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Navistar International (NYSE:NAV)

Q2 2012 Earnings Call

June 07, 2012 9:00 am ET

Executives

Heather Kos - Vice President of Investor Relations

Andrew J. Cederoth - Chief Financial Officer and Executive Vice President

Daniel C. Ustian - Chairman, 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

John J. Allen - President of North America Truck

Archie Massicotte - President

Eric Tech - Director and President of Engine Group - Navistar

Troy A. Clarke - President of Asia Pacific & Strategic Initiatives and President of Truck & Engine

Analysts

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

Henry Kirn - UBS Investment Bank, Research Division

Timothy J. Denoyer - Wolfe Trahan & Co.

Patrick Nolan - Deutsche Bank AG, Research Division

Jerry Revich - Goldman Sachs Group Inc., Research Division

Robert Wertheimer - Vertical Research Partners Inc.

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

Andy Kaplowitz - Barclays Capital, Research Division

Seth Weber - RBC Capital Markets, LLC, Research Division

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Operator

Good morning, and welcome, everyone, to the Navistar International Corporation Second Quarter Earnings Release. Today's call is being recorded. For opening remarks and introductions, I would like to turn the program over to Vice President of Investor Relations, Heather Kos. Please go ahead.

Heather Kos

Thank you for joining us today. Before we begin, I'd like to cover a few items. A copy of the 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 other cautionary note disclaimers presented in today's material for more information on the subject.

And now I'd like to introduce A.J. Cederoth, Executive Vice President and CFO.

Andrew J. Cederoth

Good morning. Following up on the format we used on our first quarter call, I will walk you through the actual results; put these into context because there's been some significant adjustments to our estimates. Dan will then step in and outline the path forward for the remainder of 2012, particularly our expectations for improved results in the second half.

Again, consistent with our presentation for the first quarter, our traditional slides that illustrate year-over-year comparisons are included in the Appendix for your reference.

Starting on Page 5, illustrated here is a non-GAAP presentation side-by-side to the GAAP presentation of income. We did this to pull off a sizable impact of warranty charges and changes in tax rate in order to put the results of the business for Q2 in a more understandable context. This highlights a small segment profit for the quarter of $7 million.

Page 6 then takes our segment profit of $7 million and separates this further in some approximated results. From this, you can see that our core business for Truck and Parts performed better than the total would indicate. This was despite some overhang from quality and some market uncertainty that impacted our market share. But it's important to remember that our -- that for our core businesses in Truck and buses, the second half of the year is historically stronger than the first half. We expect this trend to continue for 2012. This phenomenon is also true in our export business and our South American engine business. There is a certain amount of what we call seasonality of demand that favors the second half.

The second takeaway from this is the performance of our global business in Defense. In Defense, similar to last year, the majority of our revenue occurs in the fourth quarter, but we have seen some softening in defense-related spending and we have seen some schedules reduced due to budget cuts. As a result, we have modified our full year expectation for military revenue. Dan will cover this in greater detail as he previews the second half. But despite a slow start to the year, we continue to view the Military business as a business capable of delivering 10% segment profitability.

We are also experiencing some softening in our global markets, particularly India and Brazil. Recall, Brazil is going through an emissions change and in 2011 the entire industry produced in anticipation of a prebuy. What happened is that the prebuy demand was lower than expected plus the economy has softened. As a result, the industry has too much inventory, thus demand for 2012 vehicles is lower than expected until the market absorbs the excess 2011 inventory. This not only impacts our Truck business, but it impacts MWM as well. Its customers, like MAN and Volvo, have reduced their schedules. As we have seen in the past, the Brazilian economy changes quickly. As rapidly as things slow, things can recover. We remain optimistic around the second half recovery in Brazil.

Similarly, the market in India is weaker than expected as growth has slowed, and thus our business over there continues to operate at low volume. I like our strategy in India. We have a strong partner and a good product. But our business needs volume to become more cost-effective, and our volumes are lower than we anticipated.

Finally, we continue to make investments in our niche businesses to expand our revenue base and improve our cost structure. We talked about this in the first quarter relative to our foundry, which are now operating more efficiently and excess logistics costs have been eliminated. We continue to consolidate operations within our Truck business as we work to optimize our manufacturing footprint and our cost structure. We expect to begin to realize some of these benefits in the second half of 2012.

Clearly, there has been a lot of moving pieces and activity during the first half of the year. Some of this is seasonal but most of it, we believe, is behind us. Moving forward, we expect volume to recover in all of our markets and our performance to improve.

Turning to Page 7. Given all the puts and takes needed to develop a comparable set of figures, I wanted to take one moment to reconcile all of this back to the data presented in our financial statements. I won't go through this line-by-line, but we've highlighted the significant differences between the segment profit of $7 million and our GAAP statements. I will discuss warranty in greater detail in just a moment but as you can see here, a sizable release of additional tax reserves. This is the output of restructuring our business in Canada and shifting our manufacturing operations back to the U.S.

If you turn to Page 8, I'd like to put some context around the additional warranty reserve we recorded this quarter. We have detailed the element of the accounting charge and again, it's important to remember that this is an estimate of future lifetime costs. It is not a current-period cash item. Warranty spending in the quarter only increased by $6 million. When we discussed this on the first quarter call, I know we indicated that we felt the worst of this situation was behind us. Our belief at that time was primarily driven by the trends we were seeing. As you can see from the chart on the left side of the page, the data on spending was actually improving in February and March. Unfortunately, this trend reversed itself in April. Again, we see some improvement in May, and we remain confident that we are putting a quality product in the marketplace.

I want to point out the chart in the lower right of the page. This data shows the repair frequency of the big bore engines at 3 months in service. As you can see, which each subsequent quarter, the data is improving. Not illustrated here is that we expect this trend to continue past 90 days, but we will need more data in order to put a proof behind that premise. So I will not speculate on when we will be able to potentially reduce the reserve for warranty, but the early trends are favorable.

Moving onto manufacturing cash. As you can see, we closed the quarter with $681 million of cash. Honestly I expected this to be higher, but a couple of factors impacted cash in the quarter beyond the financial results, primarily working capital. As we discussed earlier, the economic conditions in Brazil have delayed the growth of volumes. This has delayed the turnover of inventory into receivables, and ultimately into cash. Second, our used truck inventory has grown. While this creates a profit opportunity and the used truck values remain healthy, temporarily it is tying up some cash. So working capital is a little higher here seasonally, but we expect this to improve as the year progresses. Finally, our outlook on cash for the remainder of the year has been adjusted to reflect lower incomes as you can see here.

