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Navistar International Corp (NYSE:NAV)
Q2 2019 Earnings Call
Jun 4, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the Navistar Second Quarter 2019 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Marty Ketelaar, Vice President of Investor Relations. You may begin.

Martin P. Ketelaar -- Vice President, Investor Relations

Thanks, Gigi. Good morning, everyone, and thank you for joining us for Navistar's second quarter 2019 conference call. Today, we will discuss the financial performance of Navistar International Corporation for the fiscal period ended April 30, 2019.

With me today are Troy Clarke, our Chairman, President and Chief Executive Officer; Walter Borst, our Executive Vice President and Chief Financial Officer; and Persio Lisboa, Executive Vice President and Chief Operating Officer. After concluding our prepared remarks, we will take questions from participants.

Before we begin, I'd 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 US GAAP equivalents 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 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.

Our 2019 industry and financial guidance does not reflect the impact of possible tariffs from goods crossing the Mexican border. When additional information becomes available, our industry and financial guidance will be reassessed and if necessary, adjusted accordingly.

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 our safe harbor statement and other cautionary notes disclaimer presented in today's material for more information on the subject.

With that, I'll turn the call over to Troy Clarke for opening comments. Troy?

Troy Clarke -- Chairman, President and Chief Executive Officer

Okay. Hey, thank you, Marty, and welcome to the Navistar second quarter earnings call. I'll share some overall thoughts on the quarter and the industry, then Walter will take you through more detail on the company's financial performance and outlook for the rest of the year.

We had another great quarter. Total company revenues grew 24%, and adjusted net income increased by 57%. This strong performance is driven by growth in core truck volume, which was up 35% year-over-year.

Second quarter retail market share was up across the board, with Class 8 share up 1.6 points to 14.5% and medium share up 3.5 points to nearly 30%. We're not finished. Our Class 6-8 truck order share doubled to 28%. Additionally, the production ramp or acceleration of the new Class 4/5 truck is almost complete.

US economy is showing signs of slowing but remains very healthy. Key economic indicators are mixed, while forecasts suggest risk to GDP growth in the upcoming quarters. First quarter GDP growth came in strong above 3%. The ISM manufacturing index remains above the 20-year average.

Consumer spending growth is soft, and yet consumer confidence remains high. Key indicators for the trucking market are also mixed. Freight demand and rates are declining from their 2018 peaks, but remain above historical averages. Used truck pricing has moderated from the 2018 peak, and inventories have increased, yet this is in line with increased new truck sales volumes.

As expected, recent industry order activity is pulled back through the first six months of 2019. Industry Class 8 orders have declined 63% from a year ago. And industry backlogs have declined by 22%, since peaking in October. However, Navistar second quarter core orders once again exceeded charge-outs, adding to our solid backlog.

Our new truck inventories remain toward the low end of their normal range, and our used truck inventories are diverse and balanced, as we've taken back trade-ins of competitors makes and models while we grew market share. Supply chain issues have eased. However, capacity remains tight. We worked closely with suppliers as we increased line rates. Since industry production has been strong, we're increasing 2019 core industry guidance. And Walter will provide more detail.

Our focus on the customer is generating this retail market share growth. We're winning business with new customers and growing our share of wallet with existing customers, including several who are among the largest fleets in the US. And winning their business will provide many benefits down the road.

One major benefit is the opportunity to earn future repeat business from these industry leaders. And pricing will continue to improve as customers experience the value of our products. These large fleets heavily influenced the buying patterns of smaller fleets and owner operators, priming the pump so to speak for the dealer channel for increased sales activity in future quarters.

In higher truck, volumes also drive growth in our Parts segment, especially from trucks with our proprietary powertrains. We expect profit and gross margins to grow over time, along with share, as our products deliver on our brand promise of uptime.

As part of our commitment to uptime, early in the quarter, the company announced that we will be opening a new Parts Distribution Center in Memphis. This will enable industry-leading delivery times to dealers and customers. And our service partnership with Love's is on track for national rollout next quarter, improving repair velocity and increasing uptime for our customers.

We achieved a great deal over the past several months. We paid down debt. We found a partner for Navistar Defense. We annuitized the Canadian pension obligation. We ratified a productive agreement with the United Auto Workers and most recently announced a settlement to address outstanding MaxxForce Engine litigation.

These actions improve our risk profile and position us for future success. It was a result of our focus on uptime, we expect to grow retail share even further this year. These higher revenues will come with stronger gross margins, generating higher adjusted EBITDA margins in the second half versus those reported in the first half of the year. Walter will walk you through our 2019 financial guidance.

In summary, Q2 was another great quarter for Navistar. Our progress demonstrates that Navistar is the best investment opportunity in the sector. Market share is increasing. Our commitment to uptime is gaining real traction with customers as we expand service locations and parts availability. The alliance with TRATON is reducing costs through the procurement joint venture and cost effective access to next-generation technologies. And we've taken actions to improve our risk profile.

I would like to comment on the proposed tariffs on goods from Mexico. As it works out, we're one of the first companies reporting results following this announcement. Given the recent nature of the announcement, it's too early to assess the impact they could have on our business. We're working with our trade associations and continue to monitor this situation. And as you would expect, we are working to understand those potential impacts. But setting the tariffs aside, early indications suggest that 2020 will be a good year for Navistar. And while we're pleased with the progress we've made, we've only begun to show the true earnings power of the new Navistar.

And with that, I'd like to turn it over to Walter.

