Navistar F1Q08 & F2Q08 Earnings Call Transcript

| About: Navistar International (NAV)

Navistar International Corporation (NAVZ) F1Q08 & F2Q08 Earnings Call June 30, 2008 11:00 AM ET

Executives

Heather Kos - Vice President, Investor Relations

Daniel C. Ustian - Chairman of the Board, President, Chief Executive Officer

Terry M. Endsley - Chief Financial Officer, Executive Vice President, Director

Analysts

Kurt Ludke - CRT Capital Group

Mario Gabelli - Gabelli & Company

Andrew Casey - Wachovia Securities

Ben Faulk - Marbobar

Chaz Kidwa - J.P. Morgan

Agshay Mehdhaven - Wedwood

Gary McManus - Impala

Operator

Good morning and welcome, everyone, to the Navistar six-months operational update conference call. 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, Heather Kos. Please go ahead, Madam.

Heather Kos

Welcome and thank you for joining us today. Before we get started and I turn it over to Dan, I am going to read our Safe Harbor statement and our cautionary legends. Information provided in statements contained in this presentation that are not purely historical are forward-looking statements within the meaning of Section 27-A of the Securities Act, Section 21-E of the Exchange Act and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements only speak of the date of this presentation and the company assumes no obligation to update the information included in this presentation.

Such forward-looking statements include information concerning our possible or assumed future results of operations including a description of our business strategy. These statements often include the words such as believe, expect, anticipate, intend, plan, estimate, or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. For a description of these factors, see item 1A, Risk Factors, of our Form 10-K for the fiscal year ended October 31, 2007, which was filed on May 29, 2008. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements.

The financial information herein contains both audited and unaudited and has been prepared by management in good faith and based on data currently available to the company. Certain non-GAAP measures are used in this presentation to assist the reader in understanding our core manufacturing business. We believe this information is useful and relevant to assess and measure the performance of our core manufacturing business as it illustrates manufacturing performance without regard for selected historical legacy costs, i.e. pension and other post retirement costs and other expenses that may not be related to the core manufacturing business. Management often uses this information to assess and measure the performance of our operating segment. A reconciliation to the most appropriate GAAP number is included in the appendix of this presentation.

And now I’m going to turn the call over to Dan Ustian.

Daniel C. Ustian

Yeah, thanks, Heather. Well, as you know by now, we are back listed on the New York Stock Exchange after an enormous effort by the team here at Navistar and outside help as well. And a couple of those that led that, Terry Endsley and Bill [Caitin], I’d like to talk a second about. We are changing their role a little bit here.

First, I want to thank both of them for the efforts in leading this effort to get us back on a timely basis but also I want to announce that the role that Bill [Caitin] now is changing, changing to is to help us get to the next level. And as you know in our strategy, we’ve talked about expanding beyond the $15 billion and that would include reaching into other areas, like next year we’ll start production in India with our partner in Mahindra. A couple weeks back we announced Caterpillar and also getting into a partnership for expanding beyond India into the rest of the world. And Bill will initiate that charge. He’ll keep us focused on meeting those objectives.

Furthermore, we do have a number of dealerships that we bought back from our dealers that were non-performing dealerships and we are going to ask Bill to help get those healthy again, and then we really would like to get those off of our balance sheet and back into private owners, and so those are the roles that Bill will play.

Terry then will keep on trying to make sure that the liquidity is there for us at the best value for us, at the same time help us run our business from the financial aspect of it.

But just a word of note here, our celebration on this actually started last night. It started last night about 11:00 at night when for some of us, at least, the White Sox swept through the Cubs, and I’m sure those of you on the East Coast understand that, but those for you in Boston might be a little cautious on getting too anxious about delivering another pennant this year with the White Sox as they are.

What this conference call is about really is to bring you up to date on how we measure up to what we talked about a month ago and the reference of that is our May 28th conference call and at the end of if, I’m going to tell you that really it’s the same as what we told you at that point in time. There’s very little that has changed. We had anticipated where the market was going to be predominantly and the results, you should be able to expect the same thing that we said back then.

So if you look at page four, let’s start out with the industry and we gave guidance of 258 to 285 and it looks like frankly it’ll be on the low side of that. The good news for us is that we are, our share, we are now confident in our shares. We’ll be able to offset any degree of negativity that’s in the industry landscape. For instance, we have a goal of 20% market share objective on class 8, 40% on mediums, and 60% on bus. On the class 8, we believe now with the orders as they are, we will exceed that, we will approach that on medium, probably slightly under that and we should exceed it as well on buses. So even though it’s a little lighter in the industry, our volume will not change materially from what we had before and so we’ll be able to meet the objectives that we had targeted for for 2008.

And if you turn over to page five, it sort of summarizes that. You can see in 2006 the industry had a very good year at 455,000 for class 6, 7, and 8. Last year it went down 30% and this year we expect it to go down another 15%. And at the same time though, our volumes from 2007 to 2008, we expect them to be flat. So that’s the penetration that we are having for 2008 and some of the things that we’ve done, of course, in products that have helped us to get to that.

Now if you look at the bottom left hand corner, let’s talk about engine shipments because we entered in a diversification strategy two or three years back that said we should not be so dependent only on two customers, the pick-up truck market and the class 6, 7 market. And this year that market is, for pick-up trucks, is way off. In fact, I’ll talk a little bit more about that as we go on here. It’s substantially off, to the tune of over 100,000 units from year to year. And yet if you look at our volume, we’re down somewhere around 50,000 or less units from year to year. So the other areas, particularly in off-highway engines in South America and other sectors, have made up that delta.