So those are the major items for the quarter. I'll stop here and let Dan put the remainder of the year into context.

Daniel C. Ustian

Thanks, A.J. What I'd like to talk about is how do we take the first half unacceptable results into -- back on track for a strong second half and position us for 2013 and beyond. You can see from chart -- on Chart 10, our estimates for the second half ranges from $575 million to $725 million segment profit, and that's -- I'm talking now about how we are able to achieve that success, but we need to start with a couple higher-level points to make, and A.J. talked about the first one already, and that's warranty. Early-in production failures have caused our warranty expense accrual to go up, and A.J. talked about that chart. He also talked about we believe we have the actions in place so that ongoing production at least for the last year is in accord with a much lower warranty.

If you'll look at the chart on 11, this is our other engine family at the bottom of it. So draw a line underneath the Q1 rate and this is the other 2 engines using the same technologies that we have, somewhat different suppliers, but mostly the same suppliers, somewhat different suppliers. You can see the trend on that has been flat all the way to the process here from the launch of 2010 product to today. So on our DT and our MaxxForce 7 products, we have had no issues with those. In fact, we're very confident in those.

The other side, at the forefront, of course, is the emissions. A lot of noise and speculation out there on this path and we have to get that behind us. We have submitted, as we spoke to you before, about an application for certification on our Class 8 engine family and we are continuing to work with the EPA on that. EPA is, for those of you that follow us, also has an NCP rule that they are finalizing. Frankly, we don't want to use that. We want to get our 0.2 certification behind us and not use the NCP, but that is a backup that the EPA is working on.

On the other hand, we are also getting ready. As soon as that certification is approved, we can go to instant production within 30 days. So we have all the mechanisms in place to respond quickly once we get that certification approved.

Now let's look over to Slide 12 and this talks about market share. And as you can see from Slide 12, our market share from year-to-year was flat. We should be higher than this, as A.J. pointed out, based on the performance of our products, the fuel economy of our products, the features that are in the products. We should be higher than this and some of this, we believe, is with the speculation on the emissions certification. You can see on the school bus, we anticipate this growing, really should be unrelated to -- actually, school bus and medium truck should be totally unrelated to emissions. But we do think there is opportunity for us to go beyond what we already have in that 48% on school bus up to as high as 55%, 58% in the second half. And on medium truck, we've been at 36% and we think we can go up to 38%, maybe even a little bit higher in the second half.

We've been flat. In spite of this speculation, we've been flat on the Class 8 business, 18%, 19%. And as soon as this gets behind us, we certainly expect this to grow to at least 20%, 22% and the ongoing rate even more than that. The performance of this product has been outstanding as well as fuel economy. And the longer it gets in the field, the better chances we have of improving our position in the Class 8 marketplace.

So if we turn to Slide 13, maybe we step back and look at where we think the industry is going. And if you remember, we have been at 300,000 to 310,000 as an industry for 2012 for quite some time now and we believe that's exactly where it's going to come out again for this year. What the chart shows is a rolling 12-month average of retail. And what we believe will happen is it's been increasing now for the last couple of years, and we believe the second half of the year will flatten out. It won't go down, it will flatten out. So the increase has gone up at a pretty strong rate over the last couple of years and it's going to be flat in the second half. And at that rate, the first half was at 323,000 or thereabouts, it'll be probably a little bit less than that perhaps in the second half, but we think that rate will at least continue into 2013. So the rate of 325,000 is certainly within the realm of the industry for 2013. For 2012, 300,000 to 310,000 is about where we think. If you compare this at the bottom of the page to what ACT says, they actually -- and this is only Class 8, they actually think that it's more than that, so we have been pretty accurate on our estimates over the last several years. So we feel pretty strong about this is where the market is going to be going. Obviously, the economy could change the future of this but based on what we see today, we feel confident that that's where the market will be over the next 18 months.

Our real success for the second half in positioning for us in 2013 is about margin, though. You can see this 4-panel chart at the top is the total overall market share that I've just spoke to. But the real key is taking costs out and improving margins. So in our integration of our facility here, bringing product development together with the support groups, we have said we would take $60 million out in the second half. We are a little bit ahead of that. We would be at a run rate of $100 million coming out of SG&A and product development going forward. In addition to that, some of the SG&A will actually filter into the Truck businesses and the Engine business, and so there's even more cost reductions related to that integration built into the Truck and the Engine process going forward.

If we look at the bottom left-hand panel, this is what we expect margins to improve on truck, and it's related to -- somewhat related to pricing in that we put our price increase in January, but it really doesn't come into effect until orders we receive after that. So the orders we had before that, and of course, due to first half of this year, most of those would be at the prior price. Orders going forward would be at the higher price. We also have identified and implementing cost-reduction programs of $1,200 to $1,500 per truck, depending on the model. And the summation of those is 3% to 4% improvement in margins in the second half of the year on North American trucks.

On the Engine side, as we have spoke to, the first half of the year we invested in our foundry and in changing some of our supply base. And in the second half of the year, we're going to get by the end of the year $1,400 per unit reduction in our big bore costs and similar cost reductions on our smaller engines as well.

So now if we look at Slide 15, let's talk about Defense for a minute. As A.J. pointed out, we have had a -- we've been stressed on the budget as everyone has known for quite some time now. We did actually have some order cuts from us recently that would say that our full year will be about $1.1 billion revenue for the year. And it's probably not too many risks or too many opportunities to that. That's kind of where we see, we think, we will be. As we look at that going forward, assuming the budgets are at the constrained levels that we see them today and you might argue that they will increase but based on what we see today, we have a path for $1 billion in that business. And then if you look at the right-hand side of this page, this is how we get more than that, and there are several major programs that we're bidding on now, some shorter-term, some longer-term. If you look at the top right-hand corner of this panel, you'll see, it looks like a pickup truck there, that's a SOCOM product. It's a high-mobility off-road product that we're bidding on where volumes just beginning of next year, so relatively soon. If you look at the -- down below that, there's a vehicle for Canada. It's off of our MXP family. It's sitting right next to the MRAP there on the left of the MRAP. That's for Canada and for Saudi that we're bidding on. And again, those are relatively soon type of awards. At the bottom right-hand corner, this is a product that we're bidding on for Canada and it's called our SMP. So these are things in the relatively immediate future over the next 12 months that we could see some breakthroughs in terms of volumes above $1 billion. Of course the big one is JLTV, and as most of you that have followed us know, this is a program that's probably 2 to 3 years away yet, but it's one that they will decide on the finalist over the next few months. And of course, we expect to be included in that on a much larger scale on a long-term basis.

