Navistar International Corporation Q4 2008 (Qtr End 10/31/08) Earnings Call Transcript

Jan. 5.09 | About: Navistar International (NAV)

Navistar International Corporation (NYSE:NAV)

Q4 2008 Earnings Call

January 5, 2009 10:00 am ET

Executives

Heather Kos – VP IR

Daniel Ustian – President & CEO

Terry Endsley – EVP & CFO

Archie Massicotte – President Navistar Defense

Analysts

Ann Duignan - JPMorgan

Henry Kirn – UBS

Andrew Casey - Wachovia Securities

Kurt Ludke - CRT Capital Group

J.B. Groh - D.A. Davidson

Agshay Mehdhaven – Redwood Capital

Eli Lustgarten – Longbow Securities

Operator

Good morning and welcome everyone to the Navistar International Corporation fourth quarter earnings results conference call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the program over to the Vice President of Investor Relations, Heather Kos; please go ahead.

Heather Kos

Happy New Year everybody, and welcome to today’s fourth quarter call.

Information provided in statements contained in this presentation that are not purely historical are forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended Section 21E of the Securities Exchange Act of 1934 as amended and the Private Securities and Litigation Reform Act of 1995. Such forward-looking statements only speak of the date of this presentation and the company assumes no obligation to update the information included in this presentation.

Such forward-looking statements include information concerning our possible or assumed future results of operations including a description of our business strategy. These statements often include the words such as believe, expect, anticipate, intend, plan, estimate, or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. For a further description of these factors, see item 1A, Risk Factors, of our Form 10-K for the fiscal year ended October 31, 2008, which was filed on December 30, 2008.

Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements.

All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in the above. Except for ongoing obligations to disclose material information as required by the Federal Securities Laws, we do not have any obligation or intention to release publically any revisions to any forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.

Other cautionary legends, the financial information herein contains both audited and unaudited information and has been prepared by management in good faith and based on data currently available to the company. Certain non-GAAP measures are used in this presentation to assist the reader in understanding our core manufacturing business.

We believe this information is useful and relevant to assess and measure the performance of our core manufacturing business as it illustrates manufacturing performance without regard to selected historical legacy costs, i.e. pension and other post retirement costs. It also excludes financial services and other expenses that may not be related to the core manufacturing business. Management often uses this information to assess and measure the performance of our operating segment. A reconciliation to the most appropriate GAAP number is included in the appendix of this presentation.

And before I turn it over to Daniel I do want to let everybody know we are going to have our Investor and Analyst Day January 22. This is our annual event but its going to be at our Melrose Park facility. So I encourage you, please definitely to register with Suzanne. We are going to be capped at a certain amount of folks and so if you can let Suzanne Sorensen know and there’s an RSVP number in there. If you can let her know about your attendance we’d appreciate it.

We think it will be one that you like. There’ll be a presentation, enough time for Q&A, all of our executive management team will be out there. We’ll have plant tours, lab demonstrations, and over 12 vehicles for people to get in and poke around and look at. So definitely, please mark that on your calendar.

Daniel Ustian

Thanks Heather, much going on in the company and we’ll talk about much of that today. We’ll start off by talking briefly about 2008 results, more importantly about what’s going on in 2009 and how we position ourselves for success in 2010. We’ll answer questions after that.

If you look at slide six, this illustrates the results of 2008 and you can see a very low year, one of the lowest years in the US and Canada trucking industry. Our financials were strong. If we compare those financials from a peak year which 2006 was, 2008 in volume was approximately 50% of what it was in 2006, and yet our results were stronger.

On the revenue side, we’re approximately the same. On the financial side we’re a lot stronger as you can see by what’s on the right hand side of that. We did exceed $1.1 billion which was our guidance at the high end of our guidance for 2008 and that excludes the impairment of about $400 million related to our Ford engine program in our Indianapolis facility.

So without the impairment it was $7.23 worth of EPS.

When you look at slide seven at a high level, what are we trying to do, two things jump out at you, leveraging the assets that we have and controlling our own destiny and having products costs and growth.

On the product side the market share is ahead of our plan. We’ll talk a little bit about that. On the capital spending side, remember we have a goal of $250 million to $350 million per year capital. We’re on the low end of that. We adjusted during the year given the economy as it was but we did not jeopardize any programs.

We also in the same timeframe launched the 13-liter engine for our big bore products. On the cost side, on target for all that. Remember the commodities we hedged during 2008 so we did not get hit with the increases, predominantly we didn’t, we had some but not much. So we did hedge that appropriately and so our cost structure was very positive in 2008.

And on the growth side of course the story is two things, the military and then the rest of the world through a pending CAT JV.

Slide eight shows the results of all that and you can see the things that we have been strong in we kept strong; school buses and medium trucks we’re still number one. In 2007 we became number one in severe service and 2008 we made that position even stronger. Severe service is turning out to be a very strong part of our business as is Class 8 heavy truck. We’re number four and keep in mind the way we measure this is we combine our competitors’ brands into one and if we look at it that way, we’re fourth but growing in share.

At the bottom of page eight you can see that we grew from 15% to 19% share and the order share is actually greater then that so certainly ProStar is having its impact.

On slide nine, the overall market share went up three to four points. So it says that our strategy for new products is working.

Slide 10 on the engine side, same story. We’re number one in mid-range engines. We have all new products now including the MaxxForce 11 and 13-liter, our first entry into the Class 8 market. But as important, at the bottom of page 10 you can see our penetration in other sectors, remember we’ve said that the likelihood of us being in the pick-up truck sector with Ford is not likely and that’s why we have that impairment at our Indianapolis plant and we need to spread that volume into other areas.

And in 2008 we’re about 20% higher then we were in 2007 in spite of some tough economic conditions everywhere and it shows we’re now getting more product and more customers balancing that and certainly South America is a contributor of that and that’s on page 11.

Our operation down in South America improved and predominantly that 20% was because of them and the reason is because they performed. They were given several awards, two of significance I might point out. They were awarded the Company of the Year in the Automotive and Trucking Industry and I think that’s an outstanding award as well as the Exporter and Company of the Year for Export and given the competition that’s there, and you all know them, is quite and accomplishment for our people there and the result is we’re growing in that business and we’ll talk more about how we’re going to grow some more with the products that we manufacture there.

On the cost side on slide 12, this is a chart we’ve shown you in the past and suffice it to say we’re on target for these. The mix of these might be different from the way we have identified it but we’re on target for having a competitive cost structure that has significant cost reductions in it.

I think on slide 13 I’d like to take a moment here and just talk about one important feature in that competitive cost structure. Often times the industry and this is automotive and truck, we talk about capacity utilization and our view of that is, if you don’t spend a lot of money you don’t need to worry about those kinds of things because if you spend a lot of money first you have to have a return on that, and secondly typically it sets up a structure of people to support that.

So our plan is to limit that and I’ll give you an example. We just put in place in South America a block line and that block line was intended to manufacture blocks for our 11 and 13-liter products. Well, by being able to have adaptability in it we not only can make the 11 and the 13, we can make the 9-liter block on it. We can make the 11-liter, we can make the 13-liter, and we can make the 15-liter, all with one investment and very few people to support that.

That’s just an example of the thinking that’s gone into our investment and how we leverage our assets.

On the paint side, virtually all of our facilities now have state of the art paint but we’ve spent less then $20 million. There’s a couple left, Springfield still has the old system in place which we spent over $100 million on, we’ll work through some of those things, but basically our other operations have paint, brand new paint systems for small amount of investment.

On the facility side, two plants that stand out on the truck side are Garland and Escobedo and for those of you that haven’t been there, you should take the opportunity to visit those. We think those are state of the art truck facilities and again, we didn’t spend a lot of money to get it to that.

