Navistar International Corporation (NYSE:NAV) Q3 2018 Earnings Conference Call September 6, 2018 9:00 AM ET
Marty Ketelaar - Vice President of Investor Relations
Troy Clarke - Chief Executive Officer, President, Chairman
Walter Borst - Executive Vice President, Chief Financial Officer
Persio Lisboa - Executive Vice President, Chief Operating Officer
Phil Christman - President of Operations
Michael Cancelliere - President of Truck and Parts
Andy Casey - Wells Fargo
Steven Fisher - UBS
Steve Volkmann - Jefferies
Joe Vruwink - Robert W. Baird
Ann Duignan - JPMorgan
Neil Frohnapple - Buckingham Research
Jerry Revich - Goldman Sachs
Faheem Sabeiha - Longbow Research
Joseph O'Dea - Vertical Research
Good day, ladies and gentlemen and welcome to the Navistar third quarter 2018 earnings results conference call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference is being recorded.
I would now like to introduce your host for today's conference, Mr. Marty Ketelaar, Vice President, Investor Relations. Sir, please go ahead.
Thanks Liz. Good morning everyone and thanks for joining us for Navistar's third quarter 2018 conference call. Today, we will discuss the financial performance of Navistar International Corporation for the fiscal period ended July 31, 2018.
With me today are Troy Clarke, our Chairman, President and Chief Executive Officer and Walter Borst, Executive Vice President and Chief Financial Officer. After concluding our prepared remarks, we will take questions from participants. In addition to Troy and Walter, joining us today's Q&A session are Persio Lisboa, Executive Vice President and Chief Operating Officer, Michael Cancelliere, President of Truck and Parts and Phil Christman, President of Operations.
Before we begin, I would like to cover a few items. A copy of this morning's press release and the presentation slides has been posted to the Investor Relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued this morning as well as in the appendix of the presentation slide deck.
Today's presentation includes some forward-looking statements about our expectations for future performance and the company expressly disclaims any obligation to update these statements. 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 included in today's presentation, please refer to our most recent SEC filings. We would also refer you to the safe harbor statement and other cautionary notes disclaimer presented in today's material for more information on the subject.
With that, I will turn the call over to Troy Clarke for opening comments. Troy?
Hi. Thanks Marty and good morning everyone. Thanks for joining our call today. In the next few minutes, I will provide you with a brief overview of the quarter and then Walter will walk you through the financials and then after that we will do our best to take your questions.
Q3 was a strong quarter for Navistar, and I really want to thank the team here for all the hard work that went into it. Here’s a couple of the headlines. The industry was strong in Q3 with July Class 8 orders setting an all-time record. We think the market will remain strong in the fourth quarter and into 2019. Navistar Class 8 heavy retail market share was up nearly three points year-over-year. Revenue was $2.6 billion in the quarter, up 18% year-over-year. Adjusted EBITDA was $218 million, an increase of 12%, and we remain on track to achieve positive free cash flow for the year.
The alliance with Volkswagen Truck & Bus, now the Traton Group, proceeds according to plan as we progress with the procurement joint venture and settle in on an array of exciting technology projects. Given Q3 performance and the strong truck market, we will again increase guidance for 2018, and Walter will provide the details in a minute.
And last but not least, although we normally talk about the coming year on the December call, I would like to provide some early insight. We are bullish on 2019, and we believe that it will look a lot like 2018 with Class 6 through 8 trucks and buses in our core markets coming in at a range of 385,000 to 415,000 units. Class 8, within those numbers, in the range of 255,000 to 285,000 trucks.
So, let me provide a little more insight into Q3 results and expectations for the rest of the fiscal year. I am going to do this by touching on three industry topics, orders, supplier constraints, and costs.
First let's talk orders. GDP growth in Q2 was 4.1%, the strongest quarter since Q3 of 2014. In July, the consumer confidence index rose to 127.4, the highest level since 2000. And year-to-date, the ISM purchasing managers index is well above 50, the highest level since 2004. These conditions support fleet utilization, higher freight rates, and improved carrier profits. Look, it's just a great time to be in the truck business. July was a record month for Class 8 orders at over 52,000 units. These numbers have created industry backlogs into Q2 of 2019.
Some of you are now questioning if all these orders will be built. Our customers are placing orders with several OEMs, ready to cancel one, if the other is delivered first or how many orders are placeholders or slots reserved for stock units that can be moved out or canceled at a later date. There are all good questions. Look, at Navistar, we attempt to manage our reporting awarded as accurately as possible. July was a good order month for us as well. We don't expect a lot of cancellations.
Let me tell you why. In the third quarter, our core market net orders were up 90% year-over-year. July was Navistar's highest order receipt month in more than a decade. Navistar's order share grew to 18%. At the end of Q3, Navistar is the only OEM to have grown Class 8 retail share during the fiscal year. In the third quarter, we achieved strong year-over-year growth in Class 8 heavy retail market share, thanks to the performance of the LT series on highway truck and the 12.4-liter A26 engine. The company’s share of the 13-liter heavy registrations more than doubled year-over-year through June 2018. And this did not detract from the company's 15-liter share, which also grew during that timeframe.
July was the first big month for orders for the new MV series medium duty truck as many dealers sold down the old DuraStar and now need to restock. The MV is generating real excitement, and through July, our order receipts in medium were up by 1 percentage point year-to-date, and the July order share in Class 6 and 7 was 38%. So, we took in a lot of orders in Q3, July in particular. Yet, incidental order cancellations have remained very stable for the last 18 months, and we don't see it changing much going forward. We expect to build the units in our backlog.