Walter G. Borst -- Executive Vice President and Chief Financial Officer

Thanks, Troy. Yes, Navistar again delivered strong financial performance in the second quarter, reflecting healthy industry conditions and our intense customer focus. Let's begin by reviewing the second quarter results before I provide an update on our 2019 guidance.

As Troy indicated, revenues grew 24% in the quarter to $3 billion. The improvement was driven by a 35% increase in core truck volumes. Our market share grew 1.9 points to 19.3%, reflecting higher share in all vehicle segments on both year-over-year and sequential basis. Also supporting truck revenue growth is improved pricing, which is up 1% to 2% across all product lines.

Gross margin for the quarter was 16.8%. The second quarter is, historically, the low point for margins due to customer mix from strong sales to rental and leasing customers. In addition, segment mix impacted consolidated gross margins as truck revenues grew substantially year-over-year while Parts revenues increased modestly after adjusting for the new revenue recognition standard.

As we've discussed previously, parts margins are higher than truck margins. So while second quarter gross margins are lower, the higher truck sales will benefit Parts sales in the future. Higher SG&A expenses during the quarter are the result of a $159 million charge for a legal settlement, as well as for current period and potential future settlements with customers of our 11 leader and 13 leader MaxxForce EGR engines.

Adjusting for this one-time charge, structural costs, including SG&A and engineering expenses fell as a percentage of revenue to 9.6% from 11.4% in the prior period.

The company reported a net loss of $48 million, which included the legal charge. To help assess the underlying operational performance of the business, we're introducing an additional metric, adjusted net income that will exclude the impact of certain identified significant one-time items from net income that the company does not consider to be part of its ongoing operations.

Excluding these one-time items, on an after-tax basis, adjusted net income grew 57% to $105 million in Q2 versus $67 million last year. Adjusted EBITDA rose 23% to $224 million in the second quarter versus $182 million a year ago after excluding one-time items on a pre-tax basis.

Moving to the segment results. Our Truck segment sales in the quarter grew 35% to $2.3 billion. The sales growth was driven by an increase in all core product segments, plus the production ramp up of the new Class 4/5 trucks.

Total Class 8 volumes grew 47% and Class 6/7 volumes increased 31%. Excluding the legal charge I mentioned earlier, Truck segment profit doubled from a year ago. The increase was largely driven by higher volumes and improved pricing, partially offset by the impact of the sale of a majority interest in Navistar Defense and cost pressures related to commodities.

Our Parts business delivered another great quarter. The Parts segment revenue results were impacted by the new revenue recognition standard ASC 606, which Navistar adopted at the beginning of this year. The implementation of this standard reduced second quarter revenue by $31 million.

On a comparable basis, revenues grew 2% year-over-year. Profit for the quarter was up 9% to $144 million due to improved US operating results, reflecting growing private label business, partially offset by lower Blue Diamond Parts volumes. Parts segment profit margin grew nearly 3 points year-over-year to 25%.

In the Global Operations segment, revenues were down $10 million year-over-year. Due to recent political uncertainty, economic conditions in Brazil are not recovering as quickly as initially expected. However, the segment remains profitable.

Our Financial Services segment is benefiting from higher average portfolio balances due to increased financing opportunities. As a result, revenues increased 24% to $78 million. Higher interest margin from improved funding strategies and income from an intercompany loan drove profitability higher by 68% to $32 million.

During the quarter, the company generated $161 million of manufacturing free cash flow, largely from strong adjusted EBITDA and favorable working capital performance. In April, the company repaid its $411 million convertible notes issued in 2014 with cash on hand. Notwithstanding the paydown, the company ended the second quarter with a strong manufacturing cash position of $950 million.

On May 23rd, NFC closed a new five-year nearly $750 million revolving credit facility with a syndicate of 15 banks and repaid its $400 million Term Loan B issued in July 2018. The new facility provides for additional liquidity, with increased flexibility at a lower borrowing cost. Since January, Standard and Poor's, Moody's and Fitch have upgraded the company one notch and now acknowledging our stronger financial performance and lower risk profile.

I want to highlight a new company inventory chart that has been added to our earning slide deck, which is posted to the website. This chart provides additional insight into our total inventory levels, including the number of days of sales on hand in a normal range over the past several years.

As you can see from the chart, days of inventory on hand are 84 days, at the low end of the normal range of 80 to 120 days, reflecting higher sales volumes. This ratio more accurately depicts total company inventories versus only referencing absolute dealer inventories in the slide we had shown previously. We plan to provide the total company inventory slide going forward.

Let me also take a moment to update our guidance for the year. As Marty indicated in his opening remarks, this guidance could require further revision if the US implements tariffs on imports from Mexico in the near term. Excluding such tariffs, we believe 2019 industry volume will range between 425,000 units to 445,000 units, a 25,000 unit increase from our prior guidance. Because of the higher-than-expected industry volumes, together with strong core market share growth, we're also raising our 2019 revenue expectations by $500 million at the midpoint to a range of $11.25 billion to $11.75 billion for the year.

Relatively, more revenue growth is coming from higher truck sales to larger fleets, magnifying both the Truck versus Parts segment mix and larger versus smaller customer mix impacts I mentioned earlier. Although we expect gross margins to increase throughout the remainder of the year, material costs headwinds will constrain gross margin growth. Taken together, we now believe gross margins will be between 18.25% and 18.75% for the year.