But perhaps to the core of the strategy, the military business probably represents how we think better then anything else because in the military business the fluctuation in the market can change overnight. We get an order and then a different order the next week. They’re not all the same so we need to have flexibility.

So what we have in our West Point operation and in our parts distribution center is just that. We didn’t spend any money for this facility. We have a flexible workforce that really aren’t us. They are ours in the sense that we train them, we pay them, but they’re contract employees so we can maneuver one way or another, increase or decrease without having the extra cost of that change going on in our corporation; a great example of how we’re leveraging the assets that we have without spending a lot of money and still living up to the targets that we have established for us.

Certainly the military, if you look at page 14, the military has been a great success for us. These are the platforms that we have and the one that stands out of course is MRAP. There’s another one on here, I’m telling you that we’re going, its going to be the next MRAP-type product and that’s the one we started out with, the MXT or its derivative.

That’s the one that really launched us into this. We got the MRAP award through that diligence and I would tell you that I think the MXT will be the next kind of product that will be able to attract many of our customers.

On page 15, what 15 shows is that in 2008 while we have a business plan, a strategy that says we have a sustainable business in the military of $2 billion in 2008 we actually had $4 billion worth of revenue from that. We are very successful on the bids that we’re on. For instance about 80% of the time when we bid on something or greater then 80% of the time, we win that award.

So as you can see from that we’re very competitive. We are more then an MRAP company, we have all these other opportunities and we’ll talk some more about that in a minute here. So now I’m going to ask you to turn to page 19, get a little bit out of order here, because I want to talk about 2009 now and what the market looks like.

So on page 19 it talks about what that trucking industry looks like today and at the upper left hand corner you can see that with the financial situation that hit us in September and October, the tonnage went right along with it and it dropped.

Throughout 2008 in spite of the challenge in the trucking industry tonnage was relatively stable but it certainly dropped in October and we believe its about that level today so its certainly challenged. In fact, what is the impact of us right now is that the only people buying trucks are the stronger companies with larger fleets buying trucks; the small guy is not buying, he can’t get money. It doesn’t mean his company is not strong, he just can’t get money.

In our favor though if I may, going forward if you look at the bottom left hand corner you can see that companies need to buy trucks. The age of these fleets and the average age in the marketplace is growing. I believe its 6.2 or greater which you can tell from that chart is one of its highest points in many, many years.

Diesel prices are dropping, another favorable thing for the trucking industry. But they’re not dropping to the same level of gas. This is a problem that we’ve had. We’ve talked about it in the past. Diesel is as much as $1.00 higher then gas today and it’s a problem for us. So what we did is we met with leaders in Congress, this is on page 20 now, we met with leaders in Congress and with several of them, headed by Senator Inhofe from Oklahoma, we got their attention and they held a hearing on it and we hope to get some action in place.

We believe that they are aligned with us on trying to get some action in place that gets that parity of gas and diesel. That’s the way its been for years and years, today it isn’t. And its partly because gasoline volume has gone down. We all know the demand for gasoline has gone down. The demand for diesel has not gone down so the mix of gas versus diesel in a crude barrel needs to change.

One of the companies that has stepped up to that recently is Exxon and they’ve said by 2010 they’re going to change that mix and they’re going to add some diesel capacity so that should help. In the meantime we’re still going to be struggling with diesel prices higher then gas but we have to continue on our diligence to try to get that on parity.

So on 21, given all those circumstances we have forecasted a volume about the same in 2009 as 2008. We do anticipate some recovery to get to these numbers in the second half of the year. The rates today are under this. We anticipate some recovery on this.

I should point out though that we do believe that 2010 instead of being a trough year will be a lot higher then 2009. Don’t take this line to mean our forecast. The point is we believe 2010 will be stronger then 2009, exactly what that is is still work to be done on that.

So now I’m going to go back to page 16 if you would and look at 2009 outlook. The industry is still going to be challenged and the economy certainly influencing all of that. On the positive side, commodity prices, I said earlier we had hedged pretty dramatic increases on commodities in 2008 and in the first quarter of 2009 some of those increases will occur.

But commodity prices where they are today, we would say the risk of increases, dramatic increases in 2009 are probably not going to happen. So that’s a positive for us, we won’t have to worry about pricing those in the marketplace and they would be contained.

On the pension side as with most companies, the funds we had significant losses in 2008 that will impact 2009 income to the level of $200 million to $250 million because of that. We’ll talk about how we’re going to address that and then in our finance business, NFC, Terry will talk about how we’re going to improve the finance business because in 2008 we didn’t make any money at it.

Finally 2009 as I mentioned earlier, our base plan calls for about a $2 billion military business versus the $4 billion that we had in 2008. Now lets turn to page 17 and talk about the financials, and this chart reflects manufacturing segment profit as we talk about it.

A couple of points I’d like to make on this, look at the actual points in 2006 and 2007, if you draw a line through those that was the trend line that we were on prior to our strategy of the $1.6 billion. You can see we’ve raised that line up pretty dramatically. So our line at $1.6 billion would be at 414,000.

As you can tell from 2006 that was about half of that in terms of manufacturing segment profits at a higher volume level. Let me point it out again, 2006 had an industry of about 450,000 and segment profit of $800 million, our target would be at less then that level we would be twice as much on the segment profit so if you just draw that line down, pretty much parallel to the results, you can see that at 250,000 which is our estimate for 2009, that would get us to about $800 million of segment profits.

Now you add to that the challenge that I mentioned earlier about $250 million worth of pension and you can see our EPS would be south of $2.00 a share and of course that’s not acceptable. So now I’ll talk about how do we bring that up and on page 18 lists the things that are in the 2009 plan over and above what’s on that $1.6 billion line, these are above it.

One of them would be improved market share, another would be addressing our fixed cost structure and SG&A, presence in other areas including the military, and then we’ll talk about our emission strategy.

So on page 22, it talks about that first strategy and that’s great products and the ProStar certainly has proven to be exactly that and one of the reasons, its not the only reason by any means, it has outstanding quality and maintenance features but certainly impactful has been the fact that we’re aerodynamically competitive to the tune of 5% to 7% versus competitive products.

And the result has been on page 23, our market share has grown. Our order share actually is above 30% now. I would say, we will be challenged to keep at this pace, one of the reasons would be because of trades. To take volume away from someone else, we’ll have to take their trades back and we probably have all we can take.

We’re not over in our own branded vehicles in terms of used trucks, but we probably can’t sustain too much more of our competitive brands so I would say because of that we’ll be challenged to keep at this pace but certainly we should be above the 20% level with the products that we have.

Another factor in the Class 8 share and presence will be the MaxxForce engine which is just getting out there now. Now this is a product, the 11 and 13-liter in size that will be 500 to 900 lbs of more efficiency in weight then our competition. But if you look at the upper left hand corner there’s nothing that’s sacrificed within that weight of performance.

You can see from this the torque curve says that its very responsive; a higher torque curve, better responsiveness. It also says that we’ll have better fuel economy because of the weight and because of the technologies that we have in it. So we believe this will also enable us to grow in this Class 8 market by having our own engine in there.

And that leads us to page 25 that talks about what the 13 and 15-liter market is. So if you look at that middle column there, this is kind of where the market is today, its split about 50-50, 46% is 11 and 13-liters in size and the balance of it is 15-liters in size.

But when you look at the horsepower less of the 15-liter, 12% of it is less then 425 hp, 64% of it is less then 455 hp, 76% of it is actually less then 455 hp so you can see the opportunity for our 11 and 13-liter products to take some of that because our rating on this is 475 hp and 1700 ft. lbs of torque at its peak.

