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Navistar International (NYSE:NAV)

Q1 2011 Earnings Call

March 09, 2011 10:00 am ET

Executives

Heather Kos - Vice President of Investor Relations

Daniel Ustian - Chairman of the Board, Chief Executive Officer, President, Member of Executive Council, Chairman of Executive Committee, Chairman of International Truck & Engine Corporation, Chief Executive Officer of International Truck & Engine Corporation and President of International Truck & Engine Corporation

Andrew Cederoth - Chief Financial Officer and Executive Vice President

Analysts

Ann Duignan - JP Morgan Chase & Co

Jerry Revich - Goldman Sachs Group Inc.

Walter Liptak - Barrington Research Associates, Inc.

David Leiker - Robert W. Baird & Co. Incorporated

Seth Weber - RBC Capital Markets, LLC

Eric Crawford - UBS

Timothy Denoyer

Chris Edwards - J.P. Morgan

Operator

Good morning, and welcome, everyone to the Navistar International Corporation First Quarter Earnings Release Conference Call. [Operator Instructions] And for opening remarks and introductions, I would now like to turn the program over to the Vice President of Investor Relations and Financial Communications, Heather Kos. Please go ahead.

Heather Kos

Good morning. Thanks for participating in our first quarter earnings call. 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 financial results presented here are on a GAAP basis, and in some cases on a non-GAAP basis. 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 report on Form 10-K and 10-Q and our other SEC filings. We would also refer you to the forward-looking statements and other cautionary note disclaimers presented in today's material for more information on this subject. And now, I'll turn over to Dan Ustian.

Daniel Ustian

Thanks, Heather. Maybe at a high level, if you could follow us through the slides here but we'll start with the overall statement and that is, we came in January and outlined the map for 2011 and beyond and we said that we should expect to see somewhere between $5 and $6 per share in 2011, depending on how things shaped up in the overall markets and clearly they are strong. North America, you've all seen how the economy is getting better. We said $2.40 to $2.60 was the industry level that we anticipated and that seems to be now on the high side of that.

On our global business side, that's taking shape and again, we should be strong on the global business side going out of this year and into 2012. On the diesel engine side, we said we were going to make $100 million for this year and we have a path to do that. On the parts business, we've had 10% growth in that business sector for several years now and we see 2011, that continues. On the military side, we said we would be $1.5 billion to $2 billion business this year, again, and we see a line of sight to achieve on the high side of that as well.

One of the challenges that the industry faces, you see it all over the industry, is on the commodity side and we're going to talk about how we're containing that. So the end results is that we expect to be on the high side of the $5 to $6 per share results for the year.

A couple of slides, Page 5 is just information. The trucking industry, while it's strong in the back half of the year, you could still see it's 52,000 units as an industry in the first quarter data on this chart you can follow. I would like to point out that typically for us, the first quarter is one of the lowest quarters and part of that is because of the operating days are lower than any other quarter in the year, and partly because of the holiday schedule of Thanksgiving and Christmas.

So if you look at Page 6, nothing earth shaking here. The volumes are about what we expected. You can see trucks sales are basically the same as last year, engine if you take out the Ford business, it's about the same, and so is revenue and military business was $333 million with the revenue in the quarter. But if you turn to Page 7, there's a lot on Page 7 that I think shows where we think 2011 is shaping up. And let's start with the industry. We believe that total year is 260,000 units. So let's read the chart here. The first quarter and the total year and then what it will take in the next three quarters to get to the total year. So we're not saying this is going to be even. We're saying this is what is going to take to reach those industry levels. So you can see, we expect the North American industry to recover quite dramatically, and the first quarter of this year was 52,000 units. To get to the 260,000, which we feel good about, it's going to take 70,000 units in the next three quarters on an average basis. That's how you read the chart.

In our Class 8 market share, we were 19%. We're a little more than 19% in the quarter. We expect to be at 25%. That means we'll need to average 27% in the last three quarters. We've launched our 15 liter now, so that will help us achieve that objective. And the OEM Diesel Engine business, we expect that to be strong, 160,000 units a year. We only shipped 28,000 in the first quarter. So 44,000 on an average basis for the rest of the year. We do believe this equates to the $100 million-plus that we have in profit for the Engine business. So you saw a segment profit in the first quarter of negative $8 million. I'll go through some of the reasons for that later but we're confident in the $100 million plus for the year on the engine segment profits.

On the military revenue, $333 million in the first quarter. To get to the $2 billion, we'll need to average $550 million and we're confident that we can achieve that. The impact of the UAW agreement, and let's remind you, that we just completed that agreement in the first part of November, and so the impacts of that really are back-end loaded for this year. So we did not run Springfield until mid-December of this year and we're still ramping that up. So there was a cost rather than a benefit in the first quarter. We'll pick that up as production increases for the rest of the year in Springfield.

Product development. We launched a number of products in the first quarter, many of those are in the global sector. We spent $129 million. We expect that to go down a little bit in the rest of the year and we expect the total year to be a little bit higher than last year as we transitioned to our new building. So in 2012, that number will come down. This year, it will be a little bit higher as we have a duplicate effort going on between the Fort Wayne operations and the Chicago operations. So it will be a little bit higher this year, and we'll get the benefits in 2012.

