Navistar International Corporation F1Q10 Earnings Call Transcript

Mar.10.10 | About: Navistar International (NAV)

Navistar International Corporation (NYSE:NAV)

F1Q10 Earnings Call

March 10, 2010 10:00 AM EST

Executives

Heather Kos – VP of IR and Financial Communications

Daniel Ustian – Chairman, President and CEO

A.J. Cederoth – CFO

Archie Massicotte – President, Navistar Defense

Analysts

Meredith Taylor – Barclays Capital

Andy Casey – Wells Fargo

Steve Volkmann – Jefferies

Jerry Revich – Goldman Sachs

Henry Kirn – UBS

Patrick Nolan – Deutsche Bank

J. B. Groh – D. A. Davidson

Kirk Ludtke – CRT Capital Group

Ann Duignan – JPMorgan

Joel Tiss – Buckingham Research

Vlad Steinberg – Realm Partners

Operator

Good morning and welcome everyone to the Navistar International Corporation first quarter earnings release. Today’s call is being recorded. And for opening remarks and introductions, I would like to turn the program over to the Vice President of Investor Relations and Financial Communications, Heather Kos. Please go ahead, ma’am.

Heather Kos

Welcome and thank you for joining us today for our Navistar’s first quarter 2010 conference call.

Information provided in statements contained in this presentation that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements only speak as of the date of this presentation and the company assumes no obligation to update the information included in the presentation. Such forward-looking statements include information concerning our possible, or assuming future results of operations include descriptions of our business strategy.

These statements often include 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, included in our Form 10-K for the year ended October 31st, 2009, which was filed on December 21st, 2009.

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 that could cause actual results to differ materially from those in the forward-looking statements.

All future written and/or 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 above.

Except for our ongoing obligations to disclose material information as required by the Federal Securities Laws, we do not have any obligations or intentions to release publically any revisions to our forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.

Other Cautionary Notes: The financial information herein contains audited and unaudited information and has been prepared by management in good faith and based on data currently available by 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. our 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 access and measure the performance of our operating segments. A reconciliation to the most appropriate GAAP number is included in the appendix of this presentation.

And with that, I will turn it over to Dan Ustian.

Daniel Ustian

Yes, thanks, Heather, and good morning. What we would like to today in today’s discussion and in prior – and in subsequent quarters is reference what we spoke about the January 19th shareowners and investment meeting where on slide four we talked about a revised goal of a $20 billion revenue company during normal times would commensurate profits with great products, competitive costs and the three pillars of remaining the same.

Two other things of importance is to find a way to be profitable during all of the cycles, control our own destiny and leverage the assets that we have. So in every conference, we will always references, and today, of course will be no different.

If you look at slide five, this is what we talked about. We mentioned that we had made progress on our original goals to the extent that we felt we could revise those goals upwards. And when normal industry comes back, we believe we have all the actions in place to be a $20 billion company, especially when the global impact hit us.

We also said that we were well positioned to improve our core business margins and we will talk about that today, while we are growing in this global sector. We will also have A.J. talk about the balance sheet impacts including what we are doing in the financial services situation, so we now believe our capital structure is constant and in place going forward.

On slide six, this is what we said 2010 would look like. These are the parameters going on in 2010. I will reference these as to what we think now. We said that the industry would be up slightly 5% to 10%. We said that the first half of the year though would be flat, the third quarter would be down, and the fourth quarter back up, we remain with that. In fact, we have more confidence in that today and here is how we get through the – if you are going up part at least.

We are seeing freight move increasing. We are seeing the utilization of trucks out there increasing. It will take some time for that reaction to head into buying trucks and we do believe we are exactly on what we said, first quarter being – first half being flat, third quarter being down a bit, and then an uptick in the fourth quarter and that’s exactly what our plan was and I believe we are on track today.

We also said that in the first quarter of the year, we would have our diesel production fairly constant. But the second part of the year, the second quarter of the year, we would be in a transition period, so volumes would be lower in the second quarter on diesels as we launch our 2010 products.

On the military side, we said we would have $2 billion which would be our normalized revenue for the military business. As we will talk about later, we think we have opportunities to improve that today.

We also mentioned that interest expense on the cash side would actually be down from our restructuring, but accounting we would have a $60 million accounting hit and that remains the same.

Truck margins we said would be flat in the first half of the year versus where we ended last year. And what we are going to show you today is they are a little bit better than where we ended last year. But the real impact for us is in the second half of the – with the 2010 launch.

We also mentioned that global situation with Mahindra, we would have a launch on the MNAL in the January of this year, which took place and we will start selling products there in end of the second quarter. We said our R&D would be similar, which is still the case. And we said we would have launch costs related to this startup of 2010 products and that’s mostly in the second quarter.

So with that, let’s go through what happened in the first quarter at slide seven. As anticipated, our revenue and sales on the truck side was basically constant to what it was in 2009 on the engine was up a little bit, somewhat last year, Ford was very low and so it increased this year. But we have also had some improvements in our South American business which is going to sustain itself through 2010 as well. So engine is up a little bit.

Our revenue on the military side, within that $2 billion worth of plan was about $350 million worth of plan in the first quarter, and that’s where we were. That compares to close to a $1 billion in 2009. So you can see we are less than 2009, but we are on track for the $2 billion that we had as an ongoing business.

Turning to page eight, let’s talk about profits. In the quarter, we had a $168 million worth of manufacturing segment profit, included in there a couple of one-time things. One was a positive thing as we closed out the situation with Ford on what we had accrued for suppliers and for other commitments that we had getting out of the Ford business, we finalized all of those negotiations, which ended up with an improvement of $17 million, that was in the quarter.

We chose to do something in Brazil, primarily related to a former business with MWM on taxes with the government there. We chose to conclude negotiation with them that resulted in a $16 million hit in the quarter. And the reason for that and we will talk some more about it in offline if there are any questions on this is we believe it will get us benefits in subsequent years of $5 million to $10 million. So we have a $17 million advantage in the quarter and a $16 million hit in the quarter. Those two wash themselves out. So we think the $168 million is representative of what an ongoing business would be for the first quarter.

And what we like about it is, is that first of all, it proves again that we could be profitable in the toughest of times. We did it in ’08; we did it in ’09. But as you know, the first quarter for us is always one of our toughest quarters because of the operating days, we have Christmas and Thanksgiving periods that were done and so all the fixed cost remaining with us, and we had no revenue coming in. So the first quarter is always the toughest quarter for income and for income and the fourth quarter is always our best. So we are able to prove that we can have profits in the quarter as well.

At a normal period, as normal revenue was military as well. If you remember in 2009, it had a lot more revenue and income of course related to military in the first quarter of ‘010 is about what would say our normalized rate.

The other thing we like about it is if you look at our core businesses now, the core business in truck North America, core business in engine or business in parts, every one of those segments are margins improved. And at the same time, we still invested in product development for the future. We were able to keep that X money, invest in our future. And of course for us, the best on margins is yet to come as we launched the 2010 products later in this year. So we feel we had a very successful first quarter.

For now, if you can turn to page nine, and there is a way you can hold this page out, because this is what we are going to talk about for the rest of the meeting. We are going to talk about the same things we talked about in Analyst Day. What we expect market share to do in 2010? Where are we on our 2010 emissions programs? What’s going on in military? And what’s going on in some of the other growth initiatives that we spoke about including fuel power technologies? And then A.J. is going to talk about looking on that balance sheet to get us what we would consider to be more shareowner value by trying to control the balance sheet.

So now if you look at slide 10, market share data is basically what we would anticipate. You can look at the shares there they are very consistent with where we have been. I would like to point out the first quarter for us is always a challenge and it’s because our competition has different yearends, and so they push out in the fourth quarter, usually December quarter, they push out some products out there, so normally a lower period for us.

And in fact in the month of December, just for reference, the market share in total instead of 31% it was 26% which again indicates that our competitors push out products in the month of December. I think as we talk about orders next you will see that we are in great shape on our orders share going forward even better than this.

So now let’s turn to page 11 and talk about the – our heavy strategy in 2010 emissions. As we went through our strategies several years back, we felt that we should focus first on our 13-liter product because that’s where the market is going to go. We would anticipate the markets only needing 13 liters in power and so that would be less on the 15-liter need, more on the 13-liter need. That’s exactly what’s happening.

