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Navistar International (NYSE:NAV)

Q3 2011 Earnings Call

September 07, 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

Unknown Executive -

Deepak Kapur - President of Truck Group - Navistar, Inc

John Allen -

Andrew Cederoth - Chief Financial Officer and Executive Vice President

Analysts

Joseph Vruwink - Robert W. Baird & Co. Incorporated

Jerry Revich - Goldman Sachs Group Inc.

Ann Duignan - JP Morgan Chase & Co

J. B. Groh - D.A. Davidson & Co.

Brian Sponheimer - Gabelli & Company, Inc.

Seth Weber - RBC Capital Markets, LLC

Henry Kirn - UBS Investment Bank

Andrew Casey - Wells Fargo Securities, LLC

Patrick Nolan - Deutsche Bank AG

Joel Tiss - Buckingham Research Group, Inc.

Timothy Denoyer - Wolfe Trahan & Co.

Operator

Good morning, and welcome everyone to the Navistar International Corporation Third 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

Thank you for joining us today. 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 reports on Form 10-K and 10-Q and our other SEC filings. We would also refer you to the forward-looking statements and the other cautionary note disclaimers presented in today's material for more information on this subject.

And now I'm going to turn it over to Dan Ustian.

Daniel Ustian

Thanks, Heather. Now the agenda for today, if you would try to follow me through the slides, Slide 4 has -- we'll talk a little bit about the current truck environment, then we'll get specific on our third quarter results, the balance of this year. We'll talk about some items that would affect the future, and then A.J. will talk about return on capital.

So if you look at Slide 5, you can see that the trend in the industry has been, for the last 3 years, very difficult and encouraging going into 2011. The other 2 charts on here from the experts, FTR organization and ACT, show that, that trend for improvement should stay with us for quite some time now. That is the forecast. I think if you talk to others in the industry, they would give you some similar feelings to that. At the bottom of the page, bottom right, retail sales. Our estimate was, at the beginning of the year, industry demand would be 240,000 to 260,000 industry demand. And then today, we're saying the same thing, 240,000 to 260,000. A little change in mix, a little bit more on the medium side, a little bit less on the Class 8 side and much of that is really related to some supply constraints that we'll talk about in a little while.

We put on Slide 6 just some recent articles that were in Transport Topics that show that production rates are still strong. Freight is good. Freight rates are good. Again, all positive things that the industry will continue to grow.

Another factor in it is used truck. That's probably another indicator. There aren't very many used trucks out there, and the price of the ones that are out there have escalated quite substantially over the last year. And you can see, it's close to $35,000 for a 5-year-old sleeper today, about $10,000 to $15,000 higher than it was only a couple of years back. So used truck market is strong as well.

On Slide 8, for those of you that have followed the industry know we've had some supply constraints. And we would say, it's really not a matter of capacity. It's a matter of the rate of change. So if you look at where the industry was through the industry data, at the beginning of this year, we were about 200,000 annualized rate and the last 3 quarters are 264,000, so about a 30% increase in rate. If you look at the beginning to the end, it's more like 40% or 50% rate increase and the supply chain has not been able to adapt that quickly. On our side, it's even more acute. At the bottom of the page, these are other markets that are growth markets that are coming into play in 2011. We'll talk more about it. But Latin America shipments of trucks in 2010 were 3,000. This year, they're going to be 11,000, and it's back-end loaded. And of course, the Mexico industry is stronger, and we are entering South America. Our products are the same, basically the same and the components and the suppliers are basically the same in each one of these markets. So it's stressing our supply base.

If you look at Slide 9, commodity cost for the industry. We began charting these in 2009 and you can see from this that they're significantly higher than they were back then. I think you could also see that they've leveled off. And one particular note is steel, but you can look at all of these and they have flattened out. I also believe that these are priced now in the vehicles appropriately to capture the increase in commodity costs.

So in summary, the industry environment is what we expected, and I think it's what we're going to expect in 2012 as well, should be a little bit stronger. It should be at a rate similar to the rate that's going on right now. We're seeing a little change in mix. There's more fleet buy, less dealer buy, which means this little stress in pricing. And for us, we certainly anticipate it on the heavy side. I think the medium and severe are stressed probably a little bit more than what we had thought at the beginning of the year. I think the difference though is this, on the heavy side, that's going to stay that way. They're going to be concentrated on fleets. On the medium and the severe side, you're going to see this dealer volume pick back up as the economy picks back up so that -- I don't think that's a permanent swing. I think it's a short-term swing. We also believe that there's an opportunity for a highway bill, and I know many don't believe that, that will happen. I personally do. Over time, we'll get a highway bill, then be right in the core of the severe service business, which is a great business for us and for our industry. We've also said that commodity costs are high, but they're stable. And we believe that it's in the pricing of vehicles throughout the industry.

So now let's turn to the financials of the third quarter for us. Slide 11 shows that we had $3.5 billion worth of revenue, and we made $0.79 earnings from that. If you look at the bottom left-hand corner, it shows the delta in the business revenues where Canadian, U.S. Truck business is up $500 million, Global Truck, Engine and Parts are all up. And the Military revenue has shifted from the third quarter into the fourth quarter, so the full year is basically the same. But last year, we shipped heavily in the third quarter. This year, we'll ship heavily in the fourth quarter. We also have spent $132 million on product development, which is up a little bit from last year. The supply constraints have certainly stressed our system in terms of productivity. And we also have some left in inventory, but -- so in spite of having the $1 billion of cash, there's still some in inventory that we'll be able to ship by the end of the year to grow that cash balance even more than where it is. And our big bore engine side, for the quarter, we built about 800 per week or at about a 40,000 rate clip. I'll talk more about where that is in the fourth quarter momentarily.

Slide 12, simple chart that shows shipments. You can see the growth in every sector of the Engine business and particularly, the OEM business is growing. And as I mentioned, the Military business was lower than last year, but it will recover in the fourth quarter.

On market share, Slide 13, Q3 for school bus was 47%. We expect that to be closer to 60% in the fourth quarter. Medium truck was 46%, a strong quarter for us. Severe service, 36% and overall Class 8 was 21%.

If you'll look at Slide 14, it shows a trend here in Class 6 and 7 and 8, significantly growing for our company from beginning of the year to the last 4 months. I want you to keep in mind on the Class 8 side that we went from a predominantly 15-liter bought OEM engine to an entirely 13 liter. So this 22% share that we have is really, almost all of it is in the 13-liter class.

If you look at Slide 15, I want to remind us all that we still have products that are being launched, have been launched, not out to market yet and will be launched at the end of this year that will grow their presence in the Class 8 market as well. These products that are shown on Page 15 cover about 20% of the market that we haven't played in for the entire 2011 year. So I think you can see why we're optimistic that our 25% goal is very realistic in the short term.