And then finally in the right-hand corner of page five, you will see that the other areas, non-U.S. and Canada shipments are up about 11% from year to year, so this is all helping us in a very difficult U.S. market and Canada market to offset that and still have a strong year financially.

Slide 6 then points out the guidance that we gave a month ago and where we are now and you can see from the slide that we said we were just under $7 billion worth of revenue for the first half and that’s where we came in. We also had guidance for segment profit of 375 to 425 and you can tell we ended up on the high side of that. And pretax income of course was on the high side as well, related to the segment profit that we had in spite of again the tough challenge in the marketplace.

So if you look at seven, let’s go through some of the challenges and try to relate to them. If you look at the right-hand corner of the page, you can see that PBT from quarter to quarter, first quarter was very tough and of course, that’s the quarter that we have a lot of downtime in terms of holidays. We also only made 12,000 trucks in the conventional trucking category, about 12,500. Just to put that in retrospect, in 2006 we averaged for a quarter 32,000 in that same industry, so we had 12,000, a little more than that, and 32,000 was an average for 2006. You can see in the second quarter we did increase up to about 17,000 in that same segment. We also had in the first quarter some extraordinary expenses related to military and getting those vehicles out into our soldiers’ hands, and in the second quarter those are gone. So on the military side, we made a commitment to ramp up our schedules to 500 a month in February and we have done that. In fact, we have completed the month of June already. Here we are on the last day and we have not had any extraordinary costs associated with that, so we’ve got a nice stream of flow going on the military side, which has enabled us to move from that -- both of those have enabled us to move from the loss to the profit position, among the other actions that we’ve taken in cost reductions and launches of new trucks as well.

On the engine side, maybe just to point out a couple of things here. The pick-up truck market is, as most of us know, is way off. Some of it is related to the economy, some if it is related to diesel prices are higher by as much as $0.70 to $0.80 a gallon higher, so it has put a stranglehold on the pick-up truck industry itself. We will have for the year in the pick-up truck industry somewhere less than 150,000 units, and that’s about 100,000 units less than normal.

So the first half of the year, we shipped a little over 100,000 units in that industry and the last half of the year, we are only going to ship half of that, or even less than half of that. So we have a substantial amount of downtime in our second half but again, I want to reiterate that’s already included in the estimate that we have provided to you. We had anticipated that.

You know, some of these things you see in the marketplace probably later than we see them, so we had anticipated these schedules to be at the levels that they are. We had to include some off-highway business that we have in engine and so our facilities, some of our facilities are running at above capacity. South America is certainly one of those. Even our Chicago operation here that makes the DT466 that previously had supported only the class 6 and 7 industries, now it supports much more than that and it is running at capacity. So not all of the industry has been affected by it and we also have other things that have offset some of the negative things going on in the U.S. trucking industry.

So with that, I think you also note then in the first half of the year, our financial services had about a break-even, and typically for us that should be about $50 million to $60 million for a half of the year. So what I would like to do is turn it over now to Terry Endsley to talk through that and what you might expect for that going forward, so Terry.

Terry M. Endsley

Okay. Thanks, Dan. Good morning, everyone. Well, as Dan said, you know, we typically guided our financial services income in the neighborhood of $100 million to $120 million every year. As you saw in our six months ended April, we just about broke even and a couple of things have occurred in that business. I want to -- that I’ll review with you. I want to emphasize that we really have not changed the way that we are doing business in terms of the types of receivables or customers that we are seeking to finance, or the way that we are approaching the market. We are running the financial services business the same way that we have in prior peaks and in prior troughs. And in terms of our general strategy, we have reorganized slightly to better meet the -- our face to the customer but in general in terms of the types of credit quality that we are taking on, nothing has changed.

What is a little different this year in 2008 is that we’ve had some challenges and one of those that is new for us is the accounting, the impact of the accounting for derivatives. As you saw, that’s affected us to the tune of about $40 million so far this year, and really what that is is we’re in the business of acquiring fixed rate receivables which we fund with floating rate debt. We are able to economically hedge that by swapping. However, the impact of the swaps is immediate expense in this lower interest rate environment, and so far this year that’s been about $40 million.

We are also challenged this year in --

Daniel C. Ustian

Terry, maybe -- that does come back, if you go through that.

Terry M. Endsley

Yeah, and the impact of marking those swaps to market will come back to us over time if interest rates stay at these levels in the form of lower interest expense on the associated debt. So while we are taking the cost of those swaps now, eventually over the life of the associated securitizations, we will record higher income, so it is temporary in nature.

The other two aspects that are shown here on page seven of lower industry volumes has to do with the fact that our acquisitions are down in accordance with the industry conditions that we find ourselves in. And then with the dislocation in credit markets on the receivables that we are acquiring and the way that we are funding ourselves with securitizations, as we’ve talked about in the past we are making a lower spread than we had historically.

When we return to more normalized markets and as the effect of the cost of the swaps that we’ve already recorded comes back into the income statement, we would expect financial services to return to its historical profitability levels. Maybe not quite the peaks that we saw in the past but a more normalized and consistent with our prior guidance.

As far as corporate items go, let’s start with post retirement here. As you know, we’ve taken some steps and have some management actions that have helped us contain and mitigate the post retirement obligation. A couple of big ones for us are that in 2007, we earned about 25% on $4 billion worth of retirement assets. That helped decrease the liability significantly. And we also had our Medicare eligible population in our post retirement healthcare, we utilized an insurance that was made available through the Medicare modernization act, which greatly reduced our post retirement obligation for post retirement medical.