The second topic I will touch on is manufacturing capacity or constraints to production. After all, the best way to avoid a potential cancellation is to build and deliver the truck. We did experience some supplier-related issues that reduced the number of chargeouts in the quarter. These supplier disruptions resulted in units not produced and others that were built, but not shipped awaiting a part. If not for these issues, we would have charged out and shipped more trucks in the quarter. As we increased build rates in the spring and early summer, we had to work with a handful of industry suppliers to bring more capacity online, resource some parts and tools to other suppliers, and improve productivity to support our increased schedules.
The issues related to these suppliers are behind us, and parts are now available in sufficient quantities to support production and complete any trucks requiring a part. Offline inventories have returned to normal, and we are working through a delivery backlog of trucks ready to transport to customers and dealers, but the supply chain remains really tight, and most of our key suppliers supply the industry as well. The system is basically running without buffers, so things like tooling or equipment downtime, power outages or even weather delays can cause disruptions or line stoppages. Hey, these are events we can't forecast but they tend to be minor in scale, and we believe we have a realistic view of supplier capability in our revised guidance.
The third topic relates to cost increases. In the quarter, we experienced additional cost due to increased transportation cost, premium freight, and other charges due to some of these supplier issues, and increased commodity prices, particularly steel. These are industry issues that affect all OEMs similarly. In this year, we are more than offsetting these increases through some hedging as well as design and procurement savings. In addition, we published price increases in July, ranging from 1% to 3% across our various models. Like all price increases, they will impact units going into the backlog and won't be realized until early next calendar year.
In summary, the current strong economy and order backlog support a strong truck market for the remainder of the year and well into 2019. And although Q3 performance is impacted by supplier constraints, we continue to monitor the supply base very closely to avoid major disruptions. We are expecting a strong Q4, and as such we are increasing guidance.
The LT and the LT with the A26 is gaining share in the market. Our order share of the new MV medium truck is growing and all international trucks are delivering the best uptime for our customers that anyone can remember. And now were taking orders for the new Class 4, 5 CV series, which launches before the end of the calendar year. We believe 2019 will be another very good year for the industry and for Navistar.
And with that, let me turn it over to Walter.
Thank you Troy and good morning everyone. I am happy to report on another strong quarter. We grew our financial results year-over-year despite facing several supplier headwinds. We also grew market share in the quarter in a very healthy industry led by our Class 8 heavy products. Against this backdrop, we are further increasing our 2018 guidance. Let's review the third quarter and then I will provide an update on our expectations for the remainder of the year.
In the quarter, as Troy indicated, revenue grew 18% year-over-year to $2.6 billion. The improvement was driven by a 26% increase in our core truck and bus volumes. Moreover, chargeouts of Class 8 heavy trucks grew 71%, double the industry growth rate of 34%, resulting in 2.7 percentage points higher heavy share. Gross margin for the quarter increased to 19.6% of revenue, up 1.1 percentage points from Q3 2017. The improvement reflects higher volumes and lower warranty expense. In the quarter, warranty expense, excluding pre-existing, fell to 1.7% of revenue compared to 2.4% last Q3, the lowest percentage this decade reflecting the improved quality of our new products.
We continue to face higher freight costs and higher commodity prices, particularly for steel, which has increased over 30% since the calendar year began. Additionally, the supplier constraints resulting from higher industry demand that Troy mentioned earlier impacted our performance. Since April, we experienced delays in certain components, leading to higher company inventories, lower chargeouts, cost inefficiencies in the assembly process and additional freight costs. These units are now making their way through the delivery process and will be reflected in fourth quarter sales. Supplier bottlenecks remain but we continue to actively work with our suppliers to minimize these issues.
Structural costs were up $22 million year-over-year largely from higher investments in the development of next generation diesel and electric powertrain programs as well as higher employee compensation expenses, expenses related to growth initiatives and profit sharing accruals related to supplemental benefits for certain retirees. As a percentage of revenue, structural costs declined to 12.1% versus 13.3% last year.
Net income for the quarter was $170 million or $1.71 per diluted share versus $37 million or $0.30 per diluted share last year. In the quarter, we recognized a gain from one-time items totaling $66 million, which included a settlement gain of $71 million related to a business economic loss claim. Adjusted EBITDA increased 12% to $218 million versus $194 million in the third quarter of 2017.
Turning to the segment results. The performance of our truck segment reflects strong Class 8 market share growth and robust industry conditions. Sales grew 25% in the quarter to $1.9 billion, reflecting higher core volumes, particularly Class 8 heavy and Class 6, 7 medium duty trucks. Truck segment profitability grew to $165 million in the third quarter from $7 million a year ago. The increase in profits resulted from growth in truck volumes together with cost savings initiatives including those from the procurement JV with Traton Group, offset by higher commodity and structural costs as well as the impact of supplier constraints. The segment also benefited from one-time items, including the settlement gain I mentioned earlier.
Parts segment revenue increased 3% to $605 million as higher volumes including double-digit growth in Fleetrite branded components more than offset the gradual runoff of the Blue Diamond Parts business. Profit for the quarter declined $13 million to $144 million as we experienced a shift in revenue mix to more private label brand sales from proprietary parts sales as well as higher freight expenses and higher internal allocation of development and engineering expenses to the parts segment. Additionally, the prior year included income related to the sale of our fuel injector business. As a percentage of revenue, part segment profit margin rebounded from the first half of the year to nearly 24%.