When we look at what’s going on with the market today, several things. Weight, weight, weight, this is Jim Hebe talking. Weight, weight, weight, that’s all our customers talk about. When you look at beverage units, you like to fill it up; refrigerator units, they fill it up. Even take Wal-Mart, and they talk about getting improvements, what do they talk about, putting more in the vehicle, getting more cubes in a vehicle, weight becomes very important.

And so our 13 liter versus the 15 liter and EGR versus SCR allows them to have another 1000 pounds or more in delivery. Very important. We are seeing our customers shifting more and more to the 13 liter. The second thing, day cabs, light regional, shorter runs, they don’t need 15-liter power, they need something less, 13 liter will provide all the horsepower that they need.

It used to be that their highways were 70 to 80 miles an hour, they are not anymore. You don’t need that kind of performance, especially when you consider that a 13 liter will get you better fuel economy than a 15 liter especially on those applications. So what we are seeing is that there is indeed a shift to 13 liter.

We are also prepared though to have a 15 liter in addition to that. So we would expect the 13 liter to be the predominant share, but also a 15 liter. As we mentioned in January, we are confident enough in the 15-liter launch that we pulled it up October.

So now when you look at where we are positioned in order rates. Our order rate last quarter on heavy trucks is 40%. We think that’s an indicator of our strategy for SCR versus EGR. So what we are seeing what we said in January remains constant. We believe we will be at 25% market share for the year, 27% or better in the first half of the year, and 23% in the second half, and that’s because we went to our customers with this strategy and they are aligning with us on buying their vehicles early and buying their vehicles late. And Jim Hebe, I know on January 19th went by customer, by customer review of all our customers that are doing it that way, so we are confident that’s exactly what’s going to happen in 2010. Our customers will buy early, they will buy late, and we will be at 25% market share on heavy trucks.

Now let’s turn over to page 12, because this is where the other applications outside of heavy truck of where we have a tremendous opportunity and advantage. And when you look at the installation of a heavy truck that’s long haul, there is a place on it for SCR, but if not’s so easy on these applications. So 70% of all products that we sell, we think will have a clear advantage. And when you look at the share that we have enjoyed now over the last four months, which is now when the customers are starting to understand 2010, our share in orders is 50%. So that’s growing dramatically. And we would expect on bus, on medium, on severe and on day cab to grow our share in this industry in 2010, especially as 2010 emissions come into play.

So now let’s look at slide 13. This is the slide very similar to what we showed you on January 19th and we are ready for the emissions standards. Our products are being certified today. Some of them have already passed; some of them will be go over the next period of time as we launch our vehicles in April and May of this year.

We do have some already in the marketplace. If you remember right, we had hundred or so buses that went into the marketplace and 2010 emissions level is also running great. We have had no quality problems with it to speak of. So we believe that our technology is already proven. We also have test vehicles also in the other applications as well, so we are confident in our 2010 emissions launch and obviously that’s very important to our strategy.

I won’t take a lot of time on slide 14. But just to point out what’s the – our vehicles will look like versus 2007 vehicles. And the three things that are important to us, four things I guess is weight, performance, life and fuel economy. And you will note on this chart that we are getting better in every category here.

I just want to point out two things. Vehicle weight on a ProStar will be done. This is the truck, will be down close to 900 pounds versus the 2007 spec vehicle. Performance will be better. We will have a finer tuned product. One of the remarks that we are getting from those driving the 2010 vehicle is again here, this is a finely tuned engine going into 2010.

We are also going to increase the life on the ProStar to 1.2 million V-50 life that’s on the on the MaxxForce 13. Fuel economy will be better. On the vehicle side of truck, it says neutral here, but on all vehicles, except ProStars they are neutral and ProStar it will be better. So this is what we believe will deliver us a good results going forward.

And of course what our competition is going to have to deal with is what the usage will be on urea, what the cost will be urea, and what the need will be for urea and the installation. So we are going to be clean. Our engines will be service, basically the same way they have always been. Our customers won’t say anything different except for better performance.

Now let’s go to the military, because a few things have changed here in the last month or so on the military. Number one, we said we had a sustainable $2 billion business and we identified how we are going to get there when Archie spoke on January 19th.

If you look at page 16 now, Archie talked about two things on – in January 19th, he talked about us having some kits for Afghan. 1200 kits for Afghan for suspension. So we have developed a suspension that will allow us to go into Afghanistan and not only go on highway, but go off highway. And then when you think about the importance of that, it will help us to avoid some of those bombs that are out there that are on the road, we can off the road, it will be very difficult for anyone to indentify where these vehicles might translate. So that’s very important for us as we go through our strategy.

So the second part is taking Iraq units and converting them. And Archie mentioned something about 1600 at the time the Iraq units that could be either kits with the change to suspension that depends on the level – where that product is, at what – how good is the product that’s left coming out of Iraq or we could put a new rolling chassis in it. And those are the kinds of things Archie identified that was going to get us to $2 billion for this year. He also mentioned on slide 17 that the allied forces were going to support FMS projects with other countries. And he said – Archie said at that time, we are getting – we are going to get some of those orders too to get us to the $2 billion.

So now let’s talk about where we are on this, slide 18. Well, what’s happening now is that our RG and the group went through the military and as you know our kits are going into there, in June, July, some of them even before at in masses and they need vehicles when they get in there.

So what’s the quickest way to get MRAP type vehicles get protected vehicles into their hands? And Archie talked to them about the fastest way, the most expedient way through the whole system is a new vehicle. So we landed a contract for a 1050 units. Now within that then there were discussions with the military and the army of what they could now, what’s the suspension was. There is nothing to going to change. We are still going to get those units for suspension. The question is how fast could they handle both of those? How fast can they handle the new vehicles? How fast can they handle suspension changes that we were talking about on the January 19th presentation?

So that’s where the uncertainty comes for us is it’s not that we won’t get all of those orders, so this won’t be incremental. The question is when will we deliver it? And Archie and his team are working with the army today to try to get it in as fast as we can, but it may drag into 2011 fiscal year for us. So it might – some of these might drag on into November and December. So there is a little bit of uncertainty as to what that total incremental 2010 will be, but it’s clear this is an add, it’s just a matter of the timing.

The second part of the uncertainty is what’s the cost? Because we need to get these vehicles out as fast possible. And so Archie is going to start shipping these – making these at the end of April and we are going to have to get our supply base in order. We are about two weeks away from understanding all of that. So at that point and time we will come back to you and give you a revised guidance that includes all of that. But it will clearly be greater than $2 billion and it will include the – one thing of certain the 1050 will be shipped this year. The question is when will the other parts of this suspension be shipped and what was the cost be that. So we need a couple of more weeks before we can clarify that, but we assure you it’s an increase to where we were on January 19th in total. So if there is any questions, we have RG here to answer those questions later on.

We also got into a business. Let’s turn to slide 19 now. We got into a business and started controlling our destiny strategy, getting to the end customers; we bought a company for again a small amount, Continental mixers, a good manufacturer of mixers in a market that’s been very depleted. We think that this market returns and it will return at the end of this year, going into 2011, we have a prime example of where can compete as being an integrated manufacture of this products.

The only one – the only one out there was EGR. And in this application not having to deal with SCR is very important. And we also have a dealer body that can deal with this in the marketplace, so we can sell it, we can service it and we have already signed up 13 Navistar dealers which now says we will have outlets of 50% greater than anyone that’s out there. So we believe this will be a good business for us.

Now the one that – if you will turn to page 20, the one I think we are most proud of in this quarter at least is figuring out how we get into the class four and five marketplace as this slide shows and we have shown you in the past, the class six and seven market has gone into – some of it’s gone in the class four and five markets and we haven’t had a product in that.

We tried to do something with General Motors and that didn’t work. So what we were able to do is leverage our assets and what does that mean? We were taking the gap we already have on the shelf. We have taken chassis we have on the shelf. We have taken our MaxxForce 7 engines, put it together and we are going to have a product in the market within six months from this time we started the product development on it.

The other thing that I think is important for this is we are going to do this, obviously there is some incremental product development on this product and we won’t really get the benefits of this product themselves late in the year or even into 2011. We are going to us the product development; we will find other ways to offset the increase in product development that it will take to get into this business.