So you can see that we believe the 11 and 13-liter can take some of that 15-liter product very competitively, offer better fuel economy, lower weight, and of course an outstanding product from a performance standpoint.

So now let’s talk about, so maybe some of that will help us generate more of the MaxxForce product in 2009 and also contribute to our share in Class 8. The second thing that we did and this is one that many companies are having to face and that’s some business restructuring and we’ve taken some costs out.

What we do and its consistent with our leveraging the assets that we have, what we typically do is in areas that we can we’ll get contractual contract people in our, because of the peaks and valleys we have in our process here and two areas that stand out, certainly in engineering because the product programs you can have peaks and valleys in that so we hire some of this out. Systems is another example, even in human resources, so what we have been able to do is between our own employees and these contractors, there’s 650 jobs that have been eliminated and of course other containment actions go on in place as well.

The result of that is that we’re going to take out about $150 million worth of SG&A or fixed costs again as a way to help get our EPS up. I should point out that included in our plan and our commitment has been to reduce the professional fees of accounting by $100 million and that’s always been in our plan and that remains the same for 2009.

I mentioned also earlier that at some point we would expect to close our Indianapolis facilities as related to the Ford business. We also are looking at our Class 8 facilities to see what the best option of operation is for the Class 8 facilities and that one is still not decided yet but we’ll continue to keep you abreast on that as we decide what to do with that facility that we have.

On the military side, our base plan has $2 billion in it, we have orders for that today. We believe there are many more opportunities for us throughout 2009, those include Canada, Turkey, Poland, for those of you that follow us know there’s a bidding process going on for an all terrain vehicle that would be a derivative of our MXT of significant volumes.

Those could occur as early as 2009 but more likely the higher volumes would be in the future so we still believe our military business is going to be very strong with more opportunities beyond our base plan and we have included in this up to $2.3 billion in our base plan that helps us get to that segment profit above $1 billion for 2009.

Also on page 28 is our parts profit has grown. You can see in 2009 we expect that to approach $2.5 billion. Some of that is clearly because of servicing the military. I want to point out something here on the military, we shipped in 2008 and expect this to be consistent in 2009, over 800,000 pieces to the military. So the effort probably has never been touched by anyone, seen anything like this in our industry before and its another reason for our success in the military is our responsiveness.

Now on slide 29 let’s talk about our emission strategy, call it our environmental strategy, and its simply this. We will meet emissions by using customer-friendly aspects. In other words we will be accountable, the manufacturer will be accountable for meeting the requirements. Included in that strategy for environmental will be in the product itself, in the vehicles itself, like hybrid electrics and electric vehicles and on January 22 we’ll show you more about that.

But for today we thought it appropriate to talk about EGR versus SCR and the question that continues to arise all over the industry is, why are we doing EGR and everybody else is doing SCR? And the answer for us is simple, because we can do both but we’re the only ones that can do both and we’ll show you why we can do it.

On slide 30, here are the rules. The rules say manufacturers have to go to .5 NOx and they can go to .5 NOx if they clean up the environment earlier with advanced technologies; keep that in mind. Manufacturers need to be at .2 NOx if they don’t choose to advance environments earlier. Now here’s what we’ve done, three years ago we started on a program that said let’s beat the standards of 2007 so in 2009 now, we will have all of our products meeting or exceeding the standards so we can get credits.

That will allow us to have 2009 products at the .5 level. It gives us a huge opportunity because it now says the customers that buy from us, they don’t have to worry about emissions, we’ll take care of that for them.

On page 31 it talks about some of the requirements that the customers now will have to deal with. And one of them will be, do they really meet emissions. There’ll be some diagnostics on here that have to say if you’re not using EGR, how do you know if you’re meeting the emission standards or not. We don’t like that strategy. We want to be accountable for it. Then the question gets to bare if those are our own products that we’ve had in our strategy, that’s all products up to 13-liter we have had an EGR strategy, the question gets to be now what should we do for our 15-liter product; should we go EGR, should we go SCR. We can go either way again.

Its our choice. On slide 32 it highlights what we have gone through in that analysis and as you can see everything points to the same strategy that we’ve been on, which is go EGR. I won’t go through these, they’re evident.

The other thing that the EGR avoids is the risks of an SCR strategy and what we have done on slide 33 is taken the label that’s on a UREA bottle that’s sold here in the United States product today, SCR is a technology that’s been out there for awhile but read the label on this and it will show you that there are challenges with keeping control of using this technology; store between 23 degrees and 68 degrees, so essentially it says you can’t store it outside.

You can’t operate it in conditions above 85 or below 12, you can, but you have to do something with it. Now is there any doubt in our mind that this will be dealt with in some fashion but it won’t be easy. Again it will put the burden onto the customers. There are many more things we won’t talk about them here, that led us to the conclusion we have to stay with EGR instead of using SCR.

So the answer for us is obvious, on slide 34, we’re going to do a 15-liter EGR engine, its called MaxxForce 15. We’re not going to talk about that today, we will tell you this though, if you come to our show, Mid America on March 18 and 21, we’ll show you that product and we’ll tell you all the attributes about it, and in fact on the 22 of January you will be able to see it if you come and visit us for that particular event.

But we’re going to do our own product. It allows us to control our own destiny. So in summary, that’s slide 36, go back to the chart that we started with, the 2009 plan has earnings per share of $5.10 to $5.60 assuming volumes around 250,000 for industry, assuming the economic conditions as we know them today.

And as you can see from this chart the reason 2008 is actually above that line was because the military was $4 billion so predominant reason why we’re above the $1.6 billion target line is because of the military. As I mentioned earlier the military is about half of what it was in 2008 and yet we’re approximately the same level of manufacturing segment profit in spite of the fact that the military is a little more then $1.5 billion less then 2008.

Now let’s go down to the EPS line, remember what I said earlier that included in our EPS is $2.50 to $3.00 a share because of pension. Terry will talk about what we’re doing about that but in 2009 that will be impacted so if you take the $5.60 it will include $2.50 to $3.00 a share of extra cost versus 2008.

So with that we’ll come back to this, but Terry can you go through some of the financials and liquidity and cash please.

Terry Endsley

Sure Daniel, thanks and good morning everyone. Nice to be able to bring you these results. A couple of things that we want to go over today are quick review of our liquidity and how we performed in 2008. I want to specifically address the financial reported restatement and respond to that as necessary and then look forward to what the year brings to us in terms of financing.

If you’ll turn to page 38, let’s just set the context of what happened in 2008. Remember that 2006 was an industry pre-buy year with high truck volumes, 2007 was the follow-on low-buy and as the economy unraveled in 2008, we found ourselves in the worst North American truck industry that many of us can remember, and yet in 2008 we generated $1.1 billion in manufacturing segment margins, pre-impairment, a strong performance for the company.

We generated $429 million in manufacturing cash from operations which more then covered our CapEx and investing budget thereby allowing debt paydown, actually increased manufacturing cash balances and maintained all of the available committed undrawn borrowing capacity that we had planned for back in 2006 and 2007 in both the operating company, the operating parent and our finance companies.

And so please compare these statistics to comparable trading multiples and I think that when you compare them to a company with a market cap of just over $1.5 billion they’re pretty favorable.

So let’s turn to page 39 and take a quick look at some summary statistics intended to tie out to exhibit 99(1) in the 2008 10-K, but these are the summary statistics that tell a story of what happened to the manufacturing parents’ cash flows during the last couple of years.