As you know, we continue to work on things that mitigate the obligation and that’s important to us as we go forward. As a result, we are seeing significantly reduced post retirement expense on a year-over-year basis. We want to see some stabilization in that trend before we let it filter into our guidance, but we are encouraged by what’s happened so far this year. Our retirement plan assets have actually had a positive return for the seven months year-to-date and the 2008 fiscal year, and so over the next several months, we’ll be considering that as we update our ’08 and ’09 guidance.

With regard to professional fees, Bill [Caitin] and John Walter and our controller have now gotten us current with our filings. As a result, we are through the big push in the use of consultants necessary to get us to that current point. In the second half of the year, we expect those costs to ramp down significantly and we believe that we will operate well within our guidance as far as the excess costs associated with becoming a current filer and staying that way.

And then in terms of taxes, you saw that we had a loss in the first quarter followed by significant profitability in the second quarter. As we look forward to the full year and in the quarters to come, it will be important to distinguish between domestic earnings and foreign earnings, but for the full year we expect our effective tax rate, our tax loss, our tax provision to be in the upper teens or a low 20%. And so if there’s follow-up questions on either of those, we can deal with those when we get to the end of the presentation here.

Daniel C. Ustian

Yeah, thanks, Terry. As part of our three pillar strategy, the objective was to have strong segment profits at all points in the industry market and then work on some of the below-the-line items that we call delivering the segment profit to the bottom liners, our quality of earnings would be strong and that’s where Terry got into some of the below-the-line items that we have been working on for quite some time now. And you can see the progress that’s being made. If you look at slide seven in the left-hand corner now, these are the results for the first half of the year. And compared to an industry, a 455 for 2006, our first half year pretax income was 103. We’re about half of that in 2008 and yet we’re up 70% in pretax income, so this is the result of many of those actions that we have put in place.

When you look at slide eight, we are still in a difficult industry for sure, and let’s talk about how we are going to deal with that, and number one is the economy and in the trucking industry, the economy is much triggered based on what’s going on with fuel prices. And as most of you probably know, not only is it fuel prices but for the trucking industry, it’s diesel and diesel is still substantially higher than gas. And so the first thing that we are going to work on with our industry competitors and partners is how do we get at that and try to make that more palatable and on parity with gasoline. We might not be able to impact much the total world’s fuel prices but maybe we can get at why the diesel is higher than the gas and certainly if we can, that will benefit the entire trucking industry. So that’s one thing we’ll do.

The other thing we have been doing is diversification. One of those is the military. We’ll have over $3 billion worth of business in the military, and we also have a strategy -- you might call this a strategy within military to diversify. We have a strategy in engine to diversify the number of customers. We have a strategy in military to diversify the products that we have, and one of the things that our company brings forward is the flexibility and adaptability to have different kind of products brought to market quickly very competitively. And I think in the last month here, you have seen that we had an order, over $7 million for areas outside of MRAP, or the parts related to MRAP and for trucks that are outside the MRAP package. So this is how we are going to get to $2 billion on a continual basis in the military sector, or more.

You can also see some of the other areas of diversification that we have in engine and in truck and in market share opportunities. And speaking of that, how do we deal with the challenge that we have in diesel fuel prices? Well, one of those is the products that we have are very fuel efficient. In fact, if you look at pro star, which again we have reiterated we have about a 6% fuel economy advantage, now let’s translate that into the customer. He’s going to get somewhere between $5,000 and $10,000 of savings related to that. So a way for us to deal with the price of the product and the challenges that we’ll have in commodity costs that are going up is we are going to bring to the customer we believe advantages in value, and that’s what pro star brings, and that’s what also lone star brings. But not yet seen in the marketplace is the Max Force. This is just coming out now. The Max Force diesel engine, 11 and 13 liters in size. In addition to our own engine, which will give us some benefit from that in cost, it will also provide some advantages in fuel economy and I would like to get some out there before we commit to a number that’s out there. But suffice it to say, it will be an improvement to fuel economy that’s in our other products today. So again, we keep concentrating on bringing value to the customer, enabling us to hopefully get some price in our products over time.

The last item, which is also just coming out, is our own integrated APU. You can see a picture of it at the bottom of page eight. It’s integrated. Again, some substantial fuel advantages to some applications that can use this kind of power unit.

Finally on commodities -- as we all know, commodities are a challenge for the entire country and certainly in the trucking industry, that’s one. Some of the things we’ve done is we do have price locks on most of the commodities for 2008. One that we don’t have, by the way, is steel scrap. That’s not one -- I don’t think you can do that, but we are contained for steel and aluminum in particular for 2008, and we have to deal with that going into 2009. We have some strategies on how to do that as well. But again, the real answer to it beyond that is get it in price through some of the advantages that we have in product and hopefully the industry will also pass on price that they are going to see in the same costs that we see.

And finally, it’s cost reductions. In addition to the plan we already have outlined, we are working on design changes that will carry us beyond that come 2010 and beyond.

So if you look at page nine, this is a summary -- it says that in the first half of 2008, we had about $7 billion worth of revenue and our target is to exceed $15 billion for the first half of this year. We had a manufacturing segment profit of $426 million, on its way to what we would say is $950 million to $1 billion by the end of this year, and certainly we believe that it indicates we will exceed the $15 billion to $18 billion worth of revenue targeted for 2009 and the $1.6 billion of segment margin based on $414,000 in the retail industry.