When you look at the bottom of the page, so there is no change where we are seeing maybe in guidance as related to the additional cost that will take for us to get into this business for 2010. If you look at the bottom of the page, I think you can see from these pictures the kind of applications that we are going to play in.

We are going to be pretty competitive in these and many of these are customers of ours already that we service in our dealer service. So we are excited about getting this class four and five market. I will tell you this, from my own standpoint, our cost structure on this was less than the one if we would have had the General Motors product. Again a great way for our people to leverage the assets that we have and get our cost right, so we can make some money on this class four and five sector.

With that comes a bus. We have not been in the Taipei bus business. Our dealers sell different brands in this. They also sell; some of them sell commercial trucks. We are able to take the same parameters, the same assets that we talked about on the truck to go out in Taipei’s school bus and cutaway commercial buses and offer through our bus distribution system.

If you look at the bottom of the page, if you can remember when there were all these different chassis companies and body companies and now there are three integrated manufacturers, we are going to be the only ones out here as an integrated manufacturer on the cutaway commercial bus. And we are the only ones out here with EGR versus SCR. We think we can make money, we have a profitable business and this will just augment it further.

I will talk for a moment about global demand, because you are going to hear us talk more and more about our global strategy going forward. But as you know, we talked about this on January 19th, and the way we are going, we are going to reach out into the rest of the regions of the world, they will all be tailored towards that region. If you look at slide 23, they will be tailored towards the region.

And I think slide 24 illustrates how we are going to that. This is a picture of the products that we launched in January in India in our Mahindra strategy. And I would also like you to note, we have an end customer strategy at the start of this business venture with Mahindra. So now that end customer strategy, that dump body in bus are now integrated. But we will sell it like that. We will get to the end customer immediately with the launch of these products.

The other thing I would like to point out is this. When you look at those products, they look a lot like either European products or they look a lot like North American products, both from the outside and the inside, but here is the facts on it. The cost structure of these is about 40% less, no 60%. It’s 40% of the US.

And here is an example of how we do it. When you look at what we would call a class eight and I am not sure what it’s called over there, but it hauls 40,000 pounds like we do in the United States. That will be powered instead of a 13 or a 15-liter engine with the 7-liter engine, that’s all they need. It’s 210 to 260 horsepower, so you can imagine the benefits in cost related to that. That’s the kind of thinking that we will have when we go to the rest of the world, we will be able to go off of the shelf and find products, technologies, diesel engines to service those for that marketplace.

An example on page 25, there are some parts of the world that has North American type pace, North American type applications. Mexico is one of those. We just launched in the last quarter into Mexico, ProStar. We had not had ProStar into Mexico. We didn’t have it into Peru. This is a picture of Peru, so Latin America as well. We think we will be able to launch our US type products into Latin America. They might be a different emissions levels. But other than that, we think we can be very successful and these are the kinds of things that are going on now as we launched the MC2 and the Mahindra joint ventures.

I want you to keep in mind on slide 26, some of the goals that we have out there, we won’t have much impact as we have said in 2010. But 2011 we are going to start to see this and in a long-term basis, this will be a major part of our strategy.

The last thing I would like to point out, which is there isn’t a slide on and that’s pure power technology. During the quarter, we bought a business continental fuel systems, it’s part of our pure power technology strategy to control fuel, to control air, and to control electronics. And so as we go forward in the next quarter and in the future, you are going to start hearing more and more about how we are controlling our own destiny and engines through pure power technologies.

So with that, A.J. talking about the balance sheet and cash.

A. J. Cederoth

Thanks Dan. I am going to start on page 28 and open the conversation around cash. We closed the quarter with $660 million of cash at the manufacturing company. That was down $492 million from where we finished at yearend. It’s not unusual for us to have cash lower in the first quarter, primarily driven by the decrease in the accounts payable than our working capital model, but we did have a few things this year that were atypical for the year.

First of all, we continue to build engines as we prepare for our transition plans, 2010 engines. So during November and December, we had its inventory. In January, you saw that inventory get paid for through our accounts payable. So you had increased inventory, decreased accounts payable, which impacted cash negatively by about $60 million. Things to remember is that it will run itself to zero by end of the year.

The second thing we did unusual with our cash this quarter was we used our cash for the benefit of our finance company. You heard about the GE announcements that we had yesterday. We allowed the finance company to defer the settlement of its receivables with the parent company as it prepared for the transition within its capital structure. And that cost us about approximately a $175 million of cash in the quarter, that allows us to decrease third-party borrowing costs, and again that will run itself to zero by the end of the year.

Again we do have a typical accounts payable runoff within the quarter. This year, a little different; as you recall, we ended our relationship with Ford, so after December, our engine group no longer was producing engines for Ford and you saw that decrease in their accounts payable. The other point on this page is our capital spending for the quarter. $84 million of capital spending is consistent with our full-year plan of spending $250 million to $350 million in cash.

On page 29, this is a page that we used in our Analyst Day to highlight the work that we have done on our capital structure. We already talked about the refinancing of the parent company and the benefits that that brings, but we have also continued to work at the finance company.

In December, we finalized our bank facility on a three-year term deal. We continue to access the securitization market as we refinanced our wholesale facilities, and of course, we announced the alliance with GE Capital.

If you look at page 30, just to highlight what this can do. Yesterday, we announced that we would align with GE Capital as we move forward on our retail portfolio and our product offering. We think this is a really strong move for our finance company as GE has an established presence in the marketplace and somebody who truly understands the Navistar customer and what they need.

Partnering with GE will also allows us to expand the product offering that we can bring to the market. Beyond our typical term debt facilities, we now it can be a more effective player with both capital and operating leases with our customers. And it also helps us align with a larger partner who will help us be better prepared to provide financing for larger fleets as we move forward. Beyond the benefits to our customer, there is also benefits to Navistar Financial with the GE alliance.

If you turn to page 31, what we have done here is just simply show the debt that we have at the finance company, going back to the peak of the cycle where we had close to $4.8 billion of debt and with the cyclical demands that has decreased now to $2.6 billion. What this will do is allow us to bring our leverage down from a peak of $13.1 million to $10.1 million at the end of the fiscal year to $5.1 million going forward. It also allows Navistar Financial to focus its capital around dealer wholesale funding and to support the dealers so that they are prepared floor planning as we come out of this economic cycle.

On page 32, this is the page we used on Analyst Day. The points here remain the same, but I thought I will just reinforce what we are doing. Our pension assets are performing well. In 2009, we actually increased our net asset position as the return on the assets exceeded the service cost of the pension plan. We continued to work on our healthcare. It’s a challenge for us. We have got a lot of work to do here. We have some things in place that we will execute in 2010, and we are going to do that and lower our cost without having to curtail service to our retiree and we think that’s a positive thing for us.

On page 33, this was a page that we showed on Analyst Day; Dan has covered a little bit of this at the beginning of the presentation. What I have done here is add a little bit of color around what this could mean in the second quarter. Our guidance was built around $175 million to $225 million and we acknowledged that the majority of that income would happen in the second half of the year as the first half of the year would kind of be dominated by the carryover of the 2009 effects and the transition to our new plans.

So let’s see how we are doing against some of the key drivers. Dan talked about volume in the quarter and volumes continues to be very consistent with what we expected, it continues to be very low as it was in 2009. We do expect volume to improve as we move into the fourth quarter. And Dan indicated some of the things that are happening that lead us to believe that that will happen.

On the military side, our original guidance was built around the premise of $2 billion to $2.2 billion of revenue sales. And as we highlighted we had $350 million of that in the first quarter. But we know we already have positive results that will help us improve that number. But what we don’t know at this time is the exact timing of the capability insertion and the cost that it will be required for us to satisfy that order. Once we have that information, we will be better prepare to update our guidance around that.

The third element of our plan is our product cost and our launch plan for 2010. We talked about some of the improvements in our manufacturing plant and those improvements are falling through to the bottom line and we saw those benefits hit in the first quarter, the second quarter is when the product transition begins. So the low production levels within our engine group will be affected by this as will the transition cost was in our truck manufacturing plants as we change our into the 2010 product. And again that will start in Q2 and carryover into Q3. So those are the key elements that drive our guidance at this point. Once we have clarity around the effects of the military opportunities, we will be better prepared to update this information.

