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Navistar International (NYSE:NAV)

Q3 2013 Earnings Call

September 04, 2013 9:00 am ET

Executives

Heather Kos - Vice President Investor Relations

Troy A. Clarke - Chief Executive Officer and President

Walter G. Borst - Chief Financial Officer and Executive Vice President

John J. Allen - Chief Operating Officer and Executive Vice President

Dennis M. Mooney - Group Vice President of Global Product Development

Analysts

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Stephen E. Volkmann - Jefferies LLC, Research Division

Brian Sponheimer - Gabelli & Company, Inc.

Andrew Kaplowitz - Barclays Capital, Research Division

Jerry Revich - Goldman Sachs Group Inc., Research Division

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Eric Crawford - UBS Investment Bank, Research Division

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Joel Gifford Tiss - BMO Capital Markets U.S.

Operator

Good day, ladies and gentlemen, and welcome to Navistar's Third Quarter 2013 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Ms. Heather Kos. Ma'am, you may begin.

Heather Kos

Good morning, everyone, and thank you for joining us for Navistar's Third Quarter 2013 Conference Call. With me today are Troy Clarke, our President and Chief Executive Officer; Walter Borst, our Executive Vice President and Chief Financial Officer; and Jack Allen, our Executive Vice President and Chief Operating Officer.

Before we begin, I'd like to cover a few items. A copy of this morning's press release and the presentation slides that we'll be using today have been posted on our Investor Relations website for your reference.

The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent as part of the Appendix in the slide deck.

Finally, today's presentation includes some forward-looking statements about our expectations for future performance. 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 projected in today's presentation, please refer to our most recent reports on Forms 10-K and 10-Q and our other SEC filings. We would also refer you to the 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 his opening remarks

Troy A. Clarke

Thanks, Heather, and good morning, everyone, and thank you for joining our call. Our agenda today will follow the same process we established several quarters ago. I will lead off with a high-level overview of our third quarter performance and our progress on our strategic objectives. Walter Borst will provide a deeper dive on the financial results. Jack Allen will provide more specific direction regarding our Drive to Deliver initiatives. And I will wrap up with some closing remarks on long-term EBITDA goals leading into Q&A.

Moving to Slide 6. Before I begin, I'm extremely pleased to introduce Walter Borst, our new CFO. Before joining us, Walter was with GM for 33 years in a wide array of key executive roles. His past experience as the head of GM Asset Management, Treasurer of GM and CFO of Adam Opel makes him the right person to lead our financial operations here. Although he's been here only a month, he's already made significant contributions, especially as it relates to our 2014 strategic plan. And you're going to hear directly from him in a few minutes.

Turning to Slide 6, you will see our roadmap. We remain focused on our Drive to Deliver and our guiding principles. We've referenced in the past that it'll take us up to 18 months to execute our plan. We're 1 year in, and we've made significant progress. As I pointed out last quarter, we still face a few significant challenges, but we have laid the groundwork to solve them and obviously we want to accelerate our rate of progress.

Slide 8, summarizing our results. Our EBITDA was less than we hoped for in the quarter. I consider the challenges that impacted our performance to fall in 3 buckets: first, we continue to experience onetime costs and charges related to our ROIC divestitures and restructuring efforts; second, we encountered some significant reversals in our results in Brazil and Latin America due to social issues that developed during the quarter; and third, we fell short of our sales volumes, primarily due to medium-duty market share erosion.

Positives for the quarter include: our cash performances at the top of our guidance. For fourth straight quarter, we have delivered this goal. As you know, cash management and working capital reduction remains a major focus of our efforts during this turnaround year. Two, we continue to overachieve in our efforts to reduce structural costs. An example of this is our targeted reductions in SG&A. On the last call, we stated we would like to achieve over $200 million in year-over-year savings, up from the $175 million we talked about before. And despite a few onetime unexpected items this quarter, we showed $236 million improvement year-to-date. And just this week, we took more actions based on our best-in-class benchmarking initiatives to further reduce costs and Jack will talk to you later about these actions, which will benefit 2014. Point three, Class 8 orders received increase from 12% of the industry in Q2 to 20% in Q3. And customer feedback continues to be excellent on our new products. Fourth, just yesterday, we announced another key initiative in accelerating our turnaround: the 2014 product strategy that focuses on bringing SCR offerings to our medium-duty vehicles as quickly as possible. We announced that we will now offer to Cummins ISB 6.7-liter engine for international DuraStar and the IC Bus CE Series vehicles. The ISB engine will provide customers with an expanded engine offering and an additional engine choice. Importantly, it will allow us to get an SCR offers -- SCR offering into our medium-duty truck segment faster than we had previously indicated. We're taking truck orders now and we're going to begin shipments in December. And last, we continue to work through our noncore assets that don't provide an appropriate return on meaningful cash flow. These are smaller initiatives now and some of the true-ups and charges impacted in our quarter, but the right thing to do as we focus on our core North America truck business.

While we're pleased with the progress we're making, we fell short in our traditional and global volume assumptions, so let me come back to this. Our Class 8 market share continues to show improvement, but not as quickly as we had hoped. That being said, we are encouraged by a substantial uptick in orders and this will eventually materialize into retail sales in the next few quarters. Our medium share situation, however, has become similar to what we experienced in Class 8. As we are switching technologies, some folks are waiting in the sidelines, so we felt we needed to take action as quickly as possible. And by launching the Cummins ISB into our medium duty products, we believe we can more quickly grow our market share.

Globally, we came in lower expectations given the social situation in Brazil and the negative impact it has had on the economy. In addition, Colombia's truck scrapping laws have depressed sales where we are the market share leader. We did not see these issues at the beginning of the quarter and both of these businesses provide healthy returns over the cycle and we view this as a short-term situation at this time. On the positive side, our China engine joint venture is performing slightly ahead of plan as it ramps up.

We're making good progress on quality, and the major field campaigns are nearly done. Expenditures per campaign are coming down, and the quality of the trucks that we are producing today continues to improve and we're encouraged by the early trends. Jack will talk more about that in a minute. And as we said in the past, customer satisfaction is one of our guiding principles and we think of it as an investment in future sales.

Before I turn it over to Walter, let's turn to Slide 9. I'd like to point out that much has been accomplished since we started this turnaround approximately 1 year ago. We're doing a good job managing those factors within our direct control. As an illustration, we have met or exceeded every targeted benchmark we set for ourselves with the exception of market share and cost of quality, both of which are improving but not as fast as we thought when we made our plan last August. Yet we recognize that both are, in fact, proof points of our turnaround efforts, so there's more to do and we continue to work with a renewed sense of urgency and we won't rest until the job is done.

So with that, let me turn the call over to Walter for the details of our financial results.

