Q3 2019 Earnings Call
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I'd now like to introduce your host for today's conference Mr., Marty Kettler, Vice President Investor Relations, Sir you may begin.
Thank you Daniel good morning, everyone and thanks for joining us for Navistars third quarter 2019 conference call.
Today, we'll discuss financial performance of Navistar International Corporation for the fiscal period ended July 31 2019.
With me today are Troy Clarke, 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 concluding our prepared remarks, we'll take questions from participants.
Before we begin I'd like to cover a few items a copy of this mornings press release and the presentation slides has been posted to the Investor Relations page of our website for reference.
The non-GAAP financial measures discussed on this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued this morning as well as the appendix of this presentation slide deck.
Today's earnings press release, Investor presentation, and our prepared remarks may include forward looking statements about our expectations for future industry and financial performance and the company expressly disclaims any obligation to update these statements.
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 included in today's presentation. Please refer to our most recent SEC 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 with that I'll turn the call over to Troy Clarke for opening comments right. Okay, Hey, Thanks, Marty and good morning, and welcome to Navistars third quarter earnings call I'll open with a few high level thoughts on the quarter and the industry and Walter will walk you through more details on the company's financial performance and outlook for the rest of the year.
We delivered another strong quarter total revenues grew 17% to over $3 billion adjusted EBITDA grew 22% and adjusted net income increased 55%.
The growth came from the truck segment, where volumes rose 45% year over year.
Retail market share continues to grow year over year as well in the third quarter class eight share grew 1.6 points to 13.9% and medium class six seven share rose 4.9 points to 26.8%.
From an industry perspective, the us economy is moderating.
A number of key economic indicators remain above their long run averages, but they are trending lower.
You as GDP is softening and is expected to be around 2% for the balance of the year.
The 2% threshold is important to us as the industry tends to add capacity when GDP increases more than 2% annually.
The ice and manufacturing index something we also follow also continues to trend lower and its hoovering around 50.
Indicating to us that manufacturing growth is shifting to neutral.
Yes, consumer confidence and re spending and spending remain positive.
But new housing permits are still running lower than expected.
Lots of mixed signals indicate an economy that is in transition.
The truck market is decelerating truck orders tend to be a leading indicator of economic activity as carriers forecaster need for trucks as freight tonnage and rates decline industry orders for class eight trucks in particular have also declined about 75% in the quarter.
The used truck market is also slowing.
Pressuring prices as inventories of less than five year old sleepers are rising as trade receipts of increased in conjunction with new truck deliveries.
Build rates of new trucks have exceeded orders, causing industry class eight backlogs declined 44% since peaking last October .
Navistars backlogs are declining as well.
And as you've seen we are actively managing this by adjusting assembly line rates.
To create a balance between customer demand inventory levels and a healthy backlog.
For example in November of last year, we added a second shift to meet class eight demand, while increasing line rates at all our truck plants.
In addition, we added overtime and weekend shifts as needed.
Today weaker U.S. orders as well as lower Mexico, and Latin America orders has resulted in the need to reduce assembly line rates in both of our truck plants.
We make these type of decisions every day.
Actively managing our business appropriately with a goal of inefficient order to delivery process.
As a result total company and dealer inventories remain at the low end of the normal range at 85 days.
Over the balance of 2019 order activity should pick up from the levels of the last couple of months due to the traditional fleet ordering season.
As carriers continue to replace aging trucks.
This fall ordering season will provide further insight into 2020.
Currently we are expecting 2020 core industry volumes to be down about 20%.
Reflecting a 25% reduction in class eight trucks.
And a 10% reduction in class six seven in bus units.
Tentatively we are planning for 2020 class six through eight trucks and buses in our core markets to range between 335 and 365000 units.
Given navistar strong class six through six seven and bus franchises, we do not expect to be down as much as the industry.
We'll continue to refine our view and share more details with you in the news in the near future.
Shifting gears over the past several years, we made a number of investments to improve our business.
We've gotten a lot of times customers listen to their feedback ideas their suggestions.
Next with this understanding we invested in our products.
We developed and delivered a full line of new products, which have been very well received as demonstrated by our growing retail market share.
Improved sales led the volume and share earnings and improved cash flow.
Now it's time to make investments in the next phase of our future.
Earlier this quarter, we announced we are investing $125 million in our engine plant in Huntsville, Alabama over the next three years. This investment is being made in preparation are producing our next generation Big Board diesel powertrain being developed with our alliance partner Trey time.
The production to these new proprietary power trains will add to the existing facility, where we currently believe our international 826 engines.
We also to continue invest in our uptime commitment.
New parts distribution center in Memphis is now open offering industry, leading cutoff times for next day delivery of parts.
Our service partnership with loves is now operational adding more than 320 loves and speaker locations and more than a thousand technicians to our service network.
In an updated version of our dealer parts inventory management system has significantly reduced emergency orders and works to position parts, where they are needed.
You know our third quarter was another great quarter for Navistar operation and legal and financial progress demonstrates that our investments are paying off.