So on page 34, let’s summarize what we heard. We believe we have had a strong first quarter in a down economy. All of our businesses demonstrated the ability to produce a profit in the first quarter despite the economic conditions that we face in 2010. We have identified some military opportunities and as we have said, once we understand the true effect of the opportunities on our plan, we will update that. We also continue to invest in growth. Dan talked about the benefits of our class four, five product. In addition, he has highlighted the opportunities of our global strategy. What all these means is profitable in the first quarter, investing in the future, we believe this positions us well once this economy turns around and volumes comeback.

With that, Heather, I think we are ready for question.

Heather Kos

Operator, we are ready for question.

Question-and-Answer Session

Operator

Very good. Today’s question-and-answer session will be conducted electronically. (Operator Instructions). And we will take our first question from Meredith Taylor with Barclays Capital. Please go ahead.

Meredith Taylor – Barclays Capital

Hi, good morning. I am hoping you can clarify how this 1050 MRAP units fits into your guidance from an EPS perspective. I mean I see it reflected here on the revenue side in the $2.4 billion to $2.6 billion of revenues, but how it is reflected at this point from an EPS standpoint?

Daniel Ustian

Yes, Meredith, I think the confusion gets to be is this is clearly an add. What we don’t know is, is there anything that reduces the net impact of that for 2010. That was the confusion I guess. There is no question. This is an add. This will be in 2010. Will some of the suspension be reduced? And that’s where our uncertainty is about 2010.

But there is no question at the end of this, this will be a full add of roughly $800 million that we will get in orders. The only question is when will we ship those orders and what will the margins be on those orders. So – and you can expect when we give you this revised guidance and I hope it can be in a couple of weeks, it will be up, it will be up.

Meredith Taylor – Barclays Capital

Okay. But – okay, so it will up be to reflects the EPS from this 1050 units of MRAPs. But then, how should we think about the –

Daniel Ustian

Let’s assume that the suspension gets pushed out and we will – I am not sure that that’s going to happen, but let’s assume that it does. Here’s what would happen. We would have an increase going on for the 1050 and we would have some reduction coming down for suspensions being pushed out in ‘011, that’s what you can anticipate happening. And the net of that is what we will report to you on. That’s not to say this won’t be a full add, but we are just not certain yet with how the army is going to accept all of this at one time. All the suspensions, all the rolling chassis and these vehicles, they are trying to figure out how they can deal with it all. And that’s what the uncertainty for us is and as soon as Archie gets all that resolved, and Arch, how long do you think that that will be?

Archie Massicotte

I think we will have clarity probably around the June timeframe.

Daniel Ustian

And we can’t wait that long, obviously. So –

Archie Massicotte

I know, but –

Daniel Ustian

We will have to give you some direction here in this next two or three week timeframe. And I hope you can appreciate that might have a range to it with some still as Archie points out, some uncertainty about the timing of some of the suspension units. But we will come to you in the next two to three weeks and it will be an increase, trust me on that part, there is no question about that. Question is how much.

Meredith Taylor – Barclays Capital

Okay. And then as we think about the margins for the independent suspension capability insertion that maybe pushed out to 2011 versus the lightly margin for the MRAP Dash units. I mean order magnitude, how should we think about the differential there? You have given an at least directionally helpful picture of how the revenue might change. But how should we think about it from a profitability standpoint?

Daniel Ustian

The problem we have with answer that is that on these new units, one of the ways we got to order was we put in an expedited way to get these vehicles to the marketplace. And so now we are trying to get out of our suppliers aligned with that and we have told them, there is nothing going to stop us from making these deliveries.

So if that means, you have got to put some extra cost in there to get that, come and talk to us. And they haven’t all come back to us yet with that in that situation. And until we figure that out of our own cost structure, it’s difficult for us to say the answer to that Meredith is I am not trying to be wishy washy on it, but there is just a little bit of unknowns in that. I just would like to point out there, we have said we have 10% margin on this business and I – we should be able to live within that.

Meredith Taylor – Barclays Capital

Okay. And then have you gotten any sense on the military of what the parts and service opportunity associated with this 1050 Dash order might be? And when –

Daniel Ustian

Well, obviously – Archie go ahead. But it obviously had some, it’s pale – it will pale on the backend of this probably at most to ‘011, but yes, the answer is it will.

Archie Massicotte

Yes, we do anticipate incremental part sales with the 1050 as well as the independent suspension work that we are doing right now for the fields units that we are going to put it into Afghanistan. There is always a tail obviously that goes out with production. That’s being worked on as we speak. 10% to 15% of the part sales is typical of what we see at the frontend, and then it’s just a matter of getting it spooled out. There is a whole team right now working directly with the army in Kuwait on this particular issue. So it’s all being developed as we speak.

And I think in the next week or two, clarity will come around that and I think to Dan’s point, that’s where we will be able to put a little more fidelity to it and then address some of this angst that everybody is having.

Meredith Taylor – Barclays Capital

Okay, that’s helpful. Thanks very much.

Operator

We will take our next question from Andy Casey with Wells Fargo. Please go ahead.

Andy Casey – Wells Fargo

Just to return to the Meredith’s question, I just want to make sure I understood what you said, Dan. It was pretty clear, but on the MaxxPro Dash the $750 million that is not included in the $2 midpoint guidance.

Daniel Ustian

Well, let me try it this way Andy. It’s a confusing way to deal with it. But when we came out with $175 million to $225 million, it wasn’t in there, okay? Now what we are saying is that it’s going to be an add to that, but we don’t know is there anything that’s going to be reduction from what we had in the $175 million to begin with. That’s the uncertainty we have.

We have no uncertainty about the order being in this year. Those vehicles are going to be in this year and they are going to be in the third and fourth quarters. The question is, is there anything coming out, because the army can’t deal with all that at the same time. So I am not trying to be evasive here on the answer, but it’s not so clear you can just add. You have got to subtract, potentially subtract when you come up with that answer.

Andy Casey – Wells Fargo

Okay, so it’s all related to military not uncertainty in the –

Daniel Ustian

No, it’s all related. This whole thing is about the military. In fact, as I pointed out, the one change that we have included in our plans that we hadn’t talked about before was the class four and five. And we have committed inside the company to find ways to offset whatever that product development is, so that we can stay within that original guidance of $175 million to $225 million. So in a way, what we are saying is, we will exceed that in another areas to what offset whatever the P&D is to bring that four and five to production.

Andy Casey – Wells Fargo

Okay. And just to clarify in another way the midpoint $2 right now until you make this announcement two to three weeks or whenever in the future, that really is not comparable to consensus that kind of move up when the MaxxPro Dash announcement was initially made. Is that correct?

Daniel Ustian

I don’t know what’s consensus. I mean I only know what we say. I can’t say what how others have looked at that, but we haven’t done anything to change until we get this military, but it’s all related to military. The whole change is related to the military.

Andy Casey – Wells Fargo

Okay. On the – now some questions on the quarter; on the military, you had a pretty sharp sequential drop off in the unit volume Q4 to Q1. Is that all just production days or were there some contracts rolling off and that’s pretty much the production per day outside of these contracts that we just talked about going forward?

Daniel Ustian

Units, and so you are talking about military units, right?

Andy Casey – Wells Fargo

Exactly.

Archie Massicotte

In this first quarter we had no MRAPs that went out in this quarter. But yes, on the FMS stuff, we had continued sales volume that’s going through the system that we are still benefiting from.

Now we will pick that back up again starting in April with MRAPs that will start – we will start leaking them out into end of April and that’s when the production push will start and to Dan’s point, obligated by contract to finish up the delivery of the 1050 by the end of July. So we will start to see – yes, there is a little bit of a soft spot in the frontend of this thing, but it will get picked up again in the –

Daniel Ustian

But I think Arch, I think what happens on these orders is you don’t get an order that is the same number of units everyday. You get an order to fill in a certain period of time, and you get another order to fill in another period of time. And so it’s – it’s all a matter of timing on when they occur, when we get these orders and when we fill them. It’s not like we have a current flow every day of the same amount, because they vary based on orders that we get.

Andy Casey – Wells Fargo

Right. I guess to be very specific, did you have any shipments under the UK Husky program and Canadian mill cuts during the quarter?