So now let's move over to Slide 16 and let's talk about the global business. And A.J. pointed out that in India, and these are just some statistics on what their economy is, and of course he mentioned India. The expectation was 8% growth and it's more like 5%. Obviously it's still strong, but it's not at the rate that many, including us, had anticipated. In Brazil, A.J. also highlighted that this is an adjustment for inventories that -- out there in the first half of the year, so we believe that Brazil will recover and these are forecasts from Moody's on what the second half and the forward years would be. And then of course, there's Russia. And in China, it remains strong in spite of what sometimes we hear. 8% is a strong indication of continued growth in China. We have recently approved, actually in the last week, our joint venture for engines in China has been approved, and of course we'll be able to capitalize on that into 2013 and beyond. And it's also a prelude to our potential JV with JAC on the truck side. But that's the backup for the global business.

I want you to keep in mind, as we look to Slide 17, what we've said for the global business is 2 years ago was investment period, last year was a breakeven, this year we'll be profitable. And that's exactly where we're still at and in spite of some of the reductions in the global economies, we're still at profits, it will be second half loaded. You can see the volumes that we have on here. This excludes India, so these volumes are volumes in Latin America, South America, Australia, rest of the world. And we shipped 5,600 units in the first half and we have a path to 9,300 units in the second half which, together with cost reductions, will improve the global business by $60 million or more first half to second half.

Now let's talk about Parts. As we know, a big part of our strategy, especially on integrated strategy, is to have Parts growth. And if you look at Chart 18, it shows that -- 2 things here. From the first quarter of 2011 to 2012, that's a 6% increase. And frankly, we would have expected a little bit more than that. As you all know, the weather has been mild, the winter has been mild and certainly that's affected all parts for the industry in the first half of 2012. In spite of that, we've had a 6% increase with that. We expect the second half to be a 16% increase, and that's not without a background that we've been able to do that in the past. So we still feel strong about our Parts business and its growth, and we'll talk more about that as we go to organization later in the discussion.

So if I can summarize on Page 19. Let's try to help you identify how we're going to get to a $700 million second half of the year. And let's take some things -- start with some things that we have said in the past that are still consistent and let's start with global.

So in global, we made investments in the first half that we talked about, softening of the market and the global business with $10 million loss. We've said that that'll be profitable for the full year. So you can take the numbers we had there. We said it'd be better by $60 million in the second half.

On the Defense side of the business, we've said we have a business that makes at least 10%, and that's true to course again this year. So without giving you numbers, we have $1.1 billion of revenue for the year and we've said we have at least 10% margins on that.

On the other side, these are our niche businesses. So we made investments in consolidation in many of these businesses: mixers, chassis, RVs and we started up Alabama plant. What we've said is those will go away in the second half. Those investments are made. We're ready to reap the benefits of those. So in addition to those going away, we expect at least another $20 million in improvements coming from those investments that we made for the second half of the year. For the balance of the improvements that are coming from Trucks and Engines and if you look at the margin improvement on Truck, we've said that's 3% to 4%. So take what we've had in the first half and 3% to 4% improvement on our Truck business in the second half. And we've said on the Engine side, we have $1,000 to $1,400 improvement in our cost structure on that. And I think if you go through that, you can see how close to $700 million segment profit for the second half is doable.

If you look at the right-hand side of this page, let's summarize a little bit what we've talked about here for the full year now.

So the BRIC economies are softer. And so this is revenue differences from the original plan that we had in Brazil. On the Truck side, that would be about $200 million. On the Engine side it's also about $200 million, so the effects that we see on our own Trucks are carrying forward into the other commercial truck businesses, including pickups and smaller-sized trucks that we don't play in that we do provide engines for. In India, now this is in consolidation so the revenue won't show up, but we expect that $200 million reduction in our revenue versus the original plan on in India. In North America in Parts, slight difference in that the Defense that ties to the $1.1 billion we expect, so you can see our revenue will be lower for the year than originally planned.

If you go to Slide 20, let's talk about the middle box here, guidance for the second half. And we expect revenue to be about $8 billion. We've talked about segment profit ranges; that makes margins 7% to 8%. And adjusted income before tax, you can see the ranges we have that -- that are identified. And EPS, somewhere between $3 and $5 for the second half of the year.

Then let's turn to Slide 21 and put it in perspective to an ongoing rate here. I think if we take the second half as segment profits that we've targeted here, translate that to a full year, you'll get a $15 billion to $16 billion business at 300,000; segment of $1.2 billion to $1.4 billion; and EPS of somewhere $5 to $8 a share.

So now let's turn to Page 22 and this is what we said on the first quarter call, is our outgoing run rate for the businesses. We have targeted in our strategic objectives of a $20 billion business with 9% segment profit. This is how it breaks down by the businesses: Truck, global and Parts -- and Engine, I'm sorry. Trucks, Global and Engine. And you can see the outgoing rate, we are at the same level, maybe a little bit ahead, we believe, by the end of the year for the outgoing rate, which approaches what our strategic long-term targets are with opportunities, especially in global as we grow that business and mature.

So let's turn to Slide 23. I think it goes without saying that the start of this year has been a disappointment for us. The influences, some outsiders certainly there, but it's much to do about our own execution. And so, the second half is to get us back on track.

If you'll look at our strategic plan here, it's to be a $20 billion business with $1.8 billion of segment profit and that's at about 350,000 units. It's also to be profitable at all points in the cycle, take the cyclicality out and we do that with growth. As part of that strategy, a cornerstone of that strategy in the early front is to have our own engine in the Class 8 marketplace. Competitors have done this as well. They've chosen to do it over many, many years and they're still doing it. We thought the best process for us is to do it at once and we think the hard part of that is over. And our share has held, it need to gets better, but it has held over the last several quarters now.

So we believe the hard part is over now.