I also want to point out that we have in the past said that if the industry is only at 385, what would you expect to be on segment profits? An we said that’s about $1.450 billion worth of segment profits, so you can kind of interpolate from that based on how the industry might take shape coming in 2009, but those are the targets as we see them today. It’s a little early yet to forecast 2009. There’s a lot of uncertainties, as you all know, in the economy and the industry to forecast that far off. But if it is at 414, we are certainly on target to make the $1.6 billion worth of segment profit.

So in summary, we’ve had a strong 2008 start, very consistent to what we had anticipated when we spoke to you on May 28th. That positions us to make the targets for 2008, 2009 and then in the future, we’ll talk about how we are going to sustain that in 2010 and beyond. So Heather, I’ll turn it back to you for questions.

Heather Kos

Operator, we’re ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Kurt [Ludke] with CRT Capital Group.

Kurt Ludke - CRT Capital Group

Good morning. I think you mentioned there’s a $40 million charge for the accounting derivatives in the first half and you also mention there were some other start-up costs associated with MRAP. And I’m just wondering, could you take us through what you see as the extraordinary items in the first half of ’08, both positive and negative, quantify them?

Daniel C. Ustian

Kurt, we’ll do that, and here’s what we’ll do then -- let us take some time and make sure we capture them all. I’ve got some off the top of my head here but let us do that and we’ll send out something publicly on that.

Kurt Ludke - CRT Capital Group

Okay, great. Also, could you help us quantify the impact of the Mahindra JV and the CAT deal for ’09?

Daniel C. Ustian

Well, for ’09, not much. As we’ve talked about before, the Mahindra JV, it’s about break-even right now. We just -- we do a few trucks in India now. We start up launch of the full lineup of trucks in mid-2009. With the launch and all that, I don’t think we expect to have any significant impact in 2009, other than a little negative from the launch but other than that, I don’t see that happening to any regard. And as far as the CAT partnership, we’ll have some investment. Again, it won’t be a huge investment in 2009 that we anticipate.

What I would like to say is that we are going to penetrate as quickly as possible though some of these other markets with distributors that are already there and products that we already have. So we sell 8,000 or 10,000 export units today and I think we can grow that in 2009. So I don’t expect a lot of impact in 2009 either way, but I do think our volumes will grow. That will help us offset what it’s going to take us to invest in some of those areas for making product that’s more adaptable to the market that those are in. Right now, we only cover a certain amount of markets with the products that we have, so we are going to need to invest in those markets type of product and that will enable us to utilize the distribution base that’s already out there and compete in those markets very well.

So in summary, those two -- they shouldn’t have much impact in 2009 -- 2010, we should see it.

Kurt Ludke - CRT Capital Group

Okay, and do you have an update on the GM transaction?

Daniel C. Ustian

You know, with all the things facing the industry today, both in trucks and in cars, it’s just taking longer for us to go through and figure out what we are going to do with that, so we are still talking longer than it’s intention to get this going one way or another, so we are kind of in a stagnant mode right now.

Kurt Ludke - CRT Capital Group

So there’s no timeframe as to when you think you might have a deal or not a deal?

Daniel C. Ustian

No. You know, again, you can imagine from General Motors’ standpoint, they’ve got a lot on their plate to deal with. You know, the things we talk about here with large vehicles moving over to small vehicles and how they deal with that, so I wish I could tell you but we really don’t have a timeframe, although we continue to meet and we are going to try to wrap this up one way or another here, as soon as we can.

Kurt Ludke - CRT Capital Group

Okay. Any update on foreign sales of the MRAP or the JLTV?

Daniel C. Ustian

We continue -- you know, we had a presence at a foreign military show here in the last week or two and certainly some interest throughout not only just for the MRAP but for our other platforms as well, like our -- we call our MXT platform. Certainly there’s that platform that there is some interest on. No orders yet. It takes some time, but certainly feel that it’s going to be a part of our future business. Not for 2009 but -- I’m sorry, not for 2008. We’re hoping to see some for 2009.

Kurt Ludke - CRT Capital Group

Okay, and the JLTV?

Daniel C. Ustian

Well, I’ve always said on JLTV, and I’ll reiterate what I’ve always said, I think that program, it’s a great program some day. I think it’s far out yet. I think there’s some things we’d like to do in between now and then to help our military business and that’s what we are going to focus on in addition to the JLTV. But we’re not counting on that in the short-term at all.

Kurt Ludke - CRT Capital Group

Yeah, I just thought there might be some type of additional award here coming up. Wasn’t there talk of some type of development award?

Daniel C. Ustian

Oh, yeah, the development award, that could happen but keep in mind all that’s for is to pay for the development of the product and that will happen, I assume, in the next 30 to 60 days. That’s what the military has said to us. Again, at some point in time, that will be a great thing. I think it’s just a little further out than it’s going to get a lot of our attention right now.

Kurt Ludke - CRT Capital Group

Okay. Thank you very much.

Terry M. Endsley

Kurt, you asked a question about extraordinary items affecting the first half, and we will do as Dan indicated and compile an explanation that we can use in our chats with you all. In order to give you a head start, and anyone else that’s interested in that, if you look at the last paragraph of the MD&A in the Qs, it ticks through a number of the extraordinary items and we’ll supplement that with the information as Dan described.

Kurt Ludke - CRT Capital Group

Okay. Thank you.

Operator

Our next question comes from Mario Gabelli with Gabelli & Company.