The improving economic conditions in Brazil are supporting our global operations segment. In the quarter, revenues grew 6% from last year to $89 million, driven by an 8% increase in engine volumes. Segment profit for the quarter was $4 million, comparable to last year's quarterly results that included income related to the sale of excess machinery and equipment assets.
Our financial services segment is benefiting from higher average portfolio balances due to financing originations with revenues increasing 5% to $65 million. Segment profit was $23 million this quarter, also comparable to last year, reflecting higher interest margins that were offset by an increase in the provision for loan losses in Mexico and a small asset impairment charge. Also in the quarter, Navistar Financial completed a new seven-year $400 million senior secured Term Loan B facility, of which $150 million was upstream via an intercompany loan to the manufacturing operations.
Moving to cash. We ended the quarter with $1.1 billion in manufacturing cash. During the quarter, net inventories increased by $233 million, largely stemming from the supplier constraints I mentioned earlier and the impact of increased line rates. This negatively impacted networking capital and free cash flow. However, due to the actions taken over the past several months to resolve these issues, we expect free cash flow to be strong in Q4 and positive for the fiscal year. Our strong cash balance positions us to repay the $200 million of convertible notes that mature next month and adds flexibility to address the $400 million of convertible notes maturing next April.
We are once again increasing our 2018 financial guidance. We are raising our revenue guidance range to $10.1 billion to $10.4 billion for the year. With higher volumes and improvements in warranty, we are raising our gross margin guidance to 0.75 of a percentage point increase year-over-year. This reflects our stronger performance to-date and our belief that we will be able to mitigate any potential supply chain disruptions in the fourth quarter. As a result, we are increasing our 2018 adjusted EBITDA guidance upwards by $50 million to range of $775 million to $825 million and we are increasing our 2018 year-end manufacturing cash guidance to greater than $1.25 billion due to the improved profitability outlook for the year as well as lower than anticipated capital expenditures.
In summary, 2018 is shaping up to be a breakout year for Navistar and as Troy mentioned industry conditions for 2019 are expected to remain strong as well. These are very exciting times for Navistar as we are growing Class 8 share in a robust industry environment while further positioning ourselves to be successful in the future.
With that, I will turn it back to the operator to begin the Q&A.
[Operator Instructions]. Our first question comes the line of Andy Casey with Wells Fargo. Your line is now open.
Thanks a lot. Good morning everybody.
Recognizing there is a lag between raw material cost increases and the impact on the P&L, I wanted to ask a couple of questions on that. First, are you seeing more or less of stabilization in the forward cost headwinds that you expect to offset or are you seeing additional inflation that potentially could spill over into 2019? And then second, you mentioned hedging as a part of the way you are offsetting cost this year and also price increases that should benefit 2019 at some point. If material costs stay flat from here, are the price increases enough to more than offset the hedging presumably rolling off?
Yes. Andy, it is Walter. Let me start, and maybe Persio of Phil will want to jump in here as well. We are watching raw material costs closely, in particular commodities. We have previously talked on our calls here and kind of dimensionalized what we have in the way of commodity costs in particular, what steel costs are as a portion of that and what we had said at that time and still directionally true today is that, we have about $400 million of commodity costs that impact us directly. About $200 million of that are related to steel. So, as we have seen, steel prices increase by over 30% since the beginning of this calendar year that does have an impact on material costs going forward.
As you indicated, we do rolling contracts with our suppliers on commodity contracts, in particular in steel, and those will be rolling off over time. We also do hedging activities for some of our other commodities, so we do expect that that will impact us negatively in 2019 versus 2018, given that we have those rolling contracts and hedges in place for this year, and those will roll off and maybe be replaced at higher levels for next year.
But we continue, on the other hand, to work our material costs as well. And so, it is preliminary at this point, and we will provide further guidance on our December call, but as we look at 2019, we think we will be able to offset those commodity headwinds with additional cost reduction initiatives on our material costs overall, including utilizing the procurement joint venture that we have with the Traton Group, formerly VW Truck & Bus, in that regard.
And then on top of that, we will see where the pricing goes. As Troy indicated, we have announced 1% to 3% price increases across the board. We would see that starting to impact our sales in the 2019 timeframe, given those units initially go into the backlog before they get produced.
Andy, this is Troy. Let me jump in on that right there. Pricing certainly is intended to reflect increased costs that impact the industry at an industry level. Things like commodities or regulatory content, right, that’s just characteristic of our industry, but pricing also reflects the superior performance of the product and things like fuel economy, better residual values, and in fact our new LT is demonstrating itself to be a very good, a superior performing product in the market, so even in the absence of some of these industry structural things, given our starting point with the performance of our new products, it would appear that there are pricing opportunities and certainly net pricing opportunities as we continue to experience success in the market.
Okay. Thank you very much.
Our next question comes from Steven Fisher with UBS. Your line is now open.
Thanks. Good morning. You guys gave some color on the order trends, but maybe you could just offer a little bit more perspective here. Have you seen large fleet placing orders earlier than usual this year? And what would your base case be for the cadence of orders in the rest of calendar 2018?
Persio, do you want to try and direct some here? Persio, do you want to get some of your insights with regards to what you see?