If you remember on analyst day, we said that our joint venture, we've had investments in the past on our joint venture. And in the first quarter, we did that again. That's $15 million of expense going to the bottom line. We expect that to be break even or slightly profitable for the year. So that means we'll be profitable in the back half of this year as well. So we're going from a loss to a profit in the rest of this year. And if you look at the global units, you can see how it's going to happen. In the first quarter, we shipped 4,000 units into that sector. The rest of the year, it will average 9,000 units and about 30,000 units for the year. So as you can see from this chart, there's a lot of strength in every market that we're playing in, and the last three quarters will illustrate that.

On Slide 8, in some of the products that we launched in the quarter, let's start with the global sector and those branded Navistar in India. And then there were some in our NC2 business in the Class 8 sector that were in Australia, South Africa and South America. So these are all being launched in the first quarter and the benefits are shortcoming.

In North America, of course, we launched the TerraStar in October, November of last year and we're starting to sell those into the marketplace. So in 2011 and '12, we'll get the benefits of those. We launched the 15-liter engine in the first quarter. And we also certified 0.2 of our MaxxForce 13. I'll get into that a little bit more in a minute here.

On the military side, we launched the Wrecker, and these are getting into the marketplace today. We also showed to a few people in the military a new armored light truck. And my favorite truck has always been the Husky, the one we sell to the U.K. and they distribute, and they'd put that into Afghanistan and it's a fantastic truck. It's smaller than an MRAP, it has the same survivability to it, but I think it's going to take second place to this new armored light truck that we have. And I'll talk about that in a little bit. That's for the future, by the way.

When you look at our market share, our market share is where we expect it to be. We would expect this to grow in, really, every segment as the products get out there and our customers see we're living to what we promised in terms of performance in fuel economy and durability. And so the back half of the year, we'll have higher share in every one of these sectors.

On Slide 10, just to remind us here, in 2009, the 15 liter was about 2/3 of the market for us. It's about 2/3 of our sales, so it was the 15 liter. And we said that we would convert many of those to the 13 liter. Well, here's what we think of it now. Today, we think that it will convert about 90%. So 90% of our Class 8 will be that 13 liter and it supports our strategy. That's really the dominant engine we're going to have. We're sending it in the marketplace today, we've had good results with it. We just need more time to get it into the customers' hands and we believe 90% is the right number, split between 13 liter and 15 liter. Let me point out another thing. One of the things I have mentioned earlier was that the engine business had an $8 million loss as they were investing in new products and they're launching the 15 liter in the first quarter.

While we ran big bore engines at a rate of about 100 engines a day in the first quarter. Today, we're running about 150 a day and that grows by the middle of the year, say in June -- June and July middle of the calendar year, we'll be at 250. And so the cost structure obviously at 100 a day is much different than 250 a day so our cost structure gets better, and not just from ourselves but it gets better from our supply base, and we'll get the benefit of that. So that's part of the reason why we can make more money in the back half of this year because we'll have the scale related to the big-bore engines. It's not the only factor but it's clearly one of those factors.

On Slide 11, interesting slide, I think, because you'll see the industry orders are at a rate that would say annualized, it's 350,000 a year. The orders for November, December, January and February were at a rate of 350,000 a year. And if you look at the first quarter, retail was 52,000 a year. So while these are good news, of course, we believe that part of these really are going into 2012. Our orders are for only 2011. We don't know how others record their orders. But clearly, it's not going to be 350,000 rate for this year. So we do believe that 260,000 is about the right number, give or take, for our fiscal 2011.

So here's what we've done. We have increased our rates accordingly. So if you take the 260,000 units and you take the market share that we have indicated as our targets for this year, we have increased our line rates and our production facilities by up to 40%. And they're different depending on the model that we have out there, but about 40% increase. That should get us to the market share and the volumes that we would anticipate needing for 2011. And our order board supports this kind of rate increase as well. So 40% increase over where we are today. We think the industry is somewhat on that same path that we are on for the rest of the year.

Then let's talk about a couple of challenges here. First, of course, is the bus industry is strapped with not having any money. Government spending in this area, of course, is tightened and we think 2011 industry might be 18,000 units. In preparation for that, we knew we needed to get into other markets. First of all, in the school bus market itself on a smaller size. So the product, the TerraStar, that we've launched for the Class 4 and 5 market is the same platform that we used for this Class 8 school bus, and that's being launched this year. We also have the commercial bus industry product that we have launched a few out there. It's going to grow this year and grow into the future. So here's where that stands out, if you will look at the 18,000 units that we expect the bus industry to be this year and we get 60%, that's 11,000 units for the year. In addition to that, this other industry, the Class 8 market and the commercial business sector will have another 4,000 units. So somewhat significant to our success and the bus industry is the additional markets that we're going to play in. And those will grow, so this year's 4,000, next year it will be a much bigger number as we go forward.

Now, let's talk about Navistar Defense on Slide 13. We said, we believe we have a sustainable $1.5 billion to $2 billion business. And of course the last three years, we have exceeded $2 billion and in this year, we have a line of sight for $2 billion again. Now we've delivered some of the vehicles into the marketplace like the Wrecker and the Dashes. Most of those will be in the second quarter. We do have a clear line of sight on $2 billion. At the same time, I mentioned we need to prepare for getting into other segments of the market and that's what we showed you at this curtain. That behind that curtain is a vehicle that will enable us to participate in some of the opportunities listed on the bottom of this page. So we claim another part of it here. We have not been in 26 countries in the Defense business and we anticipate that 2012, '13, about 40% of our revenue will come from outside the U.S., about 40% of that. So it's not just the U.S. defense budget, it's throughout the globe.

