Marty Ketelaar - VP, IR Troy Clarke - Chairman, President, and CEO Walter Borst - EVP and CFO Persio Lisboa - EVP and COO Michael Cancelliere - President of Truck and Parts

Brian Sponheimer - Gabelli & Co Mike Baudendistel - Stifel Nicolaus Joe O'Dea - Vertical Research Justine Fisher - Goldman Sachs

Thanks, Brian. Good morning everyone, and thank you for joining us for Navistar's fourth quarter and year-end 2017 conference call.

Today, we will discuss the financial performance of Navistar International Corporation for the fiscal period ended October 31, 2017. With me today are Troy Clarke, our Chairman, President, and Chief Executive Officer; and Walter Borst, our Executive Vice President and Chief Financial Officer.

After conducting our prepared remarks, we'll take your questions. In addition to Troy and Walter, joining us today for the 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 Investor Relations page of our Web site 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 to the presentation slide deck.

Today's presentation includes some forward-looking statements about the 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 filing. We would also refer you to our 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?

Okay. Hey, thanks, Marty, and good morning everyone.

I'll provide a brief overview of our thoughts about the fourth quarter, the full year, and the outlook for 2018. Then I'm going to ask Walter to walk us all through the numbers, the financials, and our 2018 year guidance.

And then, we will take your questions. This was Navistar's second consecutive profitable quarter, and it concluded a breakthrough year.

We were profitable for the full year for the first time since 2011. We achieved our largest single-year market share gain in the last eight years.

Our adjusted EBITDA increased for the fifth year in a row. In Q4, our adjusted EBITDA margin reached its highest level since the start of our turnaround.

And we also managed a steady cadence of new product launches. And our global alliance with Volkswagen Truck & Bus hit the ground running, generating savings and speeding our progress on advanced technologies.

2017 started slow, but it finished strong. And we took advantage of the second half growth in the Class 6-8 truck market.

Our sales for the year increased by 6%, and in Q4, sales were up 26% from the same period a year before. Our full year core market share grew by 1.5 points, and we recorded share gains in all truck segments.

2017 was also the second highest year on record for parts segments earning. We saw that customers like the new products we recently launched.

And an important launch in 2017 was our new A26 engine, which is driving higher share in the 13-liter segment of Class 8. Third-party testing indicates that when A26 is teamed with our long haul LT series, it leads the industry and fuel economy by an average of 4%, and customers are noticing.

In 2017, the A26 became available in both the LT and our regional haul RH series. And in 2018, we will launch it in our heavy vocational HX and HV series.

On top of these new engine offerings, our 2018 new product pipeline also includes a new medium-duty truck, and updated LoneStar, the gasoline-powered CE school bus, and we are reintroducing the RE bus. For the end of the calendar year, we will also enter the Class 4-5 market.

By the end of 2018, we will have an entirely renewed truck line-up. Our connected service offerings, starting with OnCommand Connection or OCC, as we call it, are creating new levels of customer value.

In Q4, we went live with the OCC marketplace, our open architectural cloud based ecommerce platform for Telematics and other driver support apps. The first app was our own Electronic Driver Log, which automates federal Hours of Service compliance.

OnCommand Connection leads the industry in helping customers improve uptime with more than 370,000 vehicles transmitting real-time performance data several times per minute. Thanks to the strength of our connected service offerings.

We are well-positioned to lead the industry and making unplanned downtime listing [ph] of the past. Our alliance with Volkswagen Truck & Bus is accelerating.

The alliance is on track to deliver the $500 million in cumulative savings to Navistar over the first five years, with an annualized savings run rate of 200 million, exiting that time period. We are working together on fully-integrated next-generation diesel big-bore powertrains, and we are also collaborating our new advanced technologies, including the electric medium-duty truck and electric school bus we've already announced, and the convergence of our two connected vehicles with Telematics platforms.

Looking ahead to 2018, we see stronger year with growth in Class 8 market and steady sales in Class 6 and 7. We foresee solid U.S.

GDP growth of 2.5% to 3%, and history shows a growth above 2% translates to a growing Class 8 industry. Smart truckload freight rates have remained robust, and the latest freight transportation services index reached an all-time high.

Other indicators of a strong 2018 economy include housing starts, which are expected to grow by 5%, and building permits, which will also grow another 5%. Retail sales are expected to grow by over 4%, and personal income is projected to grow between 4% and 5%.

There are a few headwinds, but nothing like this time last year. These include the ongoing driver shortage and the large supply of used trucks.

And even with these factors, we project that 2018 Class 8 market will increase by about 13.5% over 2017, making it the third best year of this decade. And we believe these headwinds will ease over the course of the year, and we could see some upside to our projections.

We have the production capacity required to take advantage of any upside that develops. We are well-positioned to gain more share in 2018.

