Q4 2019 Earnings Call
Turning to listen only mode. After the speakers presentation. There will be a question answer session to ask a question. During the session. You want me to press Star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Marty.
He kind of large vice President Investor Relations. Thank you. Please go ahead Sir.
Thank you good morning, everyone and thanks for joining us for Navistars 29, gene fourth quarter and yearend conference call.
Today, we'll discuss national performs and Navistar International Corporation for the fiscal period ended October 31 2019.
With me today, our tried part our chairman President and Chief Executive Officer, Walter Borst, Our executive Vice President and Chief Financial Officer, and Persio, Lisboa Executive Vice President and Chief operating Officer.
After conclude our prepared remarks, we will take questions from participants.
Before we begin I'd like to cover a few items.
Copy of this mornings press release in the presentation slides, that's been posted to the Investor Relations page of our website for roughly.
non-GAAP financial measures discussed in this call are reconciled to U.S. GAAP equivalents can be found in the press release issued this morning as well as in the appendix hold my presentation slide deck.
Today's earnings press release, Investor presentation, and our prepared remarks, and going forward looking statements about our expectations about future performance industry and financial performance.
And the company expressly disclaims any obligation to update these statements.
Actual results could differ materially from milk to justify our comments made here.
For additional information concerning factors that could cause actual results to differ materially from those included in todays presentation.
Please refer to our most recent FCC filings.
We'd also refer you to our safe Harbor statement and other cautionary notes disclaimer presented in today's material for more information on the subject.
I'll turn the call over to try Clark for opening comments Troy.
Thanks, Marty good morning.
Welcome to Navistars fourth quarter and year end earnings call.
All open with a few highlights on the quarter in the year and then I'll provide some insight on 2020.
Walter Walk you through some more details on the numbers.
Okay fourth quarter results, we delivered a solid quarter in the face of changing market conditions.
Fourth quarter consolidated revenues were 2.8 billion, well generating 102 million to net income and 219 billion of adjusted EBITDA.
Well at several accomplishments in 2019.
Revenue increased 10% over the $11 billion.
Adjusted EBITDA grew for the seventh consecutive year 882 million.
And we generated 263 million a manufacturing free cash flow ending the year 1.3 billion.
You bet shrink catch.
We also grew market share for the third year in a row.
One result, I'm proud to say, we're getting the leader in school bus growing market share three points to 36%.
And medium duty or class six seven retail share increased four point to 27%.
Significantly closing the gap to the market leader.
Grew class eight chair to 14%.
All in.
Our core retail share was up over a point.
18%.
In fact share has grown three points over the last three years.
In addition.
In 2019, we delivered over 10000, G.M. and international badge class four or five trucks in the first year production.
This number would have been hired not for the you end up you strike impacted our Springfield, Ohio plant.
Globally, we delivered over 100000 vehicles in 2019.
Delivering on the international brand promise, a quality and uptime.
For the second year warranty expense achieved industry best levels, representing 1.4% of revenue in 29 team.
As for Uptime, we made significant improvements, you're reducing repair frequency and repair duration.
A few key accomplishments include the formation of a service partnership with Love's travel stops grading the Industrys largest service network.
The addition of a new parts distribution center near Memphis to providing industry, leading parts availability.
Introduction of international Threesixty, a comprehensive and easy to use service communication fleet management platform.
And the creation of a predictive stocking system that uses art telematics data to help manage dealer parts inventories to the right level, but more importantly to ensure they have the right parts.
I guess Walter will go through some additional details on the quarter and the year.
Now I'd like to make some comments about 20 twond.
As stated in our Investor day event in September 2020.
In September excuse me 2020 won't be a repeat of 29 team.
The industrial be lower but it will still be a good year.
Its economy remains healthy unemployment is at a 50 year low consumer confidence is spending remains positive housing permits and approved.
Yes, the I assume manufacturing index has declined for the last four months, indicating contraction.
That's attributable in part to trade uncertainties.
We expect 2020 GDP to be near 2%.
Lower than 2019.
At 2% GDP growth freight demand shipping capacity are pretty balanced reducing the need to expand fleets.
We think the industry will be driven by replacement demand.
That is what was included in our original forecast.
We're holding our core market industry forecast for class six through eight in school bus to of 335 to 365000 units.
But sitting here today I guide you towards the low end of that range.
Recent industry orders have been running below replacement level.
As I believe the industry is working through a period of transition.
Then orders will pick up and recover in the second half a year.
Let me explain a little more.
At Investor Day, I described the industry's transition from the record year 2019, two year replacement demand in 2020.
Even today large numbers of new trucks are being deliberate and put in service to truck companies are benefiting from lower operating costs. It. It takes some time for the used trucks. They replaced to be taken out of service. So there's plenty of trucking capacity in the market.
Which puts pressure on rates.
With a lot of traits hitting the market used truck prices are declining and in cases, where the market value. They used truck drops below the book value.
As potential customers may defer their decision to purchase.
Joe conditions improve.
This is particularly the case for five year old classic sleepers, it'll take a quarter or two for the industry to work through this situation.
Class eight industry orders have declined over 70% in the second half of 2019.
Build rates are beginning to come down, but still exceed orders, which results in reducing backlogs.
Navistar backlogs are declining as well.
Orders during the fall order season have been weaker.
And this quarter, we reduced our backlogs.
In fact, our results in the first half a 2020, particularly Q1 production volumes.
Our Q1 November through January falls, right on top of the industry's transition period.
But as the market stabilizes the rest of 2020 will sequentially improve.
Walter will provide more color on how this is impacting our financial guidance.
We're taking some actions to adjusted 2020 industry levels and this transition.