Slide 15 shows a picture of the Wreckers that are being fielded today. The initial reaction to this is very strong. In fact, they're using it for other applications and just picking up vehicles. I know we've seen some photos of it being used as a crane and some other applications. So it's doing its job and hopefully will continue to grow in this business sector as well. On the global trucks side, keep in mind now we're in India, Latin America, South Africa, Australia and Brazil. We're everywhere now, and every one of these countries with good products, we would say, competitive to superior products in every one of these countries.

So if you look at Slide 17, it illustrates we've now established a presence there in distribution, either through the international, the NC2, Caterpillar, Navistar or Mahindra. We have 410 branded outlets from each of those end. And remember, this year, in 2011, they will deliver 30,000 units from those 410 outlets and they'll keep growing during the year.

On Page 18, it's just a picture of one of the outlets that we have and this is how we look in India. This is an example of the distribution that's out there. They're strong. And we expect this business to grow during the year and into 2012.

On Slide 19, let's talk a little bit about our cost structure. And if you remember, we have a strategy to move from focused facilities on making trucks to flexible manufacturing facilities. And with the agreement with UAW, now all of our plants will be converted by the middle of the year to making all different products. The benefit of that, of course, is significant. We said it's about $60 million-plus for 2011, and it will be somewhat back-end loaded as we make this conversion to Springfield.

On product development, you'll notice in the first quarter, we were a little up versus last year, as we brought some of these global products to the marketplace. We expect that to flatten out. We also said that as we go to our new building, and that will start later on this year and probably by the first quarter of next year, we should have much of that in place. We'll start to get the benefits of that, and this cost will come down. But it will be 2012 before it comes down.

Slide 20. I think when you look at commodities, there's some significant changes in commodities and these are the prices on Slide 20 that we see in the marketplace today. You can see from 2009, they're somewhat significant and here's the good news on our side. We have this contained. We got out in front of this last year with some hedging on it. We also have pricing actions on where we didn't get the hedging fully completed and we believe that our margins are in place, and we've got this commodity impact in place for 2011. Now, if it goes crazy from here, we'll have to come back with you on that. But based on the market as we see it today, the market prices as we see it today in commodities, we're okay in 2011.

On Slide 21, you hear often about is there enough capacity in the marketplace? And here's our view of it. On trucks, we can make all kinds of trucks in any volume that's needed. But that isn't the issue. But it is in our supply base. And one of the key areas that we had anticipated for a long time was there's going to be a shortage on casting, especially blocks and silver heads. And so we tried to keep our foundry open in Indianapolis to make blocks and heads for us. And it didn't work until last November. And in November, we got an agreement with the UAW to have a factory that makes blocks and heads, compacted graphite blocks and heads that we can be profitable with. More importantly, it controls our own destiny because now, we can make the blocks and heads that we need to support our engine business, and of course our trucks. So there aren't very many out there, we've got this one contained. This is being launched today. It will take a couple more months before we get up to the production levels we need. But this is one area, I think, we'll have control over.

Now I'll talk about Slide 22, and it's 0.2 emissions for 2010 and beyond. And we have two solutions, and both solutions are close looped. And by that I mean, the manufacturer is accountable for meeting those emissions. And let me start with EGNR, because this is an after-treatment solution. It's simple, it's cost effective. And we bought it from a car dealer, a truck dealer here in Chicago, and we just took it and took SCR off of it. We just took it off, put in EGNR on it, and it reduced it from 0.2 to 0.1. I think the key also to that is of course it's more efficient, it's friendly to the customer. It works all the time. So it doesn't matter what the temperature is. Too hot, too cold, doesn't matter. It doesn't matter. The life of it, it never deteriorates. So we believe this is a great solution.

We have a partner now with us is Faurecia, a company that's $17 billion automotive company out of Europe and they're a public company, but predominantly owned by Peugeot. And we're working together with them to take us to market for trucks, perhaps even cars and we have several programs going on with them in bringing that particular answer for emissions to the marketplace, both here in the United States and in the rest of the world.

Now, let's talk about in cylinder 0.2. One of our challenges, and perhaps as difficult a challenge as the technology itself, was the marketing side of our solution, which is in cylinder. Since we were the only ones out there, there's a lot coming at us with, "Oh, this can't work." And of course, now we're out in the marketplace and that's over. That argument's over. We're out there in the marketplace. We're exceeding what we had committed to in terms of performance and fuel economy and all that. So that's over. But we want to get in front of the 0.2 now because we can anticipate, here's the next one coming out that 0.2 can't be done. So what we did is we submitted to the EPA a certification of 0.2 to take that argument away. We don't plan on using this for a while but we're going to have it out there on the shelf that says that can be done and we can meet the standards and get all the performance features as well. So that's what we've done. When you hear about that, it's not that it's coming into production tomorrow. It's just to get it out there and take all that argument away.