Market share is increasing revenue and earnings are growing and now we're accelerating investments to improve operations and deliver on our promise of uptime.
I look forward to talking to you again at our Investor Day later this month.
We will discuss our plans.
To further grow the earnings power of Navistar.
So with that let me turn it over to Walter.
Thanks, Trey good morning, everyone.
Mr has continued its cadence of delivering excellent results in the third quarter revenues adjusted EBITDA adjusted net income and free cash flow were all up year over year.
Let's dive into the results.
As Troy mentioned revenues grew 17% in the quarter to $3 billion.
The improvement was driven by a 28% increase in core truck volumes.
Core market share grew 2.6 points to 18.2%.
Reflecting higher share in all vehicle segments year over year.
Q3 gross margin was 17.8%.
Up a point from last quarter.
Segment mix continued to impact consolidated gross margins as truck revenues, including the new class four five products grew substantially year over year.
As we've discussed previously parts margins are higher than truck margins and in the long run selling more trucks today will benefit parts sales in the future.
Turning to structural costs year over year, SGN, a expenses declined 25% to $167 million.
Largely from the release of a 32 million dollar accrual related to certain legacy engine litigation.
Engineering costs increased $9 million.
Largely from the development of next generation power trains with our alliance partner trade today.
Even if one adjusts for the legal accrual.
Structural costs, including SGN, a and engineering expenses.
Fell as a percentage of revenue to 9.2% from 11.3% in the prior year.
Net income in the quarter was $156 million or $1.56 per diluted share.
Prior year income of $170 million.
Or a $1.71 cents per diluted share.
Included a $71 million settlement gain related to business economic loss claims.
Excluding onetime items in both periods on an after tax basis adjusted net income in the quarter grew 55%.
$247 million versus $95 million last year.
Adjusted EBITDA rose, 22% to $266 million in the third quarter versus $280 million a year ago. After excluding onetime items on a pre tax basis.
Moving to the segment results.
Truck segment sales in the quarter grew 25% to $2.4 billion.
The sales growth was driven by an increase in all core product segments.
Plus the production ramp up of the new class four five trucks.
Total core volumes grew 28% to 24400 vehicles.
Truck segment profit grew.
And excluding the two onetime line items I mentioned earlier, the segment was up 44% year over year.
The increase was largely driven by higher volumes and improved pricing.
Partially offset by the impact of the sale of a majority interest in Navistar defense.
Our parts business delivered another solid quarter.
The parts segment revenue results were impacted by the new revenue recognition standard, which navistar adopted at the beginning of this year.
The implementation of this standard reduced third quarter revenue by $31 million.
On a comparable basis revenues were largely flat from Q3 2018.
Profit was up 3% to $149 million due to improved us operating results.
Reflecting our growing private label business, partially offset by lower blue Diamond parts volumes.
Parts segment profit margin grew over two points year over year to 26%.
The global operations segment continues to be impacted by weaker than expected economy in Brazil.
Revenues were flat year over year in the operations remain profitable.
Our financial services segment is benefiting from larger average portfolio balances.
As a result revenues increased 14% to $74 million.
Segment profitability rose, 30% $30 million largely from higher interest margin and income from the intercompany loan partially offset by the write off of debt issuance costs.
During the third quarter NFC closed a new five year, nearly $750 million revolving credit facility and repaid its $400 million term lumpy issued in 2018.
The new facility provides for additional liquidity with increased flexibility at a lower borrowing cost.
During the quarter the company generated $250 million of manufacturing free cash flow.
Largely from strong adjusted EBITDA.
Net working capital performance.
The company ended the period with a manufacturing cash balance of $1.1 billion.
Next let me take a moment to update our guidance for 2019.
For the class eight industry, we expect volumes to come in towards the upper end of our prior range.
Also we're seeing higher class six seven volumes, including greater gasoline units, where navistar does not participate.
We now believe 2019 industry volumes will range between 435004 hundred 55000 units a 10000 unit increase from our prior guidance.
Today retail market share is 18%.
During the fourth quarter, we expect share to continue to grow largely from the seasonal increase in school bus registrations.
As a result, we believe fiscal year retail market share will range between 18.5% and 19%.
One to one and a half points higher than 2018 market share.
As Troy mentioned the decline in domestic and export orders and backlogs led to the decision to lower Assembly line rates in both of our truck plants.
Due to lower production volumes in the fourth quarter, we expect revenues to be towards the lower half of our guidance range of $11.25 billion to $11.75 billion for the year.
To date consolidated gross margin is 17.7%.
We are expecting margin growth in the fourth quarter from the seasonal benefit of higher parts revenues, a larger mix of severe service trucks sales.
We now believe gross margins will end up between 17.75% and 18% for the year.
Lower aggregate gross margin from lower production volumes and revised margin percentage expectations is being offset by lower SGN a expenses.
Consequently, we are holding our 2019 adjusted EBITDA guidance at the midpoint of $900 million for the year.
Finally capital expenditures are trending lower and are now expected to be $115 million versus our prior guidance of $150 million.