We've adjusted Assembly line reached a balanced order intake and maintain a backlog necessary for the efficient operation of our manufacturing plant.
Over the past few months were reduced daily production by nearly 25%.
Manufacturing conversion costs are improving which they will schedules lower logistics cost lower premium freight as well as less unscheduled overtime.
Material costs will improve delivered by the procurement joint venture with trade to the easing of commodity prices in particular steel.
We are proactively managing trades to balance supporting customers and used truck inventory levels.
And last we're managing SGN, a and other costs.
We are adjusting assembly plants staffing to reflect volume adjustments.
And we are reducing global employment by over 10%.
2020 won't be a banner year like 2019, but it will still be a good year for navistar.
In 2020, we plan to increase market share for the fourth year in a row.
Improved margins over 2019, as we advance on our 2020 in 2024 goals of 10% at 12% adjusted EBITDA margin respectively.
Continue investing in the treated alliance powertrain and technology programs and the expansion of our Huntsville engine facility.
Proceed with the New Assembly plant in San Antonio, creating a 21st century manufacturing network.
Car service parts.
With increasing market share growing our all makes brands and our ecommerce efforts.
And we'll increase activities at next E mobility solutions.
Beginning limited production of electric school buses late in 2020.
Hey, 20, Tony will present, some challenges, especially over the next few months as the market transitions.
But we're prepared for these challenges.
These are the normal challenges of our industry.
The good news is that a resurgent navistars to serve is prepared to manage through them and prosper.
So let me turn it over to Walter and then I'll come back after his comments are done.
Thats right.
Indeed, navistar delivered a solid quarter and strong financial results for the year.
Market share also grew again in 2019, and we look to build on the success next year.
Let's begin by reviewing the fourth quarter results and before I provide an update on our 2020 guidance.
For the fourth quarter consolidated revenues were $2.8 billion, reflecting a 16% declined from last year.
You may recall that during the summer of 2018 production was constrained by suppliers were not able to rapidly increased production of certain components.
Delayed the shipment of trucks built in the third quarter.
In the fourth quarter of 2018, this disruption ease and nearly 2000 units that were originally produced in Q3 or charge out in Q4, driving very strong prior year period results.
Other factors impacting the year over year comparison includes the sale of 70% of the defense business earlier in the year.
Which had an exceptionally strong fourth quarter in 2018.
As was the impact of lower current industry demand.
Fourth quarter 2019 gross margin was 18.3%.
Half point from last quarter and relatively comparable to last year.
As improvements.
Going operations in April segment mix between parts and truck, we're able to offset the sale of the defense business and lower volumes.
Structural costs, which include SGN, a expenses and engineering costs declined slightly year over year to $285 million.
Interest expense declined 21%.
$69 million.
Reflecting the repayment of over $600 million of convertible notes back in April and October of last year.
Net income in the quarter was $102 million or one dollar and two cents per diluted share.
Prior year income was $188 million or $1.89 cents per diluted share.
Excluding onetime items on an after tax basis adjusted EBITDA income.
Was $114 million.
In two and Q4 2019.
That was adjusted net income was $114 million in Q4 2019.
Adjusted EBITDA was $290 million in the fourth quarter after excluding onetime items on a pre tax basis.
2019 was the seventh consecutive year of annual growth in adjusted EBITDA.
Full year adjusted EBITDA was up 7% to $882 million are nearly 8% as a percentage of revenue.
Meanwhile, all your adjusted net income was up 29% to $423 million.
Moving to the segment results.
For the quarter and truck segment reported sales of $2.1 billion and profit of $86 million.
The declines from the prior year reflect the 18% decline in our core charge outs to 20000 units.
As well as the impact of the sale of majority interest in the defense business.
These factors were partially offset by the ramp up production volumes of the new class four or five trucks.
Albeit lower than what was originally expected.
To the UAE W. strike at General Motors.
Q4 core retail market share was 21% the best quarter of the year.
Our parts business delivered a strong quarter.
Profit margin grew five points year over year to 29%.
The parts segment revenue results were impacted by the new revenue recognition standard assay six so six.
Which navistar adopted at the beginning of this year.
Implementation of this standard reduced fourth quarter revenue by $79 million.
On a comparable basis revenues were largely flat from Q4 2018.
Profit was up 3% to $161 million due to the improved North America operating results, reflecting our growing private label business.
Partially offset by lower Blue Diamond parts volumes.
Revenues for the global operations segment, where $93 million.
Flat year over year.
The segment incurred a loss on the quarter, largely due to $14 million and restructuring charges.
Actions include ceasing production at the Argentina engine plant and initiating further cost reductions in Brazil to make operations more efficient.
Excluding these charges the segment would have been profitable.
The financial services segment reported sales of $71 million comparable to last year.
Segment profitability rose, 15% to $30 million largely from lower interest expense related to the payoff of a 400 million dollar term loan in may.
During the quarter accompany generated $160 million of manufacturing free cash flow.
Partially from solid adjusted EBITDA performance.
For the year, we generated $263 million in manufacturing free cash flow and ended the year with a strong manufacturing cash position of over $1.3 billion.
Next let me take a moment to update our guidance for 2020.
And so secret that industry orders have been very weak for the past several months.
As Troy mentioned, we're now planning for 2020 industry volumes at the low end of our guidance range.
We believe customers are taking a wait and see approach for their new truck needs.
This is particularly true with rental and leasing companies, where we have higher penetration.
These companies are reallocating rental units to support their leasing customers and extending lease contracts until used truck prices stabilize.
This is re timing the replacement of aging vehicles until later in the year.
We're also taking actions to not create excess dealer stock units.