Yes. And I have Michael here as well, so he can help me with the answer. But I think we see, first, I think on the fleet side, there is obviously an activity taking place, and this is now a season when we start seeing orders going up, which is now expected to happen. I think there’s a lot of movement in terms of trying to have slots reserved for next year with our large customers, but that really is not different than what we would expect. I think we are all now very conscious of the supplier constraints that Troy alluded to, and we are managing through them. So we feel very good about where we are today, and when we look at our production and the backlog that we have, as Troy mentioned in his comments, it is very robust and I think that provides us good visibility into the first quarter and second quarter of next year, which makes us feel that the order activity is robust and strong and solid, so we have been consistent in how we are seeing these coming from customers. There is not a lot of cancellations. We don't see that happening, and actually we have specs defined. We have the trucks that we need to build well lined up in our production lines.
Okay. And Troy, you mentioned it's a great time to be in the truck business, then Walter calls it a breakout year. I guess can you talk about the 1% to 3% price increase? To what extent do you think the market is now entering a period of really new pricing dynamic? You talked a lot about it over the last several quarters? Is it now strong enough that we are finally able to reflect this great time to be in the truck business on a breakout year?
Yes. Steven, I will give you some color, which maybe gets to it, but we are going to have to see, right. And I think our competitors will do the same. What's really exciting from my standpoint, kind of building off of what Persio said, we don't see in the orders that we are currently seeing. The orders are coming a little bit earlier than maybe they would seasonally. But the orders that we are seeing that are coming in are really orders that are largely replacement units. And these are replacement units of products that went into service in 2014 and 2015. And now is a good time to pull those out of the market.
It's kind of four years later, the use truck market is strengthening and the trucks they are being replaced with, obviously on the other side of the 2017 Greenhouse Gas Regulations have much superior operating costs principally fuel economy like our LT, which made over 5% fuel economy improvement from the old model to the new model. So a lot of the order activity that we see is really, as Persio indicated, nailing down slots that are largely replacement demand. There is however a piece of that demand moving forward which really reflects fleet expansion given, I think what will be more consistent GDP growth over 2% and ultimately a shift in mode from more designated to more dedicated transport, which at the end of the day requires more trucks and requires fleet growth.
And so I am particularly bullish on the fact that we are, I believe, through this fall, we will see orders begin to reflect that. So this year, it is so much fleet expansion, which has been curtailed by things like drivers and stuff like that. They have had a year to get their arms around on how to get more drivers and they have added 30,000 drivers into the pool as it is. Now, I think, as we roll into 2019, our fiscal 2019, the balance of this year and early next, we are going to see fleet expansion for a handful of reasons.
To me, that's the best environment we have had in the eight years that I have worked here to seriously say, how do we create a pricing environment that is healthy for the industry. That certainly really reflects better operating cost and the value we are providing to our customers and then give us an opportunity also to recover some of the investment that not only us but the other OEMs have made in producing truly superior products. That's my thought process on it, Steve.
So I mean, hey, it's a competitive market. I know we always say that. So we will see how much of the prices stick but I think that circumstances have never been better to try to work those through.
And have your customers expressed confidence in being able to receive the trucks that they are ordering? You mentioned the driver shortage?
Look, there is a bunch of our customers we know as we manage direct sales and there is an increasing level of confidence on their part. Customers we do not know but that our dealers know, but the feedback I am getting from the dealers is those issues are being worked through here.
Terrific. Thank you.
Thank you Steve.
Our next question comes from Steve Volkmann with Jefferies. Your line is now open.
Hi. Good morning guys.
I am curious, you talked a little bit, Troy, about the trucks that are waiting to be shipped out and I just want to make sure I understood that. So the supplier issues are basically settled and it's just a matter of working with backlog through and out the doors. Is that the way to look at it?
Yes. Let me have Phil Christman give you a little bit more detail because the delivery process is little different on a car that sometimes the cars is, all cars are ready to go to the customers as soon as they leave the backdoor of the factory. It's a little different in the trucking business. And so there is a little bit of work in progress here that I will ask Phil to describe.
Yes. Steve, so what's happened is, as you know, as we ramp up, as industry ramped up, there were industry-wide supply issues largely in the early summer period. Those systemic capacity issues are really behind us. Those trucks have parts put on those trucks and they are really in the delivery process. And the delivery process, a lot of those get bodies put on them, a lot of those get modifications put on them. So they are through that process and headed to the customers. Now obviously, we are excited to get to these high-performance vehicles that we are producing a lot of customer interest and to the customer so they can get them in their hands. That's the process we are going through right now.
The supply chain remains tight. And so we continue to manage those issues, which are unlike what we experienced in early summer. These are more subject to things like unscheduled machine downtime, shipping disruptions and things like that that we continue to manage through.
And Steve, this is Persio, if I may add too. You should also consider that we continue with our production rates now really high. So what we are doing is we are really taking those units out of the system, the offline units. They have to be shipped at the same time that brand new units are coming down off the line. So it is also a little bit of the capacity and the delivery to customers that now is being managed through right now.
Okay. All right. Thank you. And then maybe this is for Walter. And I know Troy, you started talking a little bit about some of the themes for 2019 and I guess I am just trying to think through the next obvious question about profitability. And I am curious, I know you are probably not ready to put any numbers around this, Walter, but I am wondering if there are some buckets of things that we can talk about that are sort of headwinds and tailwinds to profitability? Obviously, you won't see the $70 million settlement next year, but presumably maybe you will have a little bit better mix because of the new product. I don't know, I don't want to put words in your mouth, but I am curious. Obviously, I am trying to think about whether margins, we should expect to be better next year than this year?
