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Navistar International Corp (NYSE:NAV)
Q3 2019 Earnings Call
Sep 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 Third Quarter 2019 Earnings Results Conference Call. [Operator Instructions]

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

Martin Ketelaar -- Vice President of Investor Relations

Thank you, Daniel. Good morning, everyone, and thanks for joining us for Navistar's Third Quarter 2019 Conference Call. Today, we will discuss the financial performance of Navistar International Corporation for the fiscal period ended July 31, 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'll 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 U.S. GAAP equivalent and can be found in the press release that we issued this morning as well as the appendix of the presentation slide deck.

Today's earnings press release, investor presentation and our prepared remarks may include forward-looking statements about our expectations for future industry and financial performance, and the company expressly disclaims any obligation to update these statements. Actual results could differ materially from those suggested by our comments made here. For additional information concerning factors that could cause actual results to differ materially from those included in today's presentation, please refer to our most recent SEC filings. We would also refer you to 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 -- President, Chief Executive Officer and Chairman

Okay. Hi, thanks, Marty, and good morning, and welcome to Navistar's third quarter earnings call. All over with few high level thoughts on the quarter and the industry and Walter will walk you through more details on the company's financial performance and outlook for the rest of the year. We delivered another strong quarter, total revenues grew 17% to over $3 billion, adjusted EBITDA grew 22% and adjusted net income increased 55%. The growth came from the truck segment, where volumes rose 45% year-over-year. Retail market share continues to grow year-over-year as well. In the third quarter Class 8 share grew 1.6 points to 13.9% and medium Class 6/7 share rose 4.9 points to 26.8%.

From an industry perspective, the U.S. economy is moderating, a number of key economic indicators remain above their long run averages, but they are trending lower. U.S. GDP is softening and is expected to be around 2% for the balance of the year. The 2% threshold is important to us as the industry tends to add capacity when GDP increases more than 2% annually.

The ISM Manufacturing Index, something we also follow, also continues to trend lower and it's hovering around 50, indicating to us that manufacturing growth is shifting to neutral. Yet consumer confidence and -- spending remain positive, but new housing permits are still running lower than expected. Lots of mixed signals indicate an economy that is in transition. The truck market is decelerating, truck orders tend to be a leading indicator of economic activity as carriers forecast their need for trucks. As freight tonnage and rates decline industry orders for Class 8 trucks in particular have also declined about 75% in the quarter. The used truck market is also slowing, pressuring prices is inventories of less than five year old sleepers are rising as trade receipts have increased in conjunction with new truck deliveries.

Build rates of new trucks have exceeded orders, causing industry class 8 backlogs to decline 44% since peaking last October. Navistar's backlogs are declining as well, and as you've seen, we're actively managing this by adjusting assembly line rates to create a balance between customer demand, inventory levels and a healthy backlog. For example, in November of last year we added a second shift to meet class 8 demand while increasing line rates at all our truck plants. In addition, we added overtime and weekend shifts as needed.

Today, weaker U.S. orders as well as lower Mexico and Latin America orders has resulted in the need to reduce assembly line rates in both of our truck plants. We make these type of decisions every day, actively managing our business appropriately with the goal of being efficient order to delivery process. As a result, total company and dealer inventories remain at the low end of the normal range at 85 days. Over the balance of 2019, order activity should pick up from the levels of the last couple of months due to the traditional fleet ordering season as carriers continue to replace aging trucks. This fall ordering season will provide further insight into 2020, currently we are expecting 2020 core industry volumes to be down about 20%, reflecting a 25% reduction in Class 8 trucks and a 10% reduction in Class 6/7 and bus units.

Tentatively, we are planning for 2020 Class 6-8 trucks and buses in our core markets to range between 335,000 and 365,000 units. Given Navistar's strong Class 6/7 and bus franchises, we do not expect to be down as much as the industry. We'll continue to refine our view and share more details with you in the near future. Shifting gears, you know, over the past several years, we made a number of investments to improve our business. We met a lot of times customers listen to their feedback, ideas, their suggestions. Next, with this understanding, we invested in our products. We developed and delivered a full line of new products which have been very well received as demonstrated by our growing retail market share, improve sales, selected volume and share, earnings and improved cash flow.

Now it's time to make investments in the next phase of our future. Earlier this quarter, we announced we were investing $125 million in our engine plant in Huntsville, Alabama, over the next three years. This investment is being made in preparation or producing our next generation big-bore diesel powertrain being developed with our alliance partner trade time. The production of these new proprietary powertrains will add to the existing facility where we currently build our international A26 engine. We also [Indecipherable] invested in our uptime commitment. A new parts distribution center in Memphis is now open, offering industry leading cut off times for next day delivery of parts. Our service partnership with Loves is now operational adding more than 320 Love's and Speedco locations and more than a 1,000 technicians to our service network. In an updated version of our dealer parts inventory management system has significantly reduced emergency orders and works to position parts where they are needed.

You know, our third quarter was another great quarter for Navistar. Our operational and financial progress demonstrates that our investments are paying on. Market share is increasing, revenue and earnings are growing and now we're accelerating investments to improve our operations and deliver on our promise of Uptime. I look forward to talking to you again at our Investor Day later this month, where we'll discuss our plans to further grow the earnings power of Navistar.

And so with that, let me turn it over to Walter.