On Slide 16, we've been given 2 awards, one on the vehicle side, the Best Class 8 Truck, Pick Up & Delivery in 6 categories -- 6 important categories. On the Engine side, where we won an award for the Class 8 Heavy Duty Engine of the Year. These are J.D. Power awards. Now I'll be the first to tell you that if we didn't get this award, I'd be saying it doesn't mean anything.

Having said that, I do think this does mean something because if you look at Page 17, it says that it's producing to the bottom line. And if you look at independent value guides for used trucks, you can see that our used trucks are valued somewhat significantly higher than any that are out there. So I think the 2 tie it together and it will help us in our pricing and it will help us in our share going forward.

Now I'd like to take a moment and go through Slide 18. Slide 18 is about how do we get from where we are to a strong fourth quarter. How do we get a fourth quarter that gets us to between $5 and $6 a share for the year? And the simple side of that is our revenue will be up. We expect revenue in the fourth quarter to be about $4.5 billion, which is $1 billion higher than the third quarter. North American charge-outs are up 30% from quarter-to-quarter. I'll talk a little bit about Latin America increases, but they're up substantially, several thousand units. In fact, we will ship as many in the fourth quarter in Latin America as we did for the full year and margins on those are good. And the Military, as I mentioned earlier, will be about $700 million, which is $400 million higher than the third quarter. So on the revenue side, we were about $1 billion higher than the third quarter.

On the cost side, you'll see our joint venture investments go down. Some of it is in product development, some of it is just in the establishment of our dealer body that we have in these countries. Our manufacturing strategy is now in place throughout Engine and Trucks. Our supplier constraints will be better. They won't be gone totally in the fourth quarter. But clearly, they're better and so the costs related to those supplier constraints will be much better in the fourth quarter. And we'll be at full production rate of our big bore engine, and here's how that's significant. We were at about 800 a day -- 800 a week, sorry, in the third quarter. By the middle of September, we're going to be at 1,200 a week. And so what we did to protect the quality of the product, we manned up our facilities as if we were at the higher rate so that people would be trained. Obviously, there's much efficiencies that go along with that volume. So as you could tell, 1,200 a week rate is over 60,000 units a year and that's what we think will help us into next year to meet the demands that are out there. So that's how we think Q4 gets to our $3 to $4 a share number that is in our guidance.

Well, let's talk a little bit about the full year now because I mentioned some supplier constraints. We're going to be a little bit higher in product development, maybe $20 million higher than what we anticipated. And then the mix change between medium -- it's not so much on the heavy side because we anticipated that. I think the mid-range products and the severe service products are stressing a little bit the pricing that's in that only because of mix, not because we're not collecting it. It's a matter of fleet buys versus smaller customer buys that run through our dealer. So those add up to about $100 million of stress on our system and how we make that up. So the fleets actually, in a different way, the fleets -- by having more fleets, they actually help us in the financial service side because the quality of them is stronger than the smaller size. So we'll have more earnings on NFC as a result of that. In fact, in NFC, we expect to have maybe 50 million or 60 million better than the plan. Some of that is clearly because of the quality of the customers that we're shipping to. The second part of it is annual compensation and our whole company is on an incentive program. And it's based on earnings, and so it will be adjusted based on our earnings. And so our net would be -- we'd be back into the $5 to $6 range that was in our original plan. That's how we adjust those 2 out.

Then let's turn to Page 19 and talk about the supplier challenges that we've had, particularly in Class 8 and how we're managing through that. If you look at the bottom of the page, I mentioned earlier that we spent a little bit more money on product development or we will spend a little bit more money on product development. And one of the reasons is we decided to pull up some programs into South America and Latin America into 2011 because the market there is strong. So we launched ProStar, TranStar, WorkStar and Continental Mixers in there in 2011. And the result is they've taken off. Our dealers are loving this product. They promoted the product. For the first 9 months of the year, we've sold 5,000 units. Now with the addition of these vehicles, we'll sell more than that in the fourth quarter alone. The margins on that, as I mentioned earlier, are strong and we believe that's the prudent way to balance out the challenges that are out there on supplier constraints. So what that leaves us for in North American side is we'll ship somewhere between 38,000 and 40,000 Class 8 vehicles. We think that will give us market share of 23% to 24%, but it's frozen. So whatever the industry is, that's going to dictate what the market share is and our number for shipments is frozen at that number. And we think that's the best way to manage these constraints that we have until they're lifted, which would probably be -- or toward the end of this year before there will be free demand.

On the cost structure side, you saw that we announced the official closing of our Chatham operation that completes our actions on Engines and Trucks. We've saved over $200 million in that. It's on the high side of $200 million. Yet to happen is the improvements in synergies related to our Integrated Product Development Center. We have several hundred -- I'm going to say 700 or 800 engineers already into that facility. And remember, that's combining 8 or 10 different facilities into one. That will take us another 6 or 8 months before we capitalize on all of that. But we said, at the end of that, which would be middle of next year, we would start getting $60 million to $80 million a year of synergies as related to the product development center.

On Slide 21, we said that for the year, our global business would be profitable as we're investing in the areas that we have not participated in. So you can see from this chart that we have established 410 distribution points that's not fully complete to where we would like to be, but predominantly there. We'll start making money on those distribution points next year. But our total business for global will be profitable as we said we would be for 2011.

Much of that, of course, is from what I talked about earlier about Latin American successes.

On the Parts side, the important part of this slide is that Parts has a plan to have 10% growth each year. And you have to remember, a big part of this, going forward, will be our integrated engine strategy. So keeping in mind, this year, we're going to go another 10%, but we really haven't got all the benefits from the integrated strategy yet, because those -- while they're coming in for service, they're not coming in for engine service unless it's just a maintenance item. So we would expect this rate to continue at 10% for many years going forward on the Parts side.

On the Defense side, this will be our fourth year of the $2 billion business strategy achievement. We believe, in spite of the fact, that there will be certainly some budget constraints, our business model says we're well positioned to get our fair share of that. And as you can tell from the fourth quarter, we have $700 million worth of revenue in the fourth quarter, as this -- as the government has constrained some of those investments that they're able to make in their budgets. We still believe we're at the $1.5 billion to $2 billion worth of business.

There are other major programs that are out there, one of those is the Humvee recap that we'll play in. We think we're well positioned to be very competitive in this. This is further into 2012 before we know where we stand on that. But we like where we're at positioned in our product, in our cost and our ability to deliver.

So finally on Slide 25. It's a chart that we've shown before. This is what we said to you, on the left side, was our business drivers for 2011. And on the right side, where we stand to that. And as you can see, most of these we're right on where we said we would be. In total, we expect to be $5 to $6 a share. And somewhere in the middle of that, based on what we know, our promises from our supply base in bringing parts in. The challenge with that is not just that we'll get them, but they have to be done in a timely way. So the variation from that is really when we get the parts. It's not only if we get the parts, it's when we get them so that we can have a good flow of our production and not do it offline and not have to put the extra cost in for flying or any other extra cost to make sure that, that product is quality as it leaves the facility. So we're between $5 and $6. We'd say we're in the middle of that right now.