At the same time, we're working with our dealers to create new demand so that when the market recovers orders will accelerate faster.
And while we still expect class four or five volumes to increase in 2020.
Growth is not as much as we initially anticipated.
As a result, we're adjusting production volumes accordingly.
In particular Q1 core charge outs will be down nearly 40% compared to a year ago.
Therefore, we are lowering the revenue guidance provided at our Investor day by $750 million to range between 9.25 billion and $9.75 billion in 2020.
And lowering our adjusted EBITDA guidance by $75 million to a range of $700 million to $700 million $700 million to $750 million.
Despite the weaker revenues and EBITDA.
I would expect to end the year with more than $1 billion of manufacturing cash after funding capital expenditures working capital and other balance sheet items.
A few additional comments on 2020.
Consolidated gross margins are expected to grow next year due to favorable segment mix between parts and truck.
Parts segment should contribute a higher proportion of the company's overall revenues.
We will continue to benefit from material cost savings from the procurement joint venture and currently expect commodities to provide a slight tailwind.
Together with more efficient manufacturing conversion costs and improved freight and logistics expenses.
Gross margins are expected to increase to between 18.5% and 19% of revenues.
Additionally expenses related to pension and OPEB costs are expected to be favorable in 2020 versus 2019 due to stronger asset returns less interest expense.
And better near term health care trend rates.
As Troy mentioned, we're taking action to adjust our business to the current market conditions.
We take a moment to provide more color.
We have reduced assembly line rates at our facilities and additional 10%, including the removal of the second shift in Escobedo Mexico in November .
Since July production rates are down 25%.
These actions are necessary to rebalance production with orders.
We're also restructuring our global in export operations, including the actions I mentioned earlier in Brazil and Argentina.
Once they're fully implemented later this year.
I would expect these actions to improve annual results for our global segment.
Around $10 million.
As volumes decline, we're also reducing SGN expenses.
Over the last few months, we've worked to identify ways to reduce salaried employee and contractor expenses.
As a result structural costs are expected to decrease to between 1.1 and $1.15 billion in 2020.
In total we'd expect total worldwide headcount to declined by over 10% have the result of the above production administrative and restructuring actions.
However, we plan to continue to make strategic investments in new products and technologies.
The development of new generation power trains with our alliance partner trait on as well as in our facilities, including announcements we made earlier in the year in Huntsville, and more recently in San Antonio.
These investments will help significantly improve our margins overtime as.
As part of the Navistar 4.0 play as we discussed at our Investor Day in September .
In summary.
2019 was an outstanding year for Navistar.
The company posted its third consecutive year of core market share growth and increased revenues.
Improved quality as reflected in our best in class warranty levels for the past two years.
Reported seventh consecutive year of adjusted EBITDA growth.
Paid off maturing debt.
And generated strong manufacturing free cash flow ending the year with over $1.3 billion of manufacturing cash.
Presently, we're taking actions to rationalize our business.
Leading me to believe 2020 will be a good year for Navistar.
As we look to further grow market share and position the company to benefit from even better operating performance once market conditions improve.
And longer term, we're executing our navistar 4.0 strategy to grow adjusted EBITDA margins by four points by 2024.
I'll turn it back to the operator to begin the acuity.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby well, we compile the culinary roster.
And our first question is from the line as David Leiker from Baird. Your line is Nelson.
Good morning, everyone.
Yeah.
Well, there you're talking about and it goes while they're talking about utilization rates have gone down to one shift.
Is that shift running at full line speed or have you thought the line speed on that as well.
Well hey.
David This is personal we usually what we do we tried to maximize the rate when we go dollars shifts. So we are we're upgrading all with capacity in the one shift right. Now there is always the flexibility that we can add with overtime on top of that but how we really manned and let the line to be operating at full capacity.
Yes.
Okay, and then that pace of production that you have right now would be consistent with the incoming order rates are as stated inventory works down in these lower orders go through is there another adjustment lower that's needed later in the year.
Best adjustment right now I mean, we were able to build our orders support that particular schedules pursue indicates I think as we go into the year, we would anticipate actually adding over time, which then would be the first indication that we would that need to take line rates up in some way so.
Okay, great. Thanks, and then well there on the cash balance and on the path, we've talked about what the appropriate number as an if there's some structure revolving structure credit revolver or something in that way that you could utilize that cash in a different way what are the thoughts on that.
Yeah.
They're consistent with what they've been we need about $500 million to run the business.
We're continuing to keep cash balances above $1 billion as we included in our remarks, so we feel pretty good about cash balance, especially.
Ending the year 2019, with one point over $1.3 billion of cash, but quite frankly was was better than where we had expected to end the year.
So with that.
Yeah.
Lack of a better word excess cash on the balance sheet what are the thoughts in terms of utilizing the.
Well again, we've been keeping cash hi until such point in time, where our credit rating improves to a point, where we could get a revolver something a place for the for the Corporation.
Given the changes we've seen in the industry as we head from 19 to 20, we're we're comfortable with their cash balances and outlook, but we will continue to pare down the liabilities on our balance sheet.
We've got a.
Pension contributions that we that we need to make.
As the pension splitting legislation begins to to roll off here, so weve provision for that.
We're including twice as much capex for almost twice as much Capex for 2020 is we had in 19 as we make these investments in Huntsville in San Antonio and our future products and technologies. So we're investing for the future.
Even as we're.
Looking to maintain a strong cash cash balance and we'll continue to look at the debt levels on the on the balance sheet overtime as well, particularly we have an opportunity later in the year or two to call.
$225 million of debt beginning in October so as we get closer to that date, we'll take another look at whether we want exercise that call or not.