Walter G. Borst

Thank you for the kind words, Troy, and good morning, everyone. Before I begin, I'd like to say that I'm excited to join the Navistar team, and I look forward to helping shape the company's financial and strategic direction. Since I started August 1, I've spent a significant amount of time evaluating our strategic plan and look forward to developing and implementing the company's operating plan with my colleagues. I relish the opportunity to play a part in the turnaround of this great American company.

Now let's turn to the financial results for the quarter on Page 11. Revenue for the quarter was $2.9 billion, down $385 million or 12% from 2012.

We experienced lower sales across all truck classes in our traditional markets as we transitioned to our SCR-based products. We were also negatively impacted by lower industry volumes. Additional shipments were at 3,900 units lower than in 2012 as medium-duty truck sales declined 2,400 units compared to last year.

In addition, military revenue had a little over $100 million for the quarter as compared to Q3 2012. For the quarter, the loss from continuing operations was $237 million, $317 million worse than last year. The primary drivers of the year-over-year decline are shown on Page 12.

Taxes, interest and other were $248 million worse than the prior year. Tax expense was $204 million worse than the prior year, driven primarily by a $173 million change in our estimated 2012 effective tax rate in the third quarter. Additionally, in Q4 2012, we increased our U.S. deferred tax valuation allowance. As such, we did not recognize a tax benefit on our U.S. pretax losses in the current period.

Lower industry volumes, combined with lower truck market share declines, resulted in reduced profitability of $84 million year-over-year. Warranty expense in Q3 was $35 million more than in the prior year's third quarter. Nevertheless, additional warranty accruals were significantly less than in Q2, and we did not experience any significant charges related to our big bore engines or our heavy-duty trucks.

Despite some onetime items related to our transition, we continue to improve our bottom line through aggressive cost control actions.

Focusing on SG&A and product development efficiencies resulted in a year-over-year cost improvement of $50 million. As we position the company for a solid fiscal year 2014, we will continue our cost reduction efforts and get the full year benefits of this year's actions.

On Page 13, we've reconciled our actual ending manufacturing cash against the guidance provided on the company's last call. We ended the quarter with manufacturing cash of $1.09 billion, which was at the high end of guidance. As Troy mentioned, this is the fourth consecutive quarter that we have met or exceeded cash guidance.

Excluding discontinued operations, consolidated EBITDA was a loss of $74 million compared to the $0 million to $50 million management had expected. As previously mentioned, we experienced lower medium-duty truck sales in the U.S. with slower unit volume growth in Latin America than anticipated. Moreover, much of the shortfall can be attributed to certain onetime items as we continue to evaluate our product portfolio and pursue our return on invested capital improvement initiatives. In this regard, in conjunction with the closure of our Garland plant and transfer of this work to our other truck facilities, we also experienced some start-up issues at our Springfield plant. EBITDA impacts from the lower volume and onetime items and start-up costs each accounted for about 1/2 of the shortfall [indiscernible].

Despite the shortfall in EBITDA, we are able to meet the upper end of cash guidance by focusing on other controllable costs. First, we are able to outperform our capital spending forecast by deferring, and in some cases, eliminating capital spending as part of our ongoing product evaluation. Second, our manufacturing team has done an excellent job of reducing truck inventory, which drove incremental working capital improvement that allowed the company to exceed the high end of the range provided.

Turning to Page 14, you'll find our manufacturing cash outlook for the fourth quarter. We expect manufacturing cash at the end of the fourth quarter to remain in the range of $1 billion to $1.1 billion. Typically, Q4 is one of our strongest cash flow quarters for our business, driven by an increase in operating days and truck charge-outs. However, in Q4 2013, we expect that truck charge-outs will be slightly lower than in Q3. This change reflects slightly lower industry volumes, lower forecasted medium-duty truck volumes in advance of our expanded SCR offering in late 2013.

Consolidated EBITDA for the fourth quarter is expected to be in the range of $0 million to $50 million, excluding any onetime items.

Meanwhile, we expect capital spending and pension and OPEB funding to be at -- to be higher than in the third quarter.

Net working capital is expected to show continued improvement, but at somewhat slower pace than in the prior quarter as higher seasonal commercial parts sales, reduced inventory levels and account payables increase towards the end of the fiscal year.

Let me assure you that Navistar's balance sheet will be one of my major areas of focus. We want to maintain strong liquidity and improve our capital structure over time.

Turning to Slide 15. While we are pleased that the third quarter manufacturing cash balance ended at the high end of the range, we are not satisfied with this quarter's results. With our new SCR engine offerings, we are confident that we can recapture recent market share losses. In the meantime, we are looking to further build on our recent structural cost reductions. We're prepared to do what is necessary to rightsize the cost structure to deliver on Navistar's future profitability targets.

I will stop here, and let Jack provide more insights on our Drive to Deliver plan. Jack?

John J. Allen

Thank you, Walter, and good morning, everyone. If you'll turn to Page 17 this morning, that's where I'll start and I'll give you a progress update with a key focus on 4 areas: first is quality, then the status of our product launches, an update on sales and market share and where we stand on delivering our 2013 operating plan.

First, quality, on Slide 18. On our last few calls, we've talked about a handful of EGR-related quality issues with our 2010 engines and what we're doing to fix them. The campaign we launched earlier this year is nearly done. And realistically, it should have taken us 1.5 years to get through this campaign, but we put an intense focus on it. And 8 months into it, we're already 80% complete. Now the fix rate typically slows down towards the end of campaigns because some customers just simply don't bring their trucks in to be fixed. So we believe this campaign is essentially behind us. For the vehicles we fixed, the quality trends are positive. Compared to 8 months ago, uptime has significantly improved as a result of the aggressive approach we took to fix issues. The positive quality trend continues with our new products also. Our customers can see it and feel it in the vehicles we're delivering. While we don't have mature data yet, we're getting very positive feedback from our customers about the quality of the ProStar with the 15-liter ISX, as well as our own 13-liter SCR engine.

Now before I get into more details about how these trends are translating into sales, let me give you some perspective about how we see the industry today. Turning to Page 19. The Class 8 industry sales continued to experience a number of headwinds and tailwinds. On the positive side, tonnage and freight rates continue to be good. And some sectors of the economy, like housing and automotive, are showing improvement. But on the other hand, there are areas of the economy that continue to lag and that is definitely holding back truck sales. Last week's durable goods orders are an example of that.

In Q3, the Class 8 industry orders were 8% below the prior quarter, and we now believe the industry could be 5% below our initial forecast of 215,000. However, we continue to believe there is a fundamental need for replacement vehicles due to fleet age. Combined with improving economic conditions, this is going to result in a 2014 Class 8 industry of 220,000 to 230,000 retail sales.