As you know we exited 2006 with $1.078 billion of manufacturing cash balances, that was the peak of the trough of the truck market. We used cash in 2007 to pay off trade credit and supplemented that with large dividend of $400 million from the finance company which enabled us to cover our debt paydown and CapEx budget. Our CapEx was actually higher then that. We did have a few asset dispositions in 2007 so the net is $70.

And so in trough year, we declined in cash balances to $716 million. Went into 2008 with that amount of money and had a good year in 2008, generated $429 million of cash flow from operations with low dividend from NFC, only spent $216 million on capital expenditures, net and as Daniel said earlier in 2009 we need to complete the 2010 emission strategy and we’re targeting $250 million to $300 million of CapEx for 2009 trying not to spend a lot of money.

And then we were able to continue to pay down our regularly scheduled debt and some of the debt associated with our [deal] core operations. So we actually increased cash balances during 2008 at the manufacturing parents by some $60 million and we enter 2009 with a comfortable amount of cash and because of the military business we have a lot of receivables that don’t fit on the parent company’s books, they don’t fit the normal working capital arrangement that we have with our domestic finance company and those will be monetizing in the first quarter of 2009 as we go forward to supplement the cash balances.

A couple of summary points I want to make on page 40 and I will speak specifically to the restatement in a moment but I want to emphasize that continuing to strengthen our financial reporting and internal controls is very important to this company, to its Board and to the management team. The need for a restatement is unacceptable.

We had a restatement this year and I’m going to talk specifically about it on the next page but I want to put in context. Let’s remember that we filed our [2005] 10-K in December and over the last 13 months we have had 10 major SEC filings. As far as Sarb-Ox goes, we had 15 material weaknesses in March. We were able to reduce that to eight in December with our filings.

That’s still unacceptable. The goal for 2009 is zero with significant progress by Q2. The entire accounting and finance team is aligned behind that. This happened in an environment where we doubled the size of the company. We expect smooth closings and filings hereafter starting with our January 31 Q1, and then I’ll get into the restatement impacts and revisions in just a second.

As Daniel said, the decline in market value in our pension and OPEB retirement funds was approximately 30% parallel similar to what other funds have experienced. The impact of that will be an additional expense, somewhere $200 million, $250 million in 2009 and the cash funding requirements associated with that decline in the market value will come along in 2010.

The finance company’s liquidity is strong. This is important because the finance company acts as the parent company’s working capital lender and we’ve been able to roll or refinance all of its’ facilities throughout 2008 and anticipate that we will be able to do so into 2009.

No refinancing is necessary for this company either at the parent level or the finance company level until late 2009, early 2010. And that’s very important given the state of the high yield credit markets and we think that we have some capital structure opportunities that we can capitalize on.

Let’s go to 41 and I want to speak directly to the restatements and revisions included in the recent filings. The first thing that I want to talk about is what this was and what it was not. This was a narrow focus, not widespread restatement. In fact, this issue really was about getting costs into the proper quarters.

As we examined what we had reported from the vantage point of the fourth quarter and looked back throughout the year this was about getting costs into the proper quarters. It was not about revenue recognition although much of this costing had to do with our military business. So how do we operate the military business? What’s important to us?

Well what’s important to us is to meet the customers’ requirements and in this case we had five to six model changes, something approaching 800 parts changes, 400 modifications and the way we’re going to run this business is we’re going to concentrate on what’s appropriate for the war theater and survivability for our troops.

If we get a call from the military that says we need you to adapt this vehicle in this way, we’re going to go find a supply base that allows us to adapt the vehicle and produce it and get it to the war theater. That can be done on a basis of a phone call, a handshake, a contract, a follow-up contract; we don’t care. We’re going to get that vehicle out into the war theater in a way that provides appropriate armor transport and survivability for our troops.

Potentially that creates revenue recognition issues but in the vein of what this restatement was, this was not about revenue recognition, it was costing the vehicles that we delivered to the theater. But in the future those issues are still going to be there and we’re going to get vehicles into the theater as our customer wants and needs.

So again to say what the restatement was from the vantage point of the fourth quarter we realized that with all of these changes that our customer needed that our bill of materials and correspondingly the cost of goods sold did not keep up with the rapid change that we were putting through our West Point facility and we realized that we had over costed vehicles in the third quarter and so we were thorough about it and went back and looked at well how did this bill of materials adjust to earlier changes that we had made in the vehicles and we found smaller impacts in Q1 and Q2.

The net income adjustment for the nine months was $43 million and by year-end all of the costs had flushed through the system and so there was no impact on the 2008 fiscal year. So this was a narrowly focused restatement that was caught within the year and everything is complete by the time of the filing of the 10-K.

There’s more information in the appendix on this. In addition to the restatement we also had two immaterial errors that resulted in revisions. They’re spread throughout the financial statements and you can see the detail of that in the appendix as well. The important thing being that there is no change to income or cash balances.

Let’s turn to page 42, and talk about pension and OPEB, covered a little bit of this but right now expense is expected to be higher in 2009 versus 2008. If you look at what our fund status of our plans at the end of 2007, that would have resulted in approximately zero expense in 2008 excluding the one-time gain that we had in 2008 of some $50 million.

The market sell-off will add around $150 million to $200 million of GAAP expense in 2009 we forecast versus 2008 and with a couple of other things we’ll probably be in the range of $200 million to $250 million of year-over-year increase in expense.

This is all determined by funded status which will get back to 2007 levels and expense will return to zero in the 2011, 2012 timeframe provided we have low teens asset returns for the next several years, just to give you a picture of how rapidly this can bounce back.

Now as far as cash goes, in December there was a new law passed that mitigates the risk of contribute requirements for us until the second half of 2010. We’re still setting the cash impacts of that and frankly I have to believe that there’s probably more to come in terms of relief for businesses who have been hit with these drop-offs in their asset values.

But we will give you guidance on that when and as our studies are more complete but suffice it to say that we think in the 2010, 2012 timeframe we’ll have to contribute at least $350 million and probably more depending on how the legislation is actually, the regulations are actually applied to the legislation.

Let’s turn to 43, so we had a good year in terms of consolidated operating results and that was really despite the fact that our financial services segment income was off $150 million year-over-year. Lower volumes and margins accounted for some, the predominant amount of that $150 million but also impactful was the way that we were required to account for derivative swaps used to hedge our securitization.

Actually the interest rate swaps that we put in place are intended to be conservative. They are intended to protect the profitability and the cash flow of the securitization so that the debt holders of the securitization know that they are not going to go under water with the cash flow in case interest rates rise, we’re putting fixed rate receivables into floating rate vehicles here, and that we know that any, after the investors are paid off, we get the excess cash.

The accounting trick here is that you have to value the swap which is put on the securitization for the life of the securitization but you only get to pick up the periodic [inaudible] in the current period and that cost us $50 million in 2008 so you might say, ex securitizations, the finance companies made $30 million.

We do expect profitability to rebound in 2009 although volumes and margins are going to be depressed for the first half. Derivative accounting will continue and that will depend on interest rates movements after October of 2008 but we do see margins improving. A lot of our finance competitors are on the sidelines and not aggressive. We see the opportunity to go in and help our customers who know us to be in the market in up times and down times and we know, we think we have a better knowledge of our customers and our potential customer base because we’re in the market and have been following trucking companies for 50 years.

The bottom half of page 43 shows that despite the P&L losses, we’ve maintained a high credit quality receivables portfolio. That is access to private bank conduits and that represents access to the public market when it comes around again.

So in 2009 we have these two strategic assets, NFC-US and NFC-Mexico. We’re going to use them primarily as sales finance tools to grow truck market share but with a strong caveat and a strong stake in the ground that says portfolio credit quality can’t be compromised. There are credit quality statistics strewn throughout the finance company’s 10-K but generally we’re in pretty good shape, [contrending] with economy but generally better then the past troughs in 2001, 2002.