And then just lastly, you had mentioned on the pension as you went through year end and.
Recalibrating for current rates since that at all of those.
What are you looking at those terms of touched on expense and OPEB expense in 2020 and relative to what the cash outflows.
Yeah, I think we have it in our materials and it's.
$175 million of cash out in excess of expense.
Firstly, just a little higher than what we had said at Investor day, but the reason for that is that the expenses lower as I alluded to qualitatively and Mike My comments so.
That cash versus expenses up about $35 million.
Thats, all as a function of lower pension and OPEB expense versus what we thought at that time once we close the books at year end.
Great. Thank thank you very much.
Thank you.
Thank you. Our next question is from Steven Fisher from you be yes. Your line is now open.
Hi, Thanks, Good morning, guys. It's obviously quite recent but but curious for your thoughts on recent trade agreements and how this might affect demand for freight and trucks and maybe the bigger picture is how you're thinking about the shape of the cycle.
Curious what your base case for the timing of a return to growth.
For either the North American truck markets or your own revenues are you thinking recoveries, maybe more possible in the first half of 21 or maybe more kind of mid to later and 21.
Well I'll start off and then we would kick it to Walter here, but.
This is Troy got away, but I think the prospect of these trade agreements and the impact that they can have a manufacturing in North America is important because one of the things that correlates to the type of trucks that we sell anyway that we follow fairly closely as this I assume index, which is really an indication of manufacturing activity.
That's been declining.
Hoovering around that kind of 50 point on their scale and anything below 50, you know they would highlight to you is the equivalent of a manufacturing recession and our concern had been that we would slip into something that might look like a manufacturer recession in the first half of 2020 and if we do you know that could make the second half look a little more.
Challenging and under that circumstance.
The recovery in orders in the market, maybe something that takes place late in 2020 or early in 2021, I know that's been covered and some of the in some of the transport in some of the transport press in a very similar way to how I described it the prospect that manufacturing activity could increase with the resolution of some of these trade agreements or trade issues.
And in particular, the trade agreement relative to Mexico, Canada in the United States. I think is very favorable and really has the opportunity to stimulate manufacturing activity, which again more manufacturing activity seems to correlate to the type of trucking activity that we that we sell that we sell into its not instead, putting okay, but I.
I would have a lot more confidence that the 2020 improved sequentially as I made in my comments, when those things getting getting getting behind us and last but not at least that could have a modest impact or an impact I'm not an economist, but it could have an impact on higher GDP and that 2% GDP.
He zone, you know is a zone, where when you're above it seems to be more activity and when you are below it.
To be less activity again, it takes some time to work through the transition that we're currently in but recent developments. So give me a lot of confidence that the way we're looking at the year is appropriate.
Yes, I think you I think I'd add is reduced uncertainty is good.
For corporations and for consumers and so.
We're happy to see that USM CA is moving forward and that privacy is being made on other.
Tariff matters as well.
Great. That's helpful. And then just a follow up on the prior cash flow question I think Walter you'd.
Given your expectation for the ending cash balance I missed that if you could just repeated I think it was about flat.
Just kind of wondering why is there really isn't more cash flow, particularly from a.
Working capital tailwind perspective, and obviously you have more capex, but just wondering.
With inventory reductions why.
Working capital wouldn't be a bigger tailwind leading to potentially higher cash balance.
Yeah.
So what I indicated was that we we ended the year 2019 with an excess of $1.3 billion. The cash can we would expect to have in excess of 1 billion $1 billion of cash at the end of fiscal year 2020. So that does imply that will have lower cash at the end of 20, then that night.
Teen.
And we do have some.
Outlays that that I alluded to is included in the capital investments that we plan to make up for the future of the business.
Specifically with respect to your working capital question.
The the benefits of the actions that will see are really not.
Related to inventory that we hold on our books, there dealer inventories and so on that we'll we'll see the benefit of some of these actions. So over time, so thats not flowing through our working capital.
And the working capital model that we run and others in the industry and all those I've seen it as well is.
It's really that we get paid almost immediately by the finance company or others for the vehicles that we sell and then we've still got the accounts payable related to our suppliers which are out.
50 days or so on average.
And so as volumes decline, we actually have a.
Use of working capital as opposed to a benefit from from working capital of the way our the way our model works. So I hope that's helpful. If that is thank you very much.
Thank you. Our next question is from Adam Uhlman from Cleveland Research. Your line is now fan.
Hi, guys good morning.
Yes, I was hoping you could expand a little bit more on what you're seeing with the piece of order trends. The last few months. It sounds like maybe the bigger surprise to you was on the medium duty side.
Related to leasing and.
Rental, but maybe you could just clarify that little bit more and also.
Stand on what you're hearing from the heavy duty customers and it also just related to that if you've seen any change in the piece of order deferrals or cancellations.
Hey, Adam This is personal I think first of all that we see a pretty balanced.
We will afford us between segments and mainly on medium and heavy spend reductions that are seeing.
Yes.
Let me start with a heavy side I think when a heavy marketing for heavy customers. What typically we're seeing is.
Deferring no customers are deferring some of their seasonal purchases decisions for.
We saw that in the fall actually we wanted some want it through the last quarter to see where the industry was heading so we saw some of that there is activity in the market we see activity.
But we definitely are seeing that for those that havent closed deals yet the the volumes that are expected to close are no no reduced from what the were buying in 2018 19.
On the medium sizes, so basically leasing and rental is same phenomenon I think there you saw flipping to all the customers on the seasonal easy and rental segment. They call. It de fleeting activity, which is basically yes, I think cup Troy alluded on Walter.
The move rental units seem to the leasing.
