: EPA Engine Certification, Profitablitly Trends
EPA Engine Certification:
Stephen Volkmann – Jefferies: I’m not sure where to start I guess the question is – we’ll start with the EPA engine certification, you said in your Q that you resubmitted that I think in May. Do we have any idea I guess what’s the difference between what you submitted in February and what you submitted in May and what are your views on when and if this thing gets approved and how much of that is kind of build into your second half forecast which is just a massive sequential improvement?
A Closer Look: Navistar Earnings Cheat Sheet>>
Daniel C. Ustian – Chairman, President and CEO: For sure Steve. I think let’s define what we did there. In working with the EPA they asked us to – there were some spots that they wanted us to modify and so we did that and we have been running tests on that to make sure that they meet all the requirements not just of the EPA but our own requirements on performance and et cetera. And so we submitted that back to them and we are in the process now of working with them and getting that certified. So there is what that stands. Of course it’s hard for us since it’s somewhat out of our control. To tell you exactly is the timing on any of that so I hope you can appreciate that. But that’s the process that we are in right now.
Stephen Volkmann – Jefferies: Last time I guess we were talking about this, you said it would be sort of three to four months for the approval process, so does that clock start again now in May?
Daniel C. Ustian – Chairman, President and CEO: No, of course, not. But again it’s somewhat out of our control. But no there is plenty of background out there now that it shouldn’t take nearly as long. A man could argue we should have been down with this but we are not. So we have to go forward and get it done expeditiously. We are all over the top of this every minute of every day as you can imagine and so now we are in that process.
Andrew J. (A.J.) Cederoth – EVP and CFO: In terms of your second question Steve, you asked what’s the second half, I think it’s got – for us to achieve those goals I think we got to have this approved in a reasonable time frame here. Not so much from the costs, it’s just the aura I mean question here affects us in the marketplace. So we have to get this behind us over the next short period of time and get that aura in speculation that you and others have out there and get that behind us. And that’s – in order for us to achieve the second half that’s got to happen.
Stephen Volkmann – Jefferies: That kind of begs the larger question, which is sort of you can’t control what EPA does but you can control what you do. I guess the simple you is how long do you as CEO let this thing go on? I mean, you guys, you’re losing market share, it’s obviously starting to impact the core business, the warranties have been off the chart. So even what you got out there hasn’t been working very well. There are other solutions to this problem that are fairly simple and yet you guys just continue to kind of take these punches to the gut and as CEO, at some point you have to decide how long this thing goes on?
Daniel C. Ustian – Chairman, President and CEO: Well, we’re not losing market shares, Steve. We’re not gaining any and I think so – we’ll have to get this behind and then we’ll turn this around and get this thing risk on the other way and that’s what our target is to have – distracted into something else probably not conducive to the longer term objectives.
Stephen Volkmann – Jefferies: Maybe just a quick follow-up for A.J. At this point I think we have to assume that you guys have some again massive numbers for the second half, I think the credibility there is pretty close to zero. If we assume that things continue the way they are going right now, and you continue to burn cash, you guys are going to start to get pretty tight on your liquidity. I guess how do we think about covenants and revolvers and kind of what’s available and sort of how long this thing can go on before everything falls apart?
Andrew J. (A.J.) Cederoth – EVP and CFO: Well let’s kind of take those one at a time. I think volume in the first half, we have been working through some quality issues and a little bit of uncertainty in the market. We have the ability – the quality issues are improving and customer satisfaction is improving. We monitor that very closely, so we expect those are the factors that will drive higher volumes in the second half and allow us to sell products and be successful. We do not have any maintenance covenants, so our liquidity is presented on the page. We have $700 million – just short of $700 million right now and as volume continues to flow through the second half, that liquidity will remain sufficient. Of course, everything is contingent on volume. So, we have to sell trucks and we expect to be able to do that. Recall that the majority of our volume and the profitability of our businesses are driven by medium and school buses, and we expect both of those to recover in the second half, and those are impacted by this EPA issue, and our parts business. Look at the page that Dan showed you on what we did in our parts business in the second half of last year and what we’ll do in the second half of this year. And then of course, the other part of our business that will grow in the second half is our military. So, clearly, the second half has a lot of moving parts to it. They are not all contingent on the EPA, and so that’s why we remain confident in the forecast that we put out there.
Henry Kirn – UBS: You’re a third of the way into third quarter. Can you talk about whether the profitability trends have already shown any signs of improvement based on some of the changes you made? And then I know you can’t give details, but maybe some direction on how much of the path of profitability relies on defense and EPA certification timeline?
Daniel C. Ustian – Chairman, President and CEO: Henry, here is what I’d said. Say third quarter will be obviously better than the first half. We are going to be – we are a Company that’s backend loaded every year and this will be no different, but third quarter we will trend much better than the first half of the year. If you look at the trends in terms of our orders they continue to get a little bit better in terms of share. So we’re starting to fill in the rest of the year to get some confidence and being able to achieve the goals that are out there. But the fact is that we need to get the certification behind us, I don’t think there is any question about that, but you can quit asking these questions and we will have good answers for you and that’s the number one objective right next to getting the vehicles repaired from early production and get the warranty passes as well.
Henry Kirn – UBS: There is a follow-up, what have the customers been telling you about the importance of EPA certification in the purchase decision? Has the lack of EPA certification impacted your ability to get price, and do you have any view on how much demand is waiting for your trucks as soon as certification is achieved?
Jack Allen – President, North American Truck Group: The way I would answer that is – the customers that we’re doing business with today. They like the performance of the vehicles, they like the fuel economy. We are dealing (indiscernible) with the early quality issues from our builds. These customers are really, they are indifferent to profile of the point to certifications. But we are not satisfied with our market share. We want to grow back to where our historical levels are and clearly the overhang of the EPA efficiency is challenging us on being able to get back into a number of customers that we have traditional done very well.