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

Thanks, Troy. Good morning, everyone. Navistar has continued its cadence of delivering excellent results in the third quarter. Revenues, adjusted EBITDA, adjusted net income and free cash flow were all up year-over-year. Let's dive into the results. As Troy mentioned, revenues grew 17% in the quarter to $3 billion. The improvement was driven by a 28% increase in core Truck volumes. Core market share grew 2.6 points to 18.2%, reflecting higher share in all vehicle segments year-over-year. Q3 gross margin was 17.8%, up a point from last quarter, segment mix continue to impact consolidated gross margins as truck revenues including the new Class 4/5 products grew substantially year-over-year. As we've discussed previously, parts margins are higher than truck margins and in the long run, selling more trucks today will benefit part sales in the future.

Turning to structural costs, year-over-year SG&A expenses declined 25% to $167 million, largely from the release of a $32 million accrual related to certain legacy engine litigation. Engineering costs increased $9 million, largely from the development of next generation powertrains with our alliance partner TRATON. Even if one adjusts for the legal accrual, structural costs including SG&A and engineering expenses fell as a percentage of revenue to 9.2% from 11.3% in the prior year. Net income in the quarter was $156 million, or $1.56 per diluted share.

Prior year income of $170 million, or $1.71 per diluted share included a $71 million settlement gain related to a business economic loss claims excluding one time items in both periods on an after tax basis, adjusted net income in the quarter grew 55% to $147 million versus $95 million last year. Adjusted EBITDA rose 22% to $266 million in the third quarter versus $218 million 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 25% to $2.4 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 core volumes grew 28% to 24,400 vehicles. Truck segment profit grew and excluding the two one-time line items, I mentioned earlier, the segment was up 44% year-over-year. 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.

Our Parts business delivered another solid quarter. The Parts segment revenue results were impacted by the new revenue recognition standard, which Navistar adopted at the beginning of this year. The implementation of this standard reduced third quarter revenue by $31 million. On a comparable basis, revenues were largely flat from Q3, 2018. Profit was up 3% to $149 million, due to improved U.S. operating results, reflecting our growing private label business partially offset by lower Blue Diamond Parts volumes.

Parts segment profit margin grew over two points year-over-year to 26%. The global operations segment continues to be impacted by a weaker than expected economy in Brazil. Revenues were flat year-over-year and the operations remain profitable. Our financial services segment is benefiting from larger average portfolio balances. As a result, revenues increased 14% to $74 million. Segment profitability rose 30%, $30 million, largely from higher interest margin and income from an intercompany loan, partially offset by the write-off of debt issuance costs.

During the third quarter, NFC closed a new five year, nearly $750 million revolving credit facility and repaid its $400 million Term Loan B issued in 2018. The new facility provides for additional liquidity with increased flexibility at a lower borrowing cost. During the quarter, the company generated $250 million of manufacturing free cash flow, largely from strong adjusted EBITDA and net working capital performance. The company ended the period with the manufacturing cash balance of $1.1 billion.

Next, let me take a moment to update our guidance for 2019. For the Class 8 industry, we expect volumes to come in toward the upper end of our prior range. Also, we're seeing higher Class 6/7 volumes, including greater gasoline units where Navistar does not participate. We now believe 2019 industry volumes will range between 435,000 and 455,000 units, a 10,000 unit increase from our prior guidance. Today, retail market share is 18%. During the fourth quarter, we expect share to continue to grow largely from the seasonal increase in school bus registrations. As a result, we believe fiscal year retail market share will range between 18.5% and 19%. 1 to 1.5 points higher than 2018 market share.

As Troy mentioned, the decline is domestic and export orders and backlogs led to the decision to lower assembly line rates in both of our Truck plants. Due to lower production volumes in the fourth quarter, we expect revenues to be toward the lower half of our guidance range of $11.25 billion to $11.75 billion for the year. To-date, consolidated gross margin is 17.7%. We are expecting margin growth in the fourth quarter from the seasonal benefit of higher parts revenues a larger mix of severe service truck sales. We now believe gross margins will end up between 17.75% and 18% for the year.

Lower aggregate gross margin from lower production volumes and revised margin percentage expectations is being offset by lower SG&A expenses. Consequently, we are holding our 2019 adjusted EBITDA guidance at the midpoint of $900 million for the year. Finally, capital expenditures are trending lower and are now expected to be $115 million versus our prior guidance of $150 million.

In summary, the third quarter results show the effectiveness of executing our strategy as we are recapturing market share and growing revenue, EBITDA and cash flow. I look forward to talking to you again at our Investor Day on September 19th, where we'll provide insights on our strategy, improvements we've made to the business and our road map to becoming a market leader. If you haven't registered for the event, please reach out to the IR team for details. We look forward to your attendance. Also, we invite you -- we invite you to see our latest product offerings and technology developments at this year's North America Commercial Vehicle Show in Atlanta from October 28 through the 31st.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Stephen Volkmann with Jefferies. Your line is now open.

Troy Clarke -- President, Chief Executive Officer and Chairman

Steve, are you there?

Stephen Volkmann -- Jefferies -- Analyst

Yes, I am sorry about that. Good morning.

Troy Clarke -- President, Chief Executive Officer and Chairman

Good morning.

Stephen Volkmann -- Jefferies -- Analyst

So maybe let's just start off, since you've provided this kind of preliminary look into 2020 industry volumes, I guess we have yet to really have a clear idea from you guys about how you think you'll perform in a down market and I guess specifically I'm thinking about decremental margins. I know you've lowered your break even, significantly, but any help you could give us just on how you kind of modeled the business in a declining top-line environment would be great.