And A.J., how about talking about the balance sheet?

Andrew Cederoth

All right. Thanks, Dan. We had a lot of activity in Q3, so I'll go through some of that activity. And then also talk about some of the actions that we've taken as it relates to our capital structure.

On Page 27, our manufacturing cash ended the quarter with over $1 billion of manufacturing cash. I think that's significant as our third quarter is typically our low point for cash on a quarter end. But I also think it's significant that, that's $250 million higher than it was just a year ago. Our cash will grow in the fourth quarter, driven primarily by growth in earnings and improved effectiveness within our working capital. We -- again, we expect our cash to end the year near the high end of our guidance.

On Page 28, Navistar Financial continues to do very well. It had a very strong year. Their profits in the quarter were good and their liquidity going forward is sufficient to support expansion of our dealer business as we expect the economy to recover. Our partnership with GE Capital continues to pay good dividends for us. It's expanded the financing products available to our customers. But more importantly, it's allowed us to limit the amount of capital deployed at Navistar Financial and use that capital where we can generate a better return on capital.

On the right side of this page, I've highlighted the current status of our portfolio. And I think it's important to note here that the portfolio statistics continue to improve. This reflects, not only the health of our customers, but the health of the market in general. And then what I've done here is shown that typically we see some deterioration in these metrics ahead of an economic downturn. So we remain confident in the health of the industry and the health of our customers.

Dan talked about some of the actions that we've taken that took place in Q3 relative to our manufacturing cost structure. We've highlighted 2 significant actions here in the third quarter, both of which, we believe, help our cost structure going forward. At Chatham, we made a final decision to close that facility. The majority of these costs are reflected in our third quarter items. But some of these costs will carry forward into Q4 and 2012. Those are related to final resolution of some employee costs once we reach final agreement. The cash charges, again, are reflective of the cost to settle with the employees and some pension funding that will take place in 2012 and beyond.

Custom products is a combination of our Chassis and RV businesses. These businesses have already leveraged the value of our purchasing scale, and we've integrated our engine strategy across multiple platforms. The next logical step here is to combine our manufacturing facilities and capture the synergies associated with that. The charges associated here are mostly noncash as we've written-off some intellectual property and intangible assets. The cash charges here are, again, related to some employee costs and some relocation costs, which I think are more than offset by the savings that we can capture with this strategy. We will continue to look at opportunities to improve our cost structure going forward, both as the markets recover and our strategies evolve.

On Page 30, after much deliberation and a long set of analytics, we've reached the conclusion that our deferred tax assets have realizable value. As such, we've been able to release the reserve against these assets and make the adjustments on the balance sheet. The primary factors that contribute to this, of course, are generating profits at the bottom of the cycle. But more importantly, is the confidence that we have that we can sustain this profitability going forward. The impact of this action will be that we will have low cash taxes, and we can defer cash taxes into 2013 and beyond. And equally important is the adjustment that it has been on our balance sheet as we're able to reflect positive shareholder equity for the first time in many years. So the third quarter has been a busy quarter. Our cash is strong and our liquidity is adequate to support the growth of our business. And the confidence in our strategy is such that we've been able to take actions to, not only improve our cost structure, but to improve our balance sheet.

With that, I'd like to take the opportunity now to talk about some actions that we're going to do relative to our cost structure. But first, I think we ought to take a moment and look at where has our focus been. Up to this point, our focus has been to deploy our capital so that we can improve the earnings of our -- of the business and support the growth of the business.

When you look at Page 32, you're able to see what we've been able to do with these investments. But I think what's more important is how we've been able to do this. Over the last cycle, we have invested $300 million less than we did in the previous cycle. And if we look further back to the cycle where we invested heavily in products previously, we've saved over $500 million of investment. We've been able to do this by leveraging our engine platforms across common chassis so that we can maximize the potential of this strategy, while minimizing the investment required to implement that. As a result of that, we've freed up our capital and have sufficient liquidity to support the announcement of our share repurchase program today.

We have announced $175 million share repurchase program, which represents approximately about 5% of our shares. We're doing this today because of 2 reasons. One, the continued profitability of the business at the bottom of the cycle and the ability to generate sufficient cash liquidity that we can execute this plan from cash reserves. As we move forward, we believe we have adequate cash to support the continued investment in our strategy and expand that strategy to markets such as China and our global truck products. As we move forward and outline our plans for 2012, we will continue to develop our strategy around capital so that we continue to invest in our business, but also incorporate the opportunity to return value to our shareholders. We'll have more to share with you on this as we talk about our 2012 guidance.

So on Page 34, I'd like to recap where we are for 2011. We have a lot to do for our fourth quarter and Dan outlined the critical elements of that, that support our guidance in the $5 to $6 range. The primary element of this is to grow our revenue by $1 billion in the fourth quarter, and that comes from primarily our North American Truck business, our export business and, of course, the heavy Military business in the fourth quarter. But equally important is to control the costs associated with executing that revenue, and we've outlined the plans for that. So we're confident in our ability to deliver our results in the $5 to $6 range. But we've also done more in the quarter.

If you look at Page 35 and you look at the diversification of our revenue base. No longer is our strategy simply a North American strategy, where we have invested in market leading product and improved our cost structure and attracted investment into our distribution network. But we've also added our Military business so we can leverage that investment and expand our revenue base. From this, we've effectively invested in a global growth strategy that will pay dividends in the future. Our Engine business has expanded into the big bore product line and has repositioned itself to take advantage of those investments to grow into tangential markets, both domestically and globally. Finally, our Parts business has effectively implemented the strategy built around better execution within our existing channel. The Parts business is now well positioned to expand further as our Truck and Engine businesses mature their strategies going forward.

So if you look at Page 36, I think that shows the 2 critical elements of what we talked about today. We're going to deliver on our results for 2011. Dan outlined that the actions are in place to deliver our commitments, and we're confident that we will do so. But equally important, we continue to put in place the critical elements of our strategic plan that build towards our objective to become a $20 billion company, capable of generating $1.8 billion of segment profit and delivering value for our shareholders.

With that, Heather, I think we're ready to take questions.

Heather Kos

Operator, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Henry Kirn with UBS.

Henry Kirn - UBS Investment Bank

I appreciate that the cycle is unfolding as you expected, but I was hoping to delve deeper into the lower end of the guidance range. Could you talk a little bit about what changed over the last month and maybe, if possible, quantify the impact from the surprise in mix to fleets and then the supply chain constraints?