Let's look at Slide 24 and put this in perspective. What this slide shows, and it's a chart we've shown in the past, is the black line is the industry and the bars are the segment profit as it correlates to that industry. So if you look at back at 2003, it said that at 250,000 units or 270,000 units, we couldn't make any money on segment profit. And you can see at that same level last year, we made $880 million. We have got a trend on here that's consistent with the strategy and the plans that we've had. Now this year -- first part of this year, we're off of that. So what I'd like to do is just plot the last half of the year and going in 2013. So what we've said is the last half of the year at 300,000, that will be 1.2 plus running rate. So if you put 300,000, go across, plug in 1.2, that's the running rate that we believe we'll be at going into 2013.

So let me now change this topic here to how we're going to deliver on this. We have consolidated our product development and we've also consolidated the support for that product development into one place. We're sitting in it in Lisle and we believe now it's time to consolidate the businesses into one. So what we're doing on the consolidation of that is we're going to take Truck, we're going to take Engine and we're going to put -- and take Parts and roll them up into one. There's so much integration related to that, that we believe it's time to capitalize on that and execute. So we put an organization structure together, bent on execution, bent on leaders that have already been successful in various aspects of what they've done in their career, and let's start with Troy.

Troy Clarke joined us a couple of years back. He was president of North America with General Motors. Prior to that, he had built up a successful Asia Pacific business which falls flat. Really, that's what we brought him in for is to help us with our global strategy and he's certainly done that with us. He's very successful in building the General Motors Asia Pacific business and still successful today as perhaps many of you know. Troy's background, he's an engineer, but he's got an operations bent to him. And we're happy to have Troy be the President of our Truck and Engine business.

Next you'll see Jack Allen. Jack's been with us for his -- most of his career. He's got an engineering background as well. He's worked in sales and marketing. He ran our Engine business, a successful Engine business. He ran our Parts business and helped grow that Parts business and he's improved substantially the profits of North America. So Jack has also a record of success with us. The other thing we're adding to Jack's responsibility is Parts. So we're consolidating, put Parts in there. And the real thing with that is for the service side of it. I think our people have shown that they can grow this Parts business and with this strategy in place that we'll continue to do that. One of the things Jack brings is the service side of that with our customers to help them get good uptime on their equipment better than anyone else.

We all know Archie Massicotte and he's known as kind of the legend of our company, at least, in the Military business. But before that, Archie ran manufacturing for us for many years, both in Engines and in Truck. So we're asking Archie to have a dual role here: to keep -- continue to run our Defense business and also be in charge of our manufacturing.

So we have brought in a gal named Jan Allman. You can see on the right-hand side of this, there's Jan, and she came from the automotive sector. She worked at Ford. She was responsible for manufacturing in many of the Ford product lines. She also ran some engine manufacturing businesses. So Jan brings a great background of the automotive type thinking and processes and qualities, and I think with Archie helping her to a truck business here, that's a good match for us to improve in all aspects of manufacturing and quality.

And we also, many of you know Bob Walsh, so obviously we're going to count on Bob more and more to help Archie run both of these sectors.

Then there's Eric Tech. Eric joined us about 6 ago, he came from automotive as well. He's background is engineering. He has been running our Engine business and his particular successes have been growing the global business. And in South America today, we have $1 billion, $1.5 billion business -- a $1 billion to $1.5 billion business, over 150,000 units. And he's very successful as well. He has also been at the leadership of our feet first strategy of getting engines into our global businesses first. So we've got engines first into India. We got engines now into China which will help grow our Truck business. So with that, we're asking Eric to be our global business leader as well. So his background certainly fits that and his results also would dictate he'll be very successful at that.

And then finally, there's Ramin Younessi. And Ramin's been us about 5 years now. He came out of a competitor, I won't mention their name, but they're from Germany. He's been in the industry for 20 years now. People in the industry refer to him as Ramin and everybody knows who they're talking about. There's no one that knows product better than Ramin, although he declines he does. Ramin brings a plethora of background into product development. But we're also adding to Ramin's role purchasing and quality because really, the design of the product and the integration of that with our supply base is important. So Ramin has taken over those functions as well to help us drive costs and quality into all of our products.

So with that, Heather, maybe we'll turn it over to questions.

Heather Kos

Operator, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Stephen Volkmann with Jefferies.

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

I'm not sure where to start. I guess the question is -- we'll start with the EPA engine certification. You said in your Q that you resubmitted that, I think, in May. Do we have any idea, I guess, what's the difference between what you submitted in February and what you submitted in May? And what are your views on when and if this thing gets approved and how much of that is kind of built into your second half forecast, which is just a massive sequential improvement?

Daniel C. Ustian

Yes, for sure, Steve. I think let's define what we did there. In working with the EPA, they asked us that there were some spots that they wanted us to modify and so we did that and we've been running tests on that to make sure that they meet all the requirements, not just the EPA, but our own requirements on performance, et cetera. And so we resubmitted that back to them and we're in the process now on working with them on getting that certified. So that's where that stands. Of course, it's hard for since it's somewhat out of our control to tell you exactly the timing of any of that. So I hope you can appreciate that. But that's the process that we're in right now.

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

The last time I guess we were talking about this, you said that it would be sort of 3 to 4 months for the approval process, so does that clock start again now in May?

Daniel C. Ustian

No, of course, not. Again, it's somewhat out of our control. But no, there's plenty of background out there now that it shouldn't take nearly as long. I mean I could argue we should have been done with this, but we're not. So we have to go forward and get it done expeditiously. We're all over the top of this every minute of every day as you can imagine. And so now, we're in that process. In terms of your second question, Steve, you asked what's the second half. I think it's got -- for us to achieve those goals, I think we got to have this approved in a reasonable time frame here. Not so much from the costs, it's just the aura, the -- I mean your question here affects us in the marketplace. So we have to get this behind us over the next short period of time and get that aura and speculation that you and others have out there and get that behind us. And that's -- in order for us to achieve the second half, that's got to happen.

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

So I guess that kind of begs the larger question, which is sort of you can't control what the EPA does, but you can control what you do. And I guess the simple question is how long do you, as CEO, let this thing go on? I mean you guys, are you losing market share? It's obviously starting to impact the core business, the warranties have been off the chart, so even what you got out there hasn't been working very well. There are other solutions to this problem that are fairly simple, and yet you guys just continue to kind of take these punches to the gut. And as CEO, I mean at some point, you have to decide how long this thing goes on.