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

Yes, Steve, it's Walter. you know we'll provide some additional insights on that on our Investor Day, but, you did allude to the fact that we've continued to work to lower our break even point, that's continued, we've also been growing our shares, so, the decline that we could see in industry volumes before we would drop to break even results in our truck segments, give us even that much room that versus where we were a couple of years ago? As we entered 2020, we do continue to see opportunities to grow our market share, given the strong product offering that we have and with the industry environment changing, we would expect to be able to continue to improve our cost structure as well as we wouldn't have the same kind of headwinds that we had this year in the strong industry with supplier costs and the like, so, we think that our position for next year will continue to improve even as the industry volumes decline, from a profitability per unit perspective.

Troy Clarke -- President, Chief Executive Officer and Chairman

Yes. Hi, Steve. This is Troy, but obviously, this is a cyclical industry, we've talked openly about that, I think on this call and other occasions in the past. We've been preparing for this. So we have modeled out the scenarios of what we think 2020 looks like kind of to the good and to the bad levels and we think 2020 will be a good year for Navistar with gains and things like market share and continued progress on costs, as Walter has indicated.

Stephen Volkmann -- Jefferies -- Analyst

Okay. And just so I make sure I understand what you said, Walter, it sounded like you're kind of saying that you think you can grow EPS in a down market, basically around what you've forecasted next year? Or am I reading that wrong?

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

No, I don't think you're reading that right. I think what I tried to say, at least was that, on a per unit basis, we would continue to look to improve our profitability, if units are down and the overall earnings would probably down as well, but we've got a lot more room vis-a-vis our break evens that we had a couple of years back.

Troy Clarke -- President, Chief Executive Officer and Chairman

Right.

Stephen Volkmann -- Jefferies -- Analyst

Okay. Great. All right. I'll pass it on. Thanks.

Operator

Thank you. And our next question comes from Andy Casey with Wells Fargo. Your line is now open.

Andy Casey -- Wells Fargo -- Analyst

Thanks a lot. Good morning.

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

Good morning.

Troy Clarke -- President, Chief Executive Officer and Chairman

Good morning.

Andy Casey -- Wells Fargo -- Analyst

Within -- back to the 2020 sales view, I appreciate you expect to be down less than the industry, but can you give us a little bit of color around the commentary you made, specifically the Class 8 assembly line reduction so far. And I'm just wondering how to frame up 2020 as -- are you expecting that to be down 25% on a retail basis off the bad or for production to kind of scale down during the year if orders do not improve?

Troy Clarke -- President, Chief Executive Officer and Chairman

Yes, I think it's more the latter, you know, look, we've made these -- this is a company that ran for a number of years with no or a very skinny backlog and we've taken advantage, I think if these last couple of years to restore backlog to a far more normal range, our current backlog is in kind of at the industry average over 150 days, closer to 165 days. We adjust our production rates to maintain some manner of backlog because this order to delivery system runs more effectively, more efficient balancing between customer needs, the needs to manage the inventory, that's in the pipeline as well as the inventory that's basically on the ground.

With these adjustments, we believe we see a stable environment through Q1. And then, we'll have to see how the seasonality of additional orders that are coming in from larger players, from larger customers plays out through the year. Now, very recently, we won't make any announcements you know several large players, our share of their buy year-over-year is going up and it's very encouraging, so it supports the thought that with the adjustments we've made, we should be stable through Q1, and then we'll have to see what happens if the economy and the industry as we go past that. But certainly it will be a topic we'll update at our next earnings call as well as we'll just have more insight at that particular point in time.

Andy Casey -- Wells Fargo -- Analyst

Okay. Thanks, Troy. I'll leave it at that. Thank you.

Troy Clarke -- President, Chief Executive Officer and Chairman

You're welcome, Andy.

Operator

Thank you. And our next question comes from Neil Frohnapple with Buckingham Research. Your line is now open.

Neil Frohnapple -- Buckingham Research -- Analyst

Hi, guys. Thanks and congrats on a good quarter. Walter, can you remind us from a high level, what the adjusted EBITDA number is you need to generate in order to be free cash flow breakeven? Is it still in that $650 million to $700 million range? Just trying to get a sense of whether you guys will generate free cash flow in FY '20 even if the market cycle is down?

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

Yes. Hope to see at the Investor Day.

Neil Frohnapple -- Buckingham Research -- Analyst

All right. And then just could you -- could you, Walter discussed a slight reduction in the gross margin outlook versus your prior guidance. Any more granularity on the puts and takes, whether the embedded price cost outlook is less favorable? Are you seeing more new -- more aggressive new truck pricing, whether it's just mix? Just any help that would be great.

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

Yes, probably three or four items I'd point too. Pricing is actually been good, as we indicated in our remarks, pricing is up year-over-year, so that's kind of come in as we expected, well, we've continue to see as the segment mix, which I commented in my remarks, so truck versus parts as the truck volumes have been stronger, that impacts our overall gross margins because our parts had some impact on our margins.

Thirdly, we've seen, in the strong environment, we could see higher commodity prices, which we've indicated at the beginning of the year would be a headwind and we've seen additional freight costs as well with the tighter supplies, so that has impacted our material costs. And then lastly, as Troy mentioned in his remarks, we've seen some weakness in used trucks, in particular the sleeper market and so we've made some small adjustments there too, are the prices of the units in our used truck portfolio.

Neil Frohnapple -- Buckingham Research -- Analyst

Okay. Thanks. I'll pass it on.