Archie Massicotte

Yes, we did.

Andy Casey – Wells Fargo

Okay.

Archie Massicotte

Yes, we did.

Andy Casey – Wells Fargo

Okay. And then, flipping over and I will pass it on. On the – within engines, it looked like aside from some of the special items you disclosed, there was something going on in the cost side of the segment. You took a fairly sharp sequential detrimental margin from Q4; the unit volume was down, but not to the point where the decremental margin should have been doing what it did. Did you accelerate any of the startup costs into Q1, are those all Q2?

Daniel Ustian

Andy, I didn’t notice that. So you wouldn’t mind give us a chance to go through that. We didn’t notice. I can’t think of anything that happened in the quarter. Well, the biggest change within engine Q1 versus Q4 is the discontinuation of production for Ford after December.

So in January, the engine group was fairly – was pretty much idled as we transition over. So I guess your question is right, Andy. There were some what you can label startup costs within January in the engine group. They did produce some engines, but they stopped producing for the Ford product, so their volume was dramatically down in January, where at Q4, they had a full quarter of production.

Andy Casey – Wells Fargo

Right. I appreciate that. It just seems that this was well known in advance. So may be it met your plan. Anyways I will get back in queue and follow-up offline.

Operator

We will take our next question from Steve Volkmann with Jefferies. Please go ahead.

Steve Volkmann – Jefferies

Hi, good morning.

Daniel Ustian

Hi, Steve.

Steve Volkmann – Jefferies

I was wondering A.J. if I could ask you a couple of questions about your slide 33, which looks at some of the moving pieces for the second quarter. And I guess when I look at what you have got us there, review as an industry US and Canada down, we have diesel engine launch costs. So I guess I am – I will be surprised if the margins in those businesses were not down sequentially, which makes me kind of wonder – you didn’t make a lot of money this quarter and I guess I am trying to figure out if you are going to be profitable in the second quarter. And I guess the big question mark is military revenue, is that going to be increasing sequentially enough to try to balances us out here or is there a way to think about that?

A.J. Cederoth

Well, I think what we are trying to point out on page 33 is that, the first half of the year, Q1 and Q2, we did see these first two quarters as a challenge as we gave our guidance, we would have low volume as we run off the 2009 products, and then you have to have the anticipation of the 2010 market recovery. So at it relates to volume, we think volume in Q1 and Q2 are as we expected them to be and we expect it to be better mostly in Q4.

We’ve already talked about the military and some of the challenges we have in order to understand exact timing on when those things may occur, it tends to be a lumpier business. And then, of course we have got the launch costs and the inefficiencies that go with that that start in Q2.

Steve Volkmann – Jefferies

All right. So maybe another way then, I think you said, maybe Dan said, that we had done $350 million of military revenue in the first quarter. Did I get that right?

Daniel Ustian

That’s correct. I would say the second quarter won’t be a lot different than that.

Steve Volkmann – Jefferies

Okay. But we are going to –

Daniel Ustian

Might be a little more than that.

Steve Volkmann – Jefferies

Even if we hit the midpoint of your current forecast and if there is no change in two or three weeks, if we hit the midpoint of that $2.5 billion, that that was average of $700 million for the next three quarters. But I guess you are telling me that the second quarter will be similar to the first and then the second half will be up dramatically.

Daniel Ustian

Yes, I think that’s right. I think that’s right. I think that’s not unusual for us in one regard, but this year is even more peculiar, because we have all the launch cost in the first half of the year and we have the benefits of those launch of in the second half of the year. So that’s why we are going to be tail-end loaded this year for sure on our profits.

Steve Volkmann – Jefferies

Okay.

Daniel Ustian

I think if you look at last year in the fourth quarter, we did the same thing. This year will be just like that one.

Steve Volkmann – Jefferies

Okay. And then, maybe just to switch gears slightly, you are talking about your market share on orders being, I think you said kind of 40% or something. But are – does that include any orders for actual 2010 technology engines yet or is that –

Daniel Ustian

We have – the answer is yes. We have somewhere between about 1500 orders. I mean I would wish we had more than that, but that’s where we are at. About 1500 orders that we have on 2010 products right now and we are hustling to get more than that, but as you know it’s still soft in the marketplace today and that’s why we think the third quarter for us and for the industry will be low and then fourth quarter will come back very consistent with what our thinking has been. But we do have about 1500 orders.

Steve Volkmann – Jefferies

Okay. Well that’s encouraging I guess. And then you talked about the shift – this is my last question – to the 13-liter engine. Can you give us a sense in the current backlog of orders what the split between 13 and 15 liter is?

Daniel Ustian

No, that’s maybe – what we will try to do is get you a relative going forward what the orders look like. I guess that’s what back orders might be one way to look at that. Let us try to take a look at that and we will probably do something on what that would be.

Steve Volkmann – Jefferies

Okay, thank you.

Operator

We will take our next question from Jerry Revich with Goldman Sachs.

Jerry Revich – Goldman Sachs

Good morning.

Daniel Ustian

Hi Jerry.

Jerry Revich – Goldman Sachs

A.J. can you please talk about on the GE Capital deal, what are the risk sharing agreements as part of that? And also in the past, the advantage you have cited of having your own capital business, so that you can make sure lenders offer competitive rates, how can you exert that same influence under the new parameters?

A.J. Cederoth

Sure. Your first question was on loss sharing. The parent company and the finance company have always had a loss sharing agreement. That agreement won’t be any different with GE Capital. So the biggest thing is that as GE Capital takes over the retail portfolio, they really take over Navistar Financial’s position in that loss-sharing agreement.

Your second question around how do we make sure that there is competitive rates. Remember, that what we believe is really valuable for our strategy is to be able to make sure our dealers can floor plan trucks and be positioned for the market recovery and NFC will continue to do the wholesale floor planning for our dealers.

On the retail side, there are enough competitors in the marketplace around the retail business that our customers can – a lot of them finance through their local bank or through a competitive arrangement. Remember, our market share there was only 10% to 12% of retail sales. GE has been a good competitor in that marketplace, so I am not too worried about rates going up.

Jerry Revich – Goldman Sachs

Thanks A.J. And what kind of SG&A levels there do you anticipate, are going to be needed in that business to run the wholesale receivables program? In other words, what kind of margins they expect to deliver once you complete their portfolio transition?

A.J. Cederoth

I don’t see much difference in the margins that we have today. The cost of borrowing has gone up, so I think the run rate that we have at the FINCO today is sustainable.

Jerry Revich – Goldman Sachs

Thank you. And Archie, on the pie charts that you put together looks like your parts and service items may imply a higher run rate of sales than you had in the first quarter, is that right? And so what are the factors that you expect to drive that improvement in coming quarters?

Archie Massicotte

Well, coming back to the MRAP order, we are still seeing substantial backlog if you will in parts that we are fulfilling as speak. But we anticipate incremental parts order as we go forward with the new suspension system as well as the incremental units that we are getting on the 1050. So that they are still not completely defined yet, but there are orders in the hopper right now that are coming in.

Jerry Revich – Goldman Sachs

So it’s just lumpiness this quarter was just a bit late.

Archie Massicotte

Yes.

Jerry Revich – Goldman Sachs

Okay.

Archie Massicotte

Yes. That’s fair.

Jerry Revich – Goldman Sachs

And Archie and those same pie charts looks like if we include those $750 million MRAP order looks like the pie charts may imply a lower production rates on AFMTV and other foreign military vehicle sales, is that right or should we not take the pie charts that literally – in other words, you have raised the guidance by call it roughly $400 million and you have got roughly $800 million of MRAP. And as Dan pointed out, roughly half of the cut is on the capability insertion, another half is on the other vehicle side?

Archie Massicotte

Yes, I think that’s true. I think the – there is other stuff that we have got pending out there that we can’t talk about right now as well. But right now the guidance that we are going with is the fact that we told you back in few months ago when we were at Melrose that didn’t include the MRAPs.

In the pie chart, that we have depicted here, now as we look at the order, it’s incremental. So we’ve still got parts, we still got importers for the vehicles and we believe there is yet more coming. So it’s – I don’t know if that answers your question, but that’s the best as I can put around it.