Also beginning in the second half of the year, we expect funding for alliance projects, including next-generation diesel powertrains to increase. While our structural costs will begin to grow modestly over the next few quarters, that spend will be much more efficient than if we had developed such products by ourselves. As a result of higher revenues and strong market share gains, we are increasing the adjusted EBITDA guidance by $25 million to a range of $875 million to $925 million for the year.

In summary, 2019 is shaping up to be a very strong year for Navistar. The company is recapturing market share, growing revenue and EBITDA, and taking actions to strengthen our balance sheet to prepare for the road ahead. We're very excited about the future and hope you are too. To help you better understand where we're heading, we'll be hosting an Investor Day on September 19th at our headquarters in Lisle.

Our Executive Management Team will provide additional insights on our strategy, improvements we've made to the business and our road map to becoming a market leader. Be on the lookout for more information and we look forward to your attendance.

Additionally, we invite you to attend this year's North America Commercial Vehicle Show in Atlanta from October 28 through the 31st, where you can see our latest product offerings and technology developments.

With that, I'll turn it back to the operator to begin the Q&A.

Questions and Answers:

Operator

(Operator Instructions) And our first question is from Steven Fisher from UBS. Your line is now open.

Steven Fisher -- UBS -- Analyst

Great. Thanks. Good morning.

Troy Clarke -- Chairman, President and Chief Executive Officer

Hey, Steve.

Steven Fisher -- UBS -- Analyst

Just wanted to follow up on the Mexico question. And it sounds like you have to take some lumps on the guidance near term, but what strategies and alternatives would you have to address this in the medium term? And what would it take for you to actually kind of decide to take some action on that, given that these are sort of political things that may come and go?

Troy Clarke -- Chairman, President and Chief Executive Officer

Yeah. Hey, Steve. This is Troy. Good morning and certainly -- and thanks for your question. We certainly appreciate that. And we know that all of you have many questions on this and quite frankly, we do as well. Mexico is an important part of our manufacturing footprint at both a supplier level and in an assembled truck level.

And the second thing I would comment is capacity utilization of all of our manufacturing is much higher today than it was just a handful of years ago. So really, we need to understand the details and then what changes we can make or should make in line with that. And it's hard for us and quite frankly, we really don't want to speculate on what the outcomes of that might be. But trust us, we're up to our elbows in some of that analysis as we speak. And I think at the right time as we have a better line of sight on what will take place and how it will take place, we'll be able to provide more specific guidance to you guys and some better insights.

Steven Fisher -- UBS -- Analyst

Great. Thanks. And then just as we get further into the handful of months now that we've been in this order downturn, can you just talk a little bit about the profile of what type of customers are ordering new trucks and which ones are now holding back and who's actually kind of bold enough to put the orders in for 2020 at this point?

Persio V. Lisboa -- Executive Vice President and Chief Operating Officer

Hey, Steve. This is Persio. Look, what we are having today is, we, first of all, if you go back to the peak of the orders -- the orders that we faced last year, a lot of large carriers were really placing significant volume of orders. And even the dealer network, they were trying to protect as much as possible these lots that they wanted to get reserved with the OEMs.

Past that point, we got into the first half of 2019 and we saw the orders really leveling to the right place. What we are seeing today is that we still have large customers, large carriers, no -- doing no business and no placing orders because there is a need for replacement anyway of their fleets. The other thing that we're seeing is the products are more efficient from a total cost of operation. So fuel economy is important. The new model years are improving every year. So all of us, including our competitors were delivering different products and that makes them come back to the market. So, we see still a wide variety but obviously, that those -- those that placed significant volumes last year, they are not in the market for the first half but now we see them now already talking about the future in the second half. So, we will need to monitor summertime and see what happens.

Troy Clarke -- Chairman, President and Chief Executive Officer

Yeah. But Steve, we looked at some of these Persio referenced, the people still order in trucks are the people who recognize that the economics of owning a new truck is still very, very compelling. Over the last 10 years, there have been about a 30% improvement in fuel economy performance alone, which -- so if you've got a truck that's between five and 10-years old, you've got the opportunity to save about $10,000 to $15,000 a year in just fuel costs, let alone all the uptime stuff that we're now providing. And it turns out in this, what we'd like to call, sustained demand, which is replacement, plus a portion of that's driven by technology.

Customers who appreciate the safety systems and the impact that has on their overall costs, but also their ability to attract and retain -- and retain drivers. So these, I would say a strategic, well-thought-out longer term players in the industry. Those are the guys who -- and gals who are still ordering trucks, so to speak and hanging in there. Their orders are still in their backlog solid, and we anticipate delivering those. Those are the folks that I would say.

Steven Fisher -- UBS -- Analyst

Terrific. Thank you.

Operator

Thank you. Our next question is from Andy Casey from Wells Fargo. Your line is now open.

Patrick Wu -- Wells Fargo Securities -- Analyst

Hi. Good morning, everyone. This is actually Patrick Wu standing in for Andy. Thanks for taking our questions.

Troy Clarke -- Chairman, President and Chief Executive Officer

Patrick.

Walter G. Borst -- Executive Vice President and Chief Financial Officer

Patrick.

Patrick Wu -- Wells Fargo Securities -- Analyst

Yes. Just a question on your backlog. I think you had some good commentary about how your backlog is pretty robust at this point. And just wanted to see what you guys are hearing from your customers that is supporting for your view that 2020 will be a positive year for you guys? And just from an industry's perspective, do you think the industry itself is also positive or is that more a commentary on your business?