Operator

Thank you. And our next question comes from Ann Duignan with JP Morgan. Your line is now open.

Ann Duignan -- JP Morgan -- Analyst

Yes. Thank you. Good morning. I wonder if you could give us a bit more color on the lower production levels at both facilities, I mean, how much lower is production going to be in fiscal Q4, is it going to at whatever fiscal Q4 run rate is at the end into Q1 of next year, just from the modeling perspective, if you could give us a bit more specifics on those?

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

Hi, Ann. This is Persio Lisboa. Well, I think for Q4, the exit rate, we are probably going to be calibrating the -- as Troy mentioned, we are rebalancing our lines. So overall throughout our plants will be down close to 15% versus the Q3, which is and that's the level that we are going to enter Q1, but you have also to consider that, that's the nominal rate, we used a lot of overtime days in the last few quarters and we are removing some of them. So but overall, nominal rates will go down 15% and that's what we intend to keep for the first quarter as well.

Troy Clarke -- President, Chief Executive Officer and Chairman

And Ann, I just might indicate that by taking those -- down those rates, that's after we increased the rates earlier this year, so that brings the overall daily rates back to about where we were in November and December of 2018, so, on earlier calls we've reported about production line rate increases, we're now effectively reversing that with this 15% reduction that Persio mentioned.

Ann Duignan -- JP Morgan -- Analyst

Okay. That's very helpful, especially on a year-over-year to keep that -- bear that in mind that we didn't take up production and then back. And then just a quick follow up, last quarter you guys had noted that at the summer months, we're going to be very important for fleet orders, I think all the OEM 2020 order books are now open, now we're kind of pushing them back, saying fall months are going to be very important or what are the large fleet saying and doing, I know you said you're gaining more share of pocket with them, but in general what is the commentary that you're hearing from the large fleets, they obviously are not placing orders yet.

Troy Clarke -- President, Chief Executive Officer and Chairman

Yes. What do we you talked about previously Ann was, in some years where everybody anticipates that the following year or the coming year, like in 2020 would be strong, people would open up their order books in the July timeframe, but the more traditional timeframe is September and in fact, that's what we're seeing, so this really supports what we think to be a fairly normal, I think timing for an ordering cycle. So we are engaged with large customers, and quite frankly, Ann, just put your plug-in for the products, our products are performing well in your fleets and, this is what we're hearing from them and what we're seeing from them, the deals that we're working on with them is we're continuing to improve our share of their buy on large fleets and that's our expectation. So we would expect certainly in the Class 8 space, that will continue to grow with these large customers. The second thing is, as we have a lot of trucks, we have some real momentum building on the vocational side of the business. Obviously, lower volume and share impact, but you know pretty good business for us and quite profitable, and a lot of those units are still working their way through the TEMs and so, we anticipate that this momentum on the vocational side of the house will continue well into 2020.

And then last, but not least, as you indicated, as you heard in my comments, we've picked up nearly five points of market share in a piece of the business where we're traditionally very strong in the medium duty -- in the medium duty segment. And the discussions that we're currently having with customers who buy those trucks without giving too much more way, our portion of that buy continues to be strong as we look into 2020. So we're not planning on seeding certainly any share in a segment that we believe we have advantages over our competitors. So as far as some color and insight goes, yes, 2020 is going be down, but if you take a look at the -- we have a concept we call kind of share of wallet or a share of a target customers buy, those numbers look that they will continue to improve and that's how the orders are lining up for us as we see. We'll give little more color in our Investor Day. But again, contributes whole thought process that we'll roll into Q1, a lot like we look today.

Ann Duignan -- JP Morgan -- Analyst

Okay. I appreciate the color and look forward to hear more. So I'll leave it there. Thanks.

Troy Clarke -- President, Chief Executive Officer and Chairman

Thanks, Ann.

Operator

Thank you. (Operator Instructions) Our next question comes from Adam Uhlman with Cleveland Research. Your line is now open.

Adam Uhlman -- Cleveland Research -- Analyst

Hi, guys. Good morning.

Troy Clarke -- President, Chief Executive Officer and Chairman

Hi, Adam, good morning.

Adam Uhlman -- Cleveland Research -- Analyst

Congrats on all the progress. I guess, I wanted to start with the clarification. Walter, you mentioned several headwinds that we faced this year with supplier cost, material cost. I believe you gave us a figure at the beginning of the year. I was wondering if you could update us with that, we can put that into context when we think about the 2020 profit headwinds that shouldn't exist.

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

Yes, we began the year, I think we've said that overall, we would expect performance in pricing less the headwinds that we saw material cost still to be positive to the bottom line, that's still the case as we sit here today, but it's less so than what we had seen, given the factors that I mentioned impacting our product costs on the procurement and logistics side of the business, but net-net, it's still a positive for the year, as we had expected coming in and that's in large part is due to continued efforts, including from the procurement joint venture that we have with TRATON to continue to work our product costs lower.

Adam Uhlman -- Cleveland Research -- Analyst

Okay. And the fright headwinds and supplier disruptions, is that still, a meaningful headwind outside of price cost?

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

We see that as an opportunity to be less of a negative impact going forward. It's -- I made the comments, I did to Steve earlier in the call about. As we look into 2020, as those headwinds abate that should help our profitability for years.

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

And this is Persio. We are also seeing on a supply base much fewer disruptions than we've ever saw before, so I think at the levels of productions that we are today, we are pretty safe on the supply side and freight rates start coming down. So you could imagine that as we are running overtime days and extra weekends, we were basically driving more volume and capacity in the supply base and generating some level of expedite. That's all gone.