In summary, the third quarter results show the effectiveness of executing our strategy as we are recapturing market share and growing revenue EBITDA and cash flow.
I look forward to talking to you again at our Investor Day on September 19th.
Where we will provide insights on our strategy improvements, we've made to the business and our roadmap to becoming a market leader.
If you haven't registered for the event please reach out to the IR team for details.
We look forward to your attendance.
Also we invite you.
Are we.
We invite you to see our latest product offerings and technology developments at this year's North American commercial vehicle show in Atlanta.
From October 20, Eightth through the 30 Onest.
With that I will turn it back to the operator to begin the Q and a.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your touched on telephone. If your question has been answered or you wish mainly result from the queue. Please press the pound key again, that's star then one to ask a question.
In the interest of time, we ask that you. Please limit yourself to one question and one follow up.
Our first question comes from Stephen Volkmann with Jefferies. Your line is now open.
Steve are you there.
Yep I am sorry about that good morning.
[laughter]. So maybe we'll just start off I'm you know since Youve provided this kind of.
A preliminary look into 2020 industry volumes.
I guess, we have yet to really have a clear idea from you guys about how you think you will perform a in a down market and I guess specifically.
I'm thinking about decremental margins I know you've lowered your breakeven you know significantly but any help you could give us just on how you kind of model the business in a in a declining top line environment would be great.
Yes, Steve It's Walter will probably provide some additional insights on that on their investor day, but you know.
You did allude to the fact that we've continued to work to lower our breakeven point that's continued.
We've also been growing our share so.
The.
The decline that we could see in the industry volumes before we would drop to a breakeven results in our truck segment.
Give us even that much room that versus where we were a couple of years ago as we enter 2020.
We do continue to see opportunities to grow our market share given the strong product offering that we have.
And with the you know the industry environment, changing we would expect to be able to continue to improve our cost structure as well.
As we wouldn't have the same kind of headwinds that we had this year and the and the strong industry with.
Supplier costs and the like so.
You know, we think that our position for next year will you know continue to to improve even as the industry volumes.
A decline from a from a profitability.
Per per unit perspective, yes, I mean, Steve you know the story, but you know obviously this is a cyclical industry. We we've talked openly about that I think on this call and other occasions in the past.
We've been preparing for this so we have modeled out the scenarios of what we think 2020 looks like kind of to the good into the bad levels and we think 2020 will be a good year for navistar with gains in things like market share and continued progress on costs as Walter indicated.
Okay, and just so I make sure I understand what you said Walter.
Sounds like you're kind of saying that you think you can grow your P.S. in in a down market you know basically around what you've forecast the next year or am I reading that wrong.
No I don't think you're reading that right I think what I tried to say at least was that.
On a per unit basis.
We would continue to look to improve our.
Our profitability if units are down than the overall.
You know.
Earnings would probably be down as well.
But we hope that you have a lot more room vis-a-vis our breakeven. So we had a couple of years back right.
Okay great.
All right I'll pass it on thanks.
Thank you and our next question comes from Andy Casey with Wells Fargo. Your line is now open.
Hi, Thanks, a lot good morning.
Good morning, good morning.
Within that.
Now back to the 2020 sales view I appreciate you expect to be down less than the industry.
But can you give us a little bit of color around that.
Oh the commentary you made it specifically the class eight assembly line reduction so far and I'm, just wondering how to frame up 2020 and as.
You know are you expecting that to be down 25% on a retail basis off the bat or are you know for production to kind of scale down during the year if orders do not improve.
Yes, I think it's more the latter look we've made these are this is a company that ran for a number of years with no or a very skinny backlog and we've taken advantage I think of these last couple of years to restore backlog to have far more normal range. Our current backlog is in a you know kind of what the industry average over 150 days closer to 165, we adjust our production rates to maintain some manner of backlog because of this order to delivery system runs more effectively more efficient balancing between customer needs the needs to manage the inventory that's in the pipeline as well as the inventory that's basically on the ground with these adjustments we believe we see a stable environment through Q1.
And then we'll have to see how the seasonality of additional orders that are coming in from larger players from larger customers plays out through the year now very recently I won't make any announcements you know several large players our share of their by year over year is going up and it's very encouraging so it supports the thought that.
With the adjustments we've made we should be stable through Q1, and then we'll have to see what happens at the economy in the industry as we go as we go past that but certainly I mean, it would be a.
A topic, we'll update at our next earnings call as well as we'll just have more insight at that particular point in time.
Okay. Thanks Troy.
I'll leave it at that thank you.
Youre welcome Andy.
Thank you and our next question comes from Neil Frohnapple with Buckingham Research. Your line is now open.
Hey, guys, thanks, and congrats on a good quarter.
Walter can you remind us from a high level what the adjusted EBITDA number is you need to generate in order to be.
Free cash flow breakeven is it still on that 650 to 700 million range, just trying to get a sense of whether you guys will generate free cash flow and acquired 20, even as the market cycles down.
Yeah, I hope to see at the Investor Day.
[laughter].
All right and then just could you Todd could you.