So with that backdrop, let me talk about what we're seeing in our business. Slide 20. It's been 8 months since we launched the International ProStar with the Cummins ISX 15. This is a configuration with a strong reputation in the industry and we're seeing increased interest across our key segments. In addition to ProStar, we've launched the ISX and the International PayStar, as well as the 9900 model. The majority of the configuration options for all our heavy-duty models with SCR are now complete and this has been a big factor in boosting sales. It's a very positive indicator for us that we've secured more than 10,000 orders for International Trucks with the ISX 15.

We brought back the ISX for a reason: our customers demanded a capable and efficient 15-liter solution within our trucks. And a number of orders we received so far is a testament to customer acceptance.

Our orders come from some of the industry's largest for hire and leasing fleets: Knight, Penske, Ryder, Swift. These fleets all conduct rigorous analysis before they buy and their increasing acceptance is evidence of the value of the vehicles that we are delivering today.

And we're starting to see repeat business, too. For example, one of our earlier ProStar/ISX customers put 200 trucks into service this past January. Based on the quality, the driver acceptance and the fuel economy they've experienced in the past 6 months, they've just ordered 850 more. Reception for the 13-liter SCR has also been positive. Our test fleet today has over 3 million miles on it and there have been no major issues. Just last week, we heard from a customer who has a vehicle that turned 131,000 miles. He's only brought it into the dealership for preventative maintenance, such as oil changes and to replace 1 wiper blade. So far, we're over 4,500 orders for the 13-liter SCR. In fact, Heartland Express, one of the country's premier fleets, just placed a very significant order for this combination.

We're encouraged by this kind of response. It's evident that we're starting to see -- to regain our customer confidence and earn back their business. In fact, if you look at Slide 21, our Class 8 order share is coming back. For the quarter, our order share was more than 14 -- was more than 20%, which compares to a retail market share of 14% for the quarter. Class 8 order share is a leading indicator of retail market share. So looking ahead, we can expect to see our retail share pick up on the strength of these orders.

Now let me shift to medium-duty. Medium continued to be a challenge in Q3. And as we discussed last quarter, our market share has softened because of earlier issues related to the SCR transition within our product line. Medium share for the quarter was 24%, but order share was only 16%. So we still have a lot of work to do here. And our announcement yesterday is directly intended to reverse this trend.

Turning to Slide 22. What we announced yesterday is that we're expanding our medium-duty product offering to include the Cummins ISB 6.7-liter engine for our trucks and buses. We're making this move for 3 key reasons: first, it allows us to get to the market faster with medium-duty SCR vehicles; second, like the ISX, the ISB is proven technology. And finally, we've got a ton of experience here with the ISB. We've been building this same configuration with SCR on the Ford Blue Diamond vehicles in our Escobedo plant since 2010. This is going to allow us to ramp up very quickly. The ISB in our medium-duty vehicle is going to be a winning combination, just like what we're seeing with the ProStar and the ISX. We're taking orders today, and our first salable units are actually being built this month. And we have said at December okay-to-ship date. So we expect near-term improvements in our order intake and that will be -- will quickly flow to growing our retail market share.

In addition to -- of the ISB to our medium-duty lineup provides a number of advantages, including opening the door to new customers and strengthen the demand from existing customers, especially those who want commonality in their engine offerings. In fact, a number of customers have already approached us about adding this choice. The ISB will help us recapture bus share also and our leading position in that market. Our 12 -- our rolling 12-month retail share is about 38%, but we believe our bus share will grow quickly. Everyone in the industry offers the ISB in the bus and now we will, too. We've won in this market before, and we'll win again.

So the obvious question is where does this put us with our own proprietary engines? On our last call, I said we would introduce SCR in our medium-duty engines at the beginning of calendar year 2014. Now with the addition of the ISB, we'll have a proven SCR offering that we can bring to market faster and that gives us more time to lay out a revised transition plan for our own midrange engines. In the meantime, we'll continue to offer EGR versions of our midrange engines and we have an adequate number of credits to do so.

Now let's turn to Slide 23 and the controllable items in our operating plan whereas you've already heard we continue to make progress. Our original goal this year was to reduce SG&A and overall structural costs by $175 million. We've already secured $236 million in savings. So we remain on track to what we're delivering in this area.

What we're seeing now is with so many of our employees collocated on 1 campus, there have been more opportunities for us to become leaner and more efficient. Thus, last week, we took actions to further reduce headcount, which we expect to generate an additional $50 million to $60 million in annual savings starting at the beginning of fiscal year 2014.

On the parts side of our business, it continues to be a real success story again this quarter, just like it's been all year. Although sales were down year-over-year, profit increased due to improvements in product mix, as well as year-over-year cost improvements. Another bright spot for us is material costs. We continue to be on track to exceed our plans for year-over-year improvements.

In manufacturing, our transition out of Garland is complete. Products have migrated to Springfield and Escobedo. And yes, we did have some start-up issues at Springfield that added costs in the quarter, but those are largely behind us, and things are stabilizing.

Looking ahead. As the ISB becomes part of our engine portfolio, we will reassess our plans on how to best consolidate our engine manufacturing capacity. Right now, though, it's too early to determine the impact. And as we've stated before, any decisions will be made in 2014.

The defense business is still feeling the impact of sequestration. And consequently, we continue to take costs out of this business in response. As we indicated earlier, our goal of business was challenged in the quarter. MWM volumes were below our expectations due to the social situation in Brazil as well as unfavorable foreign exchange rates. We've already implemented actions to reduce costs in these areas, but will [ph] truck also has slowed more than we expected. Latin America is our biggest global truck market and a recent scrappage law in Colombia has really had a direct impact on volumes.

In summary, on Slide 24, we're encouraged by the reception we're getting in the marketplace for our Class 8 products. It's based on the quality improvements, the strength of our new offerings and our great distribution network. Frankly, we expect our medium-duty products to follow suit with the addition of the ISB. We remain committed to doing whatever it takes to return to profitability and we've taken very strong actions this quarter to drive us in that direction. As both Troy and Walter have said, we are not satisfied with our performance, but we are building momentum to enter 2014 on a positive trajectory. As we said earlier, we have all the right building blocks in place to achieve our 8% to 10% EBITDA goal run rate by the end of 2015.

With that, let me turn it back over to Troy for some closing comments.

Troy A. Clarke

Okay. Hey, thanks, Jack. Hey, as you can tell, we're still working hard on 2013. It's still our turnaround year. And although we're not providing specific guidance for 2014 at this time, some areas of continuing improvement for '14 are as follows: On the fixed cost front, we see lower 2014 spend in product development and SG&A, given the benefits of consolidating our engineering facilities, organizational realignment and headcount reduction. We believe manufacturing costs will be lower, driven by higher capacity utilization, facility productivity enhancements and the continued implementation of our lean manufacturing and quality initiatives.

In the area of variable costs, we believe we can lower our material costs meaningfully through a combination of make-or-buy decisions, supply base consolidation, footprint and logistic optimization and design cost reductions. And last but not least, we anticipate improved market share with our complete portfolio of Class 8 products and targeting new customers with the introduction of the Cummins ISB.