Daniel C. Ustian

Well, we're not losing market share, Steve. We're not gaining any. And I think -- so we have to get this behind us and then we'll turn this around and get this stimulus going the other way. And that's what our target is, to have us distracted into something else is probably not conducive to the longer-term objectives.

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division

All right. Maybe just a quick follow-up for A.J. I mean at this point, I think we have to assume that I mean you guys have some, again, massive numbers in the second half. I think the credibility there is pretty close to 0. I mean if we assume that things continue the way they're going right now and you continue to burn cash, you guys are going to start to get pretty tight on your liquidity. And I guess how do we think about covenants and revolvers and kind of what's available and sort of how long this thing can go on before everything falls apart?

Andrew J. Cederoth

Okay. Well, let's kind of take those one at a time. And I think volume in the first half, we have been working through some quality issues and a little bit of uncertainty in the market. We have the ability, the quality issues are improving and customer satisfaction is improving. We monitor that very closely. So we expect those are the factors that'll drive higher volumes in the second half and allow us to sell product and be successful. We do not have any maintenance covenants. So our liquidity is presented on the page. We have 700 -- just short of $700 million right now and as volume continues to flow through the second half, that liquidity will remain sufficient. Of course, everything is contingent on volume. So we have to sell trucks and we expect to be able to do that. Recall that the majority of our volume and the profitability of our businesses are driven by medium and school buses and we expect both of those to recover in the second half, and those are impacted by this EPA issue. And our Parts business, look at the page that Dan showed you on what we did in our Parts business in the second half of last year and what we'll do in the second half of this year. And then of course, the other part of our business that will grow in the second half is our Military. So clearly, the second half has a lot of moving parts to it. They're not all contingent on the EPA. And so, that's why we remain confident in the forecast that we put out there.

Operator

And we'll take our next question from Henry Kirn with UBS.

Henry Kirn - UBS Investment Bank, Research Division

You're 1/3 of the way into the third quarter. Can you talk about whether the profitability trends have already shown any signs of improvement based on some of the changes you made? And then I know you can't give details, but maybe some direction on how much of the path to profitability relies on defense and EPA certification time line?

Daniel C. Ustian

Well, Henry, here's what I said. Say, third quarter will be obviously better than the first half. We're going to be -- we are a company that's back-end loaded every year and this will be no different. But third quarter, we will trend much better than in the first half of the year. If you look at the trends in terms of our orders, they continue to get a little bit better in terms of share. And so we're starting to fill in the rest of the year to get some confidence in being able to achieve the goals that are out there. But the fact's that we need to get this certification behind us. I don't think there's any question about that, so you can quit asking these questions and we'll have good answers for you. And that's #1 objective right next to getting the vehicles repaired from early production and get the warranty passes as well.

Henry Kirn - UBS Investment Bank, Research Division

And as a follow-up, what have the customers been telling you about the importance of EPA certification in the purchase decision? Has the lack of EPA certification impacted your ability to get price? And do you have any view on how much demand is waiting for your trucks as soon as certification is achieved?

John J. Allen

Henry, this is Jack Allen. The way I would answer that is the customers that we're doing business with today, they like the performance of the vehicles. They like the fuel economy. We're dealing with these dances with the early quality issues from our build. These customers are really -- they're indifferent about the 0.2 certification. But we're not satisfied with our market share. We want to grow back to where our historical levels are. And clearly, the overhang of the EPA emissions is challenging us from being able to get back into a number of customers that we've traditionally done very well with.

Operator

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

Timothy J. Denoyer - Wolfe Trahan & Co.

A quick question on medium duty. One of your public comments recently said that the medium duty credits might be running out sometime in fiscal '13. Can you talk about that, just the strategy for additional EPA certification filings on the medium-duty engine line? And is something like solid-state SCR still possible for that? I mean there have been reports that's it doesn't work that quite well in heavy duty, but is this still medium-duty option?

Daniel C. Ustian

Yes. Henry, I think what's submitted on the -- Tim, what's submitted on that is an estimate of where we are today versus when we might have the credits run out there. They're into next year. In some cases, they're out many more years. We'll continue to work on lowering that to give us more time than that. But at the same time, we're making our engines capable of meeting that 0.2 in the timing that we need. As far as EGNR, it is definitely a technology that can work and it can work on our own products. I would be remiss to say that we'll use it on that in the short-term not because of technical things, it's just marketing influences, so we're going to have to measure that on a longer-term basis, but not likely over the next year when we bring that to production. It is still a great technology and it's closed looped, so it runs all the time. So it meets emissions all the time, probably only system in the world that does that. So it's got a big value to us going forward, but probably not the next year, Tim.

Timothy J. Denoyer - Wolfe Trahan & Co.

Yes, okay. And then sort of a bigger picture, Dan, is it fair to view the organizational changes today as the beginning of a succession?

Daniel C. Ustian

Well, clearly, I think, Tim, what we would say to that is there are a bunch of old guys like me and Jack and Archie and Troy is old, too. So if you look through the rest of that chart and maybe down underneath that chart, you're going to see many people that are in their 40s or early 40s to mid-40s that now have got the experience. And the Archies of the world and the Jacks of the world have helped them develop and now they're ready for the next step. And I think that's the case with Eric, with A.J., with Ramin. There's another gentleman that you'll know more about, Persio. We have Bill Osborne on there. We have Jan. So it is, indeed, and you could some succession throughout the company is in our thought process. So I think the answer to that, at a high level, Tim, is yes.

Operator

And we'll go next to Patrick Nolan with Deutsche Bank.

Patrick Nolan - Deutsche Bank AG, Research Division

A couple of follow-ups on the EPA certification. It looks like you excluded the noncompliant penalties in the Q2 results. Is that the case in the full year guidance as well?

Andrew J. Cederoth

Yes, we -- that's in the Reg G reconciliation. We did that so that you could really step back and see the performance of the business without kind of these extenuating circumstances on it. But that data is included in the back.

Daniel C. Ustian

Pat, maybe let me add to that. We've also excluded anything that we might bring back on warranty. So you could kind of get an ongoing business look at that. So if we get the EPA accomplished here shortly, of course, that number will be very small. And if not, it's $30 million, $40 million for the whole year I think is the rest of it. If you don't get any approved at all and we have to use NCPs, the number is $30 million, $40 million. And that's not in it, but there's also no recovery in it for warranty, which we do expect. But it's hard to put a number on it right now.