Yes. Well, we sure have been managing the business to continue to grow our margins and so when I call this a breakout year, as was alluded to earlier, it's not only what's happening on the pricing front, but also what continues to occur on the cost front. So we will provide more insights on 2019 on our December call, but what I alluded to earlier is we do see some commodity headwinds there. We think we will be able to offset those with our additional product cost reduction initiatives including using the joint venture that we have with Traton and if the market is able to take price given the more favorable conditions here, then that will be favorable for our results and we obviously look to continue to grow our share next year as well with industry volumes being similar to this year should be favorable for our revenue and our profitability.
But let me stop there and we will provide you some more insights in December.
Are there more structural cost opportunities? Or are we sort of through that?
We are never done on structural costs. The guys are laughing here because where we have to say that to our team. I think what we are looking at is and you see a little bit in our third quarter results here as well, when you look at structural costs, just as a reminder, we think the structural costs as engineering and SG&A. We are investing in some portions of our business. So we have got new product programs as part of the alliance that we are investing in. On the other hand, we are driving the engineering organization to be more efficient. And then similarly on the SG&A side, we are investing in certain growth initiatives to take us to the next level. But at the same time, other areas of the business continue to need to run as lean as possible given our focus on lean practices in all our operations. So there is pluses and minuses there, maybe they equal out.
Yes. Steve, this is Troy. I think kind of as a story, yes, there are additional structural cost reduction opportunities which we plan on taking advantage of and we have many of those already planned out. But I think, do you take those to the bottomline or do we invest those? And especially, I think our mindset today is these are nominal investments. But we are going to continue investing in this uptime proposition. It's paying big dividends and we need to invest in improving our dealers capability.
We need to invest in being able to parts out to our dealers faster. We need to invest in the system support that helps us to become the uptime leader. We are going to invest in these new product programs that we have going across the board with our new alliance partner and we have talked in the past about things like electric vehicles and brand-new diesel powertrains and that kind of stuff. And although the great part about the alliance is that those development costs are shared. There are certainly localization and annotation type cost and engineering activities that we have to bear.
And then the third thing is and Walter referenced it in his remarks, we are investing in our parts business, okay. We have addition of brands. We have reman activities. We have systems and additional market adjacencies that we are going to continue to invest in. And we are going to fund a lot of this stuff basically through the continued efficiencies and economies that we are able to generate through basically the investment we have made in a lean enterprise and lowering our breakeven point.
So I think, you know, you bet. Can we be better? You bet, we can be better and we are going to take that, we are going to invest it and we will make more money for the shareholders.
Okay. I am sorry. I am hearing a lot of investment. Is there any reason not to think margins would be higher next year on higher sales?
Like I said, we will give you some guidance in December.
You wanted some themes, we gave you some themes.
Yes. We gave you some themes. We will get to that in December.
We are still finalizing our plans for next year. So it would be premature.
But thanks for asking, Steven.
Our next question comes from David Leiker with Robert W. Baird. Your line is now open.
Hi. This is Joe Vruwink
I think I heard earlier, your share of orders in the July quarter was close to 18% and your retail market share has typically been closer to 16%. Is the 18% kind of a sustainable figure, in your view, given I would imagine while you have done quite a bit of product refresh, probably not all of your offering is completely redesigned at this point and maybe you could give how much has been redesigned? But just maybe some thoughts on where order share and as a consequence, where retail share might trend over coming quarters?
Hi Michael, do you want it kick that one off?
Yes, sure. So July certainly was a strong month and really, Joe, our entire product line is new or refreshed. And we have seen the results of strong demand from our customers and enthusiasm with our dealers. Particularly, the LT with the A26 continues to gain a lot of traction. With fuel costs up 20% year-over-year, the influence of drivers is greater than ever. We continue to receive very positive feedback on fuel efficiency, the quietness, the steering visibility and just the overall performance of the LT. That, in combination with the focus we have had on uptime has really, really made our product attractive to the customers, which is what attributed largely to almost three share point gain.
One of the signs that we view very positive is customers that have purchased the LT or the LT with the A26 less than a year ago continue to significantly add quantities to their fleet as a additional vote of confidence. In fact, we had a customer recently that was running a little less than 100 LTs with A26s and was so pleased with the performance of them, they just added 500 which is one of pretty good-sized order from a truck load segment customer.
I would also add that dealers are extremely bullish on the new product line. They are seeing increased demand within their market across the entire product line. They are building up their stock inventory. And in fact, one of our larger dealers reported to me just yesterday that six out of every 10 units that are sold from stock are going to conquest customers. And that's really across not just the LT series but our entire product line.
So Joe, let me just highlight to you maybe a slightly different way. Early last year when we did not have a lot of share gains to talk about, we talked about at that time order share gains. And the reason why we did that was because, if we are going to raise that number just the math would suggest our order share has to average more than our actual share. And in fact, some of you guys even said, hey, does this really mean it's going to translate to market share?
And in fact, this year we are happy to point that it did. So it was like a one-year lag but in fact we picked up to 2.7 points, almost three points of heavy share or Class 8 share as we speak. So, to your point, it is our plan, if to gain share we have to have order share average over our current share. So your question, is 18% sustainable? I don't know how to answer is it sustainable, but it's our intention to average higher than our current market share and 18% sounds pretty good to me.
The other thing I would tell you, though, is orders are lumpy, okay. The way we manage and report orders and the way our competitors do, there is just enough differences there in timing and how stock units are worked. That is lumpy. So you can't look at it, I think, at any particular quarter, but certainly over the period of a year and I would point back to last year. If three out of four quarters were able to point to order share gain, we have confidence that we will experience market share gain as well.