Persio V. Lisboa -- Executive Vice President and Chief Operating Officer

Well, this is Persio again, Patrick. What we are seeing from customers is really, as I mentioned to you -- now the opportunity -- and Troy just referred to, the opportunity to replace their fleets is something that is very meaningful. We cannot discount the importance of that. So the backlog that we have today now is pretty solid. Actually, one of the things that we've done in terms of the production, we try to pull ahead the increase of our production as much as we could at the beginning of the year and we did that very successfully. And as we raise our rates by managing the supply base, we build more trucks, we could deliver more trucks. And actually, the reflection of our market share is a result of that as well.

So, we made more availability to our customers and that had really paid out a lot for us. So, what we are seeing today that the backlog -- we never really filled the backlog with orders that didn't have a name. We always -- we referred to that, I think several times in our previous calls. So, we tried to really give priority to customers that were real customers that would take the truck and that's the quality of our backlog. That's why we feel very good about what we have today. And new orders that are coming are the ones that we are seeing customers that want to replace their fleet, want to get into more modern trucks and they are in a market for those new technologies.

Troy Clarke -- Chairman, President and Chief Executive Officer

I mean with -- Patrick, with regards to the economy, economic and business fundamentals are still very good, right? But a lot can happen in the next 12 months to 14 months. And in some cases, order backlogs would indicate delivery. Obviously, orders today are for deliveries in basically 2020. And so it does provide the opportunity for some customers to say, hey, let's take a wait and see.

Now, freight market certainly seems to be moderating, but I think the question is, is it shifting to a lower gear or not? And it's really hard to tell because seasonal shipping, which typically happens between this July and September kind of time frame actually has increased. And so we'll have to see how that works its way through the balance of the summer, OK. But again, it's -- I think the economic fundamentals are still there that support not only the backlogs, but I think some opportunities that are yet to be discovered in 2020.

Patrick Wu -- Wells Fargo Securities -- Analyst

Got it. That's super helpful. And just touching up a little bit on your comments on market share I guess. What are some of the primary factors? Obviously, you mentioned a couple already. But what are some of the primary factors that drove your market share gains in this quarter and that gives you confidence that you can continue to do the same thing in the second half of the fiscal year?

Are you guys using any price at all in gaining the market share? Obviously, understanding that you mentioned 1% to 2% price growth in the quarter. I guess, how does that number shape up versus the industry from what you guys are seeing?

Persio V. Lisboa -- Executive Vice President and Chief Operating Officer

Well, this is Persio again. Let me touch on the market share and both. I'll try to touch both here. But market share, first of all, it is a direct result of our new product line. The fact that we relaunched the entire new product line, it is really providing us a lot of upside in terms of market share. The entire product line from the heavy side to the medium to the vocational trucks and the bus with all the alternatives, the powertrains, all our platforms, all of them without exception had been refreshed in the last, I would say three years, two and a half years.

And then we, for instance, which is the medium duty that we launched last year is really, really performing well. So the quality of the product is amazing. The customer's feedback is really, really positive, is much better than the outgoing product. That was already a winner. So as we look at the product platform today, we have a lot of new news to customers than customers that are in the market for a new truck, they are looking for a new product and they get that with international.

So that's one. And because of that, I think pricing has been a positive story for us as well. So, we can't comment on the industry pricing, but the fact that we have positive pricing in all segments is also an important data point for us.

Patrick Wu -- Wells Fargo Securities -- Analyst

Great. Thank you. Super helpful.

Operator

Thank you. Our next question is from Adam Uhlman from Cleveland Research. Your line is now open.

Adam Uhlman -- Cleveland Research Company -- Analyst

Hi. Good morning, everyone.

Troy Clarke -- Chairman, President and Chief Executive Officer

Morning.

Walter G. Borst -- Executive Vice President and Chief Financial Officer

Morning.

Adam Uhlman -- Cleveland Research Company -- Analyst

Walter, I guess first for you, back to the earnings guidance. We raised the sales guidance by $500 million or so, but the EBITDA guidance only went up by a little bit. Could you maybe provide us a bridge of what's happening within gross margin versus your expectations and kind of the changes in structural costs that are leading to that low leverage?

Walter G. Borst -- Executive Vice President and Chief Financial Officer

Yeah, sure. As we indicated in the remarks, revenues have come in stronger than what we had anticipated for the year, came in stronger in the quarter than most of you had. I thought it would be. So, that is impacting our truck versus parts mix. Our truck margins are not as high as our parts margins. So, that's impacting gross margin in the quarter and for the year as a whole.

Secondly, as we indicated, we're selling relatively more to larger customers in terms of that growth, doing well with the smaller customers as well, but relatively more to the larger customers and those tend to have lower margins.

And then thirdly, because the industry is running well and our share in particular is doing well, we're also seeing some pressures on the materials side. And some of that is due to commodities year-over-year because we're pretty well hedged in 2018. Some of those have rolled off here in '19. And then secondly, just the supply base is running full out.

Adam Uhlman -- Cleveland Research Company -- Analyst

Okay. And then how much do you think your material costs will be up for the full year roughly?

Walter G. Borst -- Executive Vice President and Chief Financial Officer

We still think that pricing will be greater than the impact on material costs. And we've made significant progress on the material cost side as well to offset those commodity price increases that we saw. But as we've indicated on prior calls, we still expect that to be a net benefit to our results.

Adam Uhlman -- Cleveland Research Company -- Analyst

Okay. The Financial Services business had a really great quarter, the highest profits here in a long time. What are you thinking about for the second half of the year for that business? And I think you had mentioned in the prepared remarks, there was intercompany loan. Can you share with us kind of the impact or how that's benefiting the numbers?