So with this portfolio credit quality we’ve been able to finance large finance company that is large relative to the parent. If you turn to page 44, some of the same statements that we’ve made in the past appear but we have been able to consistently lay off our retail receivables into private bank conduits, we’ve maintained access to our revolvers, and fund our dealers. Our dealers at the trough, at the peak, had $2 billion of floor plan inventory. Today they have $1 billion of floor plan inventory and our funding facility for that is in place and has available $345 million of availability.

Many of you were watching in October, September and October, to see if we could renew the bank conduit portion, that was successfully done $800 million and we do have a public portion that comes due in February of 2010 that we will either have to try to refinance or if dealer receivables remain low, we could let it lapse but our preference would be to renew that. It is off balance sheet.

As far as retail notes go, we have a $500 million revolving retail warehouse that does not mature until June of 2010 so no refinancing necessary there but we need to, when it gets filled to $500 million we’re always going to need to off load those retail notes into a private bank conduit or the public market if its available and that would be our preference.

The bottom right hand square on page 44 is the must, and we must renew the bank revolver by July of 2010. We will start on that later this year. It provides the initial funding of retail note acquisitions and all the things that can’t be securitized and that’s the must for us as we go forward.

Some wrap-up comments on page 45 about our capital structure and how we’re thinking about that throughout 2009, we’ve previously announced that we have the capacity and the intent to do at least one million share repurchase which we will do when we have access to the market in order to support the valuation and as well as the control option dilution.

We believe that this is a show of confidence from the company to the shareowners. Also with the cash flow that we’ll describe more fully as we get into 2009 but we expect it to exceed CapEx and investment. We can consider a debt buyback which as you know is currently selling at $0.55 in the market to $1.00 par, with the benefit of debt reduction and almost two for one and a gain on extinguishment.

So we’re looking at that. It’s a little thorny but we do think it allows us to consider a way to get a head start on our returning to a more normalized capital structure. As far as NFC goes, really the only must as I said before is the renewal of the revolver late in 2009 or early in 2010 and that’s a $1.4 billion provided by our relationship banks.

Here’s the key points now, the parent company has no need to refinance in the near-term. In fact, while its not desirable, we could go until late 2011, we don’t want to wait that long, but we’re borrowing money at 5% now and meeting our covenant requirements readily. So there’s nothing in 2009 that we have to do to continue the scale of operations that we have or to fund our CapEx budget or to execute our strategies other then off load retail receivables from the finance company.

We are using our availability and our working capital capacity to help meet the Mexican market truck inventory financing demands that are being placed on NFC Mexico. The devaluation of the Peso hurt sales in Mexico and so we are helping our Mexican company fund the inventory that is on the ground in Mexico.

We have $340 million of unused committed credit facilities borrowing at less then 5% with these low LIBOR rates our deal is in [no floor] LIBOR and just to reiterate, a debt buyback now could greatly facilitate ease of refinancing later. So what I want to leave you with is that we’ve got sufficient liquidity, and borrowing capacity to execute our strategies and we can comfortably say that as we go into the second half of 2009 and look forward to the demands, cash demands for 2010.

So I’ll leave it at that and pass this back to Daniel.

Daniel Ustian

Thanks Terry, let me conclude this by talking about the future now, past 2009, what are the things we need in 2009 to establish us for 2010 and beyond and on slide 46 the first item on it talks about Ford. We need to get that resolved. I will give you a belief now, I believe we’ve made progress on our discussions with Ford on this. Hopefully by the time the January 22 investor call and visit is we’ll have a conclusion to this.

I think hopefully we’ll find that that is consistent with what we have talked about with the marketplace but we do anticipate a resolution from this in the near future.

On the pension side, we need to get the earnings up on this and Terry has said we need to get into the low teens for this to get back to where we don’t have expense, we have no expense nor income. Keep in mind that our pension fund was earning 9% plus –

Terry Endsley

Actually higher then that for the last 15 years but our expectation for accounting purposes was 9%.

Daniel Ustian

So that’s not out of the norm for us to get that back. Hopefully we’ll be able to accomplish that in the near future and then establish our presence globally and bring in the strategy that we talked about for our big bore diesel engines as well as all of our diesel engines.

So if you look at slide 47 just to talk a little bit about what’s going on in 2010, in India this will be the year we launch the Class 4 through 8 trucks, about middle of the calendar year in 2009, we will launch this product. Don’t expect to see financial results positive in that first year but we can establish that so then in 2011 and beyond we can get the benefits of that.

And of course then there’s the rest of the world with our CAT joint venture and other products and other distribution bases that we have out there. And finally on our engine side we’ve talked about us growing in the engine business in 2008, I would anticipate us getting some more business in 2009 for the future on the diesel side.

On slide 48, here’s one we like. As we mentioned earlier we have entered the motorcoach market, let’s talk about leveraging assets and utilizing others as well. We have a partner, Monaco Coach, Monaco makes a one-piece body. Of course we make the chassis that goes with that. The combination of these is powerful. In my mind this is a $400,000 vehicle that we will be very competitive at.

By 2010 we’ll be in this market. So how do we prepare ourselves in 2009 to capture this opportunity when 2010 arrives. On page 49 you know we’ve been successful in school buses for many, many years, how do we transfer that into the commercial bus sector and the rest of the world is not strong in school buses but they certainly are strong in the commercial bus sector and this is where our partnership with Neobus. Again a body manufacturer married to a chassis manufacturer, a powerful opportunity for us in the commercial bus sectors.

And then finally on page 50 just a summary, 2008 was strong. We expect 2009 to be strong in spite of the challenges that are out there with the economy and on page 51 this just summarizes where we are.

We have some headwinds certainly in 2009, the industry, the economy, the pension that Terry talked about earlier. We think we have plans in place to overcome those through better improvements in the marketplace and better cost reductions, have the military presence which would get us $5.10 to $5.60 a share earnings.

Terry mentioned the opportunity for repurchasing stock. We’ve got a plan here for a million shares. Depending on what happens in the next three or four months with the economy we’ll decide on what is the prudent thing to use our cash for and it could be stock or debt or it could be just investments. Right now we’re committing to the stock side and we’re looking at the debt side.

But 2010 and beyond, obviously is stronger then 2009. Certainly the industry, our global opportunities, remember we have $2.50 to $3.00 in pension that we should dent in 2010 so the result should be stronger both from a revenue side and an earnings side as we head out of 2009.

So with that we’re ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ann Duignan - JPMorgan

Ann Duignan - JPMorgan

Could we step back to page 21 and could you just give me more color on your outlook, your 2009 outlook by industry, truck Class 6-7, combine Class 8, and just what you’re thinking is in terms of the volumes that you’re looking for for next year because particularly in your Class 8, that looks a bit higher then we’re forecasting or other people are forecasting, just trying to understand the logic behind each of the forecasts.

Daniel Ustian

Well what we typically do, we all look at these differently. As you know our calendar year and others is different so, our fiscal year is different then others, so we have tried to match this up. It is a little bit higher, not that much higher then what others have out there and it anticipates some improvement in the back half of the year so as I mentioned, the front end of the year is actually at a rate lower then this and the back half higher then this and that’s more from anticipation then putting up some money.

We are seeing, this is very early on, we are seeing some potential for freeing up some money to some of our customers by the first of January, which of course was last week so hopefully that will enable them to buy products that they need to buy but we don’t know any more then that.

Ann Duignan - JPMorgan

If you were to rough, back of the envelope, first half, second half, what kind of percent first half versus second half, 45-55 or something like that?