So in closing, we laid out our Drive to Deliver plan about a year ago at the time of a lot of uncertainty. It included a major technology change we executed in record time. It included significant cost reductions and rightsizing activities. These continue today. We changed our organizational structure to a leaner, simpler-to-run business focused on functional excellence. Supported by an outside consultant, we've benchmarked many pieces of our company and have road maps to become absolute best-in-class. And last but not least, we spent countless hours and miles restoring our relationships with dealers, customers and suppliers. And this continues as well.

We have made a lot of progress, and our momentum is building and we have more to do and we're excited about the headway that we're making and we're confident that the results are on the way. We're in good position for a much better 2014, as well as on the path to achieve our 8% to 10% EBITDA run rate goal by the end of 2015.

I'd like to thank you for your time this morning. And I'd like to turn it back over to Heather for our question-and-answer period.

Heather Kos

That concludes our prepared remarks. [Operator Instructions]. So operator, we're ready to open the lines.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from David Leiker of Baird.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

I want to start with a question. Troy, as you ended with the class actions, both the structural and the variable costs going into '14, you get the market share recovery and the revenue from that. This is a different business model than what we've seen in the past with rising revenues. What do you think your contribution margin is going to be on that revenue as you see that ramp up?

Troy A. Clarke

Well, David, thanks for the question. And interesting -- that's exactly kind of how we look at it. We're trying to establish a very positive trend rate with regards to contribution margin. And then it kind of becomes pretty straightforward, just to make sure that all our cost package underneath of that. So we're not giving any guidance on this, but obviously a substantial improvement in our contribution margin in the range over 30%. But we're not going to give you some specific guidance on that right yet and we're trending that way very, very quickly.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

All right, great. And then, Walter, just one question for you. As you mentioned, focus on the balance sheet and with your background, I think you bring a different perspective on the balance sheet side. Any thoughts you can share as it relates to a handful of things? You've got a convert that comes due next year, you've got the pension liabilities and the health care liabilities and what your timing is going to be that you'll be in a position to be able to talk about those in more detail?

Walter G. Borst

Yes, we obviously are taking a look at those. And one of the things I've been focusing on since I got here with the team, we're just completing our operating plan for next year. So as part of that, we'll take a look at the converts [ph] and what, if any, portion of that and when we might refinance that. We're obviously happy with our cash position exiting the quarter, so we're starting from a position of strength here, so that's good. On the pension side, I would continue to expect us to make our minimum contributions, but not more, for the foreseeable future until we can get a better line of sight on some of our capital structure. But we've started looking at it, we'll continue to look at it and we'll address the capital and -- capital structure in due course as our operating plan for next year gets completed.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Oh yes, and what about the health care liabilities?

Walter G. Borst

We'll continue to do what we've been doing there as well to meet our obligation.

Operator

Our next question is from Steve Volkmann of Jefferies.

Stephen E. Volkmann - Jefferies LLC, Research Division

My question is on market share, maybe 2 parts, medium and heavy. On the heavy side, I was encouraged there. I guess, I'm curious whether you think this can continue into the fourth quarter. Specifically I'm wondering, are we doing anything like filling some dealer inventories or something like that? Or are these really more customer orders? And what's pricing like on those orders as well? And I'll follow up on medium.

John J. Allen

Steve, this is Jack. Good morning. Our market share goals are to get us back to our historical levels, like Class 8, in the 20% range. Clearly, what happened in the third quarter for us is encouraging. The orders are a blend of dealer orders and customer orders, most of whom are for very near-term fulfillment of those orders. Very little dealer stock on the Class 8 side. It's really -- it's sold order quarter driven. So we're encouraged by that. Certainly, not declaring victory in any front, but the -- we're encouraged by the quality of the new products. We're encouraged by the repeat business. We now have a full product line out there that's been a big plus for us. And then, we're also encouraged by the MaxxForce 13 and what the customers are seeing on the SCR side of that, although it's quite early. So all indicators are continuing to be positive for us on that front.

Stephen E. Volkmann - Jefferies LLC, Research Division

And any commentary on pricing in those orders?

John J. Allen

I would just say pricing is competitive. I don't view any craziness going out there on the pricing side from us or any of our competitors. But it's a tough market right now.

Stephen E. Volkmann - Jefferies LLC, Research Division

Okay, great. And then on the medium-duty side, do you have any indication from your customers that they're ready to sort of step up as you open this order book for the new engine now? And I guess what I'm trying to figure out is, is this kind of the low point of the medium-duty? Should we expect the market share to be better in the fourth quarter?

John J. Allen

Well, as Troy indicated, any time you're going through a transition here, you have a number of customers that are kind of on the sidelines. They're seeing which way we're going and they want to fully understand it before they make decisions. And that's really what we've experienced here in the last -- over the last number of months and quarters. So we are very encouraged by the reception we received last night from the announcement on the ISB from our viewers and our customers. And also, a number of significant customers who have approached us over the last number of months and quarters really asking us to seriously consider doing this as part of our turnaround strategy. So we're not ready to talk about orders or name names, but we think that the impact here, maybe contrary to Class 8 where in the Class 8 market is very fragmented, there's a lot of customers. In medium-duty, there's a number of very large customers that move market share very quickly. And we're very encouraged by the reception from them. We think the impact of the ISB will be far more immediate. On the market share side, though, I don't think our retail market share -- we're not planning an improvement in our retail market share here in the fourth quarter. We're going to start deliveries of ISB-built products in December, so that will -- that's in our first quarter of 2014.

Troy A. Clarke

Steve, it's Troy. Just couple of comments, if I could, maybe just to add some color on that. As Jack indicated, we're not kind of counting on any major market share benefit from this in the fourth quarter at this point in time. But certainly, we're going to work hard to try to make that happen, okay? I think we've allowed ourselves that opportunity. And much different -- I mean, I was around here obviously what we announced that we were going to do SCR and even the Cummins ISX into the ProStar about a year ago, maybe actually earlier than a year ago. And at that point in time, anecdotally the response we got, that's nice, we'll wait and see. Because obviously the challenge that we were taking on was a pretty stiff one. I think we have developed some credibility. And in fact, the customer response has been much different this time. It's great. Glad you're doing that. As Jack indicated, we've been hoping for that to come along. So just anecdotally, the customer response seems warmer and I think part of that is the credibility that we may have developed with regards to managing this type of program in the ISX and the 13-liter SCR. And then last but not the least, I think we still have a great -- we got a great chassis and a great truck and a great distribution system that, I think, this engine will really play to our strengths and additional product offering.

John J. Allen

Maybe just one last point here, Steve. We will -- we won't wait until our next quarterly call to give the market an update on how the reception has been for the ISB engine. Good point.

Operator

Our next question is from Brian Sponheimer of Gabelli & Company.