Walter G. Borst -- Executive Vice President and Chief Financial Officer

Yeah. I think the second half is probably not too similar to what we've seen year-to-date. We've had some intercompany loans in the past between the manufacturing operations and the Financial Service segment. So that -- we do call that out. But the principal benefit, I think that we've seen in the Financial Services area is two things.

One is the higher volumes that we've had in the truck business is giving them additional financing opportunities. And secondly, they've been relentless in terms of trying to get their funding costs down. And the revolver that we put in place here just a couple of weeks ago or in the last couple of weeks is another example of that. So, we're just trying to continue to work our funding cost down while providing our customers the services that they're looking for.

Adam Uhlman -- Cleveland Research Company -- Analyst

Okay. Thank you.

Walter G. Borst -- Executive Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. Our next question is from Neil Frohnapple from Buckingham Research. Your line is now open.

Neil Frohnapple -- Buckingham Research -- Analyst

Hi. Good morning. Thanks. Just a quick follow-up to Adam's question on gross margin. Were there any carryover supply chain and efficiency or headwinds in the quarter from adding the second shift in excavator, I think back in November? Was there anything that continued in the second quarter that sort will moderate in the back half or is that largely behind?

Walter G. Borst -- Executive Vice President and Chief Financial Officer

I think it's largely behind us. We had that a couple of quarters ago. It continues to be tight, right? So, we're surely not getting maybe the advantages we otherwise might have seen. But we've got the supply constraints more or less under control now.

Neil Frohnapple -- Buckingham Research -- Analyst

Okay. And then I just wanted to go back to the increase in the core market share guidance to greater than 19%. Could you just talk about more -- where that -- where you're seeing faster-than-expected share gains, whether it's broad-based increase? And I guess just as a related follow-up, if you could just talk more about Class 8 order share performance, whether just directionally over the last few months relative to your recent retail share trends.

Persio V. Lisboa -- Executive Vice President and Chief Operating Officer

Well, I think -- this is Persio, Neil. And basically, the market share growth is coming from all segments as I mentioned, I think. Actually, Troy had that in his remarks. So if you look at now bus, we are up in bus significantly. Medium, we are up significantly. In Class 8, we are up, not really, as not higher, stronger than we had anticipated last year.

So, there is not a specific segment that is providing the biggest improve -- I think improvement, we are seeing that coming from all the segments that we have. Obviously, that from a customer standpoint as Walter mentioned, we have larger carriers and actually leasing and rental business is an important business to us and it is growing significantly.

I think in terms of Class 8 orders, as I said, we've been monitoring Class 8 orders for the biggie -- for the first half. And we have an important share actually. Although the orders were lower, we maintained a significant market share in the order intake, which I think provides us confidence that on a Class 8, the performance that is ahead of our initial estimates in the first half would stay for the second half as well. So, that's how we are now revising guidance and why we are taking a position where we will probably exceed the 19% overall core share.

Troy Clarke -- Chairman, President and Chief Executive Officer

And we have the -- the order share, just as for Class 8 has been running well ahead of our retail share. And so while overall industry orders are lower, that's what gives us confidence here that we'll continue to see that translate into retail share within Class 8 over time.

I mean, I think that's -- Persio or Walter maybe in my comment, I think what's unique about Class 8 is orders continue to run ahead of charge-outs. So we can say order share has been high and that should eventually convert. But when orders run in a month or a quarter are greater than the charge-outs then we're adding to the backlog, OK.

And again, the quality of the backlog gives us confidence that we can count on even with the market share expansion that we have now forecasted and guided to do the math will work out and our market share will be higher.

Neil Frohnapple -- Buckingham Research -- Analyst

Okay. That's helpful, Troy. And you don't think there's anything in the new product lineup that precludes Navistar from getting back to the, call it, 17%, 18% historical share, you guys experienced over the last 20 years or so?

Troy Clarke -- Chairman, President and Chief Executive Officer

No. No, as a matter of fact, I mean as Persio noted, right? I mean, all this, what we had originally called Project Horizon, this project, we set off a number of years ago to revamp our product portfolio and really be in tune with what the customers were looking for at that particular point in time was to get us back to what we used to call fair share plus, right?

And you think about that fair share number is kind of in that 18% range. So, anything above that, we just like to assigned to the fact that our products are performing very well in the market that the uptime services we're providing are in fact unique and differentiating for us as a company. And last but not least, we're all just so much great guys here at Navistar who know how to sell trucks.

Neil Frohnapple -- Buckingham Research -- Analyst

All right. Thanks so much.

Operator

Thank you. Our next question is from Ann Duignan from J.P. Morgan. Your line is now open.

Ann Duignan -- J.P. Morgan -- Analyst

Hi. Good morning, everybody.

Troy Clarke -- Chairman, President and Chief Executive Officer

Hey, Ann.

Walter G. Borst -- Executive Vice President and Chief Financial Officer

Good morning, Ann.

Troy Clarke -- Chairman, President and Chief Executive Officer

Good morning, Ann.

Ann Duignan -- J.P. Morgan -- Analyst

Troy, can we go back to Mexico? I think 20% of your trucks manufacturing assets are based in Mexico, but could you remind us what percent of your production is coming out of Mexico right now?

Troy Clarke -- Chairman, President and Chief Executive Officer

Well, I think -- let me put it this way right now. Capacity is -- the effective capacity we have is about two-thirds in Mexico and one third in the United States. We do have some level of flexibility between our operations but not total flexibility. And I think, again, that gives you a sense as to the type of footprint that we have. I hope that's helpful.

