Navistar Studying TRATON Buyout Offer But Keeping Mum

TRATON Group's bid for Navistar International Corp. NAV — the elephant in the room — got only perfunctory responses on Navistar's earnings call with analysts Wednesday. Executives instead unpacked some of the reasons why the truck maker lost money in the first fiscal quarter.

For starters, the company's quarterly timing, as opposed to competitors who report on a calendar-year basis, bore the brunt of the end-of-2019 declines in sales and included January's down month. Navistar's core businesses all suffered, but Class 8 trucks posted just 6% market share compared to a normal share of around 14%.

"There's nothing specifically I can point to," Persio Lisboa, Navistar chief operating officer, responded to an analyst question. "We are not driving significant pressure on the dealers to stock up or support products in the marketplace."

First-quarter orders for buses, severe-duty and medium-duty trucks rose 14% over the fourth quarter, Lisboa said.

Navistar has scrubbed its order board, removing some build slots being held for specific customers, CEO Troy Clarke said. With preliminary February Class 8 orders falling 20% from January, a tightly managed backlog is important. Heavy-duty orders could fall 50% this year compared to 2019, Clarke said.

"Over the balance of the year, our results will improve over what we've experienced in the first quarter," he said. "Absent a meaningful impact from the coronavirus issue, I am confident that succeeding quarters will improve sequentially."

By The Numbers

Navistar reported a net loss of $36 million, or 36 cents per diluted share, compared to first-quarter 2019 net income of $11 million, or 11 cents per diluted share.

Revenues in the November-January quarter were $1.8 billion, compared to $2.4 billion in the first quarter last year.

First-quarter 2020 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $59 million, compared to $173 million in the first quarter of  2019.

The company remains on track to improve its EBITDA from the current 8% to 10% by 2022 and 12% by 2024, Clarke said.

Navistar reiterated its guidance for the year

• Industry retail deliveries of Class 6-8 trucks and buses in the United States and Canada are forecasted to be in the range of 335,000 to 365,000 units, with Class 8 retail deliveries between 210,000 and 240,000 units.
• Revenues are expected to be in the range of $9.25 billion to $9.75 billion.
• Adjusted EBITDA is expected to be in the range of $700 million to $750 million.

Other Limiting Factors

Navistar sells a lot of medium-duty trucks to rental companies, including Ryder System Inc. R and Penske Truck Leasing. When the market contracts, some of those rentals are converted to leases. That means Navistar misses out on selling additional equipment.

"For us, it's a double whammy," Clarke said. "We don't sell as many [trucks] because they have lower rentals, and they are putting a rental on lease, so we're not selling a truck to them for leasing."

Navistar also sold trucks to bankrupt Celadon Group. Those trucks are now being auctioned.

"We look at the Celadon liquidation as contributing to the industry pricing trend, not specifically impacting our pricing trend," Clarke said.

"Record deliveries of new trucks over the past two years has increased the supply of used trucks, depressing their prices," he said. "There is just a lot of truck capacity right now chasing a relatively constant number of loads. This is the classic truck cycle."

Elephant In The Room

Other than a perfunctory statement in the earnings news release, TRATON SE's unsolicited $2.9 billion buyout offer for the 83% of Navistar it does not already own was an off-limits subject.

"Navistar's Board of Directors is carefully reviewing and evaluating the proposal to determine the course of action it believes is in the best interest of the company and its stakeholders," the release said.

Marty Ketelaar, Navistar vice president of investor relations, urged analysts at the beginning of the call to avoid asking about the subject. Several tried anyway.

How are customers behaving in light of the offer, one asked.

"We've had some questions from stakeholders but no change in behaviors, business as usual," Lisboa responded.

Any idea on timing, asked another.

"We'll just let the board continue to work through this and we'll just let the process work," Clarke said.

Navistar's purchasing alliance with TRATON is in its third year and on target to generate $200 million in annual savings and $500 million cumulatively over five years, Chief Financial Officer Walter Borst said.

The two companies are cooperating on a $125 million manufacturing expansion in Alabama to produce next-generation big-bore powertrains. A new Navistar assembly plant planned in San Antonio also has TRATON input.

TRATON, the truck manufacturing holding company of Volkswagen AG, purchased about 17% of Navistar shares in September 2016. It is clear about its desire to enter the North American market and compete with subsidiaries of Daimler Trucks and Volvo Group. TRATON flashed hot and cold signals about taking over Navistar before saying on Jan. 30 the time was right.

Coronavirus Concerns

Navistar executives said they are actively working on plans to protect employees and suppliers from the coronavirus.

"We're monitoring our supply chain and have been able to mitigate minor disruptions to date," Borst said, adding that has included some expedited freight and substituting parts in some cases to maintain production schedules.

Clarke said Navistar is able to shift most production between its plants in Springfield, Ohio, and Escobedo, Mexico.

"We've managed through issues like this before," he said. "We have all the tactics. We're just making sure that all those buttons [work] when we push them.

"I don't want to add to the sensationalism on the issue," Clarke said. "It's still a very small issue. You can assume hand-washing went up about 10 times."

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