Thanks to our stream of new product launches and customer's favorable reaction. The growth in the industry and market share will contribute to higher 2018 profitability, which Walter will go into in more detail.

To sum it up, 2017 was a breakout year for Navistar, and I want to thank our employees for their hard work and dedication in making this possible. Looking to the future, we are now focused on growth, market leadership, and sustainable profitability.

We have the newest product line-up, renewed momentum in the market, and additional cost reductions and efficiencies are already in the pipeline. With this and more, we believe 2018 will be the breakout year for Navistar.

And with that, let me turn it over to Walter to go through the numbers. Walter?

Thank you, Troy, and good morning everyone. I'm super-excited about our returning annual profitability and our market share gains in all truck segments.

Our new products and the alliance with Volkswagen Truck & Bus set the stage for an even better 2018. This morning, I'll review the Q4 and full year results and provide our 2018 guidance.

In the quarter, revenue grew 26% year-over-year to $2.6 billion. The improvement was driven by a 31% increase in core truck volumes.

This outpaced the industry, which was up 19%, and led to our core market share growing to 20%. Net income for the quarter was $135 million or $1.36 per share versus a loss of $34 million or $0.42 per share last year.

Adjusted EBITDA grew to $268 million, which excluded $11 million of charges primarily related to ongoing restructuring in our South American business. 2017 marks the fifth consecutive year we've increased adjusted EBITDA on both the dollar and percentage basis.

Full year adjusted EBITDA was up 15% year-over-year to $582 million or 6.8% of revenue. 2017 net income was $30 million or $0.32 per share, compared to a loss of $97 million or a $1.19 per share last year.

Our used truck operation took another step forward as it set a record by selling over 3,300 trucks in the quarter. As a result, gross inventory levels sell by 26% to $206 million.

This level of growth inventory is in the range of normal operations. Reserves also fell, reflecting higher sales.

This is partially offset by $9 million of reserve additions, reflecting industry-related used truck pricing pressures. This compares to $63 million of reserve additions in the fourth quarter of 2016.

The net inventory balance fell to under $100 million at year-end. Warranty expense continues to fall.

In fact, 2017 annual warranty expense was at the lowest level since 2009, a reflection of our product's improved quality and reliability. Excluding pre-existing charges, warranty expense as a percentage of manufacturing revenue was 2.1% this quarter versus 2.2% a year ago.

Cash warranty spend also continues to fall, but it's still running higher than warranty expense. Since October 2013, our warranty liability has declined by 53% to $629 million at year end.

For the second straight quarter, all reporting segments were profitable. Truck sales grew 33% compared to last year, to $1.9 billion.

The sales growth was driven by higher volumes across the portfolio, reflecting strong industry conditions and market share growth. Higher sales volumes and improved used truck performance resulted in segment profitability of a $112 million.

Absent [ph] the legal charge in the third quarter, the truck segment also would have been profitable for the year. In our parts business, quarterly revenues and profits were comparable to last year, reflecting 25% growth from our private label brands, which include the Fleetrite and re-manufactured parts businesses.

This was offset by the gradual run-off of the Blue Diamond Parts business. In 2017, our private label brands generated more than $500 million in revenues, surpassing the revenue generated by Blue Diamond Parts.

Our global team has done an excellent job maintaining breakeven performance in difficult economic conditions. Conditions in Brazil have begun to improve, and during the quarter, revenues grew to over $100 million as engine volumes grew.

The segment reported its second straight profitable quarter, which included a charge of $6 million for restructuring in Brazil. In the financial services segment, higher truck sales in Mexico led to more financing opportunities that drove segments results.

Revenues in the financial services segment increased to $63 million, and profits grew to $26 million. Moving to cash, we ended the fiscal year with over $1 billion of manufacturing cash.

We generated positive cash flow of $181 million in the quarter, and strong EBITDA results, lower capital expenditures due to the timing of payments to vendors, and improved networking capital results from higher truck volume. For the year, major cash uses impacting free cash flow in aggregate largely fell online with the guidance provided for the year.

Early last month, we completed two capital market transactions, which raised $2.7 billion from a $1.6 billion term loan, and a $1.1 billion senior notes offering. The proceeds were used to repay $2.5 billion of debt.

The transaction also added $200 million of liquidity to our balance sheet, resulting in $1.2 billion of manufacturing cash on a pro forma basis. As a result of these transactions, we have extended our debt maturities by four years, we have greater financial flexibility to address the upcoming maturity of our 2018 convertible debt, and we expect interest expense to decline to approximately $230 million in 2018.

We also experienced a meaningful improvement to the under-funded status of our pension and open liabilities, which decreased by over $550 million to $2.5 billion, due to higher investment returns and favorable OPEB plain [ph] trend rates. Now, let's shift our focus to 2018 and our thoughts on the year at hand.