Arena and no not only that sum up the old units that are also note, but to be returns exploration off the term of the lease youre getting extended and everything that happens. That's one last unit that we see in our pipeline. So that's been pretty typical so we've seen that no, but I would say, it's kind of balanced between.
The medium and heavy is right now.
But it was important that's.
Good morning to our that in Q4 to make a decision on how to adjust lines in the first quarter off 20 2020, though.
Okay. Thank you know just adding adding to that persist summarizing. It's it's certainly the process of landing. These orders is longer now I think as our customers are being more deliberate on the timing of their needs and last but not at least the numbers are coming of a lower to reflect the fact that the need for capacity in the market is less.
But there are orders flowing I mean, the good thing that that first Joe highlighted as you look at it if you take those two things into consideration just it takes a longer and the numbers come in a little bit haircut from what we may have been expecting later this summer.
The good thing is is that they're kind of coming in across the board.
I think as as we would as we would expect rental leasing we have a high penetration there and so in a lot of that is medium duty and so there is a little weighted impact I think especially in.
The first part of the around that but but the rest of that demand, we see holding up pretty well and should should should I think balance out by the end of the year Exec why and if I may just to compliment that on a heavy side as well the new products that are coming what we call them. The model year 2021, they have a much superior performance then they'll go.
In 2020 model, we use which we've built in 2019. So that's another element of customer consideration that is important particularly in the arcades would have superior fuel economy Thats done they were going all the have units and I think as Walter referenced in his remarks, what we're really going into a situation and I think I alluded to as well as where people really want those trucks, but.
They got to dispose of their use unit right now there's a lot of use units in the market I mean.
Over the last 12 months day cab used inventory going through auction went up from 3000 7000 units of inventory.
Sleepers from 6000 at 10000 units of inventory when you have those high numbers and what happens is auction prices kind of drop and we saw auction prices drop I think it was on average 1200 Bucks go through auction. This is just an index for all banks in the month of November we expect similar performance in December and so folks are holding onto that waiting for that.
Truck number to stabilize that hopefully begin to appreciate again because of that makes their trade easier and I think thats one of the major factors related to the timing of when they want to submit and or receive received their orders.
Okay. That's helpful. Thank you.
And then Walter.
Vince you could provide a bridge between your.
Gross margin for 2019 in the target for 2020 between them different moving pieces I'm, just thinking about that mix elements and also material costs et cetera.
Yes.
I think you've hit on a couple of the key items, obviously with lower volumes will have to absorb more fixed across.
Remaining units.
That's that's a negative but.
We're offsetting that with continued strong material cost performance and we expect our manufacturing plants to to have lower conversion costs as well.
In this past fiscal year, we were running full out and so that that introduce some inefficiencies into the process. So.
We'll be able to reverse course on those and then see manufacturing performance as well as better.
Logistics and freight cost in the current environment. So material costs will be better logistics will be better manufacturing efficiency will be improved and that will that will offset the.
The incremental fixed cost absorption that we have on lower volume.
Okay. Thanks.
Okay.
Thank you. Our next question from Brian on some high Marine from Capitally <unk>. Your line is now fan.
Hi, good morning, everyone.
Maybe just.
Question on the guidance and.
Relative to the industry guidance as well are you contemplating any sort of market share seeding any sort of market share in fiscal 2020, just maybe from a customer mix perspective, you mentioned rental and lease.
No no its metric we stated it's interesting Brian if you just you know we anticipate increasing market share for the fourth year in a row and this phenomena that we talked about with rental lease that phenomenon as in spite of the fact that we will improve market share with that segment and those customers.
In 2020 as well.
But there is a mix issue there Brian .
We were alluding to is we do well in that segment and so.
That from a mix perspective, thats, a negative but within the segment are still performing well, yes, we're not seeing any market share.
Okay.
Thoughts on engine mix preferences heading into.
Fiscal 2020, whether you may get a higher mix of a 26.
Well I think 20, no. We are no definitely seeing the first of all the 30 leader market in 50 meter market when they're talking glass safe is to half on half and our share as you know is.
Not half when the 13 liter side and we are working to improve that and I think no. We are what you're seeing with customers. Now is the acceptance of the LP with a 26 is being tremendous and.
We are starting to see some momentum right now honestly it seems to last couple quarters that we we may be seen positive mix, but we would say that's not replacement on a 15 that is no. We are adding to our total share performance in the that's how you want to think about that.
Okay. Thank you very much happy holidays, and happy new year to.
Due to bring that to you.
Thank you. Our next question is from and two men from JP Morgan. Your line is now fan.
Hi, good morning, everybody.
Walter maybe this is for you could you talk about the cadence on gross margins through the quarters main volumes and 40% in Q1, I mean, what should we expect in terms of gross margin are.
Segment margins in Q1 versus the other quarters.
Yes.
Historically Q1 is our weakest quarter and then we've got a few additional comments that we added to that this year gross margins tend to or profitability tends to improve over the course of the year.
Second quarter tends to be.
Volume higher volume, but a lot of that is this a rental as leasing volume that we've been talking about and then the second half the year.
We would see continued improvements.
The material cost side as those ramp up.
Over the the full year at our parts and our.
International operations tend to do better in the second half of the year as well so.
It wouldn't have anything to point you to have decides kind of our historical pattern, where those margins do tend to be better in the second half of the year better, but I would highlight general building off but want to Walters previous comments and this is Troy.
One of the reasons why we're reticent to cram like the dealer channel at this particular point in time is that to do that basically we're just we're just give up margin through price basically when we believe those orders will come in a more natural way to be built into second half of the year at a at or better at a better at a better margins. So not only we have impacted.