Daniel Ustian

It needs to get looked at a little harder and on the 22nd we’ll provide that to you but you’re in the range of that.

Ann Duignan – JPMorgan

On slide 25, if I look at I think what you’re suggesting on this slide is that you are proposing that you will go to loan in 2010 on the 15-liter and that you will be willing to forfeit at least initially 24% of the 15-liter market that—

Daniel Ustian

No we didn’t say that. We didn’t say that at all. We said we’ll have our own 15-liter engine. We didn’t say we were going to forfeit anything for sure.

Ann Duignan - JPMorgan

Will you have a 15-liter, your own 15-liter by January 1st, 2010?

Daniel Ustian

We said we would disclose all of the product and attributes on the product at the Mid-America show. This isn’t about an announcement on product. It was just to give you the privy of showing where we’re headed from a strategy but we’ll go through all of that at Mid-America.

Ann Duignan - JPMorgan

But I think its safe to say that you’re still adamantly EGR only?

Daniel Ustian

That’s correct.

Operator

Your next question comes from the line of Henry Kirn – UBS

Henry Kirn – UBS

The foreign military sales, could you give a little more color around how big that opportunity could be.

Daniel Ustian

On slide 27, in fact I have Archie here.

Archie Massicotte

We have quite an opportunity abroad in numbers of different countries. We’re pursuing a number of different things in foreign countries, mainly in the UK as well as in Poland, Russia, and others and there’s, we’re looking at Canada. Canada is potentially on the bubble this week potentially that we could yield a significant contract from them.

But its all out there and we’re pursuing it and we’re very, very much involved in it and it’s a little premature to declare a victory on any of these yet but we’re in the hunt believe me.

Daniel Ustian

Archie, you can talk about some of the UK, you can talk about—

Archie Massicotte

To get specific with vehicles, the UK for instance is pursuing, and they’ve been public with this, this has been public knowledge, they’re going after somewhere around 300 vehicles, armored vehicles to put into Afghanistan. There’s the [UVES] program that follows beyond that, the UK and that’s got about 8,000 vehicles in it but that’s a vehicle program that will follow behind this what they’re calling the Husky and that’s a derivative of our MXT.

The incremental dash units, Romania is very, very interested in pursuing some dash units that we’re providing into Afghanistan today for our US contingent. We got incremental business going into [Taecon] that will put field vehicles into Afghanistan for their army and also into Iraq and there’s a potential of 1,500 units there.

Poland, Romania, there’s another bid proposal out in Romania for about another 800 units. We’re not sure of the derivative of that variant but we are suited up and ready to respond to these countries.

Daniel Ustian

Another example of, on the 22nd, we’ll be able to show you some product and show you the direction on how they might apply into the foreign military sales as well as even US sales.

Henry Kirn – UBS

On the international opportunity outside the US, Canada, can you talk a little about the progress with the CAT JV and how you see those markets trending today.

Daniel Ustian

Frankly what we have spent our time on is on setting up the plant for it, getting the products in place, getting the product development first establish the products that we need for the countries that we’ll be in, the kind of product and the attributes that are in it and then how we would sell it. As far as our cooperation with CAT, right on plan. There’s some legal things still have to be concluded but no change in anything there.

Hopefully we’ll get that resolved here shortly as well and we’ll get an official document for that but we feel very good about where we’re at on that. Again another one on the 22nd we’ll be able to provide some more color for you including the product plans.

Operator

Your next question comes from the line of Andrew Casey - Wachovia Securities

Andrew Casey - Wachovia Securities

Question on the $590 million below the line items, if I could qualitatively step, quantitatively step through that, you have the increase in the pension, the decrease in the professional accounting legal fees, could you kind of clarify what’s going on in that line.

Terry Endsley

Well I think you’ve hit the main points, it is important to us to continue to drive down our reliance on contracted accounting and finance work. We are going to have a hit because of the decline in market values and net is in there will be the restructuring actions that we’ve taken to I’ll say right-size the company for the industry environment that we’re in.

I’m not sure that there is any other major headlines there.

Daniel Ustian

I think in the, about $20, $25 million of the increase in pension post retirement is in the segments’ cost, something like that and the rest of it will be in the below the line.

Andrew Casey - Wachovia Securities

And so if we were looking for this in 2009 basically the removal of the accounting and legal kind of gets deferred by about a year as long as you hit the pension return targets that you talked about.

Terry Endsley

Yes, and then we do expect the profitability of the financial services segment to rebound in 2009 as well.

Andrew Casey - Wachovia Securities

And then back on the 15-liter engine discussion, without telling us what the performance parameters have been are there test vehicles with those engines on the road today?

Daniel Ustian

You’re right we’re not going to go through that. We have engines that, have our own engines in the lab and if you come on the 22nd, we’ll be able to talk through that some more.

Operator

Your next question comes from the line of Kurt Ludke - CRT Capital Group

Kurt Ludke - CRT Capital Group

On slide 54 which is the market share slide, focusing for a second on the bottom half where you show the market share as excluding the military, what shares did you assume in your 2009 guidance?

Daniel Ustian

Can we give it to you after, let me just warn us on something here, we say combined market share excluding military. Here’s what happens on that, everyone puts in their own specifics, ours is military. Some have strip chassis, they’re all included in the market share on the top. We pull out only the military at the bottom. We’re not pulling anything out for any of the competitors because we don’t know what it is.

So they’re really not apples and apples. Now having said that I think your question we need to think through some more because as you know, we went through and said that it wasn’t good enough just to have our target market shares and we had to go back then and revise it with some substance behind it. We’ll have to come back to you and explain why market share is 22% or whatever it is in Class 8 and whatever the severe service is.

I can’t tell you that I know what that is right now but we’ll do it on the 22nd.

Kurt Ludke - CRT Capital Group

Okay but the shares are higher on this basis in your assumptions. Your assumptions are higher then the 2008 levels, is that safe to say?

Daniel Ustian

Certainly for Class 8, not in severe, a little bit higher in mediums, yes.

Terry Endsley

But they’re not gigantic—

Daniel Ustian

They’re not big changes. Bus would be a little higher, mediums would be a little higher, severe would be pretty much on and Class 8 would be higher.

Kurt Ludke - CRT Capital Group

And then also the guidance of $2.3 billion of base military sales in 2009, is that what you assume for military in your guidance of $5.10?

Daniel Ustian

Right, remember our base had $2 billion in it and then to get to the $5.50 or so that includes $2.3 billion worth of military sales.

Kurt Ludke - CRT Capital Group

And you said that excludes the MXT.

Daniel Ustian

It includes any more business related to the MXT, that’s correct.

Kurt Ludke - CRT Capital Group

That hasn’t already been awarded, okay. What kind of, just switching to liquidity, what kind of minimum liquidity do you think you need to run the manufacturing business comfortably?

Terry Endsley

Generally as we go into a year like we’re facing in 2009, we’d like to have $500 million of manufacturing cash balances. As you know we’re entering with $775 million. We like the flexibility of closing down the plants from time to time but more importantly planning for the vacation shut downs that are part of our UAW contract so with that kind of cash balances and committed available borrowing facilities, we feel very comfortable with our ability to go into a year like 2009 where we expect the back half to be stronger then the front half and to be able to have the money to execute the proper timing of our capital expenditures.

Kurt Ludke - CRT Capital Group

So I guess with respect to the share buyback and the potential repurchase of debt you’re already, you feel like at this point you have sufficient liquidity to go forward with one or both of those?

Terry Endsley

Well for sure on the stock buyback. The debt buyback makes sense when we see how the year is going to shake out and just how quickly the rebound happens.