Adam Uhlman -- Cleveland Research -- Analyst

Okay. Got it. And then on the capital spending plan for this year going forward, the CapEx came down, but there are several big projects, it sounds like under way, should we be expecting a material pickup next year or maybe back to what the prior plan was and then just along with that, if you could just expand it on the Huntsville plan through 2021, what steps should we be thinking about or listening for? Thanks.

Troy Clarke -- President, Chief Executive Officer and Chairman

Yes. Let me break it into a couple of pieces and my colleagues will probably join in as well. So cap spending, we indicated, is going to be lower this year than what we had said previously. In part, that's due to the stronger industry that we've seen, so we've pushed out some projects, some of the maintenance and so on that we do in our facilities as we wanted to keep those running, so we'll be able to do some of that work as the industry slows a little bit in 2020 back more to kind of replacement volumes.

We do see CapEx will be increasing, we'll provide some more insights at Investor Day around that as well as we do have some of these investments like the Huntsville investment coming, that will come in over the next few years in Huntsville and is related to the alliance activities around the Localization of some big-bore diesel engine or diesel powertrain investments that we've mentioned previously. So CapEx will be up versus this year's levels, but obviously CapEx has been favorable to our cash flow for this year versus what we'd originally suggested.

Adam Uhlman -- Cleveland Research -- Analyst

Okay. Thanks.

Operator

Thank you. And our next question comes from David Leiker with Baird. Your line is now open.

David Leiker -- Baird -- Analyst

Good morning, everyone.

Troy Clarke -- President, Chief Executive Officer and Chairman

Good morning.

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

Good morning.

David Leiker -- Baird -- Analyst

Walter, I want to go back in reverse, I know you talk through this and I want to just try and find some of the puts and takes on the truck pretty significant revenue increase to flat profits and I know there's some moving pieces underneath the surface. But can you just help reconcile that a bit for us to just kind of get to what the real contribution margin was here in the quarter?

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

Well, I guess, I didn't do a good job on the first time.

David Leiker -- Baird -- Analyst

Walt, I might have missed that too.

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

Yes. So what -- if you're just looking within the Truck segment, then a couple of comments there, I did mention earlier on the call that we do have the segment mix between truck and parts, which we've think [Indecipherable] long as the Truck volumes have been strong. Within the truck segment, we've mentioned couple of times this thing on the call, we did grow our medium share some of that was with rental and leasing customers, those margins are lower than with some of our other customers, we've also been ramping up the Class 4/5 vehicles and so those have a lower profit margin than our average portfolio as well. We produced those units largely for General Motors on a cost-plus type basis, which helps them to fixed in our plants. But those margins aren't as high and we do run that through the revenue as well as the profitability side of our income statement. So that year-on-year is a lower average profit margin. We also don't have the defense business this year, which was a big contributor to profitability in the third and fourth quarter of last year. So those would be a couple of puts and takes.

David Leiker -- Baird -- Analyst

Okay. Great. Thanks. And then, Troy, as we look at during the year end and then calendar 2020. Can you talk at all about what you think the makeup on the backlog looks like, our people cleaned out that backlog, how real that is and then just kind of your thoughts of cancellations as we go into 2020?

Troy Clarke -- President, Chief Executive Officer and Chairman

Yes. Look, we -- I'll make a couple of comments here then I'll ask Persio to jump in as well, because, I mean, I think certainly the second half of this year, this -- these are numbers that we've looked at quite a lot just to make sure that we're making the right decisions and have the right interpretations. I have to say, I think, let me just say overall, I think the quality of our backlog is very high, when I say that we have a very normal backlog in 165 day range, which I think is comparable to where other competitors are, there's not a lot of orders in there which have the potential for cancellation, there are orders that have the potential for retiming because as we are attempting to deliver units, some of our customers have to -- they have to figure how to dispose of their used truck right now. And now we're slipping into that, thing we've been in the past where they go to the market with a truck that has a book value and if the market's value below then they have to work that equation a little bit more so that they don't take a loss and that sometimes gets in the way of our delivery.

And that happens with very large customers, and it happens with very small customers. We have the ability to help somewhat in used trucks, OK, but, we've been in difficulties in used trucks in the past. And so we're working to manage that very, very seriously as well, OK? So that's kind of the phenomenon, but I would say that the backlog itself, we believe it's fairly high quality. Let me pass to Persio, who really keeps tracking our -- I know he watches these numbers on cancellations more than I say. Well, we all -- we all look at it, but he's the guy who kind of keeps his eye on that to make sure that the quality of this backlog is high.

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

Okay. Thank you, Troy. What we are seeing today in the backlog is as Troy referred to some of the -- we have two types of orders that get into the system, some of those that are -- that come from the very large customers that have a very constant buy throughout the year and those have been timed, as Troy referred too. I think that's where we see the most of that, because some of those customers are working through the used truck kind of phenomena that Troy described.

On the dealer side, I think we have also the activity on the retail, that's the one that's now is more impacted in the short term and we monitor that very closely with our dealers. Having said that, our dealers today have 85 days off dealer sales in their inventory, which is within the normal range that we operate, so we feel that no time will tell a little bit more as we get into Q4 and Q1, but we haven't seen any abnormal signs off cancellations compared to what we are seeing in the industry from a backlog standpoint. I think we've averaged in the last quarter 3% to 4% of the backlog cancellation, which is now pretty well insight of the industry is being presenting to us as data.