Daniel Ustian

I don't know about surprises, Henry. I think the challenge, of course, has been the supply change -- chain, not just in getting the components in, but getting them in on a timely basis. So if you schedule a truck to run down that line and you don't have that truck, you may get the truck out in the quarter, but you're doing it offline, it's expensive. You have to tell people, I have to make sure the quality is right. So that side of it, I think, you could say, it was a -- it's a little surprise. I'd say from -- the other challenge perhaps is, over the last month, and it really is the last month that's really going to affect opportunities for fourth quarter rather than third quarter, is we've seen less dealer-type orders and dealers typically have smaller unit orders. So our pricing is -- it could be 10% better on those kind of orders than if you get a fleet. So we've seen some movement in that as Washington as -- and New York, Wall Street has unfolded here. The small guy now has stepped back and says, "I'm going to wait and see a little bit." Now the fleets in that with the leasing companies, they've gone ahead and they've bought. In fact, some of it, instead of the guy buying a new truck, he's renting. So the fleets actually are fine, it's the small guy. So the mix for us is a little bit negative to the tune of -- you could have 10% difference in those 2 prices. I think the other one is on the construction and the severe service side. The government buys perhaps on the severe side. There's been less of that with the tightening of the budgets. So that's another negative because those are smaller buys again and many of them run through dealers, so the margins on those are better than "on the road" fleet price would be.

Henry Kirn - UBS Investment Bank

That's helpful. And on the Military business, could you talk about the risks, upside or downside to the $700 million Military for the fourth quarter, and how much visibility you have into your fiscal '12?

Daniel Ustian

Well, I'll let Archie say what this, but -- and we have all the orders. We're making the products. I don't think -- and we got to make sure that we get the components, but you have to understand that's by law and by practice. They get preference on the components that come in. So I think there's not a lot of risk on the production side of that. I think we're pretty solid on that. Arch, you want to add anything to that?

Archie Massicotte

No, I think we do. We have clear line of sight to produce what we said we would. And I think the risk is [indiscernible] not any risk at all to deliver what we said. To answer the question about '12 and what we foresee there, obviously, with what's happening, we do intend to see U.S. funding come down, but we're not sitting stagnant. I mean, we're going after other stuff in foreign countries. As we've indicated in some of the prior calls, we're in 26 countries that we operate in, and we're continuing down that path. We do believe that a lot of our revenue from next year is going to come from outside of the U.S. into the business. And that's also, not only just the vehicle buy, but what we're growing right now is the logistics supply chain with IOS putting mechanics on the ground to field support and part sales. So we do see growth in those areas. So we're trying to offset the lower vehicle buy by some of these other ancillary businesses that we're in.

Daniel Ustian

Let me just add to that, Arch. If we -- outside of the U.S., this isn't something that we just started working on. These have been things we've been working on for a couple of years with foreign nations that we think will come into fruition in 2012.

Operator

We'll move next to Seth Weber with RBC Capital Markets.

Seth Weber - RBC Capital Markets, LLC

So I appreciate the preliminary FY '12 outlook on the retail sales. I was wondering if you could just share some of the macro assumptions that are going into the -- your preliminary guidance for retail sales for next year?

Daniel Ustian

You mean like GDP and all that?

Seth Weber - RBC Capital Markets, LLC

Yes, GDP or freight volumes, anything like that.

Daniel Ustian

Yes, we've got that. Let us get you that, Seth. We can do that. We don't have that with us here, but...

Seth Weber - RBC Capital Markets, LLC

Okay. If I could then just get another question in. I guess, I wasn't -- I thought I heard you say that you feel like pricing is now covering input or material cost. Is that accurate? Did I hear that correctly?

Daniel Ustian

Yes. Seth, here's how we've looked at that. We, obviously, price in total, so it's hard to tell how much has been collected for commodity prices or anything else. But in total, we're probably a little bit ahead of our plan. And the one area that I think we are ahead is the 13 liter. If you followed us earlier, we were -- our intentions were to price 13 liter and then 15 liter above it. Today -- and that competes 15 versus 15. Today, our 13-liter pricing matches up with the 15 liter of others. So a little advantage for us on that side of it. And now the challenge is how do you price 15 liter. Well, in the markets we're going to play with that, we should be able to price fine with that, but we won't be able to price higher on long-haul tractors. Our own 13 liter versus our own 15 liter, we will not be able to price higher for that. But we're in good position with our 13-liter pricing against others' 15 liter.

Seth Weber - RBC Capital Markets, LLC

Okay. And as we look at one of the slides you had in there, it looks like your commodity prices have basically stabilized. So should we assume that if you were to push through kind of your typical price increase for next year that, that would be further on the plus side then?

Daniel Ustian

I always worry about the plus side of that. But yes, I don't know that we're far enough along to say when the next price change would be. Typically, they are at the beginning of the year. So as we see it today, I'd say there aren't any other changes. We're about where we're at with some maybe 1%, 2% increase. Jack Allen is here. Jack?

John Allen

I'd have to say, we think that we'll be able to move pricing along, but we're going to have to grow margins as to the cost side, not through pricing.

Operator

We'll go next to Ann Duignan with JPMorgan.

Ann Duignan - JP Morgan Chase & Co

Ann Duignan. Can we talk about the implied guidance for Q4? Could you just -- you got a $1 in range there, and I appreciate that in the appendix you have the low end and the high end. Can you just talk to 2 things? You do not have any assumptions for share repurchases in the current Q4 guidance, is that correct?

Andrew Cederoth

No, that -- well, yes, Ann, you are correct. We haven't adjusted the guidance to reflect any share repurchase numbers.

Ann Duignan - JP Morgan Chase & Co

Okay. And then secondly, could you also talk about whether you have any assumptions in there in Q4 for the debt extinguishment and the gain on that?

Daniel Ustian

The debt extinguishment? Clarify for me, Ann.

Ann Duignan - JP Morgan Chase & Co

Yes, in your appendix you talk about debt extinguishment in Q4 could result in upside to, for reported earnings.

Daniel Ustian

That's really an inconsequential amount and that won't have any impact.

Ann Duignan - JP Morgan Chase & Co

Okay. So the bigger impact on Q4 might be beyond what you've laid out here, it might be the timing of share repurchases?

Andrew Cederoth

Yes. For 2012, we do expect that the share repurchase program will decrease the number of shares outstanding in 2012.

Daniel Ustian

And A.J., it's possible we have some of those this year, right? It's possible.

Andrew Cederoth

Right. We will execute this plan in Q4. The real effects of that, you have to be averaged over the year. So the real benefit of the share repurchase comes through in 2012.

Ann Duignan - JP Morgan Chase & Co

Yes, I just wanted to make sure that it's not included in Q4 as is.

Andrew Cederoth

We haven't adjusted the numbers for that.

Ann Duignan - JP Morgan Chase & Co

Okay. And then on the engine profitability side, I mean that's probably the segment where we've had the biggest swing versus your initial guidance of $100 million in profitability. Can you just talk about what's the real driver there? Is it just the ramp up of the internal engines and then the transfer pricing at X, whatever the agreed price is? Is it South America? And what happens to engine profitability as we look into 2012?