Ann Duignan -- J.P. Morgan -- Analyst

And just to be clear, two-thirds of your total truck capacity is Mexico?

Troy Clarke -- Chairman, President and Chief Executive Officer

Yeah, that would be truck and excluding bus.

Persio V. Lisboa -- Executive Vice President and Chief Operating Officer

Excluding bus, right.

Ann Duignan -- J.P. Morgan -- Analyst

And excluding bus, I want to make sure I get that exactly right. Yeah.

Troy Clarke -- Chairman, President and Chief Executive Officer

Hold on. And excluding the G Van business, the cutaway van business that we do for GM, right? So, we have two lines in Mexico and two lines at SAP. One of the lines -- they are at Springfield. One of the lines at Springfield is a contract manufacturing operation you recall, which is a cutaway Van we do for General Motors.

Ann Duignan -- J.P. Morgan -- Analyst

Okay. I just want to make sure that's clear. Though -- maybe we don't get tariffs put on Mexico at the end of the day.

My second question then is just on your inventories. I know that maybe they're lower than they have been historically, but I'm not sure that history is a good indicator either for your own internal inventories or for your dealer inventories. Can you just talk about -- looking forward, what would be a normalized inventory level days, inventories for Navistar and dealer inventories? What level should we be looking forward on a normalized basis?

Walter G. Borst -- Executive Vice President and Chief Financial Officer

Yeah. We tried to provide that chart and to provide a little bit of historical perspective. So if that's run 80 to 120, take the midpoint of that as maybe something that's more normalized, we're running at the lower end of that currently.

Ann Duignan -- J.P. Morgan -- Analyst

Yeah. But my point is that 80 -- 120, is that really the average? Is that really normal? I mean it starts -- that seems very high.

Troy Clarke -- Chairman, President and Chief Executive Officer

Yeah. So -- this is certainly a question that's -- Ann, I come from the auto industry where we talked in days on hand, right. And days on hand in the auto industry in an ideal circumstance is probably 45 days to 60 days.

Okay? And so given the fact that some portion of our products, especially the type that go through dealers oftentimes go through a TEMs or equipment manufacturers. And that equipment manufacturers are pretty well sold out to capacity right now.

And even when they're not, right, they tend to operate at a high level of utilization. We think that compared to like the auto world that is at least 75 days and maybe more like 90 days. But this isn't something that the industry as a whole reports on. So, I think we've laid out the data. The data would suggest over some number of years that this average is around 90 days to 100 days for basically the last five years.

So, I don't think it's 45 or 60. I think it's more like 75 to 90. And I think the data kind of supports that. And again, it's the uniqueness of our industry. Some number of orders, especially the kind that go through dealers have SQs or special engineering activity, we require some time to be able to do that and then schedule them. And then, basically, source the material and then they go to TEMs. And so all of that is in the number that you see.

Ann Duignan -- J.P. Morgan -- Analyst

Okay. That's helpful color. And then I'm glad you brought up the automotive industry because that's what I had in the back of my mind as my base also, so thank you. I'll leave it there.

Troy Clarke -- Chairman, President and Chief Executive Officer

I think about that a lot. And this chart is somewhat in response to some questions we got at the last meeting. And we were pretty convinced just looking at gross inventory, it doesn't really do justice to the story because inventory will go up with more business. And look, we're all about more business, right? Our market share goes up. Our plants are better utilized. We need to make sure that we're doing the right things.

Thanks for asking the questions.

Neil Frohnapple -- Buckingham Research -- Analyst

Yeah. Appreciate it. Thanks.

Operator

Thank you. (Operator Instructions) And our next question is from Jerry Revich from Goldman Sachs. Your line is now open.

Benjamin Burud -- Goldman Sachs -- Analyst

Hi. Good morning, everyone. This is Ben Burud on for Jerry.

Troy Clarke -- Chairman, President and Chief Executive Officer

Hey, Ben.

Benjamin Burud -- Goldman Sachs -- Analyst

Morning. I was just hoping you can give us an update on your peak production capacity cycle compared to last. And given, you added some shifts and some production capacity last quarter, how do you think your capacity compares to your competitors at this point in the cycle?

Persio V. Lisboa -- Executive Vice President and Chief Operating Officer

This is Persio, Ben. The peak capacity is really a factor that -- you can make a calculation on the installed capacity that we have, but it is really dependent on the supply base. What we've seen last year is there was no point on us trying to pull ahead the second shift in the spring of 2018 when we couldn't get parts to provide to one shift. So really, what we had to do and we did -- we had a lot of investment now driven to the supply base is actually in the second half of last year to raise their own capacities to support us and that happened to the competitors as well.

But the limitating factor today in the industry is the supply chain capacity, which I think it is performing much better now than it was last year. We have still -- as Walter alluded, it is still tight, but we have much better control and we are operating on a very high level with the entire chain. So the determining factor is really how many parts we can get from the supply base, and I think we're in a good place right now probably for the size of the market.

Benjamin Burud -- Goldman Sachs -- Analyst

Got it. And then can you help provide an update on your 13 liter share versus share on 15 liter? I know a year ago, you said 13 liter share was in the 7% to 8% range. Can you maybe update us on that? And then help us think about what the ultimate opportunity in share recovery is there?