Perhaps you also heard in this quarter, we're looking longer term and what's the next level of technologies that might be out there in terms of engines? So we've been working with a company called EcoMotors. EcoMotors is a company that Bill Gates has been sponsoring for quite sometime now. We've been working with them for two or three years now, and next level breakthrough technology. This is a picture of an engine that can deliver two to three times power density. So simply put, you can get just about half the size for twice the power. Half the size for twice the power. And in fact, we have one of the engines running that's 1 horsepower per pound. Think about that. So a 300-pound engine, 300-horsepower. Incredible performance and of course, you can imagine the fuel economy you can get from that and it's clean. So we're still two or three years away from having this going to the marketplace but we're thinking out in front and trying to get off in front of the next level that we have to get, to get an advantage in the marketplace. So with that A.J., why don't you...

Andrew Cederoth

Thanks, Dan. I'm going to pick up on Page 25 and start with manufacturing cash. Outlined for you on Page 25 is our normal seasonal activity for Q1 as it relates to our cash flow. There is one thing I'd like to point out. We did end the quarter with approximately 400 additional units in our finished goods inventory. Those trucks were shipped in February and subsequently build out, but we did end the quarter with a little higher use in working capital than we originally expected. When we look at capital spending, our first quarter capital spending is higher than typical but it's consistent with our full year plan to spend $250 million to $300 million in capital spending. So overall, we're comfortable with where we are in cash for the quarter and our guidance for full year cash is unchanged.

On Page 26, we've highlighted some of the characteristics of Navistar Financial. Navistar Financial continues to do very well. Portfolio quality is improving. Their profitability is strong and they've managed their portfolio leverage very well. From a liquidity perspective, they're positioned well to support the growth in dealer activity throughout 2011. And Navistar Capital, our alliance with GE Capital is performing well and helping us with the retail sale of trucks.

On Page 27 is a page we used in December. And this is a page that highlighted the key drivers of our profitability for 2011. And as Dan talked about earlier, as the first quarter has evolved, some of these assumptions have gained clarity and most notably, the North American industry. The order activity that we've seen in the first quarter supports our assumption that the second half will be stronger and we've moved our guidance to the higher end of our volume. On our core business performance, our manufacturing cost continued to flow through to the bottom line and we've proactively managed the issues around the commodity issues that have come out at us during the quarter. And then finally, the military revenue. As Dan talked about, our visibility on military revenue has improved throughout the quarter and we now have clean line of sight towards our goal of $2 billion.

So when we look at Page 28, how does this flow for the remainder of 2011? What we try to show here is just the impacts on things as we flow through Q1 and what that looks like for the full year. We've talked about the industry volume that in Q1, we ran at low volume. Dan talked that we've raised our production schedules and we've outlined for you our expected charge-offs for the remaining three quarters. On market share, first quarter was in line with what we expected. And with the launch of the 15-liter engine, we're confident that we can move towards our goal of 25% market share throughout the remainder of the year. Military revenue, we've covered. We've got a path to $2 billion. On the cost structure, as Dan outlined, the low volume effects of the first quarter have some impact on us due to scale, and we had some carryover effect of the UAW contract. But as volume expands throughout the year, the benefits of scale will flow through particularly in our engine business.

Global business. We've launched our products both in NC2 and in Mahindra but the volumes there today are low. Volume will expand throughout the year and the benefits of that volume will flow throughout the year to profitability by the end of the year. The same story is true for our OEM engine business. We're doing very well in South America and our business will expand in North America, and those volumes flow in the second half of the year. And finally, our parts business. We have an aggressive plan for our parts business. They continue to perform very well. They had a strong first quarter and we expect those results to continue throughout the remainder of 2011.

So on Page 29, as Dan started our presentation, we are reaffirming our guidance. Our volume is trending towards the high end of our original assumptions and we expect to perform at the high end of our guidance. I do want to take a moment to point out a few things that are not included in our guidance. We talked about our strategy to integrate our engineering facilities here in the Chicago and Dan talked about how that's performing as expected, and those benefits will flow through later. We also talked about the efforts that we're taking on our manufacturing footprint and the efforts we are to rationalize some facilities there. We do need to make some final decisions on that as the year flows out, and that's mostly around our Chatham facility.

And then finally is the valuation allowance. We talked about this at our Analyst Day. We expect this to be approximately $1.5 billion of benefit. Our analytics on this issue continue and we expect to finalize those in the upcoming quarters. But overall, the first quarter results are consistent with our full year guidance and we're confident that we can perform at the high end of this range. With that, Heather, I think we're ready for questions.

Heather Kos

Operator, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And first, we'll go to Henry Kirn with UBS.

Eric Crawford - UBS

It's actually Eric, on for Henry this morning. I was wondering if you could talk a bit about the Parts business and what you saw in the first quarter and what the puts and takes were on the margin side there?

Daniel Ustian

Yes, good question. First on the commercial side of the business, it continued to grow actually at a little higher rate than the 10% I mentioned. But the Military side, there was a correction in inventory and the basis on their supply. They had too much inventory and they made a correction to it. And so they took some orders and they pushed them out in the rest of the year. So what's going to happen with that -- and so that made it go down from year-to-year, and a smaller amount of orders in the quarter. We expect that to return middle of this quarter, middle of the second quarter to the rate that would say it's $400 million to $500 million for the year. We're probably in the $400 million side of that for the year rather than the $500 million side of that for the year because of this inventory adjustment that they made. So that delta on segment profit is all because of the military parts.