Troy Clarke -- President, Chief Executive Officer and Chairman

Yes. So David, let me just, if I could just summarize this, because I think this is kind of a point that I'd like to make. Look, our guidance for the fourth quarter provides, provides for potential further softening in Mexico and Latin America, where we really don't put those orders in until we know they've got to home. The potential for customers to push out deliveries a little bit, it's the kind of thing that might happen, sometimes those gives backfield, sometimes they just get out and with the line rate adjustments we've done -- we haven't given up the ability to produce and deliver units to the previous levels that we've highlighted of our guidance, which in fact then allows us to protect the upside.

And we've done all this with the ability to roll into Q1 with a healthy backlog that allows our order to delivery systems to run efficiently without a lot of stranded inventory, a lot of premium freights and other type costs that we might -- that we might run into. I mean, it's hard for us to describe because the company hasn't been in that position for a while, but we believe -- we've got this thing boxed in very nicely and all the numbers kind of interlock and we have a lot of confidence in our forecast and the ability to protect the upside.

David Leiker -- Baird -- Analyst

Yes. Great. Thanks. Any thoughts on how the industry sets? I know it's hard for you to do.

Troy Clarke -- President, Chief Executive Officer and Chairman

I think, you know, we look at their numbers and they kind of look a lot like our numbers. So, I mean, I don't know [Speech Overlap].

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

Well, I think from what we're experiencing with our customers, I think we're all in the same position at this point in time. And honestly, I think as we've been gaining share, we want to continue the -- kind of the performance that we've delivered to customers are not only on the product side, but on the service side and customers are valuing us more because of, I think, what we've done in the last few months in 2019. So -- but I don't see anything different happening in the industry overall, I think all the customers are the same. We're all knocking on the same doors.

Troy Clarke -- President, Chief Executive Officer and Chairman

Yes. And I think they're doing the same thing, they're looking at what the orders are coming in, what the customers are telling them. There is just one small difference, our quarter ends at the end of October, right our fiscal year does their fiscal years tend to end at the end of the calendar year. So the kind of the last minute push to kind of meet the target on the scorecards looks a little different between us and them. So I certainly anticipate that they'll be pushing for deliveries between now and the end of the calendar year. And our market share forecast, by the way provides for that kind of push, because this is something that we have we see every year.

David Leiker -- Baird -- Analyst

Yes. Great. Thank you very much.

Operator

Thank you. And our next question comes from Seth Weber with RBC Capital Markets. Your line is now open.

Brendan -- RBC Capital Markets -- Analyst

Good morning. This is Brendan on for Seth. Thanks for taking my question. You had a healthy market share gains this quarter again, I appreciate the comments that you anticipate growing market share again 2020. I was just wondering any extra color you can give on, I guess, what you're seeing that drove your decision to decrease the 19% share gain to the 18.5% to 19% from over 19% indicated last quarter.

Troy Clarke -- President, Chief Executive Officer and Chairman

I think, I can comment to that. What we're -- no, we -- typically what we do, we have a forecast for the industry and we have a forecast for our no deliveries. The deliveries are pretty locked at this point in time, we know what they are going to be, what we don't know 100% control is the forecasts on the top line of the industry and as we mentioned before, there is now an effort that I think there is we are seeing more of an effort on in retail to retail, more units from all distributors.

And so the industry forecast being a slightly higher, now force us to basically consider that now our share may not be as aggressive as we thought it would, all though year-to-date, we have been performing above, I think now where we were last year, as we alluded in prepared comments. So it is more of an adjustment on a forecasting of the industry than anything else, we don't see a deterioration in our forecasted deliveries and DTUs we called it, the units that get charged out and retailed in the market, so it is more of an adjustment on overall forecasts and making sure as we got closer to the end of the year, it's easier for us to put a tighter range.

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

Yes. So as we look at the inventories of our competitors and their dealers, especially going into a softer year 2020. We have every reason to believe that they'll be pushing those units off the lots and through the pipeline, just like we will be doing that. It's one of the reasons why Walter increased in his comments the industry by 10,000 units. And so it's really the effect of the increase in the industry as Persio said, it's a math phenomenon as opposed to we think we'll be selling fewer units in the quarter than we had planned.

Brendan -- RBC Capital Markets -- Analyst

Okay. Great. Thank you.

Operator

Thank you. And our next question comes from Jerry Revich with Goldman Sachs. Your line is now.

Ben Burud -- Goldman Sachs -- Analyst

Hi. Good morning, everyone. This has Ben Burud on for Jerry. So you all are currently guiding to about $900 million of EBITDA this year at the peak of the cycle. And if we think about layering on the tree tiling cost savings that number will move to more around $1.1 billion to $1.2 billion. Is that how we should think about what the next peak looks like in your business? Or you achieving more of the trade time sourcing cost savings already at this point?

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

Hopefully, Jerry will let you come to Investor Day.

Troy Clarke -- President, Chief Executive Officer and Chairman

Yes, you need to come to Investor Day, Ben. Ben, I know Jerry is out of the line [Indecipherable] you need to come or Jerry needs to Investor Day because it's -- there's no 30 second answer to that particular question. Okay. Look, we're going to grow and we're going to continue to improve the returns that this business provide shareholders and to say that the TRATON savings that we've talked about, and we're on track for is all we're going to be able to do, that is not the case. Okay. But to explain what is the case, we're going to be a little bit more time, but you should have confidence that and I'll state it again in my closing remarks, no other OEM has the upside opportunity that we do to gain share to lower cost to grow their business, to create additional cash flow and you'll see that and what our plans are for the next handful of years at Investor Day.