First revenues, we see the Class 8 industry growing again, up 13.5% to 220,000 to 250,000 units; in Class 6 to 8 trucks plus bus, up 10% to 345,000 to 375,000 units. Higher industry volumes combined with market share and another solid year from our part segment should set us up to achieve revenues in 2018 of $9 billion to $9.5 billion.

Consolidated gross margin is expected to improve about a point. This is due to the combination of lower material costs, largely driven by procurement savings from the joint venture with Volkswagen Truck & Bus, manufacturing efficiencies from higher volumes, and improved used truck performance.

These items will more than offset the impact of higher commodity prices and unfavorable profit mix from relatively higher expected truck sales growth and part sales growth. Structural cost, which we define as engineering and SG&A expenses, will rise to approximately $1.2 billion.

As we increase our engineering projects as part of the VW Truck & Bus alliance, increased sales and marketing activities in conjunction with volume growth and increased investments in new OnCommand Connection services and upgrade our IT infrastructure. As a result, we expect adjusted EBITDA to grow to $675 million to $725 million in 2018.

And we expect to be even more profitable at the net income level in 2018 than in 2017. In this regard, we have recorded in the first quarter of 2018, approximately $47 million of charges related to the extinguishment of unamortized debt issuance costs associated with our previous debt securities as part of our refinancing activities.

The first quarter will once again be seasonally weak. Over the past three years, Q1 adjusted EBITDA has represented approximately 10% of our annual results.

Additionally, we'll have an extended Q1 shutdown period of about two weeks to upgrade our Escobedo paint facility to handle the expected higher Class 8 volumes. We forecast to end 2018 with about a billion dollars of manufacturing cash after repaying the $200 million convertible notes due in October.

We see the benefits of higher adjusted EBITDA being offset by cash outflows related to capital expenditures, interest payments, warranty spending, pension, OPEB contributions, and used truck operations to support new truck sales. As we have experienced in the past, we expect to consume cash in our fiscal first quarter, then rebuild the cash balance over the remainder of the year.

2017 was a breakthrough year for Navistar, and we expect 2018 to be an even better year as we deliver improved results that will drive greater value for all our shareholders. With that, I'll turn it back to the operator to begin the Q&A.

Hi, good morning, and congratulations.

Hey, Brian, thanks.

A couple of questions more on the balance sheet, and first on the pension OPEB, the decline in the year-over-year obligation, none of that was discount rate, correct?

The discount rate is fairly consistent year-over-year. So it's really due more to strong pension returns.

Okay. So if we're thinking about 2018, and if we see a 100 basis points increase, that's another $550 million.

That [ph] will come down?

Yes, we said in the past, and it's still about the same. It's about $500 million for each 100 basis points on pension and OPEB together; principally pension, but pension and OPEB together.

Got it, okay. So we are on the eve of potentially corporate tax reform here, have you seen just - we'll start from the customer basis, have you seen any change at your dealer level at any ordering activity or customers taking delivery ahead of the end of the year?

No, you know it just because -- Brian, because it just came out, I think we and the industry is still kind of studying it, but we have seen no actions in anticipation of where they thought that the bill would end up. So -- but I do think that they will be processing that information over the course of this weekend, in the next several probably.

Sure. And then obviously it's early, but if you're thinking about some of the puts and takes in the bill, as it relates to your own results, can you just talk about that quickly?

Yes. We've taken a look at it, obviously it's not been passed by Congress and hasn't been signed by the President yet, but based on what we see, and given our specific situation as it relates to our balance sheet and income statement, we don't expect a material impact.

We have a valuation allowance for accounting purposes on our domestic operations. And so, we wouldn't need to run anything through our P&L related to the move of the corporate tax rates from 35% to 21%.

And in terms of the other pieces of it, we'll see what kind of finally gets passed, but we don't expect any material impact as a result of individual provisions in the tax bill either. On the other hand, if it stimulates the economy, that's obviously great for the truck industry, and to your earlier comment, we would hope that our customers would react in kind.

Thanks a lot, congratulations.

Back o the comments, anything that drives GDP growth above that 2%, 2.5% kind of range, you know, really means in truck industry vernacular, it means sales in excess of replacement demand. And I think that's how most of the large leasing players in the market view the prospects of a successful tax cut.

Well, great, and Merry Christmas and happy holidays to all of you.

Thanks, Brian.

Thanks, Brian. Same to you.

Hi, good morning. This is Juan for Ann.

Yes. Good morning.

So, just had a quick question, good morning, if you could comment on the sequential market share gain in Q4 and the heavy-duty segment, so that's like related to the UN [ph], and just where do you see current orders, and what do they imply about market share going forward, especially since it looks like Navistar lost some of the share in November there?

I'll ask Michael Cancelliere to make a couple of comments on that.