Daniel Ustian

Well, we've got Eric here, Eric Tech, with us, so let me just give you a high level of that. We had a plan of between $90 million and $100 million. And you might remember, Ann, in the second quarter, I think we had extra warranty from prior years that hit the Engine business so that stressed that some more. So what his objective is to try to make that up. And we're going to be close to that. I'm not sure Eric can get all the way through the $90-ish million that we had in the plan, but that's the target to make up that $30 million that's out there. Eric, maybe you can chat a little bit though. The second question is what -- how do you look at the qualitative 2012, what would be the actions be that would show where 2012 might get better?

Eric Tech

Yes. I mean one of the things that we're really focused on is our -- from an operating standpoint, how we've been able to improve quarter-over-quarter, especially in the North American business. We're bringing the cost of our engines down. The volume is coming up. Dan talked about some operational things that will be helping us relative to the big bore. And therefore, when I'm looking at our run rate in the fourth quarter, it gives me some confidence for full year profitability or improved profitability going into 2012. On top of that, we're still considering Brazil to be a very important part of our business going forward. We will be transitioning to contract manufacturing, but we've got a very healthy parts revenue and profitability down there that will continue. And we'll actually see improved volumes with the contract manufacturing environment that we'll be going into, as well as some reduced expenses associated with that arrangement relative to our prior one. So we're thinking that both the North American and South American parts of our business are going to either maintain in South America and they will improve in North America.

Daniel Ustian

And let me just add to it, and just so to frame at least the big bore part of this. When we launched the big bore, quality was the number one thing. And so that meant that we were going to man up the facility with more people in it, but we wouldn't have to go through the training throughout the year as we kept increasing the production rate. So there were extra costs with that. We also didn't change anything. We had suppliers out there from low-volume supply base that we just kept with us and that was because of quality. Again, we didn't want to make changes going on during the year. Now in the fourth quarter this year, there are some changes and in fact, we're making our own castings, we're machining our own castings at a cost reduction of $500, $600 a piece. There's more of that, that goes on into the 2012, so the cost structure is still not where it needs to be or where it will be on a long-term basis on our big bore engine family until all those get into place because our emphasis has been making sure the quality is right.

Ann Duignan - JP Morgan Chase & Co

Okay. And any update on warranty accruals on those new engines? What rate are you using going forward?

Daniel Ustian

Well, actually, what that has been is on the prior engines. Our total warranty is about the same. The prior has been higher than '04 and '07, it's been higher and the '10s have been lower. But in total, we're about the same as we expected to be, other than that second quarter adjustment that we had.

Operator

We'll go next to Jerry Revich with Goldman Sachs.

Jerry Revich - Goldman Sachs Group Inc.

Nice sales ramp on the NC squared business this year. At what sales level do you expect that squared business to be profitable? And which regions has the product lineup been fully rolled out at this point?

Daniel Ustian

Well, the product has been rolled about 80% in India, maybe 80% to 90% is rolled out already in India. In South America, we just have 1 product on our way to 3 products. South Africa, we're kind of there. Australia, mostly there. Latin America, we're there now. South America, again, there's some opportunities that we still have to launch more. So next year, we are expecting to make money in India as the distribution gets established and the products are out there. Australia, the same way, a modest amount. South America, we'll be launching. So I think we'll probably break even in that because of the launch factor and getting the dealer body in place to support the products that will be out there. Then, in Latin America, again, we're looking at a good year. Troy or Dee, anything to add to that?

Unknown Executive

I think you said it, Dan. I think we have started the launch of products in all these regions, as Dan said. We will be adding a couple more products into Brazil in the next month, and we're still working to achieve the full local content requirement in Brazil that enables you to get government or state financing, which is a huge margin and sales improvement opportunity for us. So again, to reiterate what Dan said, we got products in Australia that are being sold and we built enough to kind of tide us over until we get the Euro V version next year. South Africa is going great. I think we were the market share leader there in Class 8 last month. Brazil is ramping up nicely and these additional products that I just talked about should accelerate that. And then the Central America and indeed [ph] American -- Latin American markets are showcasing the strategy from several years ago, while introducing new products and new dealers and we're doing quite well there.

Daniel Ustian

So maybe, Jerry, at a high level, I can summarize that. At a high level, what's going on this year was the establishment of the product, so it's product development. It's the establishment of distribution, so it's a sales organization, it's to help to get the dealer body in place. So that's the cost that's -- and mostly, that's in that line item that's $55 million for the first 3 quarters. Now next year, we start to get the revenue for that. In fact, some of it we have started already. So that, this year nets out to be 0 base, some slight profit. And next year, we expect to get somewhat more significant profit. And we'll go through that after the next quarter, and we'll tell you more about that.

Jerry Revich - Goldman Sachs Group Inc.

I appreciate the color. And Archie, excellent Dash wins this year, particularly on the ambulance side. When you talk about the foreign opportunities for next year, are you seeing demand primarily for MilCOTS-type product or is there a meaningful armored vehicle demand outside of that one tender in Canada?

Archie Massicotte

Jerry, it's both. Although, it will be heavily weighted on MilCOTS-type vehicles. But they are seeing some armored business that we're going after in foreign countries. But the primarily focus, it will be on MilCOTS.

Jerry Revich - Goldman Sachs Group Inc.

Okay. And lastly, Dan, can you say more about specifically what components are driving the supply constraints you highlighted? And with your castings capacity ramping up in the fourth quarter, is that what you need to see to feel better about the supply chain? I guess looking at the lower intersegment engine sales this quarter sequentially, it sounds like some of the constraints were concentrated in the engine component side. Is that fair?

Daniel Ustian

Well, I'd rather not get into that. I know we had a reaction from our supply base last time when we said something about that and not that we mentioned names, but it is several different areas that we think we got our arms around. We've actually canceled some overtime on some of our production because it just didn't make any sense, especially on the medium side. So we think we've got it managed with that supply base. We're tying in when we need it and when they can -- they promised on it. The risk is they have to hustle to meet the timing that we have laid out with them. And so it's probably 6 or 7 different ones. I think, Jerry, the other part is, when you get through those, are there any other ones? And we think no. We've tried to analyze and anticipate what else might happen that maybe is being camouflaged by some of the constraints we had elsewhere. We think we've got our arms around that though we're not 100% sure. But we've tried to anticipate any movement in that, that could disrupt our production. And remember, the issue is twofold. One, we had to get it out there to the customer. We made a delivery-date promise to them. So that's one thing. The second thing though is not just getting the parts during the quarter, it's getting them when we need them in the quarter. So they run down the assembly line, as prescribed, and we're not juggling schedules around all the time. And that's what we ran into in the third quarter that -- we think we've got a better flow going right now in our production operations, but we still have to prove that out.

Operator

We'll go next to Joel Tiss with Buckingham Research Group.

Joel Tiss - Buckingham Research Group, Inc.

Can you just talk a little bit, try to square up the big fourth quarter ramp in Military and the ramp in the big bore engines and some other areas and the inventory is only rising by $150 million? It doesn't seem like there's enough in the pipeline to be able to get all that out the door.