Patrick Nolan - Deutsche Bank AG, Research Division

And Dan, based on your comments, it seems like the backup plan as of now would be to just continue paying noncompliant penalties. You're not starting to think about your alternatives, be it adapting another company's liquid SCR, be it bring in other engines, be it using solid SCR. None of those you're even going down the road as kind a backup plan to start thinking about what to do?

Daniel C. Ustian

Yes, Pat, I'd just make one comment to that. I'd say that -- those are the kinds of things I think we need to keep for ourselves except for this. We're going to have our own engines, I think, and our Class 8 products are going to be our own engine family, so we should just think -- don't think of that happening now. Should we look at other avenues on our long-term basis? We always do that. But now you're talking about things that are kind of privy to our company and we'd rather not get into any of those.

Patrick Nolan - Deutsche Bank AG, Research Division

Got it. The $1 billion in Military revenue that you see kind of locked in going forward, how do you see that breaking out between Truck and Parts?

Daniel C. Ustian

Yes, let me -- a lot of that is services and Parts. I mean there's a lot of services that we're providing right now. But there's also a product that we're supplying into other foreign governments, not just U.S. So we are under contract with Canada as well as we're doing some work in Saudi Arabia right now. So as we look in the future, a lot of that is predicated on a lot of overseas spending in other governments.

Patrick Nolan - Deutsche Bank AG, Research Division

And just last one last one for A.J. Could you refresh us what do you believe is the minimum manufacturing cash level?

Andrew J. Cederoth

I don't know that we've talked about a minimum manufacturing cash level. I mean, you've seen the cyclicality, or I'll say really the seasonality of our cash from the end of the year to the low point can move as much as $500 million in the year.

Operator

And we'll take our next question from Jerry Revich with Goldman Sachs.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Archie, can you talk about which programs were impacted by the budget cuts this year and just update us on how much of this year's sales are on the rolling chassis upgrade and how much of that program do you have in fiscal '13?

Archie Massicotte

Yes. The budget cuts that we got impacted by was primarily on the FMS side where we are supplying some of the cargo trucks, the variants and other variants into the Afghan National Police and security forces where they have cut back on some of that procurement. That's where we've seen the biggest impact on the schedule reductions. On the rolling chassis side, I mean, we're, every month we're building rolling chassis and now we're actually even doing the conversions in West Point where we're actually doing the integration of the body back on those chassis and then giving it back to the government. So again, if you look at the back end of the quarter is where Dan indicated where a lot of our revenues coming from are on those contracts.

Daniel C. Ustian

Your second question is how much of that business continues?

Archie Massicotte

Well, I mean that contract it goes well into '13. And I believe there's another 1,300 to 1,400 units to go into '13 that's built into our plan.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Okay. And so if we're thinking about $600 million of that platform in fiscal '12, 213, is that the way to frame it?

Archie Massicotte

In a ballpark, yes.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Okay. And Dan, can you just talk about the plan for higher production rates on the Truck side in the back half of the year and reconcile that with the order trends we saw in the second fiscal quarter? I think shipments outpaced orders by about 10%, but we're talking about production levels picking up from here. Can you just say more about is that inventory build or what are the underlying assumptions?

John J. Allen

Well, our forecast for the second half of the year from a production standpoint really only calls for slight increases on what our production levels are, mainly because you have the industry flattening out, but we have a positive trend on share growth in both medium duty and the expectation that we're going to do better on heavy. The last 3 or 4 months of order intake on both medium and heavy for us, albeit the industry wasn't as stellar as we would like but from a share standpoint, our incoming orders are greater than what our current retail market share is in the second quarter. So that's what gives us the confidence for going into the second half of the year.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Yes, appreciate the color, Jack, but on Slide 13 very good talking about for the industry as a whole, orders and production rates coming down over the course of the year and even if you do pick up some shares, it's going to tough to deliver the type of production growth that you have outlined on the Appendix slide for the base business. Just wondering if you could say more about what's the underlying inventory assumptions are or the other drivers and so I'm looking at Slide 28.

John J. Allen

Well, let us grab Slide 28 then.

Daniel C. Ustian

Jerry, I don't know that in our production rate itself that, that is much changed at all. So maybe we need to understand the question better.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Yes, so Dan, on Slide 28, you're showing charge-outs rising from roughly 28,000 units in 2Q to about 43,000 in 4Q.

Daniel C. Ustian

Yes, so maybe we'll get into more detail on it. But we have no down phase in the fourth quarter. If you look at the blue, I think you're looking at the blue section in there, the global growth, but North America and because of more days of production, that will grow because of that, but the rate's really not much different.

John J. Allen

Right. And our exports, similar to last year, will have much stronger export volume in the fourth quarter than we've certainly had in the first half. So that's also a contributing factor to that growth in volume. We, again, Page 28 is worldwide charge-outs and that includes not only trucks, but buses and export and our global business. So, we're kind of mixing the U.S. industry data with the global production outlook. So I think Page 13 reflects our point of view on the U.S. market.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Okay. And lastly, I'm not sure if Eric's on the call. Can Eric or someone talk about what the back half of the year margin targets for the Engine segment are assumed for the warranty to sales accrual rates, and how should we think about that heading into '13?

Eric Tech

Yes, this is Eric. In the back half of the year, we're continuing and we're making some very good progress on our cost reduction -- material cost reduction goals for all of our engines, but especially in our big bore, and that's really driven by the scale and the volume that we've achieved as well as bringing the castings here to North America from Brazil where we're able to improve our margins there. As far as our accrual rates go, as the warranty improves and we saw some of the trends in the deck, we'll be able to improve the accrual rates on a CPU basis. So we're very confident in our margin goals for all of our engines where we have a lot of focus on our heavy duty as you can imagine as it's a major contributor to our overall profitability.

Operator

And we'll take our next question from Robert Wertheimer with Vertical Research Partners.

Robert Wertheimer - Vertical Research Partners Inc.

I have 2 questions. One is I mean you mentioned you're not gaining share, you're not losing a lot, but there's been some commercial impact from the 0.2. Your margins, even stripping out the warranty and other stuff, are not great the quarter. Have you lost several points of pricing due to this? Has there been sort of a damage that will take you months or quarters to recoup or is there -- is that not the case?