Walter It's got the slight reduction in the gross margin outlook versus your prior guidance.
Any more granularity on the puts and takes whether the embedded price cost outlook is less favorable already seen more new more aggressive new truck pricing, whether it's just mix just any help there would be great.
Yes, probably three or four items.
I'd point to.
Pricing has actually been good as we indicated in our remarks pricings up year over year.
So that's kind of come in as we expected.
Well, we've continued to see is a you know the segment mix, which I commented on in my in my remarks, so truck versus parts as the truck volumes have been stronger.
That impacts our overall gross margins because our parts margins are higher than our that our truck margins.
We have seen some impact on customer mix, we've grown market share smartly in the medium space.
And so.
The the medium segment in particular, weve grown with lease our leasing and rental business. So thats.
Had some impact on our margins.
Thirdly, we've seen.
In the strong environment.
We did see higher commodity prices, which we had indicated.
At the beginning of the year, which would be a headwind and we've seen additional.
A freight costs as well with the with the tighter supplies so that has impacted our.
Material costs.
And then lastly, as Troy mentioned in his remarks, we've seen some weakness.
In used trucks in particular, the sleeper market and so weve.
We've made some small adjustments there too are the prices of the units and our used truck portfolio.
Okay. Thanks, I'll pass it on.
Thank you and our next question comes from Ann Duignan.
Tracy Morgan Your line is now open.
Yes. Thank you good morning, and I Wonder if you could give us a bit more color on that.
Is there a lower production levels at both facilities I mean, how much lower is production going to be in fiscal Q4 is that going to be you know whatever fiscal Q4 run rate is that the end into Q1 of next year just.
From a modeling perspective, if you could give us a bit more specifics on those.
And Dan this is persio lisboa and that well I think for Q4, the exit rate, we're probably going to be calibrating. The as Troy mentioned, we are rebalancing our lines. So overall throughout out all plants will be down close to 15%.
Versus the Q3, which is then that's the level that we are going to enter Q1, but you have also to consider that thats in nominal rate. We used a lot off overtime days in the last few quarters and we are removing some of them. So but overall nominal rates will go down 15% and thats, what we intend to keep for the first quarter as well.
Yeah, and I, just you know might indicate that by taking those down those rates. That's after we increased the rates earlier. This year. So that brings the overall daily rates back to about where we were in November November and December of of 2018. So you know on earlier calls we reported about.
Production line rate increases, we're now affectively reversing that with this 15% reduction that Persio mentioned.
Okay, that's very helpful, especially on a year over year to keep that to bear that in mind that we did pick up production and then back and then just a quick follow up last quarter.
You guys had noted that that the summer months, we're going to be very important for plate to orders I think.
All the Oems 2020 order books are now open now we're kind of pushing that back saying Paul months are going to be very important.
I have are what are the large fleets, saying doing I know you said, you're gaining more share.
Pocket with him but.
In general what is the commentary that you're hearing from the large fleets. They obviously are not placing orders yet.
Yes, what do we have talked about previously and was you know in some years, where everybody anticipates you know that the following year or the coming year like in 2020 would be strong people would open up their order books in the July timeframe, but the more traditional time frame in September and in fact, that's what we're seeing so this really supports what we think to be a fairly normal you know I think timing for an ordering cycle. So we are engaged with large customers and you know quite frankly again just put in a plug in for the products our products are performing well in their fleets and.
So this is what we're hearing from them and what we're seeing from them.
The deals that we're working on with them is our we're continuing to improve our share of thereby on it on on large fleets and that's our expectation. So we would expect certainly in the class eight space you know that will continue to grow with these large customers. The second thing is we have a lot of trucks, we have some real momentum building other vocational side of the business, obviously lower volume and share impact, but you know pretty good business for us and you know quite profitable and a lot of those units are still working their way through the tpms and so we anticipate that this momentum on the vocational side of the house will continue well into 2020, and then last but not least as you indicated there as you heard in my comments, we've picked up nearly five points of market share in a piece of the business where were traditionally very strong in the medium duty in the medium duty segment and the discussions that we're currently having with customers who buy those trucks without you know without giving too much more away.
Our portion of that by continues to be strong as we look into 2020. So we're not planning on seeding certainly any share in a segment that we believe we have.
Advantages over our competitors so.
As far as you know some color and insight goes Yep 2020 is going to be down, but if you take a look at the show we have a concept we call kind of share of wallet or share of.
Target customers by those numbers look that they will continue to improve and thats. How the orders are lining up for us as we as we speak will be a little more color in our investor day, but can contribute this whole thought process that will roll into.
Q1, a lot like we look today.
Okay I appreciate the color and look forward to hearing Morris I leave it there. Thanks.
Thanks Sam.
Thank you and as a reminder, ladies and gentlemen that Star then one to ask a question. Our next question comes from Adam Uhlman with Cleveland Research. Your line is now open.
Hey, guys good morning.
Yeah.
Congrats on all the progress.
I guess I wanted to start with that clarification, Walter you had mentioned.