Daniel Ustian

Well, I mean the order board for Military is something that we've seen for a while, so we can get prepared for that with our supply base. And typically, they'll bring it in, a few days ahead of time. We make it and ship it. So that flow is pretty good. Now we don't get paid for it right away, so it may sit in payables, but that flow is pretty good.

Andrew Cederoth

Yes, we're averaging roughly about a 2-week window from the supply chain until it gets built into a product. So you're not going to see a lot of inventory sitting around. It flows through the system pretty quickly.

Joel Tiss - Buckingham Research Group, Inc.

Okay. And then just on Class 6 to 7, you said it was getting better. Can you just give us a couple of the factors behind what's improving that business relative to expectations?

Daniel Ustian

Well, it's better versus what our estimate was from the beginning of the year. So here's what's happened on that. It has gotten better, now it's leveled off, and it's leveled off because now the small guy is being a little cautious on buying. So it's gone up, Jack, 30% from the beginning of the year to now?

John Allen

25%.

Daniel Ustian

Gone up 25%, 30% from the beginning of the year, now it's flattened out. And what we're seeing on the flattened out side, it's this guy that buys from the dealers. It's the smaller business guy that's saying, "I'm going to wait and see here before I buy another truck." And like I said, he may turn then and lease a truck in the meantime until he gets more confidence in the overall economy. But the goods he's moving, they're still good. I mean, he's still moving what he expected. So that's the positive that we see in the trucking industry is, there's no pullback on their business and there's no pullback on the rates they're getting. So they're getting paid and they're okay. But they're cautious because they read the newspapers.

Joel Tiss - Buckingham Research Group, Inc.

And the same sort of question on Class 8. How long can those owner operators hold off from buying new trucks? It seems like their fleets are pretty stressed out there.

Daniel Ustian

Well, here's what I'd say on that one, Joel. I think the days of the owner operator -- there aren't many left anymore. In fact, what you'll see they do is they'll usually -- many of them will have been hired by a fleet to do specific loads. So they could be even buying through that fleet. So I think the owner-operator segment is very small, and it's not going to get any bigger. And so that mix change from year-to-year, when you look at a truck and we had anticipated this, so this is not a surprise to us, but when you look at the mix of a fleet versus one of those owner operators, that pricing could be 10% to 15% different. So the pricing from 2 years ago to today is just because of the mix. We had anticipated that, that's why our strategy for our 13 liter is out there. That's why we're strong in the regional hauling because that's where the market is going. So I think we anticipated all of that. And so we're right on plan for that. And so I think the medium and the severe, it's an aberration here for this year and as the economy picks back up and the people get confidence, the small guy starts to buy back in those markets. But I don't see it changing in the heavy-truck side. We're not anticipating that ever going back to the small guy being a big factor in the Class 8 market.

Operator

We'll take our next question from Andy Casey with Wells Fargo.

Andrew Casey - Wells Fargo Securities, LLC

I'm trying to gauge the short-term production volume risk. Are your U.S. and Canadian Class 8 ordered to deliver lead times beyond October at this point?

Daniel Ustian

Sure. For an order today?

Andrew Casey - Wells Fargo Securities, LLC

Yes.

Daniel Ustian

Sure.

Andrew Casey - Wells Fargo Securities, LLC

Okay. So when you look at your constraints that need to be resolved other than what you've already done with the big bore, how long do you think it's going to take for a majority of those to be resolved because it appears in the channel that your big bore engine availability relative to your competitors is pretty good?

Daniel Ustian

Well, I wish I could say the answer to that is yes. I think we're making -- every big bore engine that we make, we're selling it. And we're bringing some of that production in-house with our own foundry, making the castings and machining it. And that's how we get from an 800 per week schedule to 1,200 per week schedule. And then we think we're okay. Once we get to that 1,200 per week, we think we're okay with kind of being able to sell what our demand would be. But right now, we're restricted on that to the number of engines we can make.

Andrew Casey - Wells Fargo Securities, LLC

And I guess the spirit of the question is understanding the big bore is going up in production, while you're not going to name the components that you're seeing the constraints in, are you looking at 4-month lead time for those constraints to be resolved?

Daniel Ustian

Well, no. I think on the engine side, the biggest challenge is what I said there is the castings and machining on that, and that we've got under control. So I would say that's going to clean up here in the next couple of months. But the other suppliers in trucks, especially in trucks, their visibility is maybe a couple of months. They're going to be able to react to this by the end of the year and give us what we need. I'm convinced the industry will be able to do that. Do you have anything to add to that?

Unknown Executive

I think Andy by the -- most of the suppliers that are having challenges here with our Tier 2s and such, we expect a lot of breakthrough by the end of the calendar year. As Dan said, we're probably in better shape on the engine side than any of our competitors right now, primarily because of the actions that we've taken to put casting and machining capacity in place of our own rather than relying on third parties to be able to do that.

Daniel Ustian

Let me just add to it. I think one of the benefits and we've said part of our strategy is controlling our own destiny. Well, can you imagine if we were buying someone else's engine what we'd be talking about on this call? We'd be allocating the product. This way -- the most important part of the vehicle is the engine and we have control over it on the performance side and control over it on the delivery side. So it's clearly a part of our overall strategy.

Andrew Casey - Wells Fargo Securities, LLC

Okay. Then within the revised fiscal '11 guidance, what is -- could you further detail what's driving that $100 million corporate expense reduction discussed on Slide 18?

Andrew Cederoth

[indiscernible] not as corporate expense, but there's 2 elements of it. I mean, the -- our financial services show up in corporate expenses. So you're seeing a very good performance out of Navistar Financial, and we'll have a good year there. Dan highlighted a couple of the elements. As we produce segment profit, we accumulate annual incentive comp for our executives. When that number goes down, we adjust the AI. But then we've also taken action to reduce our corporate costs throughout the year to bring down other elements across all the elements of our corporate level to keep our guidance in the range.

Andrew Casey - Wells Fargo Securities, LLC

Okay. A.J., and then a couple, I guess, longer-term questions. On the curtailment and termination charges on the post-retirement that you took this quarter for the plants shutdowns, is there any benefit on a post-retirement and expense annual run rate?

Andrew Cederoth

Not of any real significance because the people don't -- the Workhorse chassis restructuring those people really weren't covered by those benefits, and the Canadian benefits are all funded separately. So there's a marginal improvement, but not one of significance. It's all captured in the annual savings that we highlighted there.

Andrew Casey - Wells Fargo Securities, LLC

Okay. And then I guess a quick question for Eric. The South American Engine business, is the industry down there able to stockpile engines and should we expect any drop-off in the first half of calendar '12 due to the emissions changeover?