Andrew Cederoth

I think Dan, also, when we look at our commercial side, we're seeing more volume on our all mix versus our proprietary parts as well. So there's a little bit of a mix here.

Daniel Ustian

Yes, good point.

Eric Crawford - UBS

And then on the engine side, was wondering, you said you expect about 44,000 a quarter. I was wondering what the cadence is there for the rest of the year would be. What you're looking at there?

Daniel Ustian

Well, we have about 12 new customers in the diesel OEM side that are being launched throughout the year. They're in niche markets. We can make some money on them because they're niche markets. They're all volume. But the key really is in South America. So in South America, you might remember us say our capacity there was about 140,000 units and we ran up against that a couple of years back and last year, we started to get at that rate. Well this year, we could be as high as 160,000 units for them alone in terms of the production. That's what we're trying to get to for South America, so there's strength in that market. And as the rest of these 12 new customers come in to play in the rest of the year, that business starts to grow and we are comfortable with $100 million-plus total profit in the engine business as those start to materialize.

Operator

And next, we'll go to Jerry Revich with Goldman Sachs.

Jerry Revich - Goldman Sachs Group Inc.

It's Jerry Revich. Archie, can you talk about whether the delay in the budget approval process may impact shipment timing this year and also can you talk about what proportion of your 2011 sales targets are already booked?

Archie Massicotte

Yes, the budget is pretty much firm right now with what we have in the business model for this year. There's budgeted money in the buckets that they need to fulfill. So we're very comfortable with that. As far as the orders go, there's some things out there that we continue to get, which is field service contracts and things like that. They really don't show up on the radar screen, but that helps us towards our $2 billion revenue target. And then there's future orders out there right now that we're working through that you'll see in the horizon here over the next month or two. I can't really talk too much about them but we are very, very confident that the order board is solid for the remainder of this year. And the unknown right now that's going to push us into the first quarter of next year is the schedules, the delivery schedules that we're working through right now on those orders. We believe some of that is going to carry over into 2012. So to answer the question, budget wise we're okay. We don't see a glitch there. And I think we have a solid path as Dan indicated with Wrecker and some other vehicles that we're in conversation with the military today.

Jerry Revich - Goldman Sachs Group Inc.

And Archie, have you seen a change in the U.S. foreign military sales approval process following the recent events or any changes in that cadence or the timing of potential orders as a result?

Archie Massicotte

No. I mean, the budget is obviously our concern. But the FMS contracts that we currently have are still solid. There's more that we could talk about here in the next month or two. And as Dan indicated, with what we're doing in the Middle East and in Asia right now are strong. I mean, that's where the growth is going to be in the next couple of years beyond U.S. because the U.S. will get their budgets trimmed a bit and we know that. But the war in Afghanistan is not coming to a close tomorrow and I think they will be going for the next three to four years strong, unfortunately. But a lot of interest right now in the Middle East and in Asia. And that's we're well suited. We have good teams of people and products on the ground in numbers of countries beyond the 26 that Dan indicated.

Jerry Revich - Goldman Sachs Group Inc.

Thank you Archie. And Dan, your combined Class 8 order share was only 15% this past quarter. When do you expect that number to rise above 25%? And did you get there in February or are there any issues with apples-to-apples comparisons within the order numbers that we saw for the first quarter?

Daniel Ustian

I don't know the 15%, but I think the way people count their orders is different, and I think we try to point that out here. If you look at the rate that's within the order board, we're going to ship 350,000 units for the year and that's not going to happen. So I don't know how they count the orders themselves but clearly, our order board supports the 25% that we have at an industry level of about 260, so I'll have to do some more work on that order board. But we don't know how everyone reports orders. Do they take an order that goes into next year and put it in that order? It seems like that some of that's going on because we can't sustain that 350,000 unit in the industry for this year. I think everyone would agree to that. So I take it with a grain of salt some of that information and I have to adjust it a little bit in our minds to what it means but we're comfortable. We're on the right path here to get in the range of 25% for the year.

Operator

And next, we will go to Chris Edwards with Jefferies & Company.

Chris Edwards - J.P. Morgan

We were hoping that we could talk a little bit about what the earnings ramp looks like through the rest of the year. Obviously, it's going to be pretty back-end weighted but I didn't know if you could provide any color on 2Q versus maybe in the second half or just total first half versus the second half. Either one would be helpful.

Daniel Ustian

Well, I think when you take a look at our full year number and what we said today around our confidence in the full year number and then match that up with the growth and volume that we see in the second quarter, I think that's a good illustration of what we expect profitability to flow through the year. It will flow with the volume and you can see that the charge outs in the second quarter are going to go up significantly.

Chris Edwards - J.P. Morgan

And then, I guess, I wanted to touch a little bit on 15-liter orders and see how those are going now that the order board's open. And then also, related to that, I was wondering you guys gave us some 13-liter-kind-of-anchor-order announcements, and can we expect something similar on the 15?

