Navistar International Earnings Call Nuggets: Pricing Outlook and Fourth-Quarter Earnings

Navistar International Corp (NYSE:NAV) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Pricing Outlook

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, its 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.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

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 in all of those I’ve 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 I guess that keep 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 quarter 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 2012 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 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 engines spend. Those are still EGR engines and although to 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 trap population service (indiscernible) these engines and those numbers should start coming down.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

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

Troy Clarke – President and CEO: It 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 airline.

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

Fourth-Quarter Earnings

Andrew Casey – Wells Fargo Securities: Couple questions there. We realized 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 is Navistar still in 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 to warranty to repeat itself, so the warranty 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 Hack 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 out 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?

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

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?

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

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.

Investing Insights: Navistar International Earnings Cheat Sheet>>

More Articles About:    

More from The Cheat Sheet