Thank you. So, sequentially our -- when we look at the Class 8, we were up quarter-over-quarter and on a year-over-year basis.

We had a strong finish to the year. Lot of the customer trucks that were ordered earlier in the year, the new product, particularly LT series started to -- they started to take delivery of those trucks, and that's really what accounted for the increase in market share.

As we look out, and we look at our order board, we believe that we are on the trajectory to continue to have a positive momentum in our both order share and retail share.

Okay.

This is Troy, if I can just come back into that just a little bit; fourth quarter, actually starting in the third quarter is really the buying season for major fleets, large rental and leasing companies. And then depending upon deliveries, you know, it depends on -- the market share will move around.

Our fiscal year ends October 31, and so these are the results that we are reporting. The fiscal year for our competitors really ends at the end of December, and so you can imagine they're basically pushing deliveries in that time period.

So, it is not uncommon that our market share looks like it slips just a tad here as we run into the four -- in the latter months of the fourth quarter. And so, that's just the kind of pressure given the dynamics of where our year closes and theirs do.

Mike's comment about the order board is exactly right. We are on a trajectory to anticipate additional market share gains in 2018 largely off of the improved products that we have in the market, we got the newest product line-up in there, we got a new 13-liter engine, which is really carbon back into the classic segment exactly what we had hoped that it would do.

And we anticipate to build on that going forward.

Got it. Thank you.

Hey, this is George Pika [ph] on for Andy. Great quarter, the general feedback from the dealers has been excellent on the new products, and especially the predictive maintenance.

The outlook implies 7.5% margin on EBITDA roughly, a little bit lower than the 8% to10% long-term range or goal. Can you comment on that?

And is this a little bit of conservatism, or is there anything that's impacting the guide?

Hey, George, it's Walter. The way we look at it we're going to have another strong year in 2018.

EBITDA margins will be up for the sixth year in a row. So, happy to see that our guidance suggests both higher, absolute EBITDA and adjusted EBITDA margin that will be higher than '17 as well.

We continue to march the 8% to 10% EBITDA margins, and we did over 10% in the fourth quarter of this year. We did over 8% in the third quarter.

Our first quarter tends to be weaker due to the seasonality in our business, which covers the holiday period here in December. But we expect our margins to be up, and we are proud of that, and we'll keep building on that over time as we bring this new product line up to market and keep a tight control over costs.

Yes, I mean, George this is Troy. We're just about halfway through launching all these new products.

We'll get those out over the course of the year. And very similar to this year, you'll see the results will accrue -- will accelerate even faster in the second half of the year.

Nothing we're saying pulls back from our thought that this is a great business, and when we're looking at the same kind of EBITDA margins as we have always talked about in the past.

It sounds great. Thank you.

Hi, good morning. This is Joe Veron [ph] for David.

Hey, Joe.

Hey, Joe.

I'll follow-up on another EBITDA question, the structural cost forecast of $1.2 billion, how much discretion is there over that number in the budget for '18? So typically there's been some incremental spending, but you've done a nice job of limiting growth, and the core, I'll call it or maybe even reducing structural costs, and so is $1.2 billion kind of the gross forecast as you see it right now and there might be opportunities for savings along the way?

Yes. Well, we're going to continue to keep structural costs tight in particular in SG&A, but I think what you should read into our guidance is that we are going to invest in the long-term business.

And for '18 that means a couple of things; one, engineering expense will be higher, it will be much more efficient than it was in the past because of the alliance, but we'll be able to invest in some projects that we otherwise wouldn't have been able to do on our own. Secondly, if we see the kind of growth that is expected in the industry and our expectation to grow our market share, we'll put some additional SG&A monies towards sales and marketing activities.

If the industry doesn't move that way, then I think we've shown a demonstrated a good ability to curtail those costs in the other times. And then thirdly, we want to continue to invest in our OnCommand Connection.

And those costs principally run through our SG&A expenses as well. We see this as a tremendous business for us going forward.

It helps in all parts of our business, and we want to make sure that we continue to invest in that part of the business to keep our lead in that segment of the business. So, that's really where the money is going.

So it is higher year-on-year. As a percentage of revenue, it'll continue to come down.

And we're going to focus our spend on the right things while continuing to get leaner in our corporate functions as we've done over the last few years.

Yes. So I think Walter summed it up very well; two pieces, you kind of got the pieces that we've been managing that our additional efficiencies and reductions will be pulling through, and then -- but now is the time given the market that we're in to invest in electric vehicles, Telematics, additional marketing expenditures to continue to drive consideration of the new products that we're going to be launching, and so those are as Walter indicated, those are investments, investments in accelerating the results that will accrue next year and also into the future.

That's really helpful color, thanks. And I'll follow it up with a cashless question; has revenues are in positive territory, the cash generation of the business obviously becomes much better.