Daniel Ustian

Of course the simple answer to that is, what we've tried to do is contain the orders in the first part of this year to the ones that really needed for that application. For instance, in construction, these customers in some applications need the 15 liter. When you go in to Canada, these customers -- some of the customers up there, when their long haul and they've had a 15 liter, they're not comfortable with the 13-liter going across the mountains and carrying 100,000 pounds. So we've kind of tried to target those to get them comfortable with that product. And then we have a launch coming in March 25, there's something like that at the Mid-America Show. We want to have a marketing chick going at that. So at that time, that's when we're going to really turn loose the order board. We've constrained the order board in the short end until we can get this marketing kind of plan out there at Mid-America. So I would expect May, June, before we really get the full impact on that for 2011. So there is still low -- as we migrated us to that launch in March 25, I think, is what the marketing program is at Mid-America. So in fact, anyone who's coming out there, you'll be able to see the products and the trucks, and we'll talk more about it with you, of course, and mostly our customers.

Operator

And the following question comes from David Leiker with Robert W. Baird.

David Leiker - Robert W. Baird & Co. Incorporated

A couple of things. First, Dan on the 13-liter certification you applied to, can you talk a little bit about what you did to the end to get in compliance at that level? Was there any after treatment in there or any other tweaks in the engines you can share?

Daniel Ustian

It's the same thing. It's in the fuel, air controls, cooling.

David Leiker - Robert W. Baird & Co. Incorporated

So you're telling me there is no after treatment?

Daniel Ustian

No after treatment, no. Eventually, we'll put something on EGNR, I don't think there's any question about its capability to meet those emissions. We will submit that as well at some point in time. But there was really no reason to have that brought to the EPA right now. So we'll do that eventually as well.

David Leiker - Robert W. Baird & Co. Incorporated

Great. And then on the EGNR time frame, is it a quarter or two or is that further out on the horizon, do you think?

Daniel Ustian

I don't know, we'll have development programs with customers, for sure that will take some time. So that's out in the future. And we'll pick perhaps some of our own products to put it on depending on the application but I think the bigger volume will be when we sell this to other customers. We believe. . .

David Leiker - Robert W. Baird & Co. Incorporated

How far out do you think you're hedged on costs and how big of a move would there need to be before this starts to become an issue?

Daniel Ustian

Well, clearly, we're hedged through this year and into some part of next year. If it gets wild again, even further than this, then we'll have to come back to. But it's still this year for sure and a little bit of next year. We're working on our strategy now for hedging for 2012. But of course, you don't want to do it at its peak right now. So we're going to wait a little while. But pricing recovery, we think that the market, all of us, are going to have to increase prices in commodities, because the commodities going forward on vehicles. We're seeing that happening in the marketplace today. Not just with us, but our competition as well. So we will have to see how it shakes out, but right now, we're comfortable for the year maybe into a little bit of next year. But more work to do after that.

David Leiker - Robert W. Baird & Co. Incorporated

And then some of the other truck companies have talked about difficulty on the pricing side casting on their costs. Where do you stand in that regard? And that's in terms of your 2010 emission costs?

Daniel Ustian

We're probably a little bit ahead of -- we knew there was something that was going to go on and there's still a couple of guys out there, one in particular that's not pricing. And of course, that affects how many units you can sell when they do that but obviously, we have to make money on products that we do sell. So we're watching that closely and there's one at least that's out there under us on that regard. But so far, we're a little bit ahead of plan on our pricing, total pricing that was going out there.

Operator

We're moving on to Walt Liptak with Barrington Research.

Walter Liptak - Barrington Research Associates, Inc.

I hate asking this question but I was out at NTEA, the medium-duty truck expo yesterday and the sales pitch by your competitors continues to be the same about the fuel economy being lower. I wonder if you could just address that again, what kind of fuel economy are you getting on the 11 liter, 13 liter, 15 liter at the lower NOx levels?

Daniel Ustian

Well, I mean, it's all they can do is talk about it. So when you get out into the marketplace, we're exhibiting that fuel economy is strong. I saw something from Hino and that was a new one to me. So I have to look at that. I can't respond about that other than I know it's not accurate. But we've seen others out there that we have taken a look at and we know we're better. I'll give you the test that we have. For instance, on the V8, our V8 engine, we have improved it by 9% in pickup and delivery. So the real -- how you drive it, not long haul. Not when you go on 60 miles an hour, they don't go 60 miles an hour. They pick up and they deliver. And so our V8 from year-to-year is 9% better. Our in-line sector is about 2% to 3% better. So we're meeting the commitments that we made to our customers and we'll continue to monitor this but we're in good shape on the fuel economy.

Walter Liptak - Barrington Research Associates, Inc.

And I want to ask about the price increases that you put through. Can you give us a number in percent how much you raised prices for 2011?

Daniel Ustian

No. Partly because it's different for different customers. So I'd rather not get into that. But obviously it tries to cover the commodities, price increases that are out there now. Keeping in mind now, the real cost of those commodities is a lot higher than what we're seeing in our cost structure. So our strategy is to try to collect for the full amount that's out there and we can't. We know that part. But can we collect for at least as much as our cost is so that going out of this year, whatever the commodity prices are going into 2012, we're in a position to collect that. And that's kind of where we've tried to position ourselves in the pricing model.

Walter Liptak - Barrington Research Associates, Inc.