Eric Tech

The laws are different in Brazil, and you have to sell any 2011 engine by March of 2012. So the ability to stockpile or to hold engines is somewhat limited. We're seeing our different customers are acting in different ways. General Motors is actually not -- has seen slower fourth quarter sales of some of their engines in anticipation of a stronger first quarter, and others are going the other way. So we don't see a significant pre-buy impact in Brazil. We think that will be a fairly smooth transition between fourth quarter and first quarter in the -- relative to the calendar year.

Operator

We'll go next to Patrick Nolan with Deutsche Bank.

Patrick Nolan - Deutsche Bank AG

A couple of follow-up questions. Just first on the dealer orders, could you explain, is there any difference in the cancellation penalties between a dealer order and an order for one of the large fleets? In other words, would the dealers get a larger penalty either in future allocations or something like that? Or that why they would not want to put an order in place just to lock in supply now?

Daniel Ustian

Jack? I don't know that -- we personally haven't had any of that fortunately to deal with, and I don't know. They're all case specific. I'm sure, Jack, any...

John Allen

I mean, I think the -- first off, we're not seeing cancellations of any meaningful sense as a result of what's going on in the economy. In terms of the dealers ordering, as dealers see their business coming back, as they have confidence in the economy and their customers have confidence in the economy, we'll see more dealer orders. The element of cancellation, I don't see that playing into any decision-making on placing orders these days.

Patrick Nolan - Deutsche Bank AG

And just on the Military business, the foreign Military sales, approximately of the $1.9 billion this year, what will foreign Military sales be?

Andrew Cederoth

I don't have that breakout right now. We can get it to you. It's not that significant.

Patrick Nolan - Deutsche Bank AG

Got it. And just a last one, Dan, on the supplier issues. Is it fair to say that, at least to date, it's mainly been a supply issue and not a component cost issue? In other words, are you seeing the suppliers increase their prices along with ratcheting up their supply to you?

Daniel Ustian

Well, here's a -- let's try to define the issue here. It's really -- it's our suppliers' suppliers that would be hard for industry people, manufacturers like ourselves or others to kind of understand that until you get -- until it happens. And so when their suppliers get stressed, they could come to them and say, "Hey, I need an investment or I need more money." And of course, they come to us and say, "Hey, can you collect some of that." And we deal with those on a case-by-case instance but it's not a big number. I would say this, that freight charges to get those in on an expedited basis, that's somewhat significant. And for us, running it off-line. I think for everyone in the industry when you don't run it on the assembly line, there's a lot of extra cost that goes into putting that vehicle together. And that's what we're better at right now and our production process today, we're better off today with that clean build than we were just 6 weeks ago. That's where the real money is. It's not so much that the supplier is asking for more money other than the freight part of it.

Patrick Nolan - Deutsche Bank AG

Got it. And do you think your line of sight into those Tier 2 and Tier 3 suppliers has improved? I mean, at least your preliminary guidance is still calling for industry growth again next year, but with the economic backdrop, some on these Tier 2s and Tier 3s may be a little bit more cautious about putting capacity in place.

Daniel Ustian

Well, I think that was the case to start the year out, especially when you think about what some of those suppliers just came off of. They were squeezing, trying to survive. And then all of a sudden, this big order change comes into them and they can't adapt. And so I think that's past us now. We try to get into the second tier of our supply base to understand that, especially the major ones. And I think we've got it resolved now. So I -- and I would expect this will clear its way through over the next 2 or 3 months and the industry will be fine.

Operator

We'll take our next question from Tim Denoyer with Wolfe Trahan.

Timothy Denoyer - Wolfe Trahan & Co.

I'd like to ask a couple of additional questions on Latin America, if I could. Can you give a little bit more color on which markets with the volumes that you've talked about, with the 10,000 to 11,500 this year, which markets are those going to? Is any of that Brazil? And in terms of production, is that coming all from essentially Escobedo, I would guess? And can you also address sort of the implication that, that's sort of reducing the share of MaxxForce engines in favor of Cummins?

Daniel Ustian

Well, let me take it one by one. First, none of its Brazil. We do have an addition to that though. I think we'll probably sell somewhere around a 1,000. We just started up Brazil here in the last month or 2, and immediately we're going to sell 1,000 this year, and they're going to be Class 8s. So that's all the products that we have out in Brazil right now. In Latin America, if you'll look there's some photos in there of the products that we have and that goes from Class 8s to severe service. We've been very strong in severe service in Latin America to DuraStar. So it's a full lineup of product more so in Latin America. Some of those products use the Cummins engine. So I don't know that it's any different than what our plan was, and the reason for that was just the emissions levels in those countries are different. They're made in Escobedo. All those vehicles are made in Escobedo and shipped into Latin America. That's the best for costs and the best for tariffs.

Timothy Denoyer - Wolfe Trahan & Co.

Okay. But the 1,000 in Brazil, are those essentially knockdowns that are being built in Brazil?

Daniel Ustian

Yes, they're made in -- we've got a contractor there that we work with, at least for now, until we build that business up stronger, but they're assembled in Brazil.

Deepak Kapur

The 60% local content.

Heather Kos

60% local.

Daniel Ustian

You heard Dee said there's -- we have to have the content in order to avoid the tariffs.

Timothy Denoyer - Wolfe Trahan & Co.

And just lastly to clarify, these are all separate from the NC2, right?

Deepak Kapur

Brazil is in NC2s.

Daniel Ustian

Brazil is included in NC2 and Latin America, at least for now, is not.

Timothy Denoyer - Wolfe Trahan & Co.

Okay, great. And then just one last question, [indiscernible]. Can you give an update on EGNR? And given that Amminex just started production at its new plant this month?

Daniel Ustian

Yes, EGR -- EGNR is a technology that -- it's an after-treatment technology that we have developed with Amminex for potential use for us and for sale in the rest of the world and that progress is being made on that. There isn't a timetable for when we would use it, but you could foresee us, especially outside of North America, where the quality of fuel kind of prevents us from using -- until that's improved, the quality of fuel prevents us from having a strict EGNR answer at U.S. emissions standards. So that's a potential answer for us in those markets, and maybe even some in the United States. But the bigger, I think, opportunity for us is who else might buy that.

Operator

We'll go next to Brian Sponheimer with Gabelli & Company.

Brian Sponheimer - Gabelli & Company, Inc.

Just a couple quick questions here. Given the supplier constraints right now, do you see some seasonality flattening out in the business where maybe we can look at your first quarter next year as being a little bit stronger than it typically is?

Daniel Ustian

Well, at eye level, it would be stronger than 2011, yes, for sure.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. And just if I'm thinking about the weakness in the supply base being that of a Tier 2 and potentially Tier 3 issue, what gives you the confidence that, let's say in a -- let's say we wake up on Friday and there's some confidence in the economy and order rates continue to increase, that the supplier constraints won't continuously pop up as volume ramps?