Daniel C. Ustian

We'll have Jack here, Rob.

John J. Allen

From a pricing standpoint, the answer is no. I mean that's not the issue that we have right now. It's really when what you're looking at here is really an impact of mix in our business. And from a different model, there's less medium, there's less bus. The growth in the industry that we've seen in 2012 is primarily on the heavy side and it is primarily with a number of large customers. So it's really what you're looking at is more a mixed phenomenon than anything else.

Robert Wertheimer - Vertical Research Partners Inc.

I guess without the SCR module, you're saving thousands per truck, so it seems as though you ought to be able to make better profits on that if there's not a lot of discounting going on?

Daniel C. Ustian

Yes, Rob, I think that's correct. And I think all of the cost structure to get that in place is in the second half of the year. And so we're getting the scale of that in our engine families and the scale of that on our vehicles. So we're able to capture that in the 3% to 4% margin improvement for the second half.

Robert Wertheimer - Vertical Research Partners Inc.

Okay. And if I can ask just -- sorry.

Daniel C. Ustian

Your point's still right.

Robert Wertheimer - Vertical Research Partners Inc.

Okay. A second question, I know these numbers are pretty small, and the actual cost overrun on the warranty side and I think you mentioned $6 million. But you had done a pretty good job, I think, of explaining how it was contained to third shift on a certain, I think, it was a coding and then on a certain calibrations and geographies. Was there a different issue that popped up or was it just a new population of trucks that popped up with the same issues that you didn't realize was out there?

Daniel C. Ustian

It's the same thing. It's just when we go out and be aggressive on repairing these, that'll increase the trend rate and the accounting of that has to be accorded -- recorded appropriately as to what that trend is, which then tell us we think we're going to get some of this back. As we repair all the vehicles, it will start coming back. But we said it would be coming back the last time, so we're not counting on that in our results. But certainly, we believe that this will come down over time. The other thing that happens to us is in the -- what we're recording in the reserve for warranty, comes down on new vehicles when you prove that this is at this lower level as well. So we booked, as you noticed on this page, $21 million or something for vehicles that were signed on extended warranty packages out there that are really several years still to be complete on it. So as we prove that these are behind us, that should come down as well.

Andrew J. Cederoth

Right. I think just to build on what Dan is saying there is that with the charts that we showed that illustrates that our 90-day in service quality is improving, as we accumulate more data on the newer engines, we're able to rely more heavily on that data. Absent that data, we rely on the engines that are already in service. So as the newer engines mature, that improvement will influence the accrual going forward.

Operator

And we'll go next to Ann Duignan with JPMorgan.

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

Dan, could you tell us if your engine strategy is on the agenda for discussion at your next board meeting?

Daniel C. Ustian

All our products are always on our agenda, Ann, so...

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

Yes. I just I guess I'm just echoing what Steve Volkmann said earlier. Then, a separate question. I know you like to show the charts with the 350,000-unit market and you can generate $1.8 billion in manufacturing profits. But you are telling us in this release that you don't anticipate the market getting to 350,000, probably not this cycle. If you're not going to get there next year, it's highly unlikely we'll get there the year after. So why bother showing that chart anymore?

Daniel C. Ustian

Okay, so -- fair enough, Ann. But what we have tried to show you is that at 300,000, we'll be at the 8% to 9% segment profit rate and that's going into 2013. And we've said that next year, we expect the market to be 325,000 to 345,000, which is on the low side of what some others feel it should be. So I don't think it's too far out of the range of being on that for 2013, in fact, going out of 2012.

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

Right. But it looks like we're not going to get to 350,000 this cycle, so kind of irrelevant.

Daniel C. Ustian

I don't know if that's true or not.

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

Just on a separate note, can you talk about the lawsuit that the industry has filed against the EPA, claiming that the nonconforming penalties are not sufficiently punitive and what the outcome of that could be?

Daniel C. Ustian

I don't know if that -- the suit was that they had on order that they felt didn't go through the process on granting NCPs and they've questioned that. At the same time -- so that was kind of an interim order, so at the same time, the EPA puts out and is working on a final order and they don't -- there's nothing that they can say about those. They protest at the interim and who knows where that'll come out. But the final one is up to the EPA. So I don't know. I think it's a moot point, to be honest with you.

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

Do you have any idea when the timing for the EPA ruling will be?

Daniel C. Ustian

No. I mean, I -- it's their normal process. It's one of those that we don't control on. But I know is they're in the process of completing that, so I would assume that it'll be at the same time or before any final ruling is from the court on whether the interim was legitimate or not. So I think it's really a mute point.

Operator

And we'll take our next question from Andy Kaplowitz with Barclays.

Andy Kaplowitz - Barclays Capital, Research Division

Dan or A.J., can you talk about so you changed your BRIC forecast in terms of revenue. How much of that was that like in places like Brazil, you're sort of still building out. You're the newcomer there, to some extent, on the truck side, and so how much of that is sort of being the newcomer versus the actual markets as we go forward here?

Troy A. Clarke

This is Troy Clarke on the -- with a response to your question. Actually, the majority of it from our analysis is, in fact, the headwinds that we face in the market with regards to the emission changes. Typically, when you enter a market like we did, there's-- the first couple of points a share come rather quickly because you're the new kid on the block and you have a really good proposition and certainly a name like International Truck has a good reputation in that market already, certainly with the -- and the backup of our MW, I mentioned, brand. But in our particular case, we lost right into this emission change. The market over built and although all the units are in the dealers' hands, then the dealers' orders for the industry have dropped off significantly while they're selling down their inventory. But we anticipate that that'll happen throughout the quarter and then we'll be, as the whole industry, we'll be selling Euro V a little bit later this year. One of the things that gives us confidence in the second half of the year that the volume will come back because of the Brazilian government, as you probably know, introduced about USD $8.8 billion worth of incentives into the market for vehicle purchases. They readjusted the FINAME rate, the financing mechanism upon which commercial vehicle purchases are made, to make sure that, that market -- and there's a lot of construction that's just taking place. So the Brazil thing is really the market conditions and we'll work through it as basically the rest of the industry down there is. The real key to South America for us, however, is really Latin America. Latin America has a strong seasonal influence in the second half of the year. And our deliveries were actually up in the Andean countries in Central America, that's the area we call Latin America, in the first half in our share with them. And so we anticipate that, that strong trend will continue to deliver. And our production schedules, those are mainly export products from North America, our production schedules comprehend those higher volumes in the second half of the year. I hope that got to your questions.