Brian Sponheimer - Gabelli & Company, Inc.

Just want to talk a little bit about 2014. And I know you're not giving guidance, but one of the things that you touched on is the variable cost improvement. And as we get into 2014, the idea that you guys are going to be able to take out some EGR content on your engines, you think you're able to quantify that by -- or at least put brackets around it and say $3,000 an engine, something along those lines?

Troy A. Clarke

Hey, Brian, this is Troy, and we have Denny Mooney in the room, too, our -- the Head of our Product Development activity. What I'd like you to think about is there's kind of 2 tranches of that cost reduction and we're going to get them both done in the course of 2014, one sooner than later, okay. One is just hardware on the engine and think about that as between $1,000 and $2,000; and one is hardware that's on the chassis, okay. For instance, the EGR engine has a second radiator that we no longer will need. Denny is nodding his head here, okay. And think of that as in the neighborhood -- or the hardware and the chassis kind of in the range of another $1,000, okay. So somewhere over the course of the year, a very important part of our variable cost reduction is to get at that. I don't know, Denny, have I characterized that correctly?

Dennis M. Mooney

You hit it right.

Troy A. Clarke

Does that help you, Brian?

Brian Sponheimer - Gabelli & Company, Inc.

Right. So I mean, if I'm thinking about this right, let's say, you sell 30,000 trucks next year, similar to, say, 2012. And -- this is applicable to all of your Class 8 truck sales, correct?

Troy A. Clarke

Just the ones with our 13-liter SCR engine. Remember, we've replaced a portion of the volume. And we think that eventually that normalizes 50-50 between ISX -- between 15-liter and 13-liter. So it will really only apply to that.

Brian Sponheimer - Gabelli & Company, Inc.

All right. So if it's 15,000 trucks times $3,000 engine, you're talking about a $45 million improvement next year?

Troy A. Clarke

Yes, well -- yes. And again, I'd ask you, we haven't pulled through all of those costs, so I talk in terms of a range, okay, a range that could go lower, that could be in the $2,000 to 3,000 range. But how you're thinking about the math, I think, is the right way.

Brian Sponheimer - Gabelli & Company, Inc.

All right. And just on the medium side, do you think that the share that effectively was seeded in the quarter, do you think that's gone somewhere else and it's going to need to be regained from another truck manufacturer? Or do think that this is just a delay?

John J. Allen

Are you speaking of medium-duty, specifically?

Brian Sponheimer - Gabelli & Company, Inc.

Yes, specifically on the medium side.

John J. Allen

Well, we think it's probably both, that there are customers here that have traditionally bought our products and competitor's products that have shifted the purchases more towards competitors. On the other hand, there are customers at the dealer level that we think we can recapture back here with a broader product offering fairly quickly.

Brian Sponheimer - Gabelli & Company, Inc.

All right. And just one more, please. Just as far as the fourth quarter cash guidance, you usually get a very good cash collection quarter in the fourth quarter. If I'm thinking about the first quarter -- I mean, part of that's a working capital component. Should I think about the first quarter, you think, having the negative working capital reversal being a little bit smoother than your assessed?

Walter G. Borst

I think as it relates to working capital, that's a good assumption. We've tended to -- as I've looked at it, we've tended to do better in the fourth quarter and then give some of that back in the first quarter. Without volumes expected to go up in the fourth quarter, we wouldn't expect to give as much back in the first quarter on working capital, specifically.

John J. Allen

But the first quarter has fewer working days and the payable start to run off a little bit in that time frame.

Heather Kos

Hey, Brian, before you leave, I do want to mention one thing. On that cost savings in terms of the components on the engine and the truck, yes, that's not going to be a full year savings.

Brian Sponheimer - Gabelli & Company, Inc.

All right, of course.

Heather Kos

Okay, yes. I just want to make sure. I don't want to get [indiscernible]

Troy A. Clarke

And Heather, that rolls out over time, too. It rolls out over time.

Brian Sponheimer - Gabelli & Company, Inc.

It was more a run rate question by the end of the year.

Operator

Our next question is from Andrew Kaplowitz of Barclays.

Andrew Kaplowitz - Barclays Capital, Research Division

So looking at your warranty reserve, your accruals, they were down sequentially, as you mentioned. But you still recorded $0.60 of charges in the quarter. So maybe, Troy, you can talk about your confidence level that you're getting closer to the end of this sort of reserve cycle? I know you talked about it in past quarters. And again, it's a little better this quarter, but it's still up there. So maybe you can talk about that?

Troy A. Clarke

Yes, for sure, Andrew. Thanks for the question because it does give us an opportunity, I think, to highlight a couple of things. First off, so much of our focus, I think, over the course of the last 1.5 years basically has been around our big bore engine and the issues related to that. And that's the one obviously we've worked very, very hard on. And the magnitude of those numbers are very high, given the cost of the components and the fixes that we have to do. So if there's a silver lining to the cloud, all the energy that we've put in it, there was no prior period adjustments related to the big bore engines in this quarter. And this would be the first quarter for a long time that there had been kind of -- we're not claiming victory, but it does give us confidence that we are wrestling those issues to the ground. And more importantly, I think confidence, that is, the field campaign, the fixes which we have been putting in in production for some time and now the field campaign's in the field that they're having the proper effect on the big bore engines. What you saw in the quarter here was really similar, but it was -- for the big bore issues, but now it's related to our medium-duty engines and the V8 engines. The issues are kind of similar. They're with basic components of the EGR systems and these are engines that don't accumulate miles as quickly and -- as the big bore engines do because they're just different applications. In addition, there -- the magnitude of the cost of the fixes is less. But because we've kind of seen this cycle already on the big bore engines, we kind of know what to anticipate, we know what to expect. I think we're a little bit smarter on what those numbers look like and how to get at -- and again, we have a lot of fixes that we're doing in the meantime. So yes, I'm kind of comfortable that we're getting our arms around that. Again, we -- there is the possibility that something pops up that we don't know about, but this has been the focus of a lot of effort and energy. And I hope we're going to be able to look back a couple of quarters from now and continue to see improvements that are directly reflected in our -- in our results. That's the goal, okay. And one rose does not make the spring, but we do have some progress we can point to on that.

Andrew Kaplowitz - Barclays Capital, Research Division

Troy, is it safe to say that you're making more conservative assumptions when you're looking at medium-duty given your experience on heavy-duty or -- just curious about that.

Troy A. Clarke

Yes -- I would say I don't know if conservative is the -- you may -- Andrew, you may interpret it as conservative. We have worked a lot to try to be more accurate and precise for sure. Others -- our warranty accrual process obviously is something that is heavily scrutinized and we believe we're making better use of the data today and we're tracking it on a daily basis. So we're far more conversant in it and we are not making any assumptions, let me put it that way, that things are magically going to get better just because time has passed. We're really all from Missouri right now and we're holding ourselves to the show me kind of standard that, in fact, technical actions and other things that we might do will, in fact, result in it. So I guess, a way to think about that is, yes, we're being prudent and biased to being conservative.