Several headwinds that we faced this year with supplier cost the material cost side I believe you gave us a bigger at the beginning of the year I was wondering if you could update us with that we can put that into into context. When we think about the 2020 profit headwinds that.
Shouldn't exist.
Yes.
We began the year think we'd said that overall, we would expect.
Performance in pricing less the headwinds that we saw material costs still to be positive.
To the bottom line, that's still the case as we sit here today, but it's less so than what we had seen.
Given the factors that I mentioned impacting our.
Product cost.
On the.
On the procurement and logistics side of the business, but net net it's still a positive for the year as we had.
Expected coming in.
And that in large part is due to continued efforts.
Including from the procurement joint venture that we have with straight on to continue to work our product costs lower.
Okay, and the freight headwinds and.
The supplier disruption does that still a meaningful headwind outside of price cost, we see that as an opportunity to be less of a negative impact going going forward.
The comments I did too Steve earlier in the call about.
Yeah, as we look into 2020 as those headwinds abate that should help our profitability per unit.
And then dispersed so we're also seeing on a supply base much fewer disruptions than we've ever sold before so I think that the levels of production is that we are today, we are pretty safe on the supplies and the supply side and freight rates are coming down. So you could imagine that as we're running overtime days, an extra weekends, we were basically driving more volume and capacity in the supply base and generating some level off expedite that's all gone.
Okay got it.
And then on on the capital spending plan for this year and going forward. Your Capex came down but there are several big projects. It sounds like underway should we be expecting a material pick up next year or.
Or maybe back to what the prior plan was and then just along with that if you could just expand on the Huntsville plan through 2021, what should we be thinking about are listening for thanks.
Yeah, let me break it into a couple pieces and colleagues at probably want to join in as well. So cap spending we indicate is going to be lower this year than what we had said previously.
In part that's due to the stronger industry that we've seen so we've we've pushed out some projects some of the maintenance and so on that we do in our facilities.
As we wanted to keep those running so we'll be able to do some of that work as the industry slows a little bit in 2020 back more to kind of replacement.
So we do see Capex will be increasing will provide some more insights at investor day around that.
As well as we do have some of these investments like the Huntsville investment coming that will come in over the next few years.
In Huntsville and is related to the alliance activities around the.
Localization of some.
Big bore.
Diesel engine or diesel powertrain investments that we've mentioned previously so capex will be up versus this year's levels, but obviously.
Capex is.
Been favorable to our cash flow for for this year.
Versus what we had originally suggested.
Okay. Thanks.
Thank you and our next question comes from David Leiker with Baird. Your line is now.
Hi, good morning, everyone.
Good morning.
Walter I want to go back and we've done that.
I know you talked to this I want to just try and find some of the puts and takes on the truck.
Yes, pretty significant revenue increased a flat profits and I know there are some moving pieces underneath the surface, but can you just help reconcile that a bit for us to kind of get to what the real contribution margin was here in the quarter.
Well I guess I didn't do a good job on the first time [laughter], Bob I might have missed that Phil.
Yeah.
So what.
If you're if you're just looking within that the truck segment then.
Couple of comments there.
I did mention earlier on the call that we do have the segment mix between truck and parts, which weve, which rate all year long as the truck volumes have been have been strong.
Within the.
Within the truck segment.
We've mentioned a couple times the thing on the call. We did grow our medium share some of that was with the rental and leasing customers those margins are lower than what some of our other.
Customers we've also.
Been ramping up the class four five vehicles and so those have a lower profit margin than our average portfolio as well.
We produce those units largely for for general Motors on a cost plus type basis.
Which helps in the fixed in our plants.
But those margins aren't as high and we do run that through the revenue.
You know as well as the the profitability side of our income statement.
So that year on year is.
Is.
A lower average profit margin.
We also don't have the defense business this year, which was a big contributor to profitability in the third and fourth quarter.
Of of last year.
So those would be a couple of puts and takes.
Okay, great. Thanks.
And then as we look out going into year end, and then calendar 2020.
Can you talk at all about what you think the makeup of the backlog looks like.
People cleaned out that backlog, how real that is and just kind of your thoughts of cancellations as we go into 2020.
Yes look we you know I'll make a couple of comments here, then I'll ask Chris here to jump in as well because you know I mean I think.
Certainly the second half of this year. This these are numbers that we've looked at quite a lot just to make sure that we're making the right decisions and have the right interpretation I have to tell you I think let me just say overall I think the quality of our backlog is very high when I say that we have a very normal backlog of 165 day range, which I think is comparable to where other competitors are theres not a lot of orders in there which have the potential for cancellation. There are orders that have the potential for re timing because as we are attempting to deliver units some of our customers have to they have to figure out how to dispose of their used truck right now and now we're slipping into that thing we've been in the past where they go to the market with a truck that has a book value and if the markets value below then they have to work that equation a little bit more so they don't take a loss and that sometimes gets in the way of our delivery that happens with very large customers and it happens very small.
Customers, we have the ability to help some watt in used trucks, okay, but you know we've been.
We've been you know in difficulties in used trucks in the past and so we're working to manage that very very.