Persio V. Lisboa -- Executive Vice President and Chief Operating Officer

Yeah. Well, the share on the 13 is around the 7% today. It is higher than what we were -- where we were last year at the same time for almost a point. Well, we are getting now the 13 liter. The feedback we are getting from customers is being really, really positive and we are finding the first units that are in the market with 300,000 miles to 400,000 miles, we will start hitting the market right now.

It is an important milestone for us because customers want to see the performance of a new engine in a first generation. And it is from everything that we've seen so far and the dealer feedback that we get, the customer feedback that we get. And the OnCommand Connection data that we have from more than 400,000 vehicles, we compare the trucks that have A26 on it to everybody else's trucks and it is performing very well.

So overall, we are still in a ramp mode I would say of A26. There is a ton of upside. We think that, that's where we are going to grow market share going forward that heavily (ph).

Troy Clarke -- Chairman, President and Chief Executive Officer

Yeah. So if you look at it, as Persio indicated, we are gaining market share nominally year-over-year because it's just a set of numbers with the much, much higher sales in Class 8 and the much higher sales of 15 liters, we are making a lot more A26s and it's not reflected in large increases in market share at this point in time.

However, we are seeing significant order share increases. And when you kind of get into the math thought process that we do, where orders are exceeding charge-outs. Again, that gives us high degree confidence that the pump has been prime, so to speak, and there is more growth to come. And we'll see some of that in the second half of this year.

Benjamin Burud -- Goldman Sachs -- Analyst

Great. Thank you.

Operator

Thank you. Our next question is from Seth Weber from RBC Capital Markets. Your line is now open.

Brendan Shea -- RBC Capital Markets -- Analyst

Hi. Thanks. This is Brendan on for Seth. You mentioned early indications are positive for 2020 and that some of the orders that you're taking now are actually for 2020 deliveries. Any color you can give, I guess, on how deep into 2020 your backlog is currently stretching?

And then second, are you seeing any strengthening or weakening, or any color rather on strengthening or weakening within some of your vocational end market, construction, energy or something else? Thanks.

Persio V. Lisboa -- Executive Vice President and Chief Operating Officer

Yeah. This is Persio again. Well, we are not seeing any major changes in vocational. Actually, construction businesses is still up. We don't participate too much on oil and gas, as you know. But on utilities, it is still very strong. I think we see that not happening as well. So, not a lot of changes there. In terms of the quality of the backlog as -- I don't think we're going to get into how far into 2020 we are because we need to deliver 2019. I think that's the focus that we have right now. And as I mentioned before, summertime is an important part of the year for us to really getting to these -- the orders for model year '20 and all those units that will start building in the first half of next year or so.

Troy Clarke -- Chairman, President and Chief Executive Officer

I mean the great news is, is orders that come to us today are basically being slotted into 2020. Now given the nature of those orders, for sure, they are into 2020. Sometimes the delivery of those units don't permit a sequential build of the order book. But look, this is a position we haven't been in for a number of years and it's a great spot for us to be.

With regards to the severe service and vocational stuff, I mean I would just point out, look Q1 2018 to Q1 2019, order share more than doubled. Q2 2018 to Q2 2019, order share more than doubled again. So, although we don't participate in some of the segments as robustly as we might like, the segments we do participate in, we, with these orders again, delivery time is a little disrupted because they tend to go to TEMs. It gives us confidence that on an underlying basis, we are gaining share in the severe service segments where we perform well.

Brendan Shea -- RBC Capital Markets -- Analyst

Okay. Thanks, and congrats on a strong quarter.

Troy Clarke -- Chairman, President and Chief Executive Officer

Thanks.

Persio V. Lisboa -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

Thank you. Our next question is from Jeff Kauffman from Loop Capital Markets. Your line is now open.

Jeff Kauffman -- Loop Capital Markets -- Analyst

Thank you very much. Hey, everyone, congratulations.

Troy Clarke -- Chairman, President and Chief Executive Officer

Thanks, Jeff.

Jeff Kauffman -- Loop Capital Markets -- Analyst

Thank you. My two big questions have already been answered. So, I'm just going to do a quick follow-up. I think you spoke about the 7% share in the 13-liter market. Could you tell us where your 15-liter share is, and where was that 13-liter share? And I'm going well back in time before we lost all that share when you had to walk away from that market.

Persio V. Lisboa -- Executive Vice President and Chief Operating Officer

This is Persio, Jeff. I'll give you just a reference point for the second quarter. The second quarter of last year, our 15 liter share was 17.1%, and it is 19.5% now in the second quarter of 2019. So, I think when we went back to the days when we had the biggest issues, I think we were as far as down as 13% overall share. And most of that was on the 15 liter side, so we've been growing 15, and the 13-liter is also the upside opportunity that we have. So, there is not one driving the share. I think both are performing in a better way than we anticipated.

Jeff Kauffman -- Loop Capital Markets -- Analyst

Okay. Well, thank you. And that's all I have.

Troy Clarke -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Joel Tiss from BMO. Your line is now open.

Joel Tiss -- BMO Capital Markets -- Analyst

Hey, guys. How's it going?

Troy Clarke -- Chairman, President and Chief Executive Officer

Great.

Joel Tiss -- BMO Capital Markets -- Analyst

I just wondered, can you give us a little sense why the SG&A looks like it's been rising quite a bit this year?

Walter G. Borst -- Executive Vice President and Chief Financial Officer

Well, I mean the main reason you're seeing it come through the numbers, what I mentioned in our prepared remarks, Joel, which is that the litigation charges in that number. So the first thing I'd have you do is to pull out $159 million from that number to get more of a run rate. And then it has increased a little bit year-over-year after you do that, which is principally a function of us investing in some of these powertrain programs as part of the alliance.

