Though Navistar posted a loss for the second quarter this year, largely due to charges to cover losses on its “legacy” used trucks equipped with its old MaxxForce 13-liter exhaust gas recirculation (EGR) only engines, the OEM remains confident its fortunes will improve during the second half of 2017.
“We are on track to deliver on our plan for the year,” noted Troy Clarke, Navistar’s chairman, president and CEO, in a conference call with analysts and reporters.
“The [trucking] industry was weak as the year started,” he added. “But indications are that the Class 8 market is recovering and that the Class 6-7 market remains strong. Overall market conditions should improve in the second half of year.”
Still, Navistar posted an $80 million net loss for the second quarter on revenues of $2.1 billion, with higher losses in its used truck business the main culprit.
Walter Borst, executive vice president and CFO for Navistar, added that the $60 million charge the OEM took in the second quarter to beef up its “reserve” to cover those old MaxxForce trucks is action being taken “to eliminate the need to future reserve additions and to clear the way to eliminate the rest [of them] by end of 2018.”
Borst added that if Navistar didn’t have to make that $60 million reserve allocation, its truck segment would have been profitable and the company’s overall results would have been closer to break even.
He pointed out that values in export market are typically lower than what Navistar achieves domestically, but in the past few years, there’s been pressure on used truck prices for all brands, so that price gap narrowed.
“As result made decision to shift from domestic [used truck sales] to more aggressively pursue export opportunities,” Borst noted. “It will accelerate the velocity of [used truck] sales, drive [used truck] inventory lower, and make it easier for dealers and customers to sell their [used] MaxxForce trucks in the U.S. market. We believe our legacy EGR issues coming to an end.”
“This is taking important step to put this legacy issue behind us … as legacy issues are masking our underlying improvement in results,” Clare added, noting that if Navistar didn’t take advantage of the pricing equivalency now occurring in the export market – “and it is a hot market for us,” Clarke stressed – the remaining inventory of 7,000 used trucks equipped with the MaxxForce 13 would mostly likely be with the company thru 2020 and beyond.
“By this time next year, you’ll not hear us talking about this,” he stressed. “The pace of trade-ins [for legacy equipment] is exactly as anticipated. We’re past the 75% point and are now grinding through the balance. We’re going to take this drag on our earnings and put it behind us.”
To prepare for the future, Clarke said Navistar plans to leverage its new OnCommand Connection feature to prepare for the needs of platooning and self-driving trucks.
“It really sets us up for that,” he explained, pointing out that 300,000 of its trucks now feature the OnCommand connected package. “We’ve taken the Facebook approach: gets fleets to sign up, demonstrate its value, and develop a marketplace to put apps on. That is what we view as an avenue for revenue. We also see a higher level of services also revenue generating and, last but not least integration of the vehicle to our service network. We’re starting to see ‘green shoots’ from that.
All in all, Bill Kozek, president of truck and parts for Navistar, said on the call that the OEM remains “very bullish” about the second half of 2017 and on into 2018.
Though Class 8 orders dipped in May, “one month does not make a trend,” he stressed. “May Class 8 orders were still 20% higher than [the same month] last year and orders were 30% higher when you add in medium-duty. The positive thing for us is our share was up for May; severe share was up 18% and heavy duty share was up 16%. So we’re still bullish.”
As a result, Borst said Navistar is still projecting Class 8 production volume will end 2017 between 190,000 and 220,000 units.