Daniel Ustian

One way to look at it is based on the estimates that we have in here and how we view the year now, we’re fine with that. I think what we have to be convinced with though is that’s going to happen or something better. Will it get worse before it gets better, so we’re being a little cautious before we commit to that.

Kurt Ludke - CRT Capital Group

The CapEx guidance of $250 to $300 does that reflect your leasing activities or--?

Terry Endsley

No, that reflects investment and product programs.

Kurt Ludke - CRT Capital Group

Okay so it could be a lower number, how much do you think you could lease?

Terry Endsley

Our investment and operating leases is around $70 million as far as balance sheet goes but its not a significant number to add on to the $250 to $300.

Daniel Ustian

I think it was at one time but it isn’t in the last few years now.

Kurt Ludke - CRT Capital Group

So you think you’ll, the $250 to $300 is about what you’re going to spend. It’s not going to move a lot?

Terry Endsley

That’s correct.

Daniel Ustian

And when we were buying big lines, assembly lines and block lines and head lines, those were things you might lease but we’re trying to hold back on some of those.

Kurt Ludke - CRT Capital Group

Your CapEx in 2008 came in quite a bit lower then I thought the guidance was, was the difference leasing or did you just--?

Daniel Ustian

No this was just, we pared back where we needed to and I would also argue some of it was just the nature of our company understanding leveraging the assets and its impact on how we’re controlling capital costs in an environment that’s tough.

Operator

Your next question comes from the line of J.B. Groh - D.A. Davidson

J.B. Groh - D.A. Davidson

I just had another question on this military, so there’s $2.3 billion in the budget but there’s $2 billion roughly that’s booked, is that how I should look at it?

Daniel Ustian

I’d say, by next week we’ll have the whole $2.3 billion booked.

J.B. Groh - D.A. Davidson

Okay but everything else would be just gravy.

Daniel Ustian

Right.

J.B. Groh - D.A. Davidson

Okay and then on your sourcing initiatives for your global sourcing initiatives that you’ve talked about in the past, where do you kind of see yourself with that in terms of the potential of 100% where would you put yourself in that realm in terms of future opportunities in global sourcing?

Daniel Ustian

What we really found from that is a couple of things, the exchange rate is different and US companies are getting to be competitive. The global side of that while the effort is just as strong, we’re finding that companies can be competitive here or in Mexico and we’re not getting as much off shore but we’re getting the results that we needed from US or Canada or Mexico, mostly Mexico and the US.

As a percent, now having said that as we enter now into our global strategy with Caterpillar and we go into India and we start making more trucks there, I think there’ll be some more coming from that. We’ve have common suppliers coming out of those regions.

J.B. Groh - D.A. Davidson

So that doesn’t have the same appeal it had maybe nine months ago.

Daniel Ustian

Like I said the appeal was the result and I think we’re getting that different ways.

Operator

Your next question comes from the line of Agshay Mehdhaven – Redwood Capital

Agshay Mehdhaven – Redwood Capital

If you could just talk a little bit about what working capital did on the manufacturing side during 2008, it seems that if you just look at the cash earnings of the manufacturing business and look at cash flow from operations were it looks like working capital is a use of cash of about $400 million. Its hard to actually pin down the number because of the [Finco] stuff and the consolidated balance sheet, so I was hoping you could just talk to that qualitatively.

Terry Endsley

Yes sure, if you look at the additional financial information in exhibit 99.1 you get a clearer view from the manufacturing parent’s point of view but if you think about the way the company operates, just about everything and the associated working capital, just about every product that the manufacturing parent produces creates a sales receivable which is immediately sold to the finance company and then we pay our suppliers 55 days later.

So what was operative throughout 2008 as the market declined was that we paid off supplier trade credit and we grew a segment of our business, the military, which is working capital intensive. So the receivables in the military business were higher at the end of the year then they were at the beginning of the year.

And so your conclusion is that you stated is correct. We did make good profits in the manufacturing parent and we used some of that cash flow to pay off trade credit and effectively increased the receivables portfolio at the military.

Agshay Mehdhaven – Redwood Capital

Could you provide sort of what your thoughts on working capital for 2009 because obviously the size of the military business decreases appreciably.

Terry Endsley

Sure and so we need to build on what I just said here and bring into the discussion how and when does the traditional truck market recover. We’ve said that we expect this to be a market that improves throughout the year. When production rates go down, you will find that the manufacturing company is using cash and when production rates go up because of the delay in payables to the suppliers, you’ll find that we’re generating cash.

So its going to be very specific quarter to quarter. If you think about a stair step of a constantly improving domestic traditional truck market, you ought to see cash balances from operations going up as we sell those receivables immediately to the finance company. But again it will be determined by the characteristic of the truck market and our associated production rates.

Agshay Mehdhaven – Redwood Capital

I just wanted to confirm my reading of the credit agreement, but the company’s ability to buyback stock is limited to 50 million per year, is that correct?

Terry Endsley

That’s correct, yes.

Agshay Mehdhaven – Redwood Capital

Can you just remind me on what the ability to purchase bank debt is, purchase debt more generally?

Terry Endsley

Well not simply and I’m not going to try in this forum, but a couple of thoughts. People who hold this debt need liquidity and the market for company’s ability to buyback debt has loosened up considerably over the past couple of quarters and so it would be thorny. It would be involved directly with the credit agreement but the conditions are in place where it probably makes sense for us probably makes sense for the market.

Operator

Your next question comes from the line of Eli Lustgarten – Longbow Securities

Eli Lustgarten – Longbow Securities

Slide 28 which is the part segment, shows that you’re planning this $5 to $700 million increase in parts sales, how much of that comes from the military and how much of that comes from pricing and how would you break it out, military pricing, some usage, how much of that is actually usage of market share gains, just an idea of where that $500 to $700 million is coming from.

Daniel Ustian

Its predominantly from the military. There is some, I’d say 5% from vehicles, the rest of it is from military and pricing is a small number.

Eli Lustgarten – Longbow Securities

And on the same gain, in your assumption for the year do you have a pricing assumption, price improvement assumption, and on the same token have you got a, you gave us material cost improvements, do you have a material cost change number in the 2009 plan?

Daniel Ustian

Here’s what we have said on this, we have said that we’ll recover our cost in the pricing. If you think about the plan that we had when commodities were quite high we had to recover that and now we’re saying that being that commodities won’t be so high it probably takes away the risk that we would have on recovering that. So we feel better about that side of it.

Now having said that I also mentioned who’s buying. Its only the big fleets that are buying today so obviously there’s a mix challenge with that that we have to make, be cognizant of. But we’ve included all of that in our estimates here.

Eli Lustgarten – Longbow Securities

Do you have a positive price assumption in 2009?

Daniel Ustian

We haven’t said that. Obviously costs are up a bit and we’ll collect those small number.

Eli Lustgarten – Longbow Securities

[inaudible] a little bit of pressure this year because of the market conditions, is that fair?

Daniel Ustian

That’s right.

Eli Lustgarten – Longbow Securities

Going back to your profit curve, chart 17, its in a bunch of places, would show the original $1.6 billion line in the improvement there, and I guess the big risk is if the improved volume does not occur, you have as October fiscal year, we’ve got weak order patterns that are below your guidance, that means that the first quarter of 2009 and probably the second quarter of 2009 will not improve, if it gets delayed you don’t get the market improvement would that put you back on the line or can you still be above that profit line if the volume really doesn’t change much from the first half of the year until very late in 2009, if at all.

Daniel Ustian

We’ll be above that line because that line is variable with volume. I think your question is will we be at the EPS or the segment profits, and of course, you’re looking at one part of it if the volume doesn’t materialize but there are other things that go on in the business that we’ve talked about here and so I can’t answer that question until we have a full evaluation of all the aspect of the business, could we get more military, could we do some other things. Its hard for us—

Eli Lustgarten – Longbow Securities

The volume is the biggest risk to this whole scenario at this point, is that correct?