Cost things and structural cost movements and material costs that were doing not only do we have a different mix of orders as the rental leasing the rental stuff anyway, because to be first half versus second half, but we have I think a richer mix of.
Dealer and those type of orders in the second half of years. So it's easier to tell the story each one versus each too I think that quarter by quarter, just because we'll we'll have the capacity and we will build those as you know as they come in.
Yeah, I guess, probably my question really is is there any risks that you will lose money in Q1, then north American truck.
Its a.
First quarter is going to run near our breakeven volume. If you took it on a calendar arts basis for the year, we're above our breakeven volume and even for the first half were above our breakeven volume, but the first quarter will run right around right around that so so we don't so it'll be right and it will be writing that so.
Okay. Appreciate it and then as a follow up just.
Could you talk talk a little bit more about exactly what you backed off like I think last quarter, you gave us the exact amount of backlog.
And then.
Given the production cuts given your backlog when would you have to see orders pick back up or are you not to have to cut production again.
All and this first show.
As we were money last year, we had that fleet Noah along what we call line set periods in front of us that is reduced in not only for us but no everybody. So the backlog is still supports the Q1 in Q2 today I think in a reasonable way and we will start we want to start seeing Q1 orders getting up to now at the beginning.
The year and.
Between January and February .
But right now I think as we said we are adjusting production to make sure that we keep the backlog in the Latin the right place for us to no support the production rates that we have.
And we will keep monitoring the order intake to see where it goes and if necessary now we will make adjustments in rates you from though.
Doesnt happen, nor the orders really don't come as expected between non January February March, but we are positive right now because I think it is most of the actions that we.
No we put in place now and thus far I said, we're not going to stuff our channel, we're not going to put an overflow of products in the dealer channel, we wait into inventories no normalize and that that will support I think the new ordering taking the future.
Okay sounds the backlog as I mean last quarter, you told US. It was 165 days do you know how many days ovens.
And I leave it there.
Follow up with you and on that.
Give you that.
No. That's just one second part.
Two two and other fight it but the situation we ran into right is that.
Just kind of backlog and buildable backlog right. So we got a lot of orders that in fact are scheduled to be built until we get into the second quarter, alright, So wasnt not practical to pull those into the first another customers in want a built in the first quarter and so we have this other concept. We just got what's the billable backlog and are doing fact to have a backlog.
Good allows us to fill slots, so slots or Phil you know throughout the first quarter slots are filled per our production schedules well into the second quarter.
So this is one of the reasons why rig keeps talking about while you're good PICC line rates down again, I think we've taken them down kind of inline with where we think the industry is and the way. The orders are flowing I don't think we're anticipating taking line rates down again.
At this at this particular at this particular point in time, Okay. If anything as orders go up even a little bit we think we'll be running some overtime thats. How we tried to run it right you're going to make it caught let's just make a caught okay and we're going to get cut down and then we're going to and right. Now we think orders support their production schedule that we have in and into the.
The second quarter, that's how that's how we that we see that unless something on towards happens, Okay and then.
And then again if orders come into the second quarter like we think then we're going to have a good problem here sometime in the second quarter, leaving to schedule. Some overtime to build additional units. That's the kind of how we've set ourselves up to do this because you know that kind of chasing the backlog for US just adds costs right just as cost puts pressure on margins.
We don't have to do that.
We can we can run the company like I think it up in a better economic sweet spot by how we're doing it today I hope it's helpful. It makes sense at least that's an expression of management.
Yes that color was absolutely.
Sure and straight thank you I appreciate that.
You bet. Thank you.
Thank you. Our next question is from Stephen Volkmann from Jefferies. Your line is now fan.
Good morning, guys.
Turning maybe just starting out with a quick follow up on that if you are able to add a little over time, but whenever that happens in the second half or something like that that would be upside to the guidance you provided today correct.
Nominal yes.
Okay.
And then can we just talking about parts for a minute emerging came in stronger than when I was looking for this quarter, what's kind of going on with the mix. There I would think the all make stuff might not be as a richer mix, but you're also winding down blue Diamond I guess it will be done by the end of this fiscal year, just what do you see in terms of.
Its margin trajectory as we go forward over the next few quarters.
Yes, I'll start and maybe pursuant to the jump in as well, but the parts a team. The after sales team as all is performing extremely well so.
We've been working with our dealers to to improve sales and we've also been working with them to improve margins because we've got great.
Proprietary parts and private label parts. So its high quality that that our customers are prepared to pay for so.
What you're seeing there as a result of the efforts working with dealers to to improve parts sales within their within their markets.
Blue Diamond parts does continue to wind down and then that will continue but over a long over long period of time.
It's I don't know.
Indicated would be done at the end of this fiscal year.
We are winding that down, but that's still going to be over some period of of time and the private label business is.
Continuing to do well and.
Fleet right in particular had again can remember now how many years, it's been in a row, but another year of double digit growth in 2019, So that's been wonderful.
To watch and now they're adding.
Private label stores as well in additional markets, which will continue to drive their growth in the future.
Okay. If I may add dispersed show, Steve I think some of the actions that we took in 2019. We're also very important France as we mentioned the launch of the so at no additional PDC in Memphis traditional pay to be seen message board was really meant to provide no better supported enough time to our customers, but we are well pair.
That was.
Much better predictive tools that we developed through our analytics team no snow. So now we can read the replenish talks and make sure that we get the parts of the right time and the right now actually not more brett than depth in parts, we in our dealer shelves and that's being reflected as Anil performance in revenue as well. So I think we want to come.