Various annually as well, okay. So that's kind of the phenomenon, but I would say that the backlog itself. We believe is fairly high quality, let me pass the Persio, who really keeps track in our I know he watches these numbers on cancellations.
You know more than I say, well, we don't we all look at it but he's the guy who kind of keeps his eye on that to make sure that the quality of the spec log is high.
I think that's right yes.
What we're seeing today in the backlog is as Troy referred to some of the.
No we have two types off.
Orders that gaining through the system. Some of those that are that come from the very large customers that have a very constant no by throughout the year and those have been timed as Troy referred to I think that's that's where we see the most of that because so some of those customers are working through the used truck no kind of phenomenon Thats why I described.
On the on the dealer side I think we have also the activity on the retail thats. The one thats always more impacted in the short term and we monitor that very closely with our dealers snow, having said that our dealers today have 85 days off dealer sales in their inventory, which is within the normal range that we operate so we we feel that know time will tell a little bit more as we get into Q4 on Q1, but we haven't seen any any abnormal signs off cancellations compared to what we are seeing the industry from a backlog standpoint, I think were vet, we've averaged in the last quarter to 3% to 4% off the backlog cancellation, which is no pre the welding side off the industry has been presenting to us as data yes.
So David let me just if I could just summarize this because I think this is kind of a point that I'd like to make look our guidance for the fourth quarter provides provides for potential further softening in Mexico, and Latin America, where we really don't put those orders and until we know they got a home.
It potential for customers to push out deliveries a little bit is the kind of thing that might happen, sometimes those keys backfill, sometimes they just get out.
And with the line rate adjustments, we've done we haven't given up the ability to produce and deliver units to the previous levels that weve highlighted of our guidance, which in fact and allows us to protect the upside and we've done all this with the ability to roll into Q1 with a healthy backlog that allows our order to delivery system to run efficiently without a lot of stranded inventory a lot of premium freight and other type costs that we might we might run into I mean, it's hard for us to describe because the company hasn't been in that position for a while but we really believe we've got this thing back then.
Very nicely and all the numbers kind of interlock and we have a lot of confidence in our our forecasting the ability to protect the upside.
Yes, great. Thanks, any any thoughts on how the industry sets I know, it's hard for you to do.
I think you know we look at their numbers and they kind of look a lot like our numbers, yes. So I mean I don't know first of all I think from what we are experiencing with customers I think we're all in the same mill position at this point in time and honestly I think as we've been gaining share where well we want to continue the no kind of performance and deliver to customers on not only on the product side, but on the service side and customers are valuing us more because of I think what we've done in the last few years no month is and in any 19, so but I don't see anything different happening in the industry. Overall I think all the customers are the same or all knocking on the same doors again I think they're doing the same thing they're looking at what the orders are coming in what the customers are telling them. There is just one small difference you know our our quarter ends at the end of October right. Our fiscal year does their fiscal years tend to end at the end of the calendar year. So you know the kind of the last minute puts you know to to kind of return targets on the scorecards looks a little bit.
Between us and them. So yes, I certainly anticipate that they will be pushing for deliveries between now and the end of the calendar calendar year and our market share forecast by the way provides for that kind of push because this is something that we have we see we see every year.
Yes, great. Thank you very much.
Thank you and our next question comes from Seth Weber with RBC capital markets. Your line is now open.
Hi, Good morning. This is dependent on for Seth. Thanks for taking my question you had healthy market share gains this quarter again.
And I appreciate the comments that you anticipate growing market share again 2020.
I'm just wondering any extra color you can give on.
I guess, what you are seeing that drove your decision to decrease the 19 share again to the 18 after 19 from over 19% and again last quarter.
Comment to that now what we are no we.
Typically what we do we have a forecast for the industry and we have a forecast for our no no deliveries the deliveries are pretty locked at this point in time, we know what they are going to be.
What we don't know 100% control is the forecast on the top line off the industry and as we as we mentioned before there is now an effort I think there is we are seeing more a phenomenon in retail to retail more units from all distributors and so the industry forecast being slightly higher than our now forced us to basically going see there that know our share may not be as aggressive as we thought it would although year to date, we've been performing above I think now where we were last year as we alluded in the no come prepared comments. So it is more of an adjustment on a forecasting off the industry than anything else, we don't see a deterioration in our arsenal forecasted deliveries in DT use we called it the units that get charged dolphin and retailed into market. So it is more of an adjustment on overall forecast and making sure as we got closer to Dan if the year is easier for us to put.
A tighter range, yes, so as we look at the inventories you know of our competitors and their dealers, especially going into a softer year 2020. We have every reason to believe that they will be pushing those units off the lots and through the pipeline just like we will be doing that.
As one of the reasons why Walter increase in his comments the industry by 10000 units and so it's really the effect of the increase in the industry as Persio said, it's a math, it's a math phenomenon as opposed to we think we'll be selling fewer units in the quarter than we had planned.
Okay, great. Thank you.
Thank you and our next question comes from Jerry Revich with Goldman Sachs. Your line is now.