So the answer to your question is yes. Whether it's 18% or some other number, we will let the math in the market figure that out. But we don't pull back from the thought we are gain share. We have got the products to do it. We did a great job explaining that's how it's going to work.
And then if I could, just to follow-up on that. A good point was brought up that typically when a new product is introduced, you are not going to get maximum volume by a fleet on that first go-runs. So typically you get a trial run and maybe the next years buyers at full capacity for what share you might capture. If the LT, which was kind of on the front end of all the product redesigns, if that's now getting to see the higher penetration, if you will, because it's been a around a little bit longer, where are we on some of the other new model lines? So in other words, as the newer models go through the same process, would you expect market share to be ticking up just a function of that natural evolution?
Yes. I mean I think you captured it very accurately. One thing I might add to that is also different product variations. On the LT, which is the first one that we launched, we are just now launching the final engine transmission combination of that product. We have had orders for most of the year that we won't be delivering actually until the fourth quarter because of the release of that particular combination.
In the medium duty truck, the MV that we launched, it's probably a little less. The number of variations tend to be more focused, I think, on the bodies that go on the back. But you are right. So even after you launch the product for, I don't know, Phil, a year, a year-and-a-half afterwards, we are still releasing significant build combinations that are in demand by the market. So market share doesn't mature or settle out, I don't know, Phil, would you say, 18 to 24 months after we launch a product.
We just launched the A26 in vocational, which is 13 liter segment of vocational or severe service trucks that's critically important. So you are spot on, Joe. Just having launched all the product isn't the end to the journey. You haven't launched all the product, hey, great news, we are at the beginning of this journey. And so we have high expectations.
Okay. Great. Thank you very much.
Our next question comes from Ann Duignan with JPMorgan. Your line is now open.
Yes. Hi. Good morning. Troy, maybe I will start with you. Can you explain the guidance for 2019 for Class 8 industry? At midpoint, you are guiding flat year-over-year despite what we have seen with orders? And what would have to happen for it to be at the low end of your guidance?
Yes. Ann, I am just going to tell you, Ann I am disappointed you weren't the first person in the queue. You typically are. So I don't know what happened there. If we have done something wrong, I apologize.
Ann, we have a pretty good line of sight on it and I think the industry does as well is what the first half of year looks like, right. So I think with the first half of the year and where we think the backlogs are and the discussions we are currently having with customers and dealers with regards to orders, we are pretty confident in the guidance that we have provided.
I think the real question then for the industry is, what happens in the second half of the year 2019 from an order standpoint, in anticipation of 2020? Whether the market takes a breath? Does GDP keep growing at a level at above 2%? So we thought long and hard about this and recognize we are kind of one of the first ones out there putting the stake in the ground. But we think directionally, if it's a strong first half of 2019, those are the numbers. If it's a strong second half of 2019, we you will adjust the numbers and I am sure we won't be the first to do that.
That's how we are looking at it. And I don't want to make it any more complicated than that actually.
Yes. But just looking at the midpoint, maybe Troy, first half, second half, what's your current thinking in terms of percent first half, percent back half? Just in the ballpark of what you are guiding to today?
Yes. I don't know how to tell you that answer though we think first half is probably stronger than the second half at this point in time.
Okay. I guess we will make our own forecast on that. And then just talking about fleet expansion and talking about introduction of the LVs, we are seeing fleets add capacity particularly on the private side as well as others. However, our expectation then is that those new trucks will have fewer miles put on them per year and that could result in a longer replacement cycle. Would you agree with that thinking, Troy? Or how do you guys think about that? If we are going to expand the fleet, but we are going to put fewer miles per year therefore instead of a three-year cycle, we are going to move to maybe a four or five year cycle. Is that the right way to think about the next cycle?
Well, first of all, I agree with your underlying assumption that there are fewer miles. And I think that that's a phenomenon and as we get into more, as the percentage of commercial carriers becomes more dedicated and less designated, okay, if that kind of makes sense. So, I agree with that underlying assumption. And as such, one of the reasons why we are bullish is that there is in fact more trucks to be sold as the market settles into that kind of mode. I guess I haven't thought it through on what it might mean to the ownership cycle from three-year to four-year or five-years. It's a good question. And I think part of that is going to have to do with used trucks. And of course, we have had a little distorted view of used trucks here for a while, but it is getting straightened out. So we are going to have to come back to you on that. It's a good issue. The underlying assumption, I believe, is correct. I don't know that I can make the claim that it will shorten the ownership or length of the ownership cycle yet, but certainly it's not out of the realm of possibilities.
Okay. Thank you. And I agree, I guess it will depend on the used market, which would incentivize replacement but I will leave it there in the interest of time. I appreciate your feedback.
Our next question comes from Neil Frohnapple with Buckingham Research. Your line is now open.
Hi. Thanks. Good morning. Parts segment revenue growth was a little bit better than we expected in the quarter, but can you just talk more about the outlook going forward? Do you think you can continue to deliver year-over-year growth in the segment? And when will the Blue Diamond Parts be less of a drag on the growth rate? And I guess I am really just trying to get at when can we expect segment sales to really accelerate into the mid to high-single-digit range like some competitors? Thank you.