By and all those things the ecommerce platform that we launched in 2019 as well you put all just pieces together, we are having all better velocity in the parts that we turn into dealers and we are being more precise into parts that are really turning so we can make a better profit dollars.
Okay. Thanks, that's helpful. So so do you expect parts margins to be up in 2020.
They are pretty healthy so I think if we did again in 2020, what we did in 19, we'd be happy with that.
Fair enough. Okay. Thanks, and then just a final quick and what's the outlook on the GM business is that up I assume and 2020 as a tailwind.
Yes, as I indicated in my remarks, Steve overall between ourselves and GM, we expect to to deliver more class four or five units in 2020.
In our in our current projections those are not as high as what we were assuming at the time of the Investor day and.
Jim will provide us their production volumes over the course of the year with.
Good line of sight here out 90 days or so.
But.
Growth year over year, but.
We're not baking it into be as high as we had previously thought.
Thank you guys.
Thank you. Our next question from Seth Weber from RBC capital markets. Your line is now fan.
Hey, good morning, guys.
Wanted to ask about the restructuring.
I guess I'm, just trying to think through how much of that is.
Structural versus cyclical response, you mentioned I think the 10 million.
Run rate in global ops, but is there anything you I mean is that should we think of that is permanent or if volumes come back or those costs going to come back on.
Any other regions, we should be thinking about thanks.
Let Chris who provide some color, but think of those global actions as permanent.
Yes, that's correct and we are no. We we're still rightsizing owned businesses the business in South America, our global operations, so more to come but the idea is to.
Get them no size as well.
More level going forward, so you should count that as a sustainable restructuring actions.
In an area.
An example, where we ceased engine.
Operations there so were.
We're exiting those operations.
Okay.
In the background at an enterprise level, our productivity improvements or what we'll see as sustain the opportunity for some of the reductions we talked about in the balance of the enterprise, but on top of and we need to do that because we need to harvest from productivity in our ongoing operations. So the weekend fun things like.
Next emobility, so that we can fund.
From things like the expansion of our engine operation So that we can bond.
The new the new manufacturing plant right.
So the reallocation from.
Things, where we were we that we know well inc. and have productivity.
The things that are new and growth oriented initiatives that keep moving us on that margin timeline that we shared at our Investor day, that's taking place.
All the time any enterprise.
Right, Okay, and so those two lat am adjustments is that represent the bulk of the 10% that you called out in the remarks.
The 10% is really across all three activities.
So global surely in there and that's.
Access of 10%.
But.
Within its own right, but then it's also the production reductions that we've talked about and the.
What we're doing in the SGN area.
Yeah.
Okay across all its across all of those three activities, which are all meaningful in their own way yeah. I think in the comments, we'll refer to globally. They didnt mean, the global business segment for the referencing the entire.
As into three pieces that Walter referenced thanks.
Got it that's helpful. Okay. That's all I had thank you guys.
Thank you.
Thank you. Our next question is from Andy Casey from Wells Fargo Securities. Your line is now fan.
Thanks, a lot good morning, everybody.
Good morning.
Morning.
Cleanup questions first follow up on the South American restructurings discussion.
You have any Argentinian exposure post.
Closure down there.
No I think we closed operations in Q4, and basically was to run a small parts business locally but through no a representation of brokered there. So we don't have any real exposures in Argentina as pointed.
Okay. Thank you for sale and then.
I guess Walter.
I understand you gave the cash.
Ending cash balance guidance for 2020.
I just want to kind of focusing on Q1, a little bit should we expect that greater than normal cash consumption.
Against the production cuts in Q1.
Yes, it could be a little higher than than what you've seen historically I would say for a couple of reasons one.
He is.
As any related working capital and wind and again, we posted a really strong cash number at the.
In the fourth quarter here, so that had offsets and working capital benefits.
In it so I would expect some of that to unwind.
In Q1 s.
Larger unwind than normal.
And then secondly, we are provisioning provisioning in our cash forecast that we will.
After set some money aside for this EG our settlement that we previously announced at the cash outflow could be in Q1, so we've baked that into our numbers as well.
But we have a very healthy cash balances. So I don't have any concerns about.
The ability to fund the business or anything like that.
We'll see lower cash balances at the end of Q1, but nothing to worry about.
Okay. Thank you and then.
It's kind of follows up on a few questions or finance, but given given the initiatives you highlighted to approve the return performance through the year based on current production view.
Should we expect the exit rate for EBITDA margins to be quite a bit higher than the performance.
Demonstrating Q4.
I do believe that.
The second half the year plays out the way we.
The way we've been talking about here that.
The EBITDA margin will be will be stronger at the end of.
2020.
Than what you saw in Q4 this year yes.
Okay great.
Have a great rest of the holiday season guys.
Thank you very much in.
Thank you. Our next question is from Jerry Revich from Goldman Sachs. Your line is now fan.
Yes, hi, good morning, everyone. I'm wondering if you talk about two at the updated guidance range and.
On change retail sales outlook at the midpoint.
How much would you anticipate in terms of units would come out of your dealer inventories.
Exuding 20 can you just give us a rough sense midpoint to midpoint.
Bit more color there would be helpful.
Yeah, I, you know I guess I'll I'll give my colleagues a chance to think about how to answer that question because I 'cause I quite frankly don't know how.
Hey, good about 77 days on and supply right now, but the selling rate is still fairly high.
At an industry level. So we would anticipate that that number is going to inch up a little bit through the first quarter by the end of the first quarter and maybe into the second quarter. Although the absolute number units is we'll then start to go down okay and so the absolute number units that will then decline.
You know until basically.