Andrew Kaplowitz - Barclays Capital, Research Division

Okay, that's helpful. Maybe you can talk a little bit more about your South American business, your engine business down there. You've talked about MWM going back to profitability this year, but obviously there were some issues in the quarter. Is there a way to quantify what happened or sort of give us more color? Because in the first half of the year, Brazil was doing well, and of course, it hit a speed bump here. So maybe you could give us a little more color?

Troy A. Clarke

Yes. Andrew, let me lead off and maybe Jack could contribute here. But actually, MWM will be profitable this year. And as you noted, it was kind of -- Brazil is a very cyclical market and as the year started off, we had some conservative assumptions in what we would earn in Brazil this year. And in fact, the first quarter, we did very, very well. So what we ended up doing was we recalibrated our plans predicated upon that and had that baked into the balance of the forecast for the rest of the year. With the social unrest, what happened is we began falling short of our revised goals. In any operations like ours, we're always looking to add to good news to compensate for some of the bad news that you might get in some other part of the business. And Brazil was definitely a good news -- a good news operation for us early in the year and that's what we had planned on taking advantage of the whole year. The reversal that we saw doesn't drive MWM to be unprofitable. It just takes them back to more the original operating plan that was established for the year. So it's part -- it's kind of a disappointment thing there. I don't know, Jack...

John J. Allen

Well, the only other piece around that is around the exchange rate.

Troy A. Clarke

Yes, well, that is truly so, right?

John J. Allen

So the impact in the quarter for FX between Brazil and South Africa was $11 million. So that was clearly unexpected for us. And it's all in combination with everything that's going on in that country, that the volumes and then the FX is really what hurt us in the quarter.

Operator

Our next question is from Jerry Revich of Goldman Sachs.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Troy, I'm wondering if you could talk about where the 13-liter engine will be towards the end of next year as you deliver on the cost-out engineering programs that you outlined. Where will it be on your return on invested capital framework? Will it be returns accretive at that point? And if you could, just help us understand how you're thinking about the path for the medium-duty engine as well as the idea to get through all of these actions taken on the 13-liter and then apply the learning curve in medium-duty and potentially consolidate production lines? I'm wondering if you'd just step us through how you're thinking about those items?

Troy A. Clarke

Yes. Jerry, great questions. I don't know that I've ever heard anybody ask so many questions in one question before, but I'm going to do my best and kind of get at those, if I could, okay? Actually, we're very pleased with how the 13-liter has unrolled for us or evolved for us: first, from a performance standpoint; second, from our own ability to economize, so to speak, the costs that it takes to keep that engine in the portfolio; and a really detailed plan to be able to put that thing in the right kind of cost basis. We're not going to provide this guidance to you, guys. But we've talked in the past, I think it's a very legitimate question to say, gee, you ought to be able to produce your 13-liter for less than what you're buying a Cummins ISX for. And that is really what we anticipate being able to do or what we are doing, okay? And we anticipate that that margin of difference there will continue to make sense for us in this business. And the 13-liter will be a part of our portfolio for a long time for a good reason. And I don't know, Jack, if you wanted to comment on kind of what you see in the order rates for this engine, which I think tells you that this is still going to be an important part of our portfolio and I think a very good business component for us.

John J. Allen

Yes, if you look at -- as we look forward at our order board right now, so the orders that we received over the last number of months and quarters, about -- of the trucks that are in our order board, about 46% of them are ISXs. We still have a number of EGR 13-liter engines, although obviously that number is declining. But today, 34% of all the trucks in our order board are 13-liters with SCR. So we're pleased with the market acceptance of it. And on the cost front, as Troy said, we continue to work on economizing this. And the engine -- the fundamentals of the engine from the CGI block to the power density ratios, the weight of the engine and the overall horsepower and torque, the customers love this engine and addition to have SCR to it is even improving the performance further.

Troy A. Clarke

Yes, so we're not in a position on the 13-liter. Jack and I were kind of talking anecdotally a little bit earlier to remind people why we added the product to our portfolio to begin with. There really is a segment out there for a 13-liter engine and there's a segment for a 15-liter engine. And our 13-liter engine has some really good bones. It has great characteristics. And with the SCR on it, the kind of tuning we've been able to do for torque rise, throttle response and things like that, it is the superior 13-liter engine in the market. We're convinced that we're going to continue to demonstrate that. But certainly, a key to this success has been there has always been a 15-liter market and a 13-liter market. And so one of the things that, in having both of those engines in the portfolio, in some cases, people may choose between one or the other, but there's an ample market we think to be able to work on through both. The second question is, okay, how do you apply that thought process to the medium-duty? And I would say in answer to that, exactly. The big part of that does depend on the fact that, over time, and we hope it won't be a long time, we'll actually be able to market medium-duty engines to a broader market as well. At least, that's what our insight to the market is able to tell. And hopefully, we're able to develop the exact same kind of energy and momentum around our medium-duty engine strategy. But I do have to ask you to stay tuned here. We are kind of making a bet. We think it's the right bet. We're getting a lot of encouraging feedback and let the numbers tell us kind of where we need to go as we go forward. Your last point, great point with regards to manufacturing capacity. I've kind of highlighted -- I have highlighted in the past very specifically, we have too much engine manufacturing capacity and we need to do something about that. We have a handful of different alternatives that we can act on fairly quickly to consolidate our engine manufacturing into fewer manufacturing facilities than we have today. We fully expect to be able to act on that in 2014. We need to kind of see the take rate of the ISB in order for us to select among the options that we have. So we are counting on that manufacturing, increased capacity utilization, lower cost -- manufacturing cost per engine, reduction in fixed costs. It is part of our 2014 plan and so we're planning on reaping that by the end of the year, next year, and we actually have now a couple of months to be able to sort through that kind of in response again to the ISB take rate. So I would ask you, Jerry, great questions. It's exactly what we're thinking about and talking about all the time right now and it will evolve or roll out here between now and the end of the calendar year.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Okay. Just a clarification, when you mentioned the 13-liter cost curve will be lower than what you're buying 15-liter engines at today, when do you get to that point? Is it that by year-end 2014 on a run rate basis? Can you just frame that out for us?

Troy A. Clarke

This is one where I don't want to get kind of left footed on myself because I'm not so sure that we're not already there today, okay. So let's suffice to say that it's -- as the volume continues to come up, we continue to move to an even more favorable position, okay. So without giving cost data away, it's not something I'm losing sleep over right now because the number's moving in the right direction and I think we may have already crossed over into the right place.