Yes. Neil, it's Walter. As we have discussed on prior calls, there is some ins and outs here on Blue Diamond Parts. We were very consistent on that. It's declining over time but at a very slow burn rate. So we continue to get good sales from that business. In the meantime, our private label business, Fleetrite and the reman business through renewed have higher sales than Blue Diamond Parts and as you heard in our commentary, Fleetrite had double-digit growth again this quarter, which it's been doing quarter-after-quarter. So we have some parts of the business that are growing nicely, others that are winding down slowly like BDP.
And then as Troy indicated, we are looking to find additional opportunities to grow the parts business even further. And then once you look a little bit longer into the future, as we start getting some of our new alliance products and so on that will provide additional parts revenue and profit opportunities. So parts is really a function of some ins and outs. We were happy to see that the margins here in the third quarter were more similar to what we saw earlier in the year. And that continues to be something that we want to watch together with you guys. Because some of these different businesses within the parts segment have higher and lower margins.
Okay. Got it. That's helpful. And then, Troy, you mentioned that used truck market is strengthening. But can you talk more about the outlook for North America used truck? Would you expect the supply side to start increasing, obviously given all the deliveries that will be occurring and start to put downward pressure in pricing in the next few quarters? Any more color you can provide there? And is that the biggest risk, do you think that it's the cycle in your view?
Well, truthfully, what I think happens is, I do think that, so first off, because of the delivery issues, not just with ourselves but with others, we were slower getting these trucks into the fleets than the customers would like. So they have been holding onto their trucks a little bit longer. So this large quantity of used trucks that would flow into the used truck market is going to be more metered out than we have seen in years past. That's one thing.
The second thing is, as the fleets require more capacity, as the fleet size goes up, something other than replacement demand, again another reason to hold on to that used truck a little bit longer and again they come into the market, I think, on a more gradual basis. So I wouldn't anticipate that. A slug of used trucks come in the market and depresses prices.
And then again, there are a lot of fleets and individuals who drive used trucks as their main business model. Again given the demand of higher GDP growth, there seems to be strong demand and I think this is what's important. There is strong demand for used trucks today. There is a nominal shortage of used trucks today. So I don't anticipate the collapse of used truck pricing. The same phenomenon has happened in the past, but it in fact will be far more gradual and I think we will not be as disruptive as we have seen in the past.
Okay. Thanks very much. I will pass it on.
Our next question comes from Jerry Revich with Goldman Sachs. Your line is now open.
Yes. Hi. Good morning everyone.
I am wondering if you folks can provide an update on your connected offering? How many trucks are now a part of your connected fleet? And as you are getting past the three-year initial free rollout period, can you just talk about what kind of renewal rates that you folks are seeing on software as a service offering?
Yes. Excited to talk about that. So our OnCommand connection is this telematics offering, largely intended to provide us the opportunity to give higher uptime to fleet, not just to owners of our trucks. This is product offering that we provide to all of our customers. And we have about 475,000 trucks that we are monitoring on a very regular basis. About two-thirds of those are in fact not Navistar or International branded truck. About a third of those are. This is a service, the basic uptime service we basically provide for free. It's just something. It's an ingredient to our brand and we provide again this handful of basic services which are intended to improve uptime to all customers.
Very exciting and just recently and I am going to, I think Phil, in the June timeframe, we began in our heavy on-highway trucks, installing a telematics device of our own design. It's a purchased device. So it's on a 100% since June of our heavy trucks. This is the first product that in fact has the additional services that can be purchased or subscribed. And unfortunately because we launched it in June, we are very excited about it. I think we have great plans on how to make it work and market around it, but it's really too early to tell because there is in fact a free period of time for it. And so we are really kind of not, I would say, into the strong revenue part of that. We need another year before we would be able to look back and probably give you the kind of results that you want.
That said, as we piloted the services we can offer with this, things like automated or advanced automated driver inspection, we do have customers who are paying us for those type services. But they have all been pilots for us to try to figure out what the right kind of pricing and contractual terms might be. So the 475,000, the OCC original pot of customers continues to proceed. It is not something we sell a lot into because it's just part of our brand. Exciting for us is now the installation of our own telematics device and own telematics service which then allows us to provide advanced and customized services for which we the plan is to have a revenue stream. It's just too early for us to tell you or give you much insight as to what that might look like yet.
Okay. I appreciate the update. And separately on the supply chain with actions that you and your supply chain partners have taken along with the rest of the industry, what do you view as peak production capacity that's feasible in this cycle compared to the last cycle? Are there actions that have been taken so far, just catching up with where the supply chain ideally would have been two quarters ago? Or are they adding enough capacity to help bring down the lead time for the industry as a whole? What's your sense?
Yes. I think the longer that these backlogs stay as they are, just organically so to speak, the system becomes more efficient. Increments of capacity are being added, some of which we don't even know about. And I think the industry adjusts over the course of the fourth quarter to current production rates, not just ourselves but on the part of the industry. So I think it would be fair to say, by the end of the fourth quarter calendar year, the industry will have adjusted to the production rates of the fourth quarter. And I guess someone could say, well, that's the capacity of the system and I think that would be reflected by the fact that buffers and banks and safety stocks would be restored by that point in time. Now backlogs continue to expand and we all take our line rates up, because to satisfy customers, we have got to, no customer is going to wait 300 days for a truck, then that's going to stress it again. But I would say, the path we are on today, we would feel that it's headed towards equilibrium here sometime in the fourth quarter.
Okay. Thank you.
Our next question comes from Faheem Sabeiha with Longbow Research. Your line is now open.