Okay. And this kind of goes back to the last question that was asked. You're saying that in terms of the competitive situation, you're only seeing one competitor that's not raising prices or is price discounting? Is that right?

Daniel Ustian

In general, that's true. I'm sure there are isolated cases where someone wants an account so they do what they can to keep an account. I mean that goes on and everything. But in a general statement, there's one that stands out, yes.

Operator

And next, we'll go to Seth Weber with RBC Capital Markets.

Seth Weber - RBC Capital Markets, LLC

Dan, maybe you could give us some color on what your customers are telling you about how they're reacting, how they're thinking about some of the new proposal, the hours of service and the CSA and how that's affecting their order thinking?

Daniel Ustian

Well, it's a pain. As you know, I mean, there are so many regulations for our customers to deal with and that's just another one. And with the ATA's help, I think the industry is trying to make some sense out of this. But it's a difficult challenge. It just adds more and more complexity to their business and more and more rigor to what they have to do, keep track of things. And in fact, in this area, that's exactly why we want the EGR. They don't need another thing. They don't need to keep track of emissions now. And so the industry has this challenge on how they keep track of all the information that they need. And I hope we can make some sense of this because it is a big challenge for our customers to deal within. Actually at the Mid-America Truck Show, I'm going to be talking about it to the audience about what we can do together to try to bring this into control because it's a problem.

Seth Weber - RBC Capital Markets, LLC

So you don't get the impression that it's affecting order decisions at this point?

Daniel Ustian

Not yet, no. I would say probably not.

Seth Weber - RBC Capital Markets, LLC

A.J., do you expect the engine business to be profitable in the second quarter?

Andrew Cederoth

Yes.

Seth Weber - RBC Capital Markets, LLC

Okay. And then lastly, maybe Dan, can you comment on the bus market share tick down, 51% in the quarter? I mean is there somebody out there that's pricing aggressively there? You sound like you expect it to go back to normal levels but what do you see in there?

Daniel Ustian

Well, the simple answer to that is yes. We usually run into the first quarter where it's the closing quarter for some of our competitors. They got November and December so they're trying to finish out the year and they have their incentives out there for that. So we typically have that challenge in the first quarter. It was a low quarter. You saw the industry was only 4,000 units. So a small number of units impacts that order share. So we're comfortable that for the year -- and the other factor was some of our customers that we get all of their business, they didn't buy in the quarter. So we're comfortable with the 60% share. Frankly, I think we should be higher than that. I'm disappointed that our share shouldn't be 70% or 80% given the simplicity of our answer for 2010 emissions. So we're going to be going for more than the 60% but we're comfortable that we can get to 60%.

Seth Weber - RBC Capital Markets, LLC

Okay. Thank you. And is there anything to read into this severe service order year-over-year decline as well?

Daniel Ustian

Well, it's a market that -- some of that market needs a 15 liter, and we haven't had that product to give to some of those customers. So if you -- keep in mind of this too, some of those customers that are devoted to us, they haven't bought. But now, they're going to buy as we have that product available to them. I also want to point out that Caterpillar's launching a 13 liter in the construction application coming this month. It's going to be at Time expo in a couple of weeks here and of course that will be our truck branded Caterpillar. And they're excited about it, we're excited about it. It's just another avenue for us in distribution into that market sector. And a little niche part of that market but one that both Caterpillar and us believe we can be successful in. But those are going to be 13 liters.

Operator

And we'll now go to Tim Denoyer with Wolfe Trahan.

Timothy Denoyer

Dan, can you give an update on -- a little bit more color on Chatham and when you decide to make a decision there? And can you meet peak production without it?

Daniel Ustian

Let me answer that two ways. First, we really have tried to keep Chatham open but they needed to fit within our flexible manufacturing, where it was more regional and they make all trucks, and we couldn't get that done. And so as you know, now we have Springfield who's able to do all of our other facilities are able to do. The question is then, do we need another manufacturing facility? And we all know the answer to that. But likely, no. At least in the short term, likely no. And we can always make trucks. We're not capacity limited on making trucks. We can add another shift. We can do some over time. We're not worried about our ability to make trucks especially now that we have Springfield in line with our strategy. So we have to go through that and we'll probably go through it in the second quarter, I believe, and see whether Chatham fits with us or not. But either way, I don't think we're worried about being able to make enough trucks to satisfy the market, especially for 2011.

Timothy Denoyer

And then just a clarification question for A.J., on Slide 28, the charge outs, it looks like it's a little bit over 20,000, it's about near 21,000 for the first quarter. But then in the appendix, we're at 19,500. Can you explain the difference there and what is that?

Andrew Cederoth

There is the addition of the global units on that. I think we need to look at the chart and make sure that the chart is absolutely correct on the total. But it's the combination of the North American units and the expansionary units, the differentiation between the blue and the green maybe needs to be checked.

Timothy Denoyer

Okay. Great. And then just one more little one. I think at the beginning of the call, it sounds like you said the MaxxForce 13 was certified at 0.2 but it looks like you -- you were just saying it was submitted for certification? Have you actually received certification?

Daniel Ustian

No, we just submitted it to the EPA. It takes a period of time, I don't know, two to three months before I will hear back from them likely. But we're not in a hurry. We just want to have it out there so we can take the argument away that it can't be done.