Operator

Our next question is from Ann Duignan of JPMorgan.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Can you talk a little bit about just your service segment, what you're seeing in that market, particularly construction-related business? And is there any risk that your market share will continue to suffer in that segment just because we're seeing so much of that segment convert to natural gas? If you could just talk about what you're seeing out there, it would be helpful.

John J. Allen

Well, maybe the -- I'll start with the latter part of your question then move forward. The natural gas piece of the severe service market today is really focused on the refuse segment of the market. And that's a piece of the market that, as I recall, is about 10% or 12% of the overall market. It's very stable and we really don't participate in it at all. We don't have a product there. So that piece of -- we weren't going to get that market, whether it was natural gas or whether it was diesel. So relative to our overall market share in severe service, we've traditionally done well there. We do well in the municipalities. And obviously, the municipalities with the state budgeting is not very robust right now. The market is improving on the construction side. We do well there, although some of our competitors do better. So the mix is kind of hurting us on severe service. But going forward here, as we've continued to enhance our product line of engines and as we continue to move into 2014 with our SCR strategy, I think we'll be fine in the severe service market.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Okay. And then just on engine profitability, that was probably the biggest variance versus our forecast. Could you just help us bridge the difference between what was weaker end market like MWM and what was structural? I'm trying to figure out, as I model going forward, how to model profitability on the engine side.

Troy A. Clarke

Okay. We probably need to do a walk for you on that, Ann. Could we -- can we get that to you -- can we talk to you a little bit and point to one of the guys around here to put a little a walk together for you so that we can give you the right magnitude, okay?

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Yes, that's perfectly fine.

Troy A. Clarke

I'm not taking a pass at all. Understand the question, and I want to give you the information that helps you rationalize your model the best we can.

Operator

Our next question is from Eric Crawford of UBS.

Eric Crawford - UBS Investment Bank, Research Division

It looks like your actions to improve the quality are gaining some traction with customers. Was just wondering if you could speak to your 3 months in service repair rates, how those have trended since October and maybe what measures you highlight when you meet with customers to win the sale?

John J. Allen

Well, I don't have the statistics in front of me, but the trends I know. And the trends on both the vehicle side, as well as in the engine side, continue to improve month-to-month and quarter-to-quarter. So we do share that with customers. But frankly, it's usually the other way around. The customers are sharing that with us. The customers today have a level of sophistication on repairs and downtime that is far better than what they've had in the past. So usually we're sharing information with the customers on our fleet and our business in total and they're sharing the specifics with us. But the trends continue to be positive on all fronts. Specific to the engines on the SCR, as I indicated, it's just still a little too early. We shipped our first 13-liter SCR engine in May. So by the time it gets -- really starts hauling freight and sludges in the June time period, so the information we have today is very immature. But anecdotally, it's very positive.

Troy A. Clarke

Hey, Eric, this is Troy, if I can just add a little bit to that. As I had indicated, we're spending a lot of time in the field talking to customers, looking at their data. And quite frankly, as Jack indicated, many fleets are very sophisticated in how they view this. Most recently, I did a swing through the southern part of the United States and talked to 5 different major fleet companies and it was very interesting. Their data would indicate that the units in their hands, which are units that are -- have been in the field for a year and/or 2 years, the incidence of breakdown or warranty, maintenance-type incidents, something we call our per thousands is actually in line very close to all the competitor products that they have in their fleets. So the complaint with at least these 5 companies were -- or 3 out of the 5, wasn't that the trucks break down more frequently. It was the time to repair because of the nature of the repair tends to be a little bit -- tended to be a little bit higher, although they admitted that that was improving as well. And so I think this is really evidence that the field campaigns that we have been managing were having the right effect. And then the 3 months in service data that Jack is referencing leads us to believe that actually the products we're producing today are even better than that. And so that we are walking around here believing that the repair incidents are competitive and trending to be even better. But as our -- because of the nature of the components that have been breaking down, our costs, our warranty costs, have been higher and that's kind of what's been reflected in our warranty charges.

Eric Crawford - UBS Investment Bank, Research Division

Right. Okay -- no, that's helpful. And then just real quick. I think you quantified the impact start-up issues in Springfield had on EBITDA, but I didn't quite catch it. And then what were those issues specifically. I think you said most of them were behind you?

Troy A. Clarke

Yes, so what we did was -- is again to capture some fixed cost savings and logistics savings, by the way. We made the decision to close our Garland facility and we won't see that savings this year. We see it basically for next year, but we closed the Garland facility. So the Garland facility had a high mix of severe service products. And the Springfield facility, although a flexible facility and capable of building severe service products really had a high mix of medium-duty products. So as we begin bringing more severe service in there, medium-duty products are built in fewer varieties and combinations. Severe service products are built in a lot of different varieties and combinations. So there is a learning curve for our folks there. And quite frankly, we were very aggressive on doing it and we've made a lot of progress that we incurred over time and premium transportation-type expenses to the tune of about $12 million. But now the system is operating much more in control and coming closer to shipping everything off the end of the line that it's building, and we're seeing the same kind of goodness that we saw in our Escobedo facility earlier in the year from the implementation of our manufacturing systems and our quality practices. It was just kind of disruptive. But those are overtime costs primarily, some premium transportation as we had to move some stuff around. And it was really due to the learning curve effects of severe service products into a system that was really calibrated to build a higher percentage of medium-duty products. Make sense?

Operator

Our next question is from Andy Casey of Wells Fargo Securities.

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

I wanted to first go back to a previous profitability question. In short term, we're hearing some chatter about targeted actions aimed at market share improvement on top of which over the next few quarters you're going to be changing the long -- how you address some of your truck production with the insertion of the Cummins engine. And I'm just wondering about the impact of that on longer-term margin potential. So just to properly line up the goal post for the end of 2015, 8% to 10% EBITDA run rate goal, what really has to happen to achieve that goal? I mean, do you need better industry volumes in addition to market share reversal? Or can you get there just on the internal actions aimed at improved customer confidence, cost reduction and then a mix shift in favor of medium?

Troy A. Clarke

Yes. So there's a couple -- Andy, again, this is Troy. Good -- great question. Gives us an opportunity to, I think, illustrate a couple more things. We've talked in the past we're making these cost reductions both at a fixed and a variable cost level with the intention of allowing us to be profitable and -- far more profitable in different areas of the cycle. Our kind of target in that 2015 time frame, that run rate that we're saying, the model we've done about that really is an industry that's between 240,000 and 250,000, okay. And it's a market share that is slightly north of 20%. So we would anticipate a market share between 20% and 25% and an industry of 250,000 to -- or 240,000 to 250,000 really gives us the opportunity and that's a Class 8 industry of 240,000 to 250,000 because the industry today, for instance, is over 300,000 when you add the medium-duty -- when you add the medium-duty in it. And that's kind of the market conditions, which we think would be the new norm, okay. Now again, 8% to 10% EBITDA margin, if the market is a little bit less than that, that doesn't mean we're throwing in the losses, okay. It just means that the margins are going to be less. So our break-even point would be -- is actually resulting into a lower number, a lower number. That's kind of how we're aiming at that. And as we made these decisions with regards to the medium-duty product and it's tough to be profitable on medium-duty if your market share's in the teens, okay, just to be honest with you. I won't give you the specific guidance, but we're anticipating with these changes that we've made, our market share is going to go back up to more traditional levels, which is higher than -- certainly, I'm looking to project here.