Joel Tiss -- BMO Capital Markets -- Analyst

Okay. And then the finance business, wasn't that in run-off mode for a while and now it looks like it's growing again? I wonder what happened there.

Walter G. Borst -- Executive Vice President and Chief Financial Officer

Well, I wouldn't describe it that way. Our finance business, we do have an excellent partnership, as you know, with BMO. So, I don't know if you're just looking for an advertisement. But BMO does most of the retail business for us. We do the wholesale business here domestically. We do both retail and wholesale down in Mexico. As our volumes have grown, our market share has grown, the industry is doing well. There's more business there for NFC. And as we've taken actions to improve our balance sheet, their funding costs are coming down, which is great because it improves our results and it allows us to do even more for our customers.

Joel Tiss -- BMO Capital Markets -- Analyst

Oh, great. Okay. I didn't know about the BMO thing. Sorry about that. And the -- are you willing to give us a manufacturing company free cash flow estimate for 2019, or is it too early?

Troy Clarke -- Chairman, President and Chief Executive Officer

No, just keep watching the actuals.

Joel Tiss -- BMO Capital Markets -- Analyst

All right. Thank you very much.

Walter G. Borst -- Executive Vice President and Chief Financial Officer

Thank you, Joel.

Operator

Thank you. And our next question is a follow-up from Adam Uhlman from Cleveland Research. Your line is now open.

Adam Uhlman -- Cleveland Research Company -- Analyst

Hi. Thanks. Thanks. Can we go back to the Class 4/5 trucks for GM? You had a lot of growth this quarter from the 2,500 units or so that you shipped. Can you remind us what the delivery cadence looks like through the second half of the year? And then has there been much channel fill yet? Is that just inventory filled so far, and is there anything left with the international dealer network?

Troy Clarke -- Chairman, President and Chief Executive Officer

Yes, I think first off, overall, we're just finishing up the final stages of the manufacturing acceleration. So, we'll reach a full acceleration of the product here in the next 30 days or 40 days. All the units so far really have gone to channel fill. And if you think about how GM sells versus how we sell, it's much more probable that they're taking units and setting them on dealer lots as a way that they create awareness around the product, and our products are all ordered typically with a customer.

Very seldom is a unit sitting in a lot, so we have kind of different channel fill characteristics. Both are lacking for number of units still. So as we complete our acceleration and I think still further into the year, we'll still be satisfying the initial demands for the product. The product is sold out for the year. Every unit we can produce, largely driven by suppliers, is sold out for the year, which is a good thing.

Persio?

Persio V. Lisboa -- Executive Vice President and Chief Operating Officer

You're right, spot on. We are sold out for the year. I think this was the comment that I was going to make.

Adam Uhlman -- Cleveland Research Company -- Analyst

Okay. Has there been a material cost with that ramp up that maybe we should be looking to fall off as we get to the full volumes? And what exactly were those full volumes again? Is that like 5,000 units a quarter or so?

Troy Clarke -- Chairman, President and Chief Executive Officer

Yeah, it's in the neighborhood of 5,000 a quarter at full acceleration. And that's where we'll be basically in the fourth quarter-ish of this year. But at the end of the day, yes, in any acceleration, right, I mean there is some number of units that are lost or the material doesn't come in or doesn't work out as you're kind of ringing out all those problems. And so there is some friction and some inefficiency, which contributes to your costs.

It's a portion of what we build at the Springfield plant. So it does affect the plant performance, but those costs, again, as you get fully accelerated kind of fall behind you. I can't really point to a number in the performance that we shared with you today that I would assign to those acceleration costs, but it's just one of those frictional elements in the background, but I think very much in the normal course of doing business, right?

Adam Uhlman -- Cleveland Research Company -- Analyst

Great. Thanks.

Troy Clarke -- Chairman, President and Chief Executive Officer

Okay.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Troy Clarke for closing remarks.

Troy Clarke -- Chairman, President and Chief Executive Officer

Okay. Hey, thank you very much for being on the call with us today, and thanks for your interest in Navistar. Q2 was a great quarter for Navistar. I want to thank our employees and dealers for delivering these strong results. Our marketplace progress and strategic actions are really setting us up, we think, for even much better performance in the future.

As Walter indicated, please mark your calendars for September 19 for our Investor Day. We look forward to hosting you, and the North America Commercial Vehicle Show in Atlanta in late October. Please reach out to Investor Relations or Communications for any additional questions or details on those events.

And again, thanks for your time and interest in our company. We look forward to speaking with you again when we report our third quarter results, or anything that impacts our results significantly between now and then. Have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.

Duration: 56 minutes

Call participants:

Martin P. Ketelaar -- Vice President, Investor Relations

Troy Clarke -- Chairman, President and Chief Executive Officer

Walter G. Borst -- Executive Vice President and Chief Financial Officer

Persio V. Lisboa -- Executive Vice President and Chief Operating Officer

Steven Fisher -- UBS -- Analyst

Patrick Wu -- Wells Fargo Securities -- Analyst

Adam Uhlman -- Cleveland Research Company -- Analyst

Neil Frohnapple -- Buckingham Research -- Analyst

Ann Duignan -- J.P. Morgan -- Analyst

Benjamin Burud -- Goldman Sachs -- Analyst

Brendan Shea -- RBC Capital Markets -- Analyst

Jeff Kauffman -- Loop Capital Markets -- Analyst

Joel Tiss -- BMO Capital Markets -- Analyst

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