Their business picks up and borders orders are submitted so quite frankly I haven't looked at maybe my colleagues have what we think Q4 of 20 to 20 looks like but but we studied the phenomenon in the first half of the year right days on hand goes up but units come down and that has the sales rate starts to pick up in.
In the market in the second half days come down at that particular point in time as well. So we may pick up to the upper range of the.
What we think is the right the right set of numbers.
Yes, yes out say, well probably wouldn't guiding to volume, but more on the no days off sales that we have in the range. So we see the diesel sales going up.
No and do do ratio going up now in Q1, and that's why we are monitoring the inventories and we believe that by no that enough second quarter I will be pretty much in the range and we're not going to let it did go to much higher than the range that we know traditionally operate which is 80 to 120 days of inventory.
So and enough second quarter will be probably there. There is no you should expect kind of 20% production mode by the end of second quarter.
Snowfall overall inventory trend.
Okay. So I think in totality the industry needs to under produce retail demand by about 10%, maybe 10% to 50%.
Would you characterize your underproduction versus retail in that same order of magnitude in terms of what that was created in the guidance.
I think we're probably a little a little more a little more reduce the that if that makes sense again, we've we've cut a little deeper.
In anticipation of happened to add back.
As opposed to go through successive cuts as Walter indicated since July which is kind of with the industry production kind of peaked we've cut nearly 25% of our we've cut our production rates by about 25%.
Okay, and then the outlook for the 40% decline in Chargeouts were in the first quarter can you just give us a bit more color why platform is that.
Last eight down 50 school bus flat you can you just give us an order of magnitude.
Of the.
Production cut.
Five vehicle class.
Yes, I think in general kind of production is going to be kind of the proportional to the segments. So but the school bus traditionally it's a much more no production though.
Order for US as you know the seasonality on school bus and happens in Q4, traditionally, but we're seeing a pretty even though reduction between have isn't mediums as we disclosed.
Okay. Thank you.
Thank you our next questions from Rob Wertheimer from Melius Research. Your line is now fan.
Hey, good morning, everyone.
My question would just be on price and market share and obviously you've had tremendous success in recovering share with.
In the industry softer becomes a little bit harder and and I think the current environments pretty transitional funnel, if theres, a read yet or not but my question is really on whether pricing is holding in or not and what are your philosophy may be on.
Prioritizing share gain in a down market.
At this pretty good point in time, you know, we're not of a belief that that a lot of.
But a lot of lower pricing does much more demand because theres. These other structural elements that are really governing the demand cycle at this point in time overcapacity in the market the influence of used truck prices.
And as we look at that quite frankly, the deals that are out there.
We attempted to go.
A lot lower pricing really we just don't think creates a kind of stuff doesnt stimulate demand to create the kind of a left to see that could.
Change.
Kind of kind of the results and so so so our point at this particular point in time, where our products are well received in the market people I think understand and recognize the value and quite frankly, we're kind of.
We're kind of giving the price we think we should for we think we should for our products and which supports our margin growth that we've indicated we're going to have kind of for 2020. So this is maybe answering your question.
In reverse but our philosophy is let's not go to the market right now would be crazy things on pricing because we really don't think it's going to stimulate much demand at this particular point in time.
I don't know Persio, you're a little closer to the market no I think you're absolutely right and the only other thing that we see no performance off our model year. No products is also superior which is so another.
Element that customers can see their total cost of operations. So that is something that adds to our price opportunity to your point market is competitive the price would be what it is no. We don't think that no they can't price pressures downwards to.
Preshow courses referencing the 2020 greenhouse gas you know.
Provisions, which is which really just.
Results in a significant fuel economy improvement.
On the units that that value alone I think it's the kind of thing that typically in a market you would price for that you would price for that value and I think thats. How we have to look for that we in the industry have to look at this time as well.
Perfect and I'm, sorry, if I can sneak in a follow up what is that fuel economy improvement for your own engine and for the the Cummins engine in the near truck.
Well I think you did model year 2021 have used in our improving three and a half percenton a baseline on the no no under its own 50 meter platforms kind of flat on the 26 at this point time Wendy's is all the beaten all with the 2021 generation that is being launched now in January 20 twins. So when you.
And the arrow packages that we developed as well you can go as high as stated in the half percent.
Joining me in a heavy truck, which is substantial yeah, I mean anything in that 3% or above ranges material very material and noticed by the by the owner and user of the truck, it's very positive factor in their Cosmo.
Great. Thanks, gentlemen.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Marty Ketelaar for closing remarks.
We will turn it over Detroit for closing remarks, yes, well, Hey look you know thank you very much for being on the call with US today, it's always good to finish up another year and I think 2019 was a very good year for Navistar I Hope you would agree.
Really want to thank our customers are ploys dealers for helping us deliver these strong results is certainly all of you for your interest and supportive Navistar is industry cycle moves lower in 2020, I want you to walk away thinking we have plans in place to rationalize our business, including proactively managing production levels and actively managing costs in our support function.
We've been preparing for this we know this is a cyclical industry and one thing that this company has demonstrated year. After year is our ability to manage our costs and our ability to handle changing market conditions Navistar isn't a much better positioned today than during the last cycle downturn and that is why I remain optimistic.
And confident at 2020 will be another good year for Navistar.
At our Investor Day, we introduce Navistar 4.0, which simply stated these goals, we're going to take our current adjusted EBITDA margin from 8% today.
10% by 2022, and 12% by 2024, the improved financial results will allow the company to continue investing growth initiatives and improve the balance sheet. We believe navistar represents a unique investment opportunity. Please reach out to the IR team for any additional questions or follow up but before I close on wish all.
You are wonderful holiday season, and happy New year. Thanks, again for your type and your interest in our company.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.