Operator

And Ann Duignan with J.P. Morgan has the next question.

Ann Duignan - JP Morgan Chase & Co

A couple of things since we're on Slide 28. This slide says that for a full year, you will ramp up through 2011 towards 25% market share. Are you reiterating full year 25% market share or are you saying now that you will ramp up towards 25%? I think it's a bit confusing.

Daniel Ustian

Well, our full-year goal is 25% market share, Ann. It's semantics but what it says is we're at 19% and we won't jump to 25% on average until the end of the year.

Ann Duignan - JP Morgan Chase & Co

So it's more like you will be up 25% by year end? Is that what you're trying to say in there?

Daniel Ustian

The full year average, 25%.

Ann Duignan - JP Morgan Chase & Co

Okay. And then on your 15-liter engine, it's conspicuous there hasn't been a press release that, that has been certified. I know you verbally, you told us that you've gotten verbal approval by the EPA at your analyst meeting. But it hasn't been approved on the CARB website either. Can you tell us have you got an official in writing approval for the 15 liter?

Daniel Ustian

Yes, from the EPA. The answer is yes.

Ann Duignan - JP Morgan Chase & Co

And we didn't get a press release?

Daniel Ustian

And verbal approval from CARB, right.

Ann Duignan - JP Morgan Chase & Co

But there hasn't been a press release or anything that you have...

Daniel Ustian

I didn't think it was significant enough to put a press release out, but it's...

Ann Duignan - JP Morgan Chase & Co

You did it with the 13-liter?

Daniel Ustian

Okay, we'll put a press release out then.

Ann Duignan - JP Morgan Chase & Co

Well, I just think it's interesting because CARB usually posts them right away.

Daniel Ustian

Well, CARB was only verbal. The EPA has approved and the CARB is verbal at this point. And we'll put something out as soon as they give us official approval on that for California.

Ann Duignan - JP Morgan Chase & Co

And then on EGNR, can you talk a little bit, Dan, about why such a big splash on EGNR today? Can you define exactly what EGNR is? It's after treatment, it's out of cylinder, it's SCR, really? Why talk about it so much? Are you saying that eventually, some of the vehicles will have to go EGNR for performance? I'm just a little confused why we're doing two technologies now?

Daniel Ustian

I think we've always had this in our strategy, that we had EGNR in our strategy. What happened in the quarter is that we signed an agreement with the partner and that's Faurecia, that happened in the quarter, to go to market with us together to manufacture, go to market with this product together. That's the significance for that slide, is it happened in the second quarter and you're going to hear us more and more talk about the business aspect of EGNR and not just for ourselves but more importantly, for other applications. We do believe it's a better answer than SCR and hopefully, we'll convince some others to buy that and we believe we'll do that, and it'll be just another part of our Engine business.

Ann Duignan - JP Morgan Chase & Co

But aren't you saying that it's better than EGR in some applications also and then if it's going to have any market?

Daniel Ustian

Well, here is where -- it's a simpler way, if you need to do something quickly, and I mentioned when we had that slide. All we did was take a pickup truck that we bought off the lot and we put EGNR on it, now it has controls to doing all that. But we just took it and slapped it on it and we improved that from 0.2 to 0.1, by the way. From 0.2 to 0.1 and the bigger thing of it is that it works all the time. It doesn't just work when it gets to temperature. It doesn't just work when it's the right temperature outside. It works all the time and our customers don't need to worry about emissions. That's the significance of EGNR. And we believe it has some applications, perhaps in size but more importantly, adds an OEM sector for our Engine business. It's something that we're going to market and make some money off of, and we think it's a better answer than SCR.

Ann Duignan - JP Morgan Chase & Co

But also a better offer than EGR in some applications?

Daniel Ustian

No, I didn't say that at all. The simpler you get, it's always better than cylinder. It's always going to be that way. For instance, let me just give you an example, we go to South America and the fuel quality isn't there. We want to put something that's ours on it that we take care of. So instead of putting SCR on it at the right time, we'll put EGNR on it because the fuel quality wouldn't allow us to put an in cylinder answer in a global application. So that's what I'm talking about here. That's what EGNR provides us inside the company.

Ann Duignan - JP Morgan Chase & Co

And what exactly is EGNR? I mean exhaust gas and?

Daniel Ustian

NOx reduction. We had a little bit talk about it at the Analyst Day and we'll be glad to spend some more time with you on it, Ann, to get you an understanding of what it is. But it's a very simple answer and it works all the time. So if you want...

Ann Duignan - JP Morgan Chase & Co

And I appreciate the technology. I know you have talked about it before, I just thought it was interesting at the Caterpillar page today and that's also some benefit for Fauracia joint venture or alliance. And then just real finally, I know it's end of call, but your electric truck partner Modec filed for bankruptcy yesterday or the last couple of days. What does that do to your electric truck strategy?

Daniel Ustian

It doesn't affect it. We have -- we were mindful of that, and we have all the technology we need for the markets that we're going to play in and that's under control.

Operator

We have no further questions at this time.

Daniel Ustian

Thank you much.

Heather Kos

Thank you for participating and we look forward to any of your follow-up calls.

Operator

And once again, this does conclude today's conference. We do thank you all for joining us.

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