Jerry Revich – Goldman Sachs

Okay. And Dan lastly, can you just clarify your comments on the margin outlook for the second quarter? And I believe it was A.J. slide, there is a comment indicating first half margins are going to be flat year-over-year and you have the same comment for 2Q being flat year-over-year. So with the first quarter margins being down year-over-year, do you expect second quarter to be – margins to be up year-over-year or flat?

Daniel Ustian

Here’s what we are at on. Our margins improved as we went through 2009. By the end of the year, our margins were better than they were in the first half. And some of it was because of the effects of running product out of Escobedo versus Chatham, some of it because we moved product out of Conway into Tulsa, and some of that material cost reductions that we have been working on.

So that what we said is that in the first quarter, all those materialized, some of those we had at the end of last year, but they – the margins are better on our core – everyone of our core businesses than they were a year ago. So the core business truck that we sell in US and Canada, core business engines and the core business parts margins are improved and they will continue to be that way as we head into Q2.

Now they still don’t have – especially in truck, they still don’t have the impact of a margin improvement we expect to get when we launch 2010 product. That will be in the back half of the year. So I don’t – does that answer you? Does that clarify where we are at on it?

The margins in Q2 on engines will be low, because we won’t have much production, because we are launching all the new engines now.

Operator

We will take our next question from Henry Kirn with UBS. Please go ahead.

Henry Kirn – UBS

Hi, good morning, guys.

Heather Kos

Good morning, guys.

Henry Kirn – UBS

Wondered if you could chat a little bit about pricing on new orders how that might compare to a year-ago pricing? You are already getting that 2010 prices today or is that still on the comps?

Daniel Ustian

Henry I think what our strategy was is have the lowest cost and match the price and bring value by having a strategy that we think is more customer friendly than others. And so what we have been able to do is follow that strategy. We are not going to go underneath anyone.

So far the orders that we have are matching what everyone else has done. In some cases, we think a little more. But right now, we are just trying to match what the competition is. And in some cases, competition is getting all of the value, in some cases they are not. So that’s just what we are up against and we are going to match. That’s the strategy. We are not going to be underneath and then we are going to try get above. But right now as we go through this transition, it’s just matching.

Henry Kirn – UBS

And on the input cost, could you talk a little bit about what you are –

Daniel Ustian

I think the bigger opportunity on price is in those 70% that I mentioned that really aren’t very friendly. You are going to have a very difficult time on installing SCR on all those applications that I mentioned earlier. And as time goes, we think we have got an opportunity on price there, because of our friendly answer to customers.

Henry Kirn – UBS

Okay. And on the input cost side, if possible, talk a little bit about what you are seeing there.

Daniel Ustian

On the input and our cost –

Henry Kirn – UBS

Raw materials and other components.

Daniel Ustian

Yes, we are on plan to what we expected it to be.

Henry Kirn – UBS

Is there a tailwind this year or a headwind? How does it compare to what you would have seen a year-ago?

Daniel Ustian

We are a little better off this year than last year, yes, mostly in commodities. They translate – commodities translate into a lot of different things. I want to you to keep in mind on the truck side at least, remember we have taken 900 pounds out of the vehicle, we have other cost reductions going on at the same time, so it’s not just the 2010 engine launch, it’s the 2010 vehicle launch. And with that comes cost reductions and product improvements and everything else. So we should help our margins related to all of that as long as we deliver on our launch.

Henry Kirn – UBS

And one other question if I could sneak one in; how big a revenue opportunity the class four and five have got?

Daniel Ustian

Well as we have shown on this chart here, the volumes are approaching the class six and seven. And we haven’t stated what it is, but I would say it’s in the range of a $0.5 billion.

Henry Kirn – UBS

That’s helpful. Thanks a lot.

Daniel Ustian

Okay.

Operator

We will take our next question from Patrick Nolan with Deutsche Bank. Please go ahead.

Patrick Nolan – Deutsche Bank

Good morning, everyone.

Daniel Ustian

Hi Pat.

Patrick Nolan – Deutsche Bank

Just one clarification on the MRAP’s capability insertion revenue; so are these contracts currently out for bid and it’s a question of what percentage of win, have you already been awarded a portion and the timing is uncertain? Can you just help us? I mean is it –

Daniel Ustian

Yes, sure, sure. Yes, let me talk about that. We are under contract right now with what would they call an STS contract. That allows us to go out and engineer changes that the army wants that we incorporate engineering changes into the existing vehicles. So capability insertion is a derivative of what comes out of STS.

And then usually with that the design is thought through and is processed then we go out and commercialize it and pick the product in and do the insertion in the field. So we are under contract, not so much a bid proposal type thing. Obviously when they get into big stuff, they do go out and do RFIs and look for industry ideas. But we are – this is not. Capability insertion for our product is contained and maintained by us.

Patrick Nolan – Deutsche Bank

So the way to think about what the size of the opportunity is known and your share of the opportunity is known. It’s just purely amount a point of timing?

Daniel Ustian

Well, it’s – timing is always of the question. It’s as fast as we can design, implement the change if they are requesting is where the revenue stream comes from. Now that is all funded by the government and that’s – it’s not that’s we are under a contract now to do the engineering change. Then the change that comes through is a modification to existing contracts to implement the change.

Patrick Nolan – Deutsche Bank

I am sorry not to believe at a point, but – so the timing is more due to your engineering of the changes and not so much of the army’s ability to field those units?

Daniel Ustian

Well, it’s both. It’s actually both. I mean we are moving quick. We have a whole team of people that that’s all they work on is the STS changes for the MRAPs. And as soon as we can implement the change, we go full bar at it and get the tooling setup and go – manufacture the parts and go – Patrick, maybe a direct answer if maybe is this is what’s you are looking for, we are going to get these orders. I think it’s now a matter of when we get them and then of course there are always commercial terms that we have to workout with the military. But that’s all happening right now, we are going to get these orders. It’s just the question of when and when we deliver them.

Patrick Nolan – Deutsche Bank

And I can just ask one question on class eight – your class eight shares options. So if I look at the 27% share you are assuming for the first half, it looks like that assumes something in the low 30% range in Q2. Do you think that’s realistic? And secondly, if you can comment on what kind of type of assumption you are making as far as converting 15-liter customers to 13-liter customers in the back half in that 23% share assumption?

Daniel Ustian

Okay. I think on your first question is yes. I would say that would be correct as far as wholesale deliveries in the second quarter will be in that range. And as you can see from the orders, we believe the orders support that. You never really know what – what other competitors are going to have with orders. But based on what we think they have that we know what our shipments are going to be and they support the 30% would be in the second quarter.

As far as the 15 to 13-liter transition, I know we went over that on January 19th by customer and it’s a lengthy discussion on that. And we will be glad to do that with you offline. If you want to call in, it would be similar to what we have already said, so I am comfortable that we can go through that with you offline to get you comfortable. Our customers are buying in the first half of the year, they are buying late in the year and we believe we are confident that we will get that transition done and have a 15-liter product ready for those that want a 15 liter later in the year.

Patrick Nolan – Deutsche Bank

Thanks very much.

Daniel Ustian

But if you call Randy and Heather, will take you through that.

Patrick Nolan – Deutsche Bank

Okay, I will follow-up after the call.

Daniel Ustian

Okay.

Operator

We will take our next question from J. B. Groh with D. A. Davidson. Please go ahead.

J. B. Groh – D. A. Davidson

Yes, guys. A couple of questions maybe for A.J.; on slide 33, you talked about Q3 typically being the most challenging. And does that dynamic change once you incorporate this 1050 MRAP units, $750 million? I mean it would seem that Q2 would certainly become probably one of the better quarters of the year given the timing of the deliveries there?

A.J. Cederoth

I think you are right. With that we need to work with some of the details on the timing. But remember, Q3 is a challenge because of holidays and the fewer working days coupled with the product transition that we have going on this year. Those will be some of the challenges in that quarter. And then of course the 1050 order for military will figure on top of that.

J. B. Groh – D. A. Davidson

Okay, so it’s going to balance out your typically seasonality if that were to – if the timing on that ends up being right?

A.J. Cederoth

I think that’s the right way to look at that.

J. B. Groh – D. A. Davidson

Okay. And then could you – you may have gone over this, but can you talk about trends and delinquencies and those kinds of things that NFC has that changed since your last update?