Mario Gabelli - Gabelli & Company

Dan, one of them was answered, and that was the update on the General Motors. Again, the -- anything you want to share with us about discussions with Ford?

Daniel C. Ustian

Yeah, you know again, Mario, what we’ve said on that is if you go through the process here in the courtroom, it takes forever. I think the prudent thing for our company is just to find an answer outside of that and I’m still hopeful that we will at some point, but I can’t tell you that we are any closer than before, you know, a month ago than we are now. So we’ll just keep trying --

Mario Gabelli - Gabelli & Company

Okay, well, that’s helpful. For 30,000 feet, Charlie [Wrangle] gets up and says we need another fiscal stimulation. We’ve got to focus on infrastructure, focus on productivity -- you know, it’s been a long time since we had an investment tax credit or something like that for the trucker. Is that enough to stimulate demand or the bonus depreciation had a help but it really comes down to other macro variables, right?

Daniel C. Ustian

I’ve got to tell you, in my own mind, Mario, in my own mind, if we can do something on this delta with diesel to gas, that will be an emotional swing for the whole industry. Some of these other things aren’t well-known by truckers and the trucking community. That changes the way they feel about the industry.

I believe if we can do something with that, that will spur the industry on and I think for all of us, not just for international, I think that’s where our focus is going to be on trying to help do that.

Mario Gabelli - Gabelli & Company

All right, so we just have to vote for Vin Diesel. Thanks.

Operator

And the next question comes from Andrew Casey with Wachovia.

Andrew Casey - Wachovia Securities

Good morning, Dan. Congratulations to everybody being relisted. I’ve got a number of questions but the first one, if I look at the truck profitability increase in Q2 that drove most of the benefit that you talked about on page seven, if I exclude warranty R&D, SG&A, I get about $178 million gross profit increase year over year versus Q207. And it looks like most of that probably came from MRAP. I don’t really think you realized any significant price realization in the quarter elsewhere, so is that a correct assumption, that it’s mainly driven by incremental volume and then MRAP’s benefit to operating efficiency?

Daniel C. Ustian

No, I wouldn’t say that. I would say there are so many different things, Andy. It’s cost reductions, number one. We didn’t have pro star last year. We do have pro star this year. There’s a significant cost related to that. You know, cost reductions are material. Engine business was better, parts business was better. It would be hard for me to say it’s one thing for sure.

Andrew Casey - Wachovia Securities

I was just focusing in on truck. So the pro star and the cost reduction, but not the engine, right?

Daniel C. Ustian

Not the engine, right.

Andrew Casey - Wachovia Securities

Okay. If I look at ’09, just kind of looking at the military business, without talking about your share of the potential business, can you kind of give us some sort of quantification of the total pool of potential military stuff that you are looking at that’s out there that could hit ’09?

Daniel C. Ustian

You know, we have in prior, maybe even on the May 26th, we talked about all the different products that we have and all the different markets that we have. Unfortunately, the military doesn’t -- is not able to forecast that far out. I mean, they are dealing with monies that are available to them, sometimes monies that they already have that they don’t know where it’s going to be funded -- where it’s going, the funds, and some of those are unfunded yet. So that one’s tougher for us to try and pinpoint where it’s at.

But if you look at -- it was on slide 19, if you go back to that other --

Heather Kos

The May 28th call.

Daniel C. Ustian

The May 28th call, it shows you how we expect to get to $2 billion and there’s a gamut of products and a gamut of businesses that these would impact, and what we are saying is that we believe the MRAP certainly will fall off dramatically going into 2009 for the U.S. There’s some opportunities for that in the rest of the world but some of the other businesses that we picked up, just like we did a couple of weeks back, some of the other trucks that we make to support the military we think will grow.

Andrew Casey - Wachovia Securities

Okay.

Daniel C. Ustian

So it’s -- I mean, it’s anticipated for sure that MRAP’s coming down and we are going to have over $3 billion worth of military business this year that we think next year will be closer to $2 billion, but it won’t go away by any means.

Andrew Casey - Wachovia Securities

No, I was just looking at trying to get in addition to what you gave what the total pool might be.

Daniel C. Ustian

Yeah, and it’s -- it is very difficult to pin that down.

Andrew Casey - Wachovia Securities

Okay. If I can flip back to a comment you made about your traditional business, you know, the truck industry dealing with heightened raw material costs -- if the truck industry follows the suggestion of increasing pricing to offset that -- and right now that’s a difficult proposition, given the state of the industry -- do you think that would have any effect on ’09 demand?

Daniel C. Ustian

That pricing -- I don’t, not if the industry, we all do the same thing. I don’t think that will impact the demand. I think it’s more confidence in the economy and the need to replace trucks that now have -- they are worn in the tooth. They’ve been out there a long time now, many of them past 500,000 miles. They need to be replaced and I think those will be the drivers, and for a small increase that we are talking about here, that won’t impact -- in my mind it won’t, anyway.

Andrew Casey - Wachovia Securities

Okay. Now one other and then a few clarifications -- the GM potential that a couple of people have discussed; is GM currently developing trucks to meet the 2010 emissions standards change? And I’m wondering that because in a lot of their trucks, they use CAT and CAT has basically announced that they are not going to be developing engines for 2010. And it kind of relates to if you are successful bringing GM in-house, does that cause kind of an accelerated R&D investment that would kind of hit some of the interim earnings potential?

