Navistar International Corporation Page5 Annual Meeting
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To our shareholders, employees and customers: The Navistar of today is a much stronger company than it was a year ago. While our financial results are still a work in progress, we have made tremendous strides in reducing our costs, improving our products and revitalizing our culture. And we are laser focused on regaining customers’ confidence, building shareholder value and reclaiming our status as an industry leader. In late August 2012, Navistar launched a plan called “Drive to Deliver” to address the problems that arose from the company’s past emission strategy. Though there is still work to be done on fixing legacy warranty issues and growing sales, we have made many fundamental improvements, including: • Rapid introduction of new products • Improved product quality • Significant cost reduction • Strong cash management • Lower break-even Our progress so far puts us in a stronger position to win in the future. And across the organization, we are determined to get there. Rapid introduction of new products One proof of the new spirit at Navistar: Since we changed our emission strategy, we have not only committed to launch new, Selective Catalytic Reduction (SCR)-based products in record time—we actually have met all of those new product launch dates. We have radically revamped our heavy-duty product portfolio, with new heavy engine options that include the Cummins ISX15 and our own proprietary 13-liter engine with SCR. With the launch of the International LoneStar/ISX combination in October 2013, we completed our SCR transition for heavy-duty engines. These accomplishments show our newfound agility as an organization. So do the steps we’ve taken to build our medium-duty SCR product lineup. In September 2013, we announced the Cummins ISB 6.7L as an option for medium trucks and school buses. We then met aggressive “OK to ship” dates for medium trucks and school buses with the ISB. We’ll continue to build on this foundation during 2014, as we complete additional plans for our medium-duty portfolio. Improved product quality These rapid product launches have also been achieved with quality. Over the past year, we rebuilt and reinforced our quality processes, focusing on extensive validation, and the products we are producing now are performing well. We have logged more than 1 million test miles on vehicles with the new ISX15, with no major issues, and more than 4 million test miles on our 13-liter engines with SCR running in the International ProStar—again with no major issues. Thanks to these and other improvements, including the implementation of our Manufacturing Execution System at our truck plants, first-time quality has improved significantly year-over-year. We believe we are building the best trucks in the company’s history. Meanwhile, we continue to support our customers as we deal with issues from our EPA 2010 Exhaust Gas Recirculation (EGR)-only engines. We take these issues very personally, and we have launched unprecedented actions to define them and address them. As a result, we believe an end to our current elevated level of warranty spend is on the horizon. By the close of 2015, the majority of our warranty exposure from these units is expected to be behind us. Page2 Positive marketplace response The remaining issue stemming from our past emission strategy is winning back our customers’ confidence. We are in a relationship business: Generally, about 80 percent of our sales are to customers who have bought from us before. We’ve clearly disappointed them, and we’re working hard to get them to experience our great new products. We are determined to regain their confidence by convincing them that they can count on us. Our improving order backlog in our traditional markets, which is up 26 percent year over year, confirms that we’ve made the right product decisions. With a broader SCR engine portfolio in 2014, we are well positioned to build on this foundation. Significant financial improvements We’ve also made fundamental progress by improving our underlying financial position. That starts with cash. We have demonstrated tremendous discipline on cash, and have delivered on our cash guidance for five quarters running, while significantly reducing working capital. We ended the fiscal year with manufacturing cash, including marketable securities, of $1.52 billion—our highest cash level in at least the last 30 years. We’ve also made the tough decisions necessary to reduce costs, beginning with structural costs. We’ve streamlined the business to reflect our current product lineup and our renewed focus on our core North America markets. We’ve cut our senior executive ranks by 40 percent—reducing layers, increasing spans of control, and eliminating activities that add less value. Our engineering spend is more focused, largely reflecting our change to SCR and our increased focus on the core North American truck products that will build our future. These changes have increased the speed of our decisionmaking, improving our ability to respond to customers’ needs and marketplace conditions. Thanks to these and other improvements, we reduced our structural costs by $330 million in 2013, nearly doubling our original goal of $175 million. On top of that, our volume-adjusted material and manufacturing costs improved by $115 million, net of the incremental costs required to add SCR to our big bore engines. We also executed a number of actions to fix, close or sell parts of our business that detracted from our renewed focus on the North America truck market. We rationalized our manufacturing footprint by closing our Garland, Texas truck plant, subleasing a portion of the Cherokee, Alabama manufacturing facility and idling the West Point, Mississippi truck facility. We restructured our Brazil engine business to lower its break-even point and increase profitability. We sold non-core businesses, including Navistar RV, Workhorse, Bison Coach and our India truck and engine joint ventures. And we right-sized our defense business in response to declining government spending. All told, we made cost improvements of approximately $450 million year over year—significantly lowering our cost of doing business. Driving a lean enterprise While these accomplishments are important, they’re obviously not enough. We still have a great deal of work to do, and we’re committed to moving ahead aggressively in 2014 on multiple fronts. In 2013, we had great success in streamlining our manufacturing operations and our product development process. Now, we’re taking this lean approach to the next level. Page3 We’ve created a lean transformational initiative—“The Navistar Way”—to drive functional excellence, eliminate waste and achieve continuous improvement across the enterprise. We’ve challenged employees to look for ways to work leaner and to be better, faster and more efficient. I am genuinely excited by the enthusiastic response our emphasis on lean has generated around the company. Many teams of employees have already approached me to discuss what they are doing to improve the business. They’re making an impact on everything from reducing parts inventory, to finding better ways to share workloads across groups. It’s this kind of enthusiasm and engagement in attacking our challenges that is transforming Navistar, creating a new culture where employees across the company are committed to making a difference every day. Our focus on lean will build customer satisfaction while further lowering our costs and ultimately, driving profitability at all points in the cycle. Building toward industry-leading vehicle uptime Our improvements in product quality are paving the way to the next frontier: industry-leading uptime, which is the most critical requirement for our customers. They make money only when their trucks are up and running. Our intent is to deliver industry-leading uptime by building quality into design and delivering it in manufacturing, while providing fast, responsive service. Down the road, we believe this focus on uptime will provide Navistar with a strong and sustainable competitive advantage. Our vision is to be the truck maker customers can count on to help them win. Achieving profitable market share improvements With a fuller portfolio of SCR-based products available in 2014, we will be even better positioned to increase volume and market share. We are determined to build on that opportunity and spark customers’ enthusiasm with new and improved products, options and features. For example, we recently introduced OnCommand Connection, the industry’s first remote diagnostics system that uses an open architecture approach to provide truck fleets with one-stop access to information about their entire fleet through a single portal, lowering operating costs and improving uptime. That’s the kind of innovative thinking that will yield real benefits for customers and drive further improvements in profitable market share. Delivering EBITDA growth Growing sales volume is one of the two important components of improved EBITDA. The other is cost reduction. Thanks to our new, lean culture, we will continue to make strong progress on cost in multiple areas: x Lower material costs and logistics costs. Over the next few years, we intend to save an incremental 5 percent in this area through design cost reductions, strategic sourcing and footprint optimization. Among other improvements, we plan to streamline and optimize our trucks by removing costly, unnecessary EGR components from our proprietary engines. x Significantly lower warranty expenses as a percentage of revenue. Our longer-term goal is to lower warranty expense to 2 to 2.5 percent of revenue, the industry norm. Page4 x Realize an incremental $175 million in structural savings in 2014. We’ll pursue additional SG&A and product development opportunities as we work toward absolute best-in-class structural costs. x Take out additional manufacturing costs. We’ll continue to consolidate our engine manufacturing footprint, implement lean manufacturing and quality initiatives, and improve our truck manufacturing operations.