A.J. Cederoth

No, there hasn’t been a material change in the quality of the portfolio. The economy is still kind of moving along, hit the bottom, so it hasn’t improved significantly, but it’s still fine.

Daniel Ustian

But if you look at the – what we are doing on the GE, if – to think about your question there –

J. B. Groh – D. A. Davidson

Yes.

Daniel Ustian

There are several things that the GE deal does for us. First, it provides retail financing for our customers that’s the biggest thing. We believe that GE will have a greater abilities to do other types of financing that we wouldn’t take inside. And the reason we won’t take it inside number one is we still have NOLs, so we can’t do some creative financing with them.

And the second thing that you are talking about is risk. This will allow us to get to sharing some of that risk certainly with GE and at a lower cost of money that’s out there versus what we can get it for. So we think this is a great answer for us that answers the questions you have on a long-term basis.

As soon as we get some of those retail off of the books, we are going to keep this as it bleeds down, we will have to deal with some of that risk. But after that, that risk will be mitigated by having someone else financed the retail and we will just to do the wholesale. And as you know on wholesale, we don’t have a lot of risk on the wholesale side with our dealers. So we think this is a great answer for us and a great answer for GE as well. That’s the market that they are in.

J. B. Groh – D. A. Davidson

Okay. But is it safe to say that you have seen the worst on the credit quality issues?

Daniel Ustian

Yes, that’s where we are at.

J. B. Groh – D. A. Davidson

Okay. Thanks A.J. Thanks Dan.

Daniel Ustian

Okay.

Operator

We will take our next question from Kirk Ludtke with CRT Capital Group. Please go ahead.

Kirk Ludtke – CRT Capital Group

Good morning, everyone.

Daniel Ustian

Hi, Kirk.

Kirk Ludtke – CRT Capital Group

Just a couple follow-ups, with respect to the GE question, I think – did you mention earlier that GE already finances your retail sales?

Daniel Ustian

Actually they do in Canada.

A.J. Cederoth

Yes, GE is our provider in Canada. We have had that relationship for 30 years now. But GE is also in the North American retail space as well. And so this gives them the opportunity to expand their portfolio with Navistar products.

Anyways you can look at it, maybe a simple way to look at it is, from the customer standpoint, they are going to see the same people. This will be invisible for them. What we will be doing in essence is using GE’s strength in money and their back office without people out in front of the customers, so again invisible for the customer probably a little better hopefully for that customer, but he won’t see the difference there.

Kirk Ludtke – CRT Capital Group

Yes, I guess where I was going was, I mean they probably already have a lower cost of capital than you do. So how do you – how do you incentivize them to commit more of their resources to your retail finance?

Daniel Ustian

That’s why this negotiation has taken a long time for us to finalize, as we have spent a lot of time with that. But if you look at their market share as it relates to Navistar products, this gives them an opportunity to grow their portfolio.

But I think that’s the key. They have committed to growing their portfolio and they liked this space, that’s where it will go.

Kirk Ludtke – CRT Capital Group

So you have given – so you have – I guess you are going to hand over to them a certain amount of share, is that how they justify, is that part of the economics from their perspective?

A.J. Cederoth

Well, I don’t know that we are handing anything over to them. What we will do is exactly what Dan said is that, as it relates to our customers, this is going to be a fairly transparent change to our customers.

The underlying fundamental here is that GE now has better access through our dealers to provide retail financing through our dealers, the way that Navistar Financial has done. So this streamlines GE the access to the market and doesn’t do – it doesn’t deteriorate anything from our customers.

Kirk Ludtke – CRT Capital Group

Maybe their cost of creating these assets goes down, because you are giving them preferential access.

A.J. Cederoth

Yes, I can’t speak to what their cost of origination is. This should make it easier for them.

Daniel Ustian

That’s probably right. That’s right.

Kirk Ludtke – CRT Capital Group

Okay. I guess I just wanted to make sure and I – now we have kind of talked about the guidance or the pending guidance revision at length. But just so that we understand what you are waiting on before you revise the guidance. I guess, you have mentioned that there is still military sales that are in the revised military sales budget that you haven’t – haven’t been awarded yet. So I guess you are waiting to hear on some of those revenues. You are waiting to hear from your suppliers, your MRAP suppliers and to understand more what your margins are going to be on the MRAPs. Are there other major items that you are waiting to hear, delaying guidance, the revision to the guidance to learn more about.

Daniel Ustian

It’s all military related.

Kirk Ludtke – CRT Capital Group

Okay. And you mentioned that there was a shift in demand from more of a macro shift in demand from classes six and seven to four and five and I was wondering if you could expand on how dramatic that is? Why you think it’s happening? What kind of timing?

Daniel Ustian

Yes, one of the chart here on that class four and five, this is a phenomena that has gone on for quite some time now, and we have known about it for several years and that’s why we wanted to get into the class four and five markets. And as you look at – the phenomena is actually on slide 20, and over the last several years, it hasn’t changed too much, but it’s a big player. So half of the volume in four through seven is in class four and five which we don’t have a product on.

So you can see on the chart on how it’s gone over the many years. And we have tried to get in through GM it didn’t work, now we have got our own product and it is big as the class six, seven. The question is can we be a successful? The low end of this we will not have that greater presence, on the low end of this that need a pickup truck. We will have when they need something more robust as the applications are underneath there. You can look at those photos, we are going to be pretty strong.

Kirk Ludtke – CRT Capital Group

But is the shift happening, because engines are getting better and you can – the functionality of the classes one, five is –

Daniel Ustian

No, I think that came off, because off of a pickup platform base, there is going to be lower cost. So they went and used the pickup our competitors and mostly Ford and GM, took a pickup platform. GM is now out of that business.

Actually GM came off of their six and seven product and Ford came off of their pickup truck product and that’s how they went to market. What we are doing is similar more to what General Motors did and we are targeting the high-end of this four, five base. And we probably won’t have a great impact when they really want a pickup truck, they are going to get a pickup truck and we probably won’t be able to compete as well in that.

But if they need something like I say, more robust, that’s what we are going to have and we won’t have any – we won’t have SCR, so we will be the only ones out there. So on those applications, we are going to have a high presence. There is not a lot of competition as you know out there anymore in this sector.

Kirk Ludtke – CRT Capital Group

Okay. I think I understand. And then lastly, so you fielded 6444 MRAPs, how many could use a kit – a suspension kit.

Archie Massicotte

Roughly, I mean they all could actually. But what they are doing right now is taking the early vintage the smaller MRAPs that went into Iraq originally. That’s about 1600.

Kirk Ludtke – CRT Capital Group

But none of those – all 6444 could use a kit.

Archie Massicotte

They could, sure.

Kirk Ludtke – CRT Capital Group

Yes. And how much will the kit cost? For how much you would sell it for?

Archie Massicotte

We are not under contract yet, so I can’t answer that question.

Kirk Ludtke – CRT Capital Group

Okay. I appreciate. Thank you very much.

Operator

We will take our next question from Ann Duignan with JPMorgan. Please go ahead.

Ann Duignan – JPMorgan

Hi, good morning, guys. May you should issue a truck 101 before next quarter or so, we could to Q&A faster. Then, just could I ask you a question on why shouldn’t we be concerned that you won a bid on the MRAPs program without having suppliers lost in from the pricing? And I mean what’s to stop, let’s say a tire guy coming in and saying, okay I need $1 million for tire to fulfill these timelines?

Archie Massicotte

It’s not so much that they are not locked it. It’s just that we have started – we are in production and we obviously idled the production. Now we are going back and we are re-starting up manufacturing with some changes to the existing product that there will be tooling and they have to do some things.

So they are going to have an extraordinary cost at the frontend just like we are as we introduced the change in the manufacturing. That’s the cost we don’t know about yet. And there – we are trying to help work through that with them and vice-versa. So the unknown right now is – it’s a blip at the frontend that we got to exercise and get into production, workout the bugs and then the cost will stabilize. But right now, we don’t know.

Daniel Ustian

Yes, one of the – last time Archie, one of the excess cost was the air freight to keep our lines going in and to get things out quick.

Archie Massicotte

We are not sure we are not going to be faced with some of that, no.

Daniel Ustian

And that’s kind of what it is. But before we took the order, we got a commitment from each of these suppliers they could deliver to us.