Daniel Ustian

I wouldn’t say that. I’d say there are plenty of opportunities here.

Eli Lustgarten – Longbow Securities

You have assumed $100 million of professional fee risk, professional fees this year.

Daniel Ustian

Right.

Operator

Your next question is a follow-up from the line of Ann Duignan - JPMorgan

Ann Duignan - JPMorgan

On the profitability, on highway truck business, current volumes or the volumes that you’re projecting, is that business above break-even, below break-even, any color you can give us in terms of the profitability of the core business, non-military would be gratefully appreciated.

Daniel Ustian

We record our segment profits, truck engine and parts, you can see what that is based on the 2008 results so I think you can see we’re profitable.

Ann Duignan - JPMorgan

You’re profitable overall but can you break out the on highway, non-military business for us at all, or just directionally? These are very low volumes.

Daniel Ustian

We don’t do it that way. Keep in mind we have several businesses. We have the bus business, we have severe service business, you already know we’re successful on both of those from a presence standpoint, from the facility standpoint and then we have the mid range and the Class 8 sectors as well, all baked into that so we don’t break it out by each one of those categories. We only do it in total.

Ann Duignan - JPMorgan

And the sense I’m getting is that bus and military are higher profit then the medium and heavy duty?

Daniel Ustian

We don’t break it out that way.

Operator

Your next question is a follow-up from the line of Kurt Ludke - CRT Capital Group

Kurt Ludke - CRT Capital Group

A couple of cash requirement questions, it sounds like the pension funding requirements are pretty uncertain right now, do you have any guidance as to what you’ll be spending on OPEB in 2009?

Terry Endsley

We provide that guidance as part of our footnote disclosure but I believe that the numbers that we’ve said are around $100 million.

Kurt Ludke - CRT Capital Group

That’s in the K somewhere?

Terry Endsley

Yes.

Daniel Ustian

One of the things on the OPEB, there’s two parts of it, there is a fund and of course that has suffered just like the pension fund and then there’s the expense and the expense side actually has gone down for several years including 2008 and we would expect 2009 to so we’ve done some nice things operationally. The funding side we’re still challenged.

Kurt Ludke - CRT Capital Group

And is there expense guidance in the 10-K?

Terry Endsley

No. There is not expense guidance in the K.

Kurt Ludke - CRT Capital Group

But it will be, I guess last year it was 52, was that it?

Terry Endsley

Of profit, yes.

Kurt Ludke - CRT Capital Group

And then it will be an expense in 2009?

Terry Endsley

Yes, that’s correct.

Daniel Ustian

Let’s put it down for a January 22 item. We can work on that.

Kurt Ludke - CRT Capital Group

And then cash restructuring costs, do you have a sense for what those will be in 2009?

Terry Endsley

Associated with the impairment?

Kurt Ludke - CRT Capital Group

Well just overall, for all of the cost savings.

Daniel Ustian

There’s a challenge with that question. Obviously what do we do with our Class 8 and specifically what do we do with Chatham I think is the question here and based on what we have for Indianapolis, we’ve taken the impairment and that’s been a non-cash item. We would not anticipate that being a big number either way. And for Chatham the only question gets to be in the pension, how does that cash requirement work for pension. Other then that, there’s no cash really related to that as well either. But we haven’t decided on where we’re going with that. As you know the exchange rates now kind of come back.

The challenge we have in Canada is many of the suppliers were right next to us, have now moved south and so the logistics costs of supporting Chatham is challenged. So we haven’t decided. We’ll decide that in the first part of 2009.

We don’t expect that to be a big drain either way.

Kurt Ludke - CRT Capital Group

Okay, and then I was curious if you could just give us a little more color as to where the market is for retail receivables and if there have been any recent transactions that you could point to as evidence that the market is open and what your plans are.

Terry Endsley

There have been minimal transactions. We at this point are dependent on retail note securitizations through private bank conduits. We are in discussion with relationship banks right now for a February, March type of sale. I don’t know that we could successfully access the public market right now although that would be our preference if it were available.

What you ought to hold us, look for us to do is to update you as to progress that we’re making for a securitization around the February, March timeframe and at that point in time it would be appropriate to talk about cost of the funding versus the earnings on the receivables that we’re putting into the [inaudible]. At times that was unfavorable and we were in a bad trend last year but this year, so far we’re feeling better about our ability to securitize receivables profitability.

Kurt Ludke - CRT Capital Group

Does it make sense to think about the TARP for this type of --?

Terry Endsley

Well its interesting, GMAC just got 8% preferred money and I don’t know how much warrants they had to give up that were obviously dilutive in order to get that 8% money. I look at our borrowing costs with our LIBOR based revolver provided by bank relationships and hopefully what ought to be an improving ability to sell retail notes into securitizations both because the market is a little quieter then it was in 2008 but also we’re making, we’re loaning it at higher spreads because of the diminished competition and so I ask myself, do we need extra capital provided by TARP or [TELF] in the finance company and its certainly something that we’re looking at.

It wasn’t set up for us but it seems to be a willingness to have dialogue. Its not clear to me that taking 8% money with warrants that would be dilutive is the right overall financial play for us particularly if we can see this market loosening up in the second half.

Kurt Ludke - CRT Capital Group

I really wasn’t thinking that you would take the preferred stock, I thought maybe you could just sell, they might be a buyer of your receivables.

Terry Endsley

Have that dialogue too. We’ll let you know.

Operator

Your final question is a follow-up from the line of Andrew Casey - Wachovia Securities

Andrew Casey - Wachovia Securities

Could you let us know what you’re seeing in used truck pricing. You indicated in your monologue I think Daniel, that you’re kind of filled up on other people’s brands and that seems to indicate a little bit of excess inventory out there.

Daniel Ustian

Here’s the, it’s a tough question because its almost a week to week question. If you asked me that question when the financial markets went to hell, it just dove. And then its had some recovery since then so I don’t think we’ve established enough basis here of experience to give you a good answer. I’m not trying to beg off on it. Maybe on the 22nd we’ll have some more experience on it, but it has come back a little bit.

Like I said, our own level of inventory is not that bad. In fact our own level of finished goods is too low for us for that matter but as far as our own vehicles inventory and new [structs] were fine, but we’ve taken some back. Obviously when we get conquest accounts, we take some others and have it factored in when we do the deal to what we expect from it so I think we’re covered from a financial standpoint.

But the market is not stable right now in used truck prices.

Andrew Casey - Wachovia Securities

If I could switch down to Brazil, it would appear as if you have a future opportunity with some of the ownership changes going on at VW, do you think that will increase your volumes given your relationship with the new owner and if so, when do you think you could realize that.

Daniel Ustian

Well as you know we, the interesting thing about our product line up, is you take that DT 466 here and DT 570, nine-liter product here. That is a Class 8 product from some countries like South America so we’re putting that product in down there and which obviously where VW is and if you look at that product it could be used in other parts of the world as well.

The new partner of course is also a partner of ours, MAN, so are there opportunities for us, MAN and VW to work together and there absolutely is and we’ll be working on those. In fact I was just down there in the last month or so and visited with them and they have an incredible operation down there, very unique in how they deal with it.

A little bit like Archie does with our military, that’s the way they do, making commercial trucks down there and they’re pretty successful at it so that’s certainly one we want to keep our eye on and continue to grow with them and continue to partner up with MAN and now we’ve got a nice avenue to do that with the three of us.

Heather Kos

Thank you very much.

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