Daniel C. Ustian

Well, first I can’t comment about what GM is doing, you can imagine that. But for us, your point is still right. What we’d like to do, and the original thoughts were trying to get a non-SAR solution for everything, including GM. The longer this stretches out, the more difficult it gets for us to put the resources in place and change the product to be able to do that. Now we are doing some of that right now in spite of that, but until you get a deal done, it makes it more challenging to be able to commit to that fully. So if we get the deal and we want to live to that commitment, there will be some increased pressure to spend some more money next year. But again, none of that is going to impact our ability to make the $1.6 billion. We’re not talking about those kind of numbers.

Andrew Casey - Wachovia Securities

Okay, one last one and then I’ll follow-up with Heather and everybody later on -- the engine’s R&D expense that you are incurring right now, does that include investment for U.S. EPA 2010 emissions compliant engines for the North American pick-up truck applications?

Daniel C. Ustian

You know, whatever we might have, the answer is yes.

Andrew Casey - Wachovia Securities

Okay. Thank you very much.

Daniel C. Ustian

I mean, as you know, we’re in discussions, or at least in the court discussion with Ford on where that business might go, so -- but we’re prepared for that.

Andrew Casey - Wachovia Securities

Okay. Thank you.

Operator

And our next question comes from Ben [Faulk] with [Marbobar].

Ben Faulk - Marbobar

Hello, there. Just a couple of questions, if I may; first of all, you talk about $15 billion to $18 billion of revenues, sticking to $1.6 billion EBIT for 2009. If I can just quickly work that through, it comes to I guess somewhere around $12 of earnings, which is -- I guess A -- you know, two questions; A, is that kind of roughly correct? And B, why is there such a difference in current estimates out there? And then the second question is given your truck margin was I guess just over 7% in the second quarter, which is -- I think it’s higher than the last peak, which was in ’06. If you were to kind of do a blue sky scenario and everything kind of starts to recover, I mean, would it be unreasonable to assume 8% to 10% margins kind of going forward, kind of in a couple of years to start something like that? Just kind of trying to understand where this business could head if everything were all --

Daniel C. Ustian

Ben, here’s what we’ve done in that. On the below the line items, we’ve had some guidance on that that’s in the May 28th, and if you want to call us after, we’ll break that down with you, but it’s on the -- it’s in the Reg G of the May 28th and it’s also in this package as well. It’s in the Reg G in this package as well, Heather tells me. That takes you from the segment profits down to the PBT, so I think that will help you get through that.

Now, in terms of the volumes for ’09, that 414, as you can tell from the charts we have in here, is about equivalent to what the volumes were in 2005, and what we’ve said is that we’ll have the $1.6 billion based on that 414 volume. We’ve also said if it’s 385, we’ll have 1.450. So I think if you take the Reg G and you interpolate the profits, you can get pretty close to what you might expect from us for 2009 and beyond.

And Terry gave you tax guidance for 2008, so I think that there’s enough there that you can piece all that together and if you need some help, call Heather, Randy, and we’ll help you get through that.

Operator

Our next question comes from [Chaz Kidwa] with J.P. Morgan.

Chaz Kidwa - J.P. Morgan

Just wondered if you could give us some broad thoughts on your capital structure, and I guess the financing of the business as you look forward, both at the manufacturing business and at financial services. And I guess in particular as well, if you could maybe address the medium term impact of on financial services funding of now being obviously a current filer with the SEC.

Daniel C. Ustian

Yeah, sure. Staying with the financial services group, the majority of its financing that it has is done through securitizations. In the last several quarters, we have been dependent on using private market bank conduits to securitize our retail receivables. That will continue to be the case until we become Reg AB eligible. We are working on that. In the meantime, we see the early signs of normalization in the bank conduit market for retail securitizations and we see that in terms of the amount, size of deals that we can do, and a little bit better spreads than we had been seeing in the past.

Of more interest to us is how do we replace the funding that we have for our wholesale securitizations. That comes due in November, two significant pieces of that funding come due in November and in that regard, we are cognizant that spreads are still meaningfully different than they have been in the past and we are working on capacity so that we have enough capacity to fund the up-turn in business conditions that we expect for 2009.

Again, it will help us being current there but the -- being current will help more on the retail side than it will on the wholesale side.

With regard to the manufacturing parent, right now we are enjoying LIBOR-based pricing without a LIBOR floor and we have until January of 2012 to refinance, if we think that we need to. At some point in time, we will want to refinance to have a more conventional capital structure and staggered maturities and so forth, but there’s no urge or immediate need to do that right at the moment. We’ll start considering that more seriously in early 2009.

So for now, the main thing in our capital structure is to replace the capacity that we know needs to be replaced at the financial services unit in November of 2008.

Chaz Kidwa - J.P. Morgan

And what is roughly that size that needs to be replace in November 2008?

Daniel C. Ustian

$800 million is coming due.

Chaz Kidwa - J.P. Morgan

Okay. Thank you very much.

Operator

And our next question comes from [Agshay Mehdhaven] from [Wedwood].

Agshay Mehdhaven - Wedwood

Good morning. Thank you for taking the questions. The first question may related to what Kurt asked earlier but I was wondering -- the first half of the year, you did about $424 million of segment profit and you are giving guidance for the full year of $950 million to $1 billion. And just given sort of the macro environment for the second half of the year as it appears now, one would intuitively think that number on a run-rate basis would be lower for the second half. Is it just that the extraordinary items from the first half would adjust to sort of a number closer to 950 to a billion on a run-rate basis, or is there something that’s coming on board in the second half that we should be thinking about?