Archie Massicotte

Yes, it’s not so much the piece price. It’s the manufacturing cost and the startup cost that we are trying to wrestle through right now.

Ann Duignan – JPMorgan

But their tooling cost could exceed your expectations.

Archie Massicotte

I am not too worried about the tooling cost either, it’s just a matter of working it through, getting their material on time without air freight and all of the other things that we have to stabilize. That’s the only issue that we are in. We will get there just – and they are comfortable.

We are in about a high degree of confidence that all those vendors that we are working with right now will meet our timelines, it’s just at what cost, because of excess air freight, excess manufacturing cost and so on and so forth. It will stabilize, it will stabilize quick, it’s just getting through that first few weeks of production that will get us back to where we need to be.

Ann Duignan – JPMorgan

Okay, that’s helpful. I appreciate that. And then on the truck side, can you tell us when you will ship your last truck with the Cummins 09 (ph) 15-liter engine?

Daniel Ustian

We can’t tell you that because until we get all the orders lined up, it would be hard for us to say exactly when that is.

Ann Duignan – JPMorgan

What’s your last order right now? Where does that indicate you will be shipping ’09 engines until –?

Daniel Ustian

I don’t have an answer to this.

Ann Duignan – JPMorgan

Or does it go into June, is it May?

Daniel Ustian

It’s in that timeframe right.

Ann Duignan – JPMorgan

Okay, okay that’s helpful. And then how many miles have you talked up so far on the new 15 liter?

Daniel Ustian

I know what –

Ann Duignan – JPMorgan

Yield not in the lab.

Daniel Ustian

Ann, the question – I know miles is something that the industry talks about. We would like to look at it as miles that you don’t have a problem with. So there is two, there is two points to make. The miles that you put on it for durability and then the miles that you have – that you don’t have a problems with it and I don’t have that answer with us. We will get that for you though.

Ann Duignan – JPMorgan

How many trucks then have 15 liters?

Daniel Ustian

We know what the latest is on that, anybody? Bt we got to get back to you on that one too. I know we have – now we have some in customers hand not that many, a dozen or in customer’s hand, so I will have to get the latest information on that. They have had it a little while now. So we have to update where we are at on that.

Ann Duignan – JPMorgan

Okay. And the industry standard is about 10 million miles before customers really kind of trust if the engine is durable and is not going to break down, et cetera. Are you saying then that you are going to launch these engines with fewer than 10 million miles?

Daniel Ustian

I don’t know about the industry standard, but here’s how we look at that. We have a bottom end of this that has millions of miles on it, tens of millions of miles on it. And as you know it’s the Caterpillar platform on the bottom end of it and that’s how we prove it. We are not going to have any problems with that. We already know that the top end of it is the same top end, identical, literally identical top end of this as the 13 liter. So that already has tens of millions of miles on it, if not hundreds of millions of miles on it.

The only question gets to be now marrying those two. That’s what we need to get the miles on. So I don’t know if we you can relate to a specific mileage target for us. It’s more – are we confident that we are going to get enough experience on these that that integration is not going to have any challenges to it and that’s where we are spending all our efforts on. And so the real key is how long will you go before you have any significant problems and that’s how our measurement is. And I don’t have the answer to that in front of me, but we will get it for you.

But I don’t think you should measure it just by number of miles that’s out there, I know the industry likes to say that, because it’s the simple way. But it really not representative of what you could expect, what if during that time they had 50 different problems with it, then they haven’t solved them all.

So miles is only a barometer, but probably not the real test as whether you have good product out there or not. And we will give you some of that information so we can try to get all of you comfortable with where we are at on the fifth. But I assure you, it won’t launch unless it’s ready and we are comfortable that there is not a lot of change, because this is just the integration. We are going to have a great product when we launch it in October.

Ann Duignan – JPMorgan

But it is the integration, that’s normally – that’s where the unknown is, that’s where the problems could occur and that’s normally the case within engine?

Daniel Ustian

Well, obviously that’s one area for sure.

Ann Duignan – JPMorgan

Okay, well, I live it at that, because I am not getting any – but thank you, I appreciate it.

Daniel Ustian

Okay.

Operator

We will take our next question from Joel Tiss with Buckingham Research Group. Please go ahead.

Joel Tiss – Buckingham Research

Hi, I appreciate it guys. They have all been answered. Just one quick one, can you give us a run rate on the interest expense going forward?

A.J. Cederoth

Yes, we can. Interest expense should be consistent going forward at the manufacturing company should be consistent with exactly what you saw in the first quarter.

Daniel Ustian

I think the confusion gets to be on that line item though. On the line item on the income statement, three are other things in the interest rate in it. So we probably need to clarify that a little bit A.J., because I am not sure Joel, what your specific question is. But the line items for interest expense includes other things in it like from the finance company.

A.J. Cederoth

Right. It’s the finance company – the finance company’s interest is floating rate with their portfolio and then of course it’s dependent on the size of the portfolio as it moves forward. So the manufacturing company has a fixed cost capital structure, so that run rate won’t change throughout the year and the finance company has a variable rate structure dependent upon the size of their borrowings you did on that quarter and of course the relative interest rate at the time.

Joel Tiss – Buckingham Research

And all the derivative contracts were all on the financing side.

A.J. Cederoth

Yes, the derivatives are all associated with sole portfolios.

Joel Tiss – Buckingham Research

And then all the new financing that $815 million, that’s all finance related as well.

A.J. Cederoth

That’s in the Finco, yes.

Joel Tiss – Buckingham Research

Okay, all right, perfect. Thank you.

Heather Kos

Joel.

Operator

We will go next to Vlad Steinberg with Realm Partners. Please go ahead.

Vlad Steinberg – Realm Partners

Good morning. A few questions; and first of all on page 33, so you state the first half truck margins you expect to be the same as in 2009. And then you say in second quarter, you expect it to be the same as in 2009. Now Q1 was substantially below 2009 Q1 margins for the trucks, so I am just – it’s just – I am puzzled at the inconsistency. Are we expecting a significantly better margins in Q2?

Daniel Ustian

Let us clarify. What we have said is that we have two sectors that goes in that truck margin. One is for military which is down in revenue by $600 million, and one is for our core truck business. The military will continue to be at the rate of $400 million in the second quarter and the truck margins off the core business will be consistent with the truck margins that were in the first quarter and those are up versus last year.

Vlad Steinberg – Realm Partners

Okay. The second question is just if you were to delay all of the suspension case into 2011, how much of the revenue would that represent in 2010?

Daniel Ustian

What was the question?

Archie Massicotte

If we delay the suspension kits – the orange part of the pie in slide 15 is where those kits reside, so that’s the piece that you should think about related primarily to that point.

Vlad Steinberg – Realm Partners

Is that just the kit?

Archie Massicotte

That’s a big part of that pie.

Vlad Steinberg – Realm Partners

So what is that in terms of a dollar numbers? Sorry, I don’t have that presentation in front of me.

A.J. Cederoth

Vlad, it’s the presentation that was sent out this morning, and we haven’t provided any other color beyond that.

Vlad Steinberg – Realm Partners

Okay, so it looks like it’s 10% -- and so it’s roughly – would it be fair to say $200 million?

A.J. Cederoth

Approximately.

Vlad Steinberg – Realm Partners

Okay. So as of right now, you expect some portion of that capability insertion to be still in 2000, so I am trying to understand what goes into your updated $2.4 billion to $2.6 billion of military. Maybe you can – it sounds like it’s – the answer is on that chart. So you used to have roughly $200 million, it looks like it’s still in there with the updated numbers. What am I – am misreading something?

A.J. Cederoth

The pie in the left has the independent suspension kits on the rolling chassis and other capability insertion items. The pie on the right has similar items in smaller quantities. So the – part of that has been pushed out into 2011 with this view. The real question is how much of that really does get pushed into 2011 and how much is in 2010.

Operator

Ladies and gentlemen, this will conclude today’s question-and-answer session. Ms. Kos, I will turn the conference cal back over to you.

Heather Kos

We thank you for your participation. If you have any follow-up questions, you can call my cell or Randy Diaz, and we will be around. Thank you.

Operator

Ladies and gentlemen, this will conclude today’s conference call. We thank you for your participation.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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