Daniel Ustian

The first thing, Brian, I'm going to do with that is I'm going to go out and have a drink. We're going to celebrate. And the second thing we're going to do is -- we've already gotten out in front and just in case that happens. So we kind of know where everyone is on that and what it would take. Now the issue gets to be when do you want them to turn on in an investment if they need an investment in the second tier? And so that's why we have to keep track of that so we can give them enough lead time to react to that. So I would say, that would take us maybe -- I'm going to ask Jack here -- 3, 4 months.

John Allen

Sure.

Daniel Ustian

If it's anything of significance beyond the rate that we're at, which is an industry of 290,000, if it gets to 325,000, it's going to take us a little time, 3 or 4 months, for the supply base to react to that.

Brian Sponheimer - Gabelli & Company, Inc.

Okay, that's helpful. And then just one more kind of bigger picture. You've done a lot of heavy lifting over the last 12 months, whether it be facility integration, shutting plants, Chatham obviously. If you were -- if you had the ability to snap your fingers and do one more thing tomorrow, what's left? What would it be, and what could we potentially, as we're thinking about 2012, 2013, see? What will we see as far as major changes in the business?

Daniel Ustian

Well, 2 things. We've got to make this global. We've got to make that work now. We've got the product in place. The distribution is 75% in place. We got to capitalize on that next year. I think the other thing, Brian, that we still -- is a little bit unsettling is Mexico. And while we've been fine with that, we have a great place there, the political environment there worries us. So we have the ability to move production around. That's the neatness of our strategy here is, but we're going to be thinking through that. We've got a lot of product that's made in Mexico today. And I can say the quality is fantastic, the plant is as good as we've got, but the political environment worries us still. So we'll have to keep thinking about that as we go forward.

Operator

We'll take our next question from David Leiker with Robert W. Baird.

Joseph Vruwink - Robert W. Baird & Co. Incorporated

This is Joe Vruwink on the line with -- for David. I just want to try to get a sense of what's your underlying truck profitability is. And I know this is a very nuanced item, but if I look last quarter and you did around a 4% manufacturing profit margin; I look this quarter, you had a little less Military business and I'm wondering if maybe your customer mix stayed the same with fleets more in the mix than dealers. But is this still essentially a 4% to 5% type margin business and it was just supplier issues that kind of brought it down to the 2% level this quarter?

Daniel Ustian

Well, I think the end of that probably is correct that we were certainly stressed by the extra cost related to the supplier constraints. But what we've said, Joe, is that all of our businesses need to make 10%. We got a plan in place. When the industry is at -- Heather, I'm thinking 330,000 or 340,000 that the trucking industry would be at 330,000 or 340,000 industry, that our Truck business in North America would be at that 10% level. We're not at that point yet, but we can say we've got a clear path to anything less than that, and that's what we keep working on. But I think it's been stressed in the third quarter. You'll see an improvement in the fourth quarter, clearly, on the Truck business side as well.

Joseph Vruwink - Robert W. Baird & Co. Incorporated

Okay, that's helpful.

Daniel Ustian

But you can see -- you can get margin better in the fourth quarter probably in all the businesses.

Joseph Vruwink - Robert W. Baird & Co. Incorporated

Okay, great. As I look at the net corporate expense item and that moving down by about $100 million, I understand that financial services should be pretty strong and that contributes to that. And then am I -- I don't know if I'm understanding this correctly, but with the incentive comp that you accrue, given the profit at your segments, can I read in that maybe Engine is a little below plan, not hitting that $100 million target and so you're going to accrue less incentive comp in that segment and that kind of helps move that corporate expense item lower?

Daniel Ustian

Yes, Eric is over here. He's worrying about this conversation. That is how it works. That's why he's hustling to try to get it back to the number that's his commitment for the year. But what we said on that was, he is likely going to be -- miss his target of 90-ish because of the prior year warranty that we had in the second quarter. But that's his goal, to keep going after that number, and we think he'll get close to it, but it won't get all the way there.

Joseph Vruwink - Robert W. Baird & Co. Incorporated

Okay, good. And then just one last one for me. I understand that the cash taxes are going to be lower. A.J., I'm wondering what the kind of tax rate might look like on the P&L though?

Andrew Cederoth

We'll use approximately a 30% GAAP tax rate, but our -- but it's important to remember that our cash taxes will continue to be in the 10% to 12% range, just like they were this year. So cash flow was unchanged.

Operator

We'll take our next question from J. B. Groh with D.A. Davidson.

J. B. Groh - D.A. Davidson & Co.

I just had a couple of follow-ups on the charges. It looks like the Chatham, the Monaco total amounts are a little smaller than the original press release. Can you kind of square that up in terms of what changed?

Andrew Cederoth

The impairment and Workhorse in Monaco came in -- once we did a fair value analysis -- when we did the press release, we didn't have all the final information. So once we did a fair value of all the assets and the potential of the business, that impairment came in a little bit lower than we expected.

J. B. Groh - D.A. Davidson & Co.

Okay. So the difference is just accounting, not opportunity?

Andrew Cederoth

No, it's just accounting.

Daniel Ustian

Here's what I would say. We do have some that is still going to trickle in too..

Andrew Cederoth

Okay. Not all -- I think Dan's point is not all the costs are in the third quarter.

J. B. Groh - D.A. Davidson & Co.

Right, right. That's understood. It looks like you've got like 19 -- roughly 20 to 70 remaining that's in Q4 and maybe into 2012, as you said, correct?

Andrew Cederoth

That's correct.

J. B. Groh - D.A. Davidson & Co.

Okay. And then I just want to talk -- maybe you could address sort of the seasonality. I mean, obviously, this year highly back-end loaded. I guess part of that's Military. But looking into 2012, is there any expectation, at this point, whether it would be a little bit smoother on a quarter-to-quarter basis? Or is that just sort of the dynamics of your business that you've got always sort of a back-end loaded figure?

Daniel Ustian

Yes, barring any major change in the economy, we are back-end loaded. And there's less -- there are downtime in the first quarter, with Christmas and Thanksgiving. There are less operating days. It's seasonal for our customers as well. So we're going to be -- unless there's something -- one year, we had a Military business that was strong in the first quarter and weaker in the end of the year. But other than those things, I think we're going to see first part of the year is lower than the back part. We're going to be back-end loaded.

Operator

And ladies and gentlemen, that is all the time that we have for questions. I'd like to turn the conference back over to our speakers for any additional or closing comments.

Heather Kos

Okay. I just want to thank everybody for today and your participation. I also have 2 questions that I have outstanding that I want to give the answers onto now in the webcast.

The first is, what were the GDP assumptions in 2012? And that is 2.4%. So that's the GDP assumption in our 2012 industry standard. The other thing too is we're still assuming that replacement demand is the major factor going into 2012.

The other open item was Military. How much of the Military revenue in 2011 is foreign Military sales? And that is -- we anticipate Military sales having about 12% foreign revenue sources for this year.

So with that, if you have any questions, please call myself and Randy Diaz for follow up, and we'll get back to you as quickly as we can. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude today's conference call. We'd like to thank you all for your participation.

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