How should we think about free cash flow? I don't know if a conversion metric is the right way to think about it, or incremental EBITDA, how that should convert in the free cash, and then how you intend to use that free cash cover the maturities that are on the horizon in '18 and '19 for instance?

Yes. So we've -- I didn't mention the numbers in my remarks, but on Page 14 of the presentation materials, we've provided some guidance on specific cash flow items consistent with what we've done in the past.

So, on the one hand, the way we think about it is how much EBITDA can we generate, and we expect that to grow again in 2018. On the other hand, we do have cash uses in the areas of interest expense, capital expenditures.

We still expect warranty spend to be greater than expense for a couple of years, although that is the difference between the two is narrowing. And pension and OPEB contributions that we plan to make to keep eating into this unfunded pension liability will result in higher cash contributions than expense as well.

So that obviously impacts the free cash flow. But on balance, we expect to end the year with a strong cash balance again of about a billion dollars.

That's after repaying our convertible debt that comes due in October of 2018 of $200 million.

Okay, great. Thank you very much.

Thank you. You mentioned that structural costs you're going to rise $1.2 billion, I mean, where do you think that's going to be sort of longer term over the next few years at least sort of -- can you give us some guidance directionally?

Well, I think we will continue to grow it a little bit with sales, but we surely wouldn't plan for dollar for dollar in there. But we'll continue to manage it very tightly other than in the areas that -- where we want to invest in the business.

I mean I think as a percentage of revenue, we still anticipate structural cost to come down.

Yes, okay.

Now, part of that is revenue growth, but underlying that as Walter indicated, enterprise and efficiency initiatives which you know, now we have the ability to invest in some of the core capabilities, I think IT systems, manufacturing system that let us -- that we haven't had the ability to work on in the last couple of years, but it's something we're good at, we're going to watch it as a percentage of revenue we expect it can continue to come down.

We worked very hard to lower our breakeven point. We don't want to start spending on…

And we know the benchmarks out there and who the best are with this kind of stuff, and we intend to be the best here not in too distant future.

It sounds good. Also just want to ask you, I mean you're getting into some new sort of product categories that you haven't been in a while, any of those products, any higher or lower margin that could create a mix impact?

I think you're kind of referencing the electric RE bus or the gasoline bus, for instance, and/or the Class 4-5 product, I think this in my mind is at minimum there is an opportunity cost there, we need to follow these segments because these are the segments where when you think about last model delivery, when you think about the regulatory impact beginning over the course of the next decade, these segments are going. And if we don't participate in these segments, then certainly we could anticipate revenue pressure potentially in other segments of the market.

These segments do have their own characteristics. And they tend to be a little more I think sensitive to volume than some of the traditional stuff that we do.

Thus in the Class 4-5 segment, we have this partnership with General Motors in that product to make sure that between the two of us we sell a volume that keeps us in the right kind of cost zip code to be able to be -- to be able to be competitive, so…

And the real opportunity here in '18 is that Class 8 volumes are going to be increasing. And as we've said a couple of times on the call already all of our product is new.

So we have new heavy product. We have new vocational product.

We'll get new medium product next year in addition to the product categories that that Troy talked about. So the whole product category -- the whole product portfolio will be new by the end of 2018.

Great point.

Great. Thanks very much.

Okay, Mike.

Good morning everyone. This is [indiscernible] on for Jerry.

Just wanted to spend a minute on OnCommand, I was wondering if you guys could discuss your expected customer renewal rates that will come into play at the end of the new truck promo period, and whether you guys think you can get above a $20 monthly subscription fee based on your projections for the system?

Yes. So as you know, OnCommand connection is -- based OnCommand connection which is really aimed at improving the uptime of our customer's vehicles, whether they're International trucks or some other brand truck, that's a service that basically we provide to our customers for free.

It's really -- there's really not a revenue base associated with that; it's really part of our brand proposition. And one of the reasons why I think we are getting far more attraction in the market is this is how we live up to our uptime promise.

One of the most exciting things, however, is the introduction of what we call the OnCommand Connection marketplace in our own Telematics device. Now, that happens to be -- that device launched over the course of the summer, you can buy it on Amazon, you can buy it TA Truck Stop, sales of that are launching and there is a monthly fee associated with that particular product.

When you talk about renewal rates, it really applies to that segment of our product offering, and we're really too early to tell you, we're still in the point, it's just initial activations, we've had nobody get to a point where there's a renewal basically required. So that's a great question, but it's a question for a little bit -- I think that that particular product segment is a little more mature for us.

However, I would highlight there are other sources of revenue. And as we continue to grow this business, we will be more forthcoming with that.