Andy Kaplowitz - Barclays Capital, Research Division

Yes, I think so, that's helpful. And Dan, maybe if I could ask Ann's question in a slightly different way. You got a $20 billion revenue sort of strategic target that you've talked about for a long time. Do you think -- and one of the things that I worry about is that there's just too many things that Navistar's trying to doing at once here. And would it be beneficial to the company to sort of back up and sort of retrench in a sense and focus on some of the things that really matter, maybe pulling out of markets or not building out as fast and maybe not having a $20 billion target and focusing more on profitability than that revenue goal?

Daniel C. Ustian

No, that's a fair question. I think the way we look at that is we're into the implementation stage, the execution stage of that. So if you look at our strategy of 1-2-3, so now all our products, if you look at the difficulty of what we're trying to accomplish, it's about the actions that we have to do. And so now the products are in place. A 1-2-3 meaning commonality between the products, between even the countries and those things are behind us now. Now it's the matter of the marketplace. So what this reorganization structure will do for us is let us focus on the execution of those and get those things accomplished of all the work that we've put in place. So I think that's what we have to prove for the rest of the year.

Andy Kaplowitz - Barclays Capital, Research Division

Dan, how great a distraction is this certification process on you and the senior management? I imagine it's quite big.

Daniel C. Ustian

I don't have -- there's no question about that. It's a distraction for the senior management, myself and others. And so, Andy, that's why we are focused on getting that behind us and it's somewhat out of our control. But we've got enough leverage here and things we can do to get that accomplished, but I don't think there's any question it's a distraction for the senior management, for sure.

Operator

And we'll take our next question from Seth Weber with RBC Capital Markets.

Seth Weber - RBC Capital Markets, LLC, Research Division

Just want to go back. I think I heard A.J. say that used truck inventories were up, but you're not worried about it. I guess can you give us some color on that and why we shouldn't be worried about it?

Andrew J. Cederoth

Sure. I'll let Jack give you more color on that.

John J. Allen

The large fleets that we've been buying, significant amount of trucks in the first half of this year and really in the last year are finding ways to optimize our assets and trade the vehicles. So it's really just -- part of it is just timing. But the turnover of the used tracks in the marketplace continues to be strong. So although the inventories are up, the aging isn't something that we're worried about. The margins are fine on these. So we've built an infrastructure in place to be able to be a market leader in used trucks, to be able to be a manufacturer that the fleets can count on as part of our value proposition for us to be able to take that to the market, and that's what we're doing right now. So we watch used trucks all the time. It's certainly an area that can change dramatically. But I'm not worried about our numbers. And the biggest one is this: if you go back into the recessionary times here in the last number of years, when you look at how few new trucks were built, as we move into the next couple of years, there's just not going to be a lot of 3-, 4-, 5-year-old trucks in the used truck market. So the supply-and-demand phenomenon is going to continue to make, I think, the used truck market be robust for the next couple of years for sure.

Seth Weber - RBC Capital Markets, LLC, Research Division

Okay. And if I could switch back to the warranty chart on Page 8, I guess, Slide 8. So it looks like May has come down from April, but it's still higher than the 1Q rate. I mean so is it fair to assume that we're going to see another fairly substantial charge -- accrual here in the third quarter?

Andrew J. Cederoth

No, based on the data that we're looking at today, and we looked at that May data when we developed the estimate for Q2 and stress tested that, I can't predict the future. But given the data in front of us and this is exactly what we look at, we think that Q2 rate, you can see it's below the Q2 rate. So we're confident that, that Q2 rate is sufficient going forward.

Daniel C. Ustian

So maybe, Seth, just for clarification. The reserve has been established based on that high rate that you see on the page here. And I think what A.J. was trying to point out is that at least for one month, it's coming down. We're not counting on that. But for us, it's got to go past the higher rate in order for the reserve to go up and we're confident in that it won't happen.

Seth Weber - RBC Capital Markets, LLC, Research Division

Right, okay. I mean, I think you touched on this before, so it's just hard to get confidence that it's not going to tick back up, but you guys seem to think that you have that conviction?

Andrew J. Cederoth

Well, I think that's why the chart in the lower right-hand side of that Page 8 is important because you can see that sequentially, quarter-over-quarter, the new engines that are going into the market are demonstrating better performance than the engines that we put out in the market in late 2010 and early 2011.

Operator

And we'll take our last question from Jeff Kauffman with Sterne Agee.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

I guess really, too, at this point, I think a lot have been asked. Question one, if I look at your share of the orders that the North American Class 8 excluding military market was, you're down about 200 basis points versus last year, about 9.4%. If I add it all up with the military, you're closer to 15%. How do we average 20% to 22% share of the market if you're running roughly 15%, 16% of the order flow? Are you thinking when the EPA mandate comes through that you're going to be representing closer to 25% of the market?

Daniel C. Ustian

Jeff, I don't know where those numbers are coming from. But our orders share is a little bit higher than what our -- as Jack pointed out, it's higher than our retail share right now. And I always worry about orders because if you look back at the orders, the relative accuracy of orders, you could question over time, if you look that the order rate for the last 2 years, the industry should be about 450. So we can't tell you what goes into those orders. All we can tell you is what ours are. And even based on those past practices, our order rate is higher than our retail rate right now. So we have to understand where you're getting this from and I think...

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Okay, I can hit you off-line. But it's normally within 100 basis points of what you do. Last follow-up, if I take military out of your Truck business, it looks like your units are up about 10% and your revenue per unit is up close to 13%, which is actually very positive. Can you help me bridge those numbers to the Truck profit, excluding military, being down about $60 million? And this is adjusting for the table you put in the back.

Andrew J. Cederoth

Recall that commodities are up year-over-year. Yes, I'll have to -- I want to point out commodity costs are higher year-over-year, but we can get together off-line and go through that.

Operator

Thank you, everyone. That concludes our question-and-answer session. At this time, I would like to turn it back to our speakers for any closing remarks.

Heather Kos

I just want to thank everybody for their participation, and we'll be available after this call for your questions. Thank you.

Operator

Thank you, everyone. That does conclude today's conference. We thank you for your participation.

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