Ben Burud -- Goldman Sachs -- Analyst

Got it. Understood. And in 3Q, obviously continued this trend of strong market share gains, you all have seen across the portfolio. How do we think about share gain momentum into 2020? Do we keep going at this current cadence. And are there any more notable share opportunities -- on the horizon in 2020?

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

Well, I think what we -- we'd never say that, what to say that we're going to slow down anything we continue to work to demonstrate the value of our products and services to our customers and we've been rewarded by that. So, again, I think we'll be able to provide more guidance into next year in our next call, but at this point in time, we just want to stay the course and make sure that we continue to do the right things, there is a lot of activity taking place right now, not only on the product side of the business, but also on the service side. We launched a very aggressive plan to transform our dealer network, we have a lot of support and you heard Troy talking about Loves and how we expanded our network to better serve our customers. Our Uptime promise is really sticking. Right now we see that customers are valuing us more than just for the products that we deliver to them. So we hope that, that will continue into 2020. And we do expect our share to go up next year.

Troy Clarke -- President, Chief Executive Officer and Chairman

Yeah. I'm sure everybody is going to say the same thing, but we really mean it.

Ben Burud -- Goldman Sachs -- Analyst

Got it. Thank you very much.

Operator

Thank you. And our next question comes from Steven Fisher with UBS. Your line is now open.

Steven Fisher -- UBS -- Analyst

Thanks. Good morning, guys. Within your 2020 initial industry Class 8 outlook. Do have any feel yet for how that would shape up between severe service and heavy trucks. I'm kind of particularly curious about the severe service piece in your backlog has been holding up better than the heavy trucks, but it is starting to come down now as well?

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

Within that, I'd have to look up the numbers, but I think within that we continue to see the severe service portion of Class 8 holding up a better for the industry as a whole with heavy coming down a little bit more than severe.

Steven Fisher -- UBS -- Analyst

Okay. And I was curious, what's behind the double digit decline in the Class 6 to 7 outlook for 2020? I've always thought of that as a relatively steady your business, but still you have it down about 14% for the industry. What's the thinking behind that market decline for next year?

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

Well, I think what we are seeing is -- no, as the industry peaked in two different segments. If we take leasing and rental there is usually a movement on with the leasing companies when they start seeing a decline in a market, what traditionally they do, they take their rental units and they move their own rental units into leasing business and that's a portion, that's something that basically goes away from the industry, it is an internal movement. So that's one thing. And the other is really, we're monitoring all the

housing, all the stocks and all construction and things that also impact medium-duty segment. And that on you -- you add all those two factors together, we got to do 10%, I just saw there. But it is still at a very strong level, we are still considering that this is above replacement demand for medium duty. So --

Troy Clarke -- President, Chief Executive Officer and Chairman

We're only counting our medium duty being down as an industry 10% next year and we don't think we'll be down in line with the industry, as Persio indicated, 50% of the medium duty trucks are bought by the two largest rental on leasing companies, when they choose to push their units from rental to leasing, then nobody is building a unit for them and that's part of what you see -- part of what you see in that particular number. But again, this is above replacement demand, so it's an area of traditional strength for us that we've built a lot on in the last couple of years and we'll continue to do that.

Steven Fisher -- UBS -- Analyst

Great. Thanks a lot.

Operator

Thank you. And our next question comes from Rob Wertheimer with Melius Research. Your line is now open.

Robert Wertheimer -- Melius Research -- Analyst

Hi. Thanks, and good morning, everybody. Troy, I think you mentioned you mean it on share gain and you've talked -- and we've talked in the past about some of that natural entitlement coming in back to you is fleets that had been customers, more customers are now starting to be customers. Any insight on how far along in that path you are? If you've got them all trailing or only a few of them trailing? Are they trailing at high levels, normal levels? Still just testing the waters, anything you can do there?

Troy Clarke -- President, Chief Executive Officer and Chairman

Yes, I'll give you a little bit of color on that without trying to give you too much detail because again, it kind of gets complicated, it's been Persio and Michael Cancelliere in sales, they have a number of very complicated charts. But look, we've staked out and you'll see a little bit more of that on our Investor Day as well, just putting in a plug for that. Look, we staked out a number of customers, so think about like 15 major customers and between those, a bunch of them used to business with us and then stopped and some of them stopped doing business with us and really never had a bad experience with the previous emissions technology. In both of those cases, OK, every one of them have in some cases for a couple of years had some of our new units with our new Uptime proposition, with the new quality, the new design, the new driver centric kind of design philosophy we add and every one of them had given us very positive feedback.

Now, in a handful of cases, they have -- in the course of two years stepped up their percentage of our buy to where we are at parity with the other brands that they buy for their fleet. In other handful of cases, we are becoming the largest supplier to them. And in another handful of cases, they're working themselves off from under some longer term contracts, so we get a portion of their buy that we would anticipate that we would gain over time. Michael, call these customers as influencers, these are the trucks that, their color, their badging, the freight they haul, those are rolling billboards. Right. Because their endorsements that, these are well-run truck companies that manage total cost of operation that don't make these decisions lightly. I mean, they're making them for the right reasons.