We kind of look at OnCommand Connection as kind of having three service pools, the first pool is support uptime and our brand promise round uptime; the second is in fact to become the digital backbone for things like insurance companies and load providers, and those are the kind of things which are also coming to the market and will also be revenue generators. And then the third thing is this is marketplace which really gives us the opportunity to not only sell Telematics product, but to sell other apps through that marketplace, and ultimately gain access to segments of the market where we're underrepresented for the purpose of selling things like Fleetrite parts.

And all makes brand parts and our ReNEWed series of remanufactured parts. So it's a great question, I think it's a little nascent at this particular point in time, but we're pushing into those directions.

Got it. And then, I know it's a smaller piece of the pie, but can you spend a minute on school bus, and you maybe give us an idea what inning of that cycle you think we're in?

And then could you just touch on what you think the main drivers were of the retail share loss you had during the year? Thank you.

Yes, this is Mike Cancelliere. Let me take that one.

So, the school bus continues to be an important part of our business, and we have a terrific distribution network dedicated towards the success of it. It's a business that we've recently ramped up investments in product.

So we have introduced the propane. We've expanded our propane offerings.

We've recently introduced gas; got a lot of orders for the gasoline engine. We've invested in additional configurations that product all to meet the demands of the market.

So it's a fairly stable, fairly small industry. So, market share could tend to sway by just a handful of different deals a customer sell.

With our renewed focus on product investment and alternative fuels in that segment as well as our connected services strategy to be better in different than the competitions with our ongoing focus on safety, and all the other investments we've made in products where we have confidence that the school bus share will head in the right direction.

Yes. This is Troy.

So, some years ago, to be very honest, we just took a strategic point of view that we're just going to be a fast follower from the product side. And so, that's a little bit what you see with regards to the market share.

We weren't the first with propane. We followed the year afterwards.

We weren't the first with gasoline. We're following the year after.

We weren't the first with regards to saying, "We will have an electric vehicle," although we maybe the first to have electric cars out there. Our goal is not to be first, but in fact to be the best.

And so, we believe in each of those categories we do have the best product offerings. And in fact the market is responding favorably to those product offerings.

So this has told us we shouldn't really be worried about not having that first mover advantage. It's a small market as Michael indicated, there's only three players; we have very solid relationships.

And in this particular segment, we really need to make sure when we say, "The soup is ready," then the soup is ready, okay, because we are carrying the most precious cargo that you could possibly carry. That's our brand promise in buses.

The advent of our Telematics applications and the new edge log thing we're doing with regards to automated inspection and a whole bunch of other features, that's part of our brand promise. And so, the future of this business is bright, because we basically have never violated putting the best product out there for those purposes.

So we're really excited. I think you'll see those market share numbers begin to reverse this coming year.

And Troy…

And just following up, any… Oh, sorry.

Just adding to the comment, we are -- max in '18, we will have the full lines -- just like on the truck side, we'll have a complete new full line of alternative fuel products on the bus segment, which honestly we didn't have completely in ready in '17. So we'll participate with full presence on that on the alternative segment of the market that wasn't as a strong for us in '17.

Thanks, Persio. That's a…

Got it. And then any color on where we are in that cycle, the school bus cycle specifically?

We continue to expect that to be strong.

Yes, I mean it kind of goes with municipal funding, and I think as the economy goes up and more tax dollars are generated, or that are shared in the municipal level, then they tend to want to change over their fleets. So I think that as the -- with the GDP growth that we talked about earlier, I think we're looking at a couple of good years for this particular market.

Awesome. Thank you.

Hi, good morning.

Good morning.

First question is on 13-liter and share there, and you talked recently about 3% share I think in U.S. and Canada in 2017, and just as we think about some of the mix shift happening in 2018 and some of the sleeper demand that we're seeing in the order boards right now, and on top of your initiatives, what kind of share expectations you have for the 13-liter in 2018, and what kind of progress we can see along those fronts?

Hey, Persio, can I ask you to get off on that 13-liter question and then pass it over to Mike?

Yes, sure. Well, first of all, we are really, really super-excited with the performance of the progress, and you know that we launched A26 at the end of June.

And honestly what we saw in terms of performance for the product in the first -- the three, four months, we saw units and we have more than 2,000 units in the field right now, more than 4,600 in order, and that is really now I think -- just actually this market share is going up, you know, even faster than we thought in the early adoption of the products in the marketplace. That was basically just on the LT.

And then we lost the RH, the Regional Haul truck, and now the A26, severe service, the HV that we just announced at NACV. So we really see that the product for the initial acceptance is phenomenal.

Second, the other important data point is we went through an independent fuel economy performance test. And with the results that came back are that when you pay one A26 with the LT day cab you get close to 4% better fuel economy than a competition.

And honestly that's what I think is being reflected already in the growth of market share. I don't think we're going to be specific on the guidance, but if you think that into that 15-liter market now today, we have those 17% share, we shouldn't expect in long-term the A26 will drive those to the same place.