John J. Allen

30 plus.

Troy A. Clarke

And certainly, 30 -- over 30%. And look, we -- I mean, I think Navistar, going back decades and decades, cut their teeth in the medium-duty market. We know a lot about it. We have a great distribution system, which is tailored to take advantage of that kind of stuff. There are no structural reasons for us not to get back to that kind of share. Hey, we got great competitors and it's going to be a dogfight, but we don't enter into that fight without advantages that we've enjoyed in the past and we'll enjoy in the future. And I would highlight here our previous success wasn't a profitless success. Our previous success in the segment was actually very important to the previous earnings at Navistar and will be going forward. I hope to give the impression I'm kind of bullish on this.

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

That comes through, Troy. Just back on the medium-duty, just on a clarification. As you pointed out, the traditional share has been considerably higher than what your order rate was in the quarter. And it's traditionally been one of the key profit drivers of the company, at least the way I look at it. When you introduced an external engine into that mix, that also gets back to a prior question. You have an awful lot of manufacturing capacity devoted to internal engine manufacturing. At what point do you potentially consider adjusting that capacity beyond what you're already anticipating?

John J. Allen

Andy, as we've indicated here, even going back to March at the Mid-America Truck (sic) [Trucking] Show, we acknowledge that our engine manufacturing footprint is not ideal for the structure of the company today. But before we move forward with anything, what we really want to do is assess how the ISB and our product is performing and what's the take rate and where does our medium-duty market share get to. With that piece of information, we think we can make a better, more comprehensive sustaining long-term decision for what our engine manufacturing capacity will be. So we're going to take the next number of months to do that. As we indicated, we'll make a decision in 2014. We've baked savings into our plan for 2014. We just have a number of alternative scenarios that have been put in front of us and we're going to take a few months to evaluate what those -- what the best one might be.

Andrew M. Casey - Wells Fargo Securities, LLC, Research Division

Okay. And then a question for Walter and add my welcome. When looking at Navistar from the outside, it's pretty difficult to predict performance on a quarterly basis. And I'm wondering, from your perspective, coming in with fresh eyes, how much work really needs to be done, if any, on the financial systems? Or is it more a function of just choppiness of the turnaround?

Walter G. Borst

Our financial systems are not the most advanced, but they do the job, I guess, is what I would say. And when you do have movements like we've seen, it's a little bit more difficult to make the forecast. So if we get a little less choppiness, to use your word, that would help us out. So we continue to make incremental improvements to our financial systems as well. We really haven't been in the position to make a wholesale change there. So we'll work with what we have and fortunately we have great people that operate those systems for us. That helps us to do a good job.

Operator

Our last question is from Joel Tiss of BMO Capital Markets.

Joel Gifford Tiss - BMO Capital Markets U.S.

I just wondered if you're updating -- you said earlier that you were hoping to end 2013 with roughly an 18% market share. And is your 20% market share in the third quarter, is that incremental to that 18% or does that just keep us on track with that?

John J. Allen

Well, it's certainly a bullish indicator towards us being able to grow our market share and exit 2013, enter 2014 on a positive front. So it would certainly be very positive for us if we could end at 18%.

Troy A. Clarke

But don't interpret the order intake rate, Joel, as incremental to the market share, right. So retail market share versus order rate, there tends to be a little bit of lag there so you can't draw a line between them and say 20% order share translates into 20% retail share in that time frame. What Jack is indicating, it makes us more bullish on the fact that that's doable for us. I would not construe it as it's incremental. Now we're working on that next sale, tomorrow that is, so -- and the one after that and the one after that. So we're going to get to that point here soon. But right now, I would just interpret it as it is cementing the foundation a little bit underneath the numbers that we've talked about previously.

Joel Gifford Tiss - BMO Capital Markets U.S.

And then the 18% to 20% market share, I mean, it's sort of -- maybe it's just me inferring that was sort of the breakeven in heavy-duty? And is your focus on incremental cost savings more of a comment that the turnaround is slower than expected or you're just trying to add a little more cushion to that breakeven?

Troy A. Clarke

Well, I would say 2 things. One, the turnaround has been slower than we expected and we have not -- kind of -- we haven't tried to hide that. We made some strategies in an effort to avoid our market share falling as it did, to be very honest with you. And now that market share is beginning to increase. And so we did not believe our market share would fall as far as it did and -- but it did. And we're glad to report that if we believe that we're on the mend and that it has started to rise again. So that said, the cost reductions are really a function of coming together in a central campus where almost all of our people work and all of our functions are and the benchmarking activity we've done to find ways and then the restructuring as well, right, to find ways to take further costs out of the company, I would say not -- it's not like we're not doing things, right? It's when we were in many locations, we would run as many different companies that we were kind of adding the results together. There were pieces of HR and communications and marketing all over in support of these business units. Now that we're kind of all in the same buildings, we have a HR function who brings a level of efficiency and therefore the HR cost per unit is a lot less. And that's the savings -- I'm not taking on the HR guys because it's really the same in marketing, it's the same in communications. Heck, it's the same in engineering, one of our core activities. We are spending less and getting more and better engineering done from these -- the consolidation and benchmarking activities. And in the manufacturing vernacular, which I'm familiar with, you would just call that lean, right? We're just becoming a leaner organization by eliminating non -- repetitive, duplicative, non-value-added type of activities and just doing those in a more efficient fashion. And so I would tell you without the market share pressure or without the fact that the plan didn't accelerate as fast as we had thought, we would still be doing these things because they're just the right things to do for making a better running and more efficient operation. And we're enthused about it. I mean, this is -- we're not doing it because we feel we're in the penalty box as much as we're doing it because we want to be the best-run truck company in North America. And we're getting there. We're getting there.

Joel Gifford Tiss - BMO Capital Markets U.S.

And the cost savings are excellent, I mean, with 80 million shares outstanding, that 200-and-almost 40 million adds up to a lot. Can I just be a little bit of a pig because there's nobody behind me? I just wanted to ask Walter quickly if he has any early reads on the level of warranty reserves? Whether he feels like it's too much or too little or just about right or just any early color?

Walter G. Borst

By definition, just about right.

Operator

Thank you. I would now like to turn the conference back over to Heather Kos for closing remarks.

Heather Kos

I want to thank everybody for participating today. If you have any follow-up questions, Randy Diaz and myself will be available. Thanks again.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.

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