Hi, Good morning, everyone. This September it on for Jerry.
So so you all are currently guiding to about 900 million of EBITDA. This year at the peak of the cycle and if we think about layering on the trade telling cost savings that number will move to a more around 1.1 to 1.2 billion.
Is that how we should think about what the next peak looks like in your business or are you achieving more of the trade Taiwan.
Sourcing cost savings already at this point.
Hopefully Jerry will let you come to Investor Day, Yes, you need.
[laughter], Ben Ben I know.
I need you to maturities come to Investor day, because it's there's there's no 32nd answer to that particular question. Okay.
Look we're going to grow and we're going to continue to improve the returns that this business provide shareholders and to say that the trade time savings that we've talked about and we're on track for is all we're going to be able to do that that's not that is not the case, okay, but to explain what is the case, we're going to be a little bit more time, but you should have confidence that.
And I'll state it again in my closing remarks, no. Other OEM has the upside opportunity that we do to gain share to lower cost to grow their business to create additional cash flow and you'll see that and what our plans are for the next handful of years on it at Investor Day.
Got it understood and.
In Threeq you, obviously continued the trend of strong market share gains you you all have seen across the portfolio.
How do we think about share gain momentum into 2020.
Do we keep going at this current cadence and are there any more notable share opportunities.
On the horizon in 2020.
Well I think what we would never say that want to say that we are going to slow down anything we continue to work to no demonstrate the value of our products and services to our customers and we've been rewarded by that so again I think we'll be able to we'll provide more guidance into next year in our next call but at this point in time, we just want to stay the course and make sure that we continue to do the right things. There is a lot of activity taking place right now not only on the product side of the business, but also on the service side, we launched a very aggressive now plan to transform our dealer network. We have a lot of support you heard try talking about luvs in how we expanded our network to better serve our customers. Our uptime promises really sticking right now we see that customers are valuing was more than just for the products that we delivered in them. So we hope that that will continue into 2000.
And we do expect their share to go up next year exactly yes.
I'm sure everybody's going to say the same thing we really need it.
Got it thank you very much.
Thank you and our next question comes from Steven Fisher with EUV, Yes. Your line is now open.
Thanks, Good morning, guys.
Within that Youre 2020, additional industry class eight outlook do you have any feel yet for how that would shape up between severe service and heavy trucks.
I'm, particularly curious about the severe service piece of your backlog has been holding up better than the heavy trucks, but.
It is starting to come down now as well.
The you know within that that I'd have to look up the numbers, but I think within that we.
Continue to see the severe service a portion of class eight holding up better for the industry as a whole you know with heavy coming coming down a little bit more than severe.
Okay, and then I was curious whats behind the double digit decline in the class six to seven outlook for 2020 I've always.
Part of that is relatively steadier business, but still you have a down about 14% for the industry well, what's the thinking behind that behind that market decline for next year.
Well I think what you're seeing is no as as the industry peaked incidence doing two different segments. If it take leasing and rental there is usually a movement on with the leasing companies when they start seeing a decline in the market or what traditionally they do they take their rental units and they move their own rental units into leasing business and that's the portion that's something that basically goes away from the industry. It is any internal movements. So that's one thing and the other is really where monitoring no. The housing starts and no constructions and things that can also impact the medium duty segment and that when you add all those two factors together, we got to the 10% I just saw there but it is still at a very strong level. We're still considering that is above replacement demand for medium duty. So we're only counting on medium duty being down as an industry, 10% next year and we don't.
I think we'll be down in line with the industry experts, who indicated you know 50% of the medium duty trucks are bought by the two largest rental and leasing companies when they choose to push their units from rental to leasing then nobody is building a unit for them and that's part of what you see you know part of what you see in that particular in that particular number but again. This is above replacement demand. So it's an area of traditional strength for us that we've built a lot on in the last couple of years and we'll continue to do that.
Okay, great. Thanks, a lot.
Thank you and our next question comes from Rob Wertheimer with Melius Research. Your line is now open.
Hi, Thanks, and good morning, everybody.
Try I think you mentioned you mean, it on share gain and you've talked and we've talked in the past about some of that natural entitlement coming back to you as fleets. The email had been customers more customers now starting to be customers any any insight on how far along in that path. You. You are if you got them. All trialing are only a few of 'em trialing or the trailing at high levels normal levels still just testing the waters anything you can do there, yes, I'll give you a little bit of color on that without trying to give you too much detail because it again it kind of gets complicated you know between pursuing Michael canceling sales. They have a number of very complicated chart, but look we stick out and you will see a little bit more of that on our investor day as well just put in a plug for that here look we staked out a number of customers. You know so think about like 15 major customers and between those of a bunch of them you used to visit with US and then stopped and some of them stopped doing business with us and really never had a bad experience with you know the the previous emissions technology in both of those cases okay.
Every one of them have and in some cases for a couple of years had some of our new units with our new uptime proposition with the new quality the new design, the new driver centric kind of design philosophy, we had and every one of them have given us very positive feedback now in.
A handful of cases, they have you know.