I don't know Michael if you want to complete the thought here.

Yes. No, I think Persio covered a lot of the key points in that.

Remember, it's not just the A26, it's the A26 in combination with the LT series. That's just been a product that together have helped us getting some fleets that we haven't done business with in many, many, many years.

The combination of the fuel economy, the driver centricity, the lighter weight, and the overall focus we have on uptime has really ramped up our order intake share as well as our retail share in the 13-liter segment. Persio talked about that 4% improvement in fuel economy.

That equates about $1,500 of vehicle. So if you think about it on a 100 truck fleet or so, that could be a $150,000 per year in savings, and that's one of the largest costs that our customers face, so, we are pretty excited about the performance to date in all aspects of the A26 and the LT series.

Yes. And I think Persio you were talking to me earlier about the June versus September penetration of the 13- liter segment?

Yes, I have the latest numbers in that. So you are early on in the year we were tracking in that 3% to 5% range, and we just introduced it in about the June-July timeframe of last year.

As Troy -- to your point as we look at the last 90 day run rate, August throughout October for our penetration, it was almost 9% share. So, really more than double what we've been running at in the early part of the year.

And again, as we look at the orders, that would be consistent with what we believe the future outlook will be for the success of the A26. And remember, we haven't launched it yet in severe service.

When we put it in the HX, the HV series in early next year, we believe that it will have equal acceptance to that market, and with the reliability, durability, fuel economy, the severe service segment in combination with the on highway segment will really be a very positive trajectory for the A26.

Those are really helpful details and clarification. I believe when you're gaining share in the 13-liter, that's not at the expense of your 15-liter share, these are buyers that don't have a preference for 13-liter, and so that's would be incremental to Navistar share?

Yes, that's a great follow-up question. I was looking at the trajectory of our success in the 15-liter segment as well as the 13-liter segment, and as I look at the fourth quarter for example, the number I said earlier, it's also the -- we've also have success in the 15-liter segment and growing share in that segment as well, which tells me it's not coming with the expense of 15-liter.

That's all great, I appreciate it. And then, just one on the part segment, I don't know if you are willing to say kind of expectations for parts revenues in 2018 when we try to look at the Blue Diamond decline curve, I mean, it looks those revenues have roughly halved over the last several years.

So, just trying to appreciate some of those declines you could be facing on top of gains, which you would see elsewhere. So question is really, what kind of declines you expect in Blue Diamond Parts over the next few years and then overall what the part segment revenue growth should in '18?

Yes. So it's Walter, I'll start, and then Michael maybe -- want to add some color commentary.

You know, we've talked a long time about Blue Diamond Parts continuing to decline over time and have a run-off, it's a long run-off period, we've seen that, and that will continue for some years yet. And the key item to takeaway from our call today, which we first time we've shared it is that our private label brands Fleetrite and the ReNEWed business now do more revenue than Blue Diamond Parts over $500 million of revenue this year from those entities.

So, even as we continue to have the run-off in BDP over time, that slow run-off, we continue to look to grow our Fleetrite and ReNEWed remanufactured brands. And they had double-digit growth for the year and even higher growth that -- which Michael probably comment on in the fourth quarter.

So we are looking to continue to grow our parts business over time. There are some puts and takes there, but I'm very proud of what the team in the private label business has been able to accomplish this year again.

Yes. Thank you, Walter.

Again, Walter really hit the high points. So the important thing is our parts business remain strong, 2017 was our best year on record.

The private label business is just -- we continue to invest in it, add new products reach, but not only reach our customers, but reach competitive mix as well. So that's part of the overall growth strategy.

Got it. Thanks very much.

Hi, Good morning. This is Brendon on for Seth.

I was wondering if you could give some color on the source of your recent order strength, whether that's coming from kind of the bigger fleet or some of the smaller owner operators, or some combination of the two?

Yes, Brandon, this is Michael. So we have been receiving orders from all different segments.

So, our dealer business on a year-on-year basis was up in every truck segment. They of course came to hit the small-to-midsize customers, really it's part -- our dealers have never been more enthusiastic about the price we had to offer.

We recently received feedback from the American Truck Dealer Survey that indicated the highest year-on-year dealer sentiment overall franchise value as a result of the investments we made in both product and in technology that we are all benefiting from support of our customers. In the large fleet segment, the leasing industry to general freight industry as a result of the - as I talked about earlier the products we have, the LT, the RH, the A26, we are selling to customers and increasing our consideration with fleets that we haven't done business with in many years.

So, answer to your question, it's really coming from all different segments of the truck industry.

Okay, thanks. And then, bringing back to the VW, so you said that you are on track for the savings there, I was wondering if you could give an update sort of where we are in that getting towards that five-year savings plan?