Hi. Good morning guys. I was wondering if you could provide a little color around your higher EBITDA guidance for the year? I was just wondering what would get your EBITDA to the high end of that range? Are there big truck shipments that may go off the quarter? Is it higher military builds? Is it better parts performance? If you could your thoughts around that, that would be great.
Yes. It's Walter. A number of things go into our guidance. But one of the things that would obviously impact that is where we are within the revenue range, right. So at the higher end of the range, we would expect to be towards higher end of guidance. We have got a good line of sight on what units will be delivered. We are still working through some of the supplier issues. So if that goes perfectly then we would be closer to the higher. And then if there any additional issues pop up, as Troy indicated, we are kind of running full out here at the moment.
And then the on the margin side, to be at the higher end of the guidance, if our margins are little stronger than what's implied and we have been able to do that here this year. So we will see where the actuals come in for the fourth quarter.
Okay. Great. And then can you also talk about what NAV is doing to drive double-digit growth in its Fleetrite parts brand? I mean, it seems this has been performing well. And if would be great if you could provide some color on what's driving that strength?
Michael, do you want to make some comments on that?
Yes, sure. So Fleetrite is a brand that's been around for over 45 years. It is well known throughout the industry. And what we do is continue to invest in expanding product lines not only for traditional all-makes parts, but also into parts availability for competitive brands. So for example, we recently launched a competitive crash parts program. It would have grills, hoods, bumpers and many other components that would be available for makes of trucks beyond our own brand. We are also looking at expanding availability and reach. Many of our dealers are looking at opening parts-only Fleetrite type stores to reach a different customer base. Some of them already have opened them, but they are more plans in the works. So we are really going to leverage the success of the Fleetrite brand and the quality that it offers. Many of our Fleetrite parts are used in OE production as customers really care not just about price, they care about overall value starting with quality. So we have a lot to offer there and we are very bullish on what the future of Fleetrite will be.
Okay. Thank you.
Our next question comes from Joseph O'Dea with Vertical Research. Your line is now open.
Hi. Good morning. First question on the A26 and the share doubling year-over-year. Does that put it roughly in the mid-single digits in the 6% to 7% range? And then based on what you see in the order book, could you talk about where that hare is going and then what the timeline looks like for getting that up into something that might be more like mid-teens?
A great question. The number is above 7%, okay. So you were pretty close here, 6% to 7%. It's above 7%. And I would probably want to go back to Michael again. He provided part of this expiration earlier. With most major fleets, we have some number of these units in their fleets and as they prove themselves out, they will purchase more on their cycle, I think.
But Michael, why don't you go ahead and talk about that?
Yes, sure. So we have been very successful in A26 and continue to grow. The more customers get experienced with the product, the more they continue to add to it. And it's really been doing a fantastic job from fuel economy, uptime, reliability, quietness and drivers just really love it. And if you look at the heavy segment, the two biggest segments are the general freight segment and the leasing segment and we continue to make inroads in both of those segments. So customer feedback is great. And again, the price of fuel, 20% up year-over-year. So it's more important than ever to customers to have fuel-efficient tractors. We are making penetration gains in really all segments. The day cab as well as the sleeper and then as we are offering it now in the vocational segment, we continue to see tremendous acceptance of the product in that segment as well. So we are optimistic about continued share growth. And not only in the 13 liter segment, but also the 15 liter segment as we continue to grow our overall Class 8 share.
Thanks for that. And then on the pricing side, when you talk about July pricing, the 1% to 3% is kind of a wide range actually. So could you talk about whether that's just dependent on the customer mix? And then in addition, on the discount side, are you also able to dial back discounts for stocking or conquest program, so the net realizations end up being better than that 1% to 3% and then whatever cost you are offsetting?
Go ahead, Michael, go ahead please.
Yes. So Joe, this is Michael. So what's most important is that there is increased consideration and demand for the entire new or refreshed product line. And that's helped change the conversation with customers. It takes the focus off of initial price. It really transitions to a discussion of total cost of ownership. And for most customers, price is a function of the value that they get. So when you look at the benefits that customers get in improvements in fuel economy, uptime and the driver acceptance of the product, the recently announced 1% to 3% price increase in July has seen them varying degrees of positive price stickiness. And that's across all segments of the market and all size of the customer.
We think about it as there is just no substitute for demand and as our market share gains increase, there is significant demand for our product, again particularly in the largest segment of the business. We track quarterly how many orders we receive of 100 trucks or more. And on a quarter-to-quarter basis, third quarter this year versus last year, our demand for the product of large sales were up 68% year-over-year and that really increases to over 225 increase of the actual amount of units that are sold. So we are seeing the demand impacts pricing on the dealer side, but the dealers, as I mentioned, are bullish on the product.
They are looking forward to restocking their lots being position to grow and improve their market share. They have got tremendous acceptance from customers in their market. And really, there was just an example the other the day of a dealer that it sold 10 of the MV series to a leader in the towing industry and this customer had these for really less than 60 days and he was so impressed with the cab interior, the fit and finish of the product that they added 100 additional MVs to that order. So again, price is always important, but it's really about demand and we are confident we have good demand for the product.
That concludes today's question-and-answer session. I would like to turn the call back to Troy Clarke for closing remarks
Just my thanks to everybody here for your interest in Q3. It was a very good strong quarter robust market. We are set up for a very strong close of 2018 and a great start to 2019. And I was talking to somebody the other day and they said, man, if you are not having fun in today's market, then there is something wrong. I just have got to tell you, this is a great time to be in the truck market and it's a great time to be at Navistar. Thanks for your interest and look forward to talking to you all in mid-December.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.