In the course of two years stepped up their percentage of our bi to where we're at parity with the other brands that they buy for their fleet in another handful of cases, we are that we are becoming the largest supplier to them and in another handful of cases, you know, they're working themselves out from under some longer term contracts. So we get a portion of their buy that we would anticipate that we would gain you know overtime.
Michael call. These customers as Influencers. These are the trucks that they're color there badging the freight they haul those are rolling billboards right because they're in Dorset, what's that.
These are well run truck companies that manage total cost of operation that don't make these decisions lightly I mean, they're making them for the right reasons and so I would tell you.
On all 15 of those very key largish kind of customers. We have made significant progress some some more than others. I mean this is just one of the things that gives us tremendous encouragement for look I don't I don't know that some of these customers are going bad thousand trucks next year, they're going about 100 trucks next year, but you know.
Over 50% in some of those customers, they're going to be our trucks and last year. It was 50.
So that's the kind of you know.
Insight that we have now we will take that 15.
And we will start expanding that for next year, we'll take the next five the next 10.
And then we have a very intensive sales process, where we go in reintroduce ourselves talk about the value proposition and ends and a good business to business kind of sales process. So we're extremely encouraged.
Okay. Thanks, a frame former thank you.
Thank you and our next question comes from Rob Salmon with Wolfe Research. Your line is now open.
Hey, good morning, guys.
All right I guess kind of settling on on that question. As you guys have been going into those those larger kind of high profile fleets could you give us a sense of any sort of residual value guarantees that you guys have been doing earlier in the conference call. You noted that you're seeing some weakness on the used truck. So just curious how we should be thinking about that piece that that piece of the business.
Well I just first so no every case is a case we used traditionally don't have a lot of residual value again guarantee so we really manage to the no fair market value of the units when they have to go no for a trade and customers understand that I think the good news is that the new products that we have no have been no really no demonstrating that our residuals are going up and they'll dramatically with all of them new products that we've launched so no. There is not a practice so for us to really no work with no residual value guarantees.
All right appreciate that commentary is helpful. So kind of more of just the improvement in the underlying product driving that that incremental market share from your perspective and yes.
And the confidence that the that the residual value will continue to improve over the lifecycle.
That makes sense could you speak more broadly about what you guys are seeing from from a used truck inventory as well as pricing perspective, we saw.
This is kind of less than five year truck, particularly the four of the five year and in the month of July inflect negatively looking at some industry data, but would love to get your perspective of what you're seeing across your dealers from both the pricing and inventory perspective.
Inventories are going up because the.
Given the strong new volume truck sales that we've.
That we've seen this year.
Our used truck inventories are up as well in the third quarter.
When we expect to work those lower in Q4.
I think we alluded to the sleepers in particular, where there's some weakness and the pricing.
Yes, and then what is happening right now is that now in the past actually between no first and second quarter I think it was taking longer for customers to trade their units and now we are seeing a higher velocity on the trades. So this is not taking as long as thats why I think is happening in the industry as the inventories start going up that's one of the reasons why as new units get delivered the old ones our return faster.
That makes sense and should we be contemplating just as the.
Later model used truck inventories kind of rise and we see additional pressure there should we be contemplating softer pricing as we look out to next year relative to what we've seen this year.
Well I mean, I think yes, I mean, we're already seeing.
The softer pricing.
You know I mean, I think that as we in the industry turn those units that support that also that will support pricing right. So couple of things that affect used truck values right. It's if you need a whole bunch of trucks you tend to hold onto used trucks, a little bit longer while you're waiting for your new wins that phenomenon is reversing that was what persio is describing the second phenomenon is when the market starts to recover used trucks is the quickest way to add capacity to your fleet.
And get and take advantage of rising.
Of rising freight rates and so you know look I mean, I think how we look at this we're kind of in a period of time, where especially on the classics slippers. We are we as an industry are a little oversupplied and so there will be pressure on those prices until that oversupply is resolved and I think that will take probably a couple of quarters to make to make that happen.
That makes sense I appreciate the time guys.
Good.
Thank you ladies and gentlemen, this concludes our question and answer session.
I would now like to turn the call back over to Troy Clarke for any closing remarks.
Hey, Yeah. Thanks in closing Q3 was a great quarter for Navistar and I really want to thank our customers our employees our dealers for helping US deliver these strong results you know truth be told as we've indicated it's no surprise the U.S. economy. The trucking market is moderating our industry tends to run in in four year cycles. This isn't a surprise for us we have been preparing for this time.
During our turnaround we lowered the breakeven for the company by implementing lean practices, reducing our cost structure, while growing market share and strengthening the balance sheet.
We are in a much better position today and we remain firm in our belief that no OEM has the potential to increase volume gain share lower cost.
And create improved cash flow like Navistar and we plan to continue those improvements into 2020 and this is why I remain optimistic that 2020 will be another good year for navistar.
We look forward to talking to you again at our Investor day, Please reach out to the IR team for any additional questions or details on those events. Thanks for your time and interest in our company. This morning.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect everyone have a wonderful day.