And so I would tell you, on all 15 of those very key largest kind of customers, we have made significant progress, some more than others. I mean, this is just one of the things that gives us tremendous encouragement for -- look, I don't -- I don't know that some of these customers are going to buy 1,000 trucks next year or they're going to buy 100 trucks next year. But, over 50% in some of those customers, they're going to be our trucks and last year, it was 50. And so, that's the kind of insight that we have now.

We'll take that 15, and we'll start expanding that for next year, we'll take the next five, the next 10. And then we have a very intensive sales process where we go in, we introduce ourselves, talk about the value proposition and a good business-to-business kind of sales process, so we're extremely encouraged.

Robert Wertheimer -- Melius Research -- Analyst

Okay. Thanks. That's very informative. Thank you.

Operator

Thank you. And our next question comes from Rob Salmon with Wolfe Research. Your line is now open.

Rob Salmon -- Wolfe Research -- Analyst

Hey, good morning, guys. I guess kind of segueing on that question. As you guys have been going into those larger kind of high profile fleets. Could you give us a sense of any sort of residual value guarantees that you guys have been doing earlier in the conference call, you noted that you're seeing some weakness on the used truck. So just curious how we should be thinking about that piece of the business.

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

Alright. This is Persio. Every case is a case we used traditionally don't have a lot of residual value guarantees, we really manage to the fair market value of the units when they have to go for a trade and customers understand that. I think the good news is that the new products that we have not have been really, now demonstrating that our residuals are going up and they'll dramatically with all the new products that we've launched. So this is not a practice for us to really work with, residual value guarantees.

Rob Salmon -- Wolfe Research -- Analyst

Got it. Appreciate that commentary. It's helpful. So kind of more of just the improvement in the underlying product driving that incremental market share from your perspective.

Troy Clarke -- President, Chief Executive Officer and Chairman

Yes, and the confidence that the residual value will continue to improve over the life cycle of the product.

Rob Salmon -- Wolfe Research -- Analyst

That makes sense. Could you speak more broadly about what you guys are seeing from a used truck inventory as well as pricing perspective we saw those kind of less than five year trucks, particularly the four or five year in the month of July inflect negatively looking at some industry data, but we'd love to get your perspective of what you're seeing across your dealers from both the price and inventory perspective?

Troy Clarke -- President, Chief Executive Officer and Chairman

Inventories are going up because the strong new volume truck sales that we've seen this year, our used truck inventories are up as well in the third quarter when we expect to work those lower in Q4. I think we alluded to the sleepers in particular where there's some weakness in the pricing. And what is happening right now is that, now in the past actually between first and second quarter, I think it was taking longer for customers to trade their units and now we are seeing a higher velocity on the trade, so this is not taking as long, that's why I think is happening in the industry as the inventories start going up, that's one of the reasons why as new units get delivered, the old ones are returned faster.

Rob Salmon -- Wolfe Research -- Analyst

That makes sense. And should we be contemplating, just as the later model used truck inventories kind of rise and we see additional pressure there, should we be contemplating softer pricing as we look out to next year relative to what we've seen this year?

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

Well, I mean, I think, yes. I mean, we're already seeing the softer pricing, I mean, I think, as we and the industry turn those units, that support -- that also support pricing. Right. So, -- the couple of things that affect used truck value. Right. If you need a whole bunch of trucks, you tend to hold on your used trucks a little bit longer while you're waiting for your new ones, that phenomenon is reversing, that was what Persio was describing.

The second phenomenon is when the market starts to recover, used trucks is the quick [Phonetic] way to add capacity to your fleet and get -- and take advantage of rising freight rates. And so look -- I mean, I think how we look at this, we're kind of in a period of time where especially on the classic sleepers, we are -- we as an industry are a little oversupplied and so there will be pressure on those prices until that oversupply is resolved. And I think that will take probably a couple of quarters to make that happen.

Rob Salmon -- Wolfe Research -- Analyst

That makes sense. Appreciate the time, guys.

Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Troy Clarke for any closing remarks.

Troy Clarke -- President, Chief Executive Officer and Chairman

Hey, thanks. In closing, Q3 was a great quarter for Navistar, and I really want to thank our customers, our employees, our dealers for helping us deliver these strong results, truth be told, as we've indicated, it's no surprise the U.S. economy and the trucking market is moderating. Our industry tends to run in four year cycles, this isn't a surprise for us, we have been preparing for this time.

During our turnaround, we'd lowered the break even afforded the company by implementing lean practices, reducing our cost structure while growing market share and strengthening the balance sheet. We are in a much better position today and we remain firm in our belief that, it's no OEM has the potential to increase volume, gain share, lower costs and create improved cash flow like Navistar. And we plan to continue those improvements into 2020, and this is why, I remain optimistic that 2020 will be another good year for Navistar.

We look forward to talking to you again at our Investor Day, please reach out to the IR team for any additional questions or details on those events. Thanks for your time and interest in our company this morning.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Martin Ketelaar -- Vice President of Investor Relations

Troy Clarke -- President, Chief Executive Officer and Chairman

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

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

Stephen Volkmann -- Jefferies -- Analyst

Andy Casey -- Wells Fargo -- Analyst

Neil Frohnapple -- Buckingham Research -- Analyst

Ann Duignan -- JP Morgan -- Analyst

Adam Uhlman -- Cleveland Research -- Analyst

David Leiker -- Baird -- Analyst

Brendan -- RBC Capital Markets -- Analyst

Ben Burud -- Goldman Sachs -- Analyst

Steven Fisher -- UBS -- Analyst

Robert Wertheimer -- Melius Research -- Analyst

Rob Salmon -- Wolfe Research -- Analyst

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