Daniel C. Ustian

Well, there are a number of factors and if you go back in the history of -- number one for us is the second half is stronger than the first half, and it’s just based on the number of operating days that we have, the fourth quarter has no down days, you know, operating down days, so fourth quarter is always our strongest quarter. That’s one thing.

The flip of that and the second thing that’s positive is your point. We had some extra costs in the first half, this first quarter at least to service the military that now we don’t have, and that -- so the second quarter will be better for that.

On the negative side though is our engine business. The pick-up truck industry was relatively constant in the first half of the year and it’s about 50% of that in the second half of the year, so there are things going in and out. I think if you could see from the history of where our revenue and income comes, we should be able to do this second half about the levels that we talked about based on the run-rates that we are having right now. Our schedules from the first half of the year to the second half of the year on trucks and buses are quite a bit higher than they were in the first half to support the revenue that we have and of course, if you add the revenue, that helps you get the EBIT as well. So we do believe that very well supports the 950 to $1 billion that’s out there.

Agshay Mehdhaven - Wedwood

Great. My second question is you provided sort of segment operating income guidance of sort of 1.450 if industry stats are at 385. Would your revenue still be north of $15 billion assuming an industry of 385?

Daniel C. Ustian

Yeah, no -- I mean, we’re already at $15 billion for this year and that includes over $3 billion in military, so take $1 billion off of that, we’re still going to be above $15 billion, even at 385, yes.

Agshay Mehdhaven - Wedwood

Okay, great. And my last question, maybe this could be offline, but the 414,000 for 2009 which you stated would be roughly in line with ’05, could you provide a breakdown of how those numbers break down between the different classes and buses?

Daniel C. Ustian

I think we said in a -- we don’t have it in a prior one? Okay, let us go through that and see. We have it internally. I’m not sure we’ve talked about it externally so let us take that on and publish something on that as well. We’ll give you some ranges on that.

Agshay Mehdhaven - Wedwood

Okay, great and my last question, when do you believe you will start providing EPS guidance going forward? Is that something we can look forward to after the third quarter call?

Daniel C. Ustian

Yeah, I think that’s right. I think as we go into -- you know, get a little firmer understanding of some of the things Terry talked about in terms of the post-retirement costs and make sure that we have some more understanding of where that might go forward and we’ve got some more time to prove that we are going to do the things that we talked about on the post retirement cost. And the second thing is now we need to work on our taxes and understand where our income is coming from. As we’ve talked about in the past, our income has been, a lot of it from offshore and so we are still paying at 30%-plus rate on that, whereas in the U.S. we have our NOLs, we won’t pay anything on, so we just need some more time to focus on that and I think now that we are up to date on our filings, we’ll be able to concentrate some more on that and put a plan together that we can talk to you about it as the third quarter end approaches us.

Agshay Mehdhaven - Wedwood

Great. Thanks. Good luck.

Operator

Our next question comes from Gary McManus with Impala.

Gary McManus - Impala

On the tax rate, I think Terry was saying about a 20% tax rate roughly, and that’s for fiscal ’08? Because you barely had any taxes in the first half. Does that mean the second half tax rate may be higher than 20% to get the full year at 20%? Is that what I’m --

Terry M. Endsley

Yes.

Gary McManus - Impala

Okay. Secondly, you said if industry volumes are 385, you have $150 million less of segment operating profit, is that a good run-rate, even if we thought volumes were below 385? That for every 30,000 unit delta, you get $150 million change in segment profit? Does that run pretty much --

Daniel C. Ustian

Well, we haven’t said it but let us take a look at it and we’ll get back with you on that one too, Gary.

Gary McManus - Impala

Okay, and just on some assumptions for ’09, you’ve got $1.6 billion segment operating income. What’s your expectations for military profits, you know, pension healthcare expenses, and is pricing going to be able to offset raw material costs and external engine revenue forecasts? If you can kind of go through some of those assumptions that are embedded in your ’09 forecast.

Daniel C. Ustian

What we’ve said on the military is we would have a $2 billion business on the military.

Gary McManus - Impala

Are the margins in ’09 the same as margins in ’08 or would they be better?

Daniel C. Ustian

Well, we haven’t talked about margins on that, in that military business, but you can assume that we are very competitive on that part of the business and we’ve targeted 10% on all of our business segments.

Gary McManus - Impala

But I would think that you have a greater parts mix in the military in ’09 versus ’08 as MRAP rolls down, then that would be a positive benefit to margins -- is that -- that’s not necessarily the right assumption or --

Daniel C. Ustian

We haven’t said that, Gary. Your second question, what was it again?

Gary McManus - Impala

Well, it was pension, healthcare expenses -- directionally, are they higher?

Daniel C. Ustian

That’s one that -- you know, Terry talked about some of the actions that we’ve put in place and really they go back two and three years ago, and now we are starting to realize the benefits of it. But I hope you can appreciate, we have 40,000 retirees out there that we have to measure this healthcare on, so while we have a good trend here, we’re reluctant to say we’re all the way there yet until we see, get some more time under our belts to give anymore guidance than we have out there.

(Multiple Speakers)

-- good trend, and again --

Gary McManus - Impala

But it seems you have to make --

Daniel C. Ustian

-- coming down.

Gary McManus - Impala

Yeah, I assume you have to make some sort of assumption to come up to your segment profit forecast.

Daniel C. Ustian

We did. We put a range in there on that and I think we are going to be within that range for sure.

Gary McManus - Impala

Okay. And do you expect pricing in ’09 to offset higher raw material costs?