Yes, obviously, there is a couple of pieces to that. The first piece that we designed or intended to be more short-term or immediate focus is a procurement joint venture.

The procurement joint venture is actually ahead of schedule. You know, we had thought to ourselves, we would be able to book or can track in the neighborhood of $50 million of the savings in the first 12 months of operation.

It's been an operation about 10 months. We are actually ahead of that.

We've actually revised about 75 different agreements, and are in contact with about 250 suppliers. So the purchasing or procurement joint venture is on track moving forward and we are very excited about the progress that we are making.

The second piece of that is the integrated technology, and some of the engineering -- additional engineering spend that Walter talked about is the transition cost to be able to enter the market, and I think we made an announcement, I think in the 2021 timeframe, beginning of launching of the integrated powertrains into our big bore diesel powertrains into our products. That's actually on track as well.

And then, you know, the third thing is we are finding opportunities, we really were not on the board this time last year, and things like the electric vehicle announcements that we've been able to make, we couldn't do those things, if it wasn't really before the opportunities that we find as we interact with our Volkswagen Truck & Bus alliance. So I would say from my standpoint, and I think they would say the same thing, the relationship needs to grow.

The progress continues to accelerate. I think we are going to -- I'll be pleasantly surprised with the results of this alliance.

Okay. Thank you.

Congrats on the quarter.

Thank you.

Thank you.

Good morning. How are you?

Hello?

Yes, hello. Can you hear me?

Oh, hi. Sorry.

Okay. The first question I had is on the EBITDA guide, is there anything non-cash in that guide that we intend to be aware of like a charge for an inventory, because we were surprised that that guide was reasonably below where the street wasn't, and it seems that there is a lot of that is the structural spending and spending on sales and product as you mentioned, but I just wanted to clarify whether there was anything else kind of non-cash that you guys were including that guide as well?

We did mention for the first quarter that as part of the refinancing about $47 million of charges that we booked, we would add that back for adjusted EBITDA purposes. But that's really the only thing that comes to mind at the moment.

Okay. And then, the next question is just on impacted tax reforms, some of the other companies that we've covered have large NOL balances have said that the lower tax rate may allow them to extend their NOLs for longer, so that they are not a cash tax payer for longer.

Is that something that might affect Navistar?

I don't see that at the moment, but let us see the legislation get passed first, and then when we come back in our first quarter call, we will give you a more in-depth view of any impact. As I said earlier, we don't expect any material impact as it relates to the NOLs and the like.

There will be some footnote disclosure that I'm sure we'll need to do as result of that, but they don't come on our first quarter because our year is over, and the legislation is not passed yet.

Okay. And then, the last question is just on the balance sheet management as we head through the cycle, well, obviously heading into a very good year for the truck cycle, and as some of the credit investors that we've talked to has pointed out, you know, the company recently did re-fi the balance sheet, but didn't repay any debt.

And so I'm wondering how guys are approaching preparation for turning the cycle, which is going to kind of even though, it's obviously not going to be in 2018, is it company, I'm thinking about is showing equity with the stock price where it is, and additionally if you guys are going to spend more on the business over the next year, does that ramp back in 2019, you know, the cycle turns or 2021, whatever it is?

Yes, I mean I think we've done a great job over the last couple of months preparing for the future. We just refinanced $2.7 billion of debt.

We pushed our debt stack out four years, and that we've significantly lowered our interest cost. So I think -- personally I think we've done a great job on balance sheet management.

And we've done a pretty good job on that over the last few years as well. We will continue to watch the markets to see what kind of opportunities it might present for us.

So I will just stand by our track record what we did here in November and over the last few years.

With the restructuring of the debt that Walter had indicated, our ready ability to take out the first tranche of converts in 2018, and then with the improving fortune of the company, I mean, I think what we've really done is we've created flexibility that gives us several pathways to address this largely dependent upon the level of cash flow and what other options might be available to us in the timeframe. So I don't know.

I sleep a lot better tonight than I did, or last night than I did a year ago this time, with regards to how we manage the debt on our balance sheet going forward. So I would endorse Walter's comments, we are -- it's like ninth day we are at today, compared to where we were this time last year.

Great. Thank you so much.

Thank you, Justine.

Okay. Hey, thank you very much.

I really do just want to thank everyone for joining us today. Obviously your questions are -- hopefully, we were able to answer your questions, and give you some more insights, but also your questions are helpful for us, right.

And our team is very excited about the year we've just completed. We are probably more excited about what's coming for 2018.

We sincerely believe we have the right strategy, new product offering, the right team in place to make 2018 a breakout year for Navistar. Thank you very much for those of you who follow us, and we want to wish you all a happy and joyful holiday season, and we look forward to talking to you again in the early March timeframe of next year.

Thanks.