Daniel C. Ustian

So maybe answer it two ways, because what’s a little tougher is what the overall industry pricing is versus our pricing, and what I’m trying to say is if you look at the advantage that we have on fuel economy and other things that we have -- features, APU, features, fuel economy, there’s $5,000 to $10,000 a vehicle advantage versus others in the marketplace. So what -- we don’t need a $5,000 to $10,000 increase to overcome the commodity increases that we have, so we are comfortable that we will be able to recover the increases that we will see in commodities. Now, where it all shakes out is still -- who knows, but I think what we are trying to work on is the things we can control and we can bring to the market in terms of value so that we are prepared to be able to collect for at least the cost increases that we have incurred. And with value, I think we feel pretty good about we’ll be able to do that.

Gary McManus - Impala

Okay, and the last part of my question is external engine business, like the Ford business, do you expect that directionally up next year with a very weak ’08, or flat or down or --

Daniel C. Ustian

We haven’t said it but I mean, you can see the second half of this year, the pick-up truck market is very, very low. Some of it is an adjustment of inventory that’s out there, so I would assume that after that inventory adjustment is complete, that we’ll see some increase in volume from year to year but we haven’t said officially what that might be. I would just tell you logically the pick-up truck market for us ought to be a little better than the rate for the second half of this year for sure.

Gary McManus - Impala

Because of the absence of inventory reductions.

Daniel C. Ustian

Right, right.

Gary McManus - Impala

Okay. Thanks a lot.

Daniel C. Ustian

And if we -- and again, I’ll go back to the other point that I made on diesel fuel; if we can get diesel fuel in line with gasoline, that will also help that marketplace and I think once the customers are out there and they go from a diesel to a gas, they are not going to be happy with the performance they have in that product, and so if you couple those, I think that the diesel market ought to come back.

Gary McManus - Impala

All right. Thanks.

Operator

And our final question is a follow-up from Andrew Casey with Wachovia.

Andrew Casey - Wachovia Securities

Thanks for taking my question. A follow-up on Gary’s post-retirement question; you had about a -- it looks like $42 million income in Q1. That is the benefit of the UAQ contract. I assume that does not recur. Is that accurate?

Daniel C. Ustian

Here’s the way I would look at that though; you have to look at the total pension expense that we’ve got. I mean, although there were some actions in 2007 that impact the first quarter, the real key is what happens on an ongoing basis and that’s what we are saying we believe from the earnings that Terry’s talked about of last year, and I think Terry, we’re about flat this year in earnings, so we should be able to at least contain that, in spite of some of the challenges that are out there in that marketplace. The real key question is how much of it keeps going and that’s what we’re trying to keep that -- the total amount for that year consistent from year to year and so it does keep going. And even though there’s one of those that’s a one-time effect, what we are trying to do is keep pension flat so we don’t have any expense on pension from year to year, and that’s what Terry’s reluctant yet to commit to totally, but we are on that path.

Andrew Casey - Wachovia Securities

Okay.

Daniel C. Ustian

Do you want to add to that, Terry?

Terry M. Endsley

No, I think that captures it. I think the description in the Q describes what the UAW plan is, that was the subject of first quarter income. But other than that, that is our objective and we’ll try to get more definitive on this as we go forward and have our third quarter conference call.

Andrew Casey - Wachovia Securities

Okay, so if I look forward and I look at the market performance in what’s a very tough market right now on the equity side, if the returns are sub expectations, aside from the expense issue, would that affect the corridor qualification that you talk about for the amortization expense exemption?

Terry M. Endsley

Conceptually, that’s correct but you need to realize that we are not invested in an S&P 500. That’s not the right benchmark to think about us. We have made money so far this year, not lost money. You know, we have some commodity exposure, we have some hedge fund exposure, we have some weak dollar, non-U.S. equity exposure as well as the Navistar stock that’s in the plan. So conceptually what you are saying is true but our plans have made money so far this year.

Andrew Casey - Wachovia Securities

Okay. And then one last one, if I could sneak it in -- the sustainability; I’m trying to determine the sustainability of the downward warranty expense trend. In the Qs, there’s some language about eliminating or rectifying warranty related issues earlier in the product life cycle, and I’m trying to understand what that includes. Does that include the whole Ford litigation commentary or does that also mean that your warranty expense determinant attributes have kind of changed? Meaning you don’t have to have as much data from field returns before reducing the warranty expense.

Daniel C. Ustian

Well, I think it’s a good question. It’s actually the opposite [of that though]. I think what we have said is that our -- we are now confident that the products going out the door and the products that are in the field are outstanding. What we don’t have yet is -- for instance, let’s take the new trucks that we have launched or the new engines that we have launched, we don’t have enough data yet to get confidence that they will be any lower than our experience. As we get that confidence, and we’ve seen signs so far that it’s there, that we believe this could be lower. But we just don’t have that confidence yet to be able to say that. But we can say what we know is very positive.

Andrew Casey - Wachovia Securities

Okay. Thank you very much.

Daniel C. Ustian

But it does take, you know, maybe to your point, it takes more time now than it did before to get that confidence based on the accounting practices.

Andrew Casey - Wachovia Securities

Thank you.

Operator

Ladies and gentlemen, that does conclude our question-and-answer session for today. I would like to turn the conference back over to Ms. Kos for any additional or closing remarks.

Heather Kos

I would just like to say thank you to everybody for participating and we look forward to our third quarter call with you.

Operator

Ladies and gentlemen, that does conclude today’s conference. Thank you for your participation. You may now disconnect.

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