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Q&A: Navistar's Troy Clarke

October 2014, TruckingInfo.com - WebXclusive

by Deborah Lockridge, Editor-in-Chief - Also by this author

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Troy Clarke assumed the role of president and chief executive officer of Navistar International on April 15, 2013, after serving as chief operating officer since August 2012. We talked with him shortly after Navistar's third-quarter earnings call.

HDT: Your third quarter financials showed a net income loss of "only" $2 million. Why is that actually good news?

Clarke: "I said seriously, we can't find $2 million in $2.8 billion in revenue? (laughs) I think the point is, the net income after taxes, minus $2 million, that number last year was minus $247 million, on roughly the same level of revenue. The revenue in North America was up and in Brazil was down. So what we really have is a $245 million year-over-year improvement.

That's why, at least internally, we take the opportunity to recognize and celebrate break-even performance. To improve roughly a quarter billion dollars is significant.

HDT: Your market share isn't where you want it to be. Where did you expect it to be by now, and why do you think your projections/goals were off?

Clarke: I think the market share is a good story but it's not a great story. Market share is improving, and we have a large backlog of units to build, and I think the North American volume is actually up 20% in terms of units. But the market is a little hotter than we had thought. So despite the fact that we have been gaining on sales, our market share, just how the math works, is not quite what we had originally calculated.

What we have noticed is a couple things. One is the [previous] lack of an SCR severe service product. Navistar has always had a very healthy market share in Class 8 severe service, and we didn't until July have an SCR product to sell for that market.

In the other half of Class 8, on-highway tractor, sales have recovered a lot and we've had a lot of market share growth. The other good story is the percentage of Class 8 on-highway trucks sold through dealers has gone up significantly. Sales we're involved in directly are improved, but dealer sales have lagged a little bit, they're obviously facing a little different circumstance.

When we launched [trucks with the SCR-equipped] Cummins ISX in 2013, despite the fact it was a well-known engine, we didn't gain a lot of traction for eight or nine months. The market would not shortcut the need of fleets to try units out and to test them. When we did the ISB in medium-duty we did a faster conversion, and at the end of the day market share declined, with customers needing to test the ISB in our medium-duty chassis. It's like we missed part of a buying cycle. Now the quoting activity is going up, so we're very confident that [we'll see a pattern of adoption] similar to the ISX. Although I'm optimistic about the severe service product, realistically, looking forward, I think again people are going to test it, try it out and make sure it's everything we say it is.

The flip side of the coin is we've done a lot to lower the breakeven point of the company. So as the volume comes up that portends good things for our earnings.

HDT: Do you expect the rate of growth in market share to improve?

Clarke: The first thing is to get the severe service product out. We probably lost about 5 points of market share. There's just no way of stepping past the fact that we haven't had a product to sell there. If that alone happened that would be in the range we thought we might be.

The second thing is to continue to gain traction in the Class 6 and 7 line, and those pare primarily sold through our dealers. About a third of them have improvements in market share year over year and the other two thirds are about the same. And that's happening basically every day.

Last but not least as we're able to report better performance, as we did today and as we hope to do going forward, it kind of takes away the stigma of doing business with a company that has had losses for a long time.

HDT: Making such significant cost cuts could create some pretty low employee morale, but you indicated in the investor conference call that such isn't the case at Navistar. Can you explain?

Clarke: I think if you walked into our facility today, I think you'd feel it – it's palpable, the confidence in the hard work we've done and optimism for the future. I'd like to think it's superior leadership (laughs). But I think it's the Navistar culture, this is a company that going back to International Harvester days has faced its share of challenges, and it's a resilient team of people and a very smart team of people. We have great truck engineers, and these guys know trucks and how to make trucks, and they're very proud of that. Spread the Lean enterprise philosophy and expect that people will be involved, it creates an energy. In my history and my experience in working with other companies, it's times when there are a lot of challenges when teams pull together.

HDT: There have been rumors for years that Navistar is a logical target for purchase by a company such as Volkswagen. And for years Navistar execs have brushed off or laughed off questions about this possibility. Earlier this summer you made remarks to journalists that seemed to indicate that the company might be open to such a deal. Can you talk about that scenario?

Clarke: There are not active discussions about the sale or acquisition of the company. Every other week an investment banker comes in and says he has it on best authority that someone's interested in acquiring the company. Quite frankly, I'm not that hard to get a hold of; it's my job as CEO to take that call and report to the board on what that opportunity might look like.

We really don't spend a lot of time speculating about it. The comment that I made, the point I meant to create is that the things we're doing to improve the business are just the right things to do. Whether the company remains an independent manufacturer centered in North America or gets bought, we need trucks that are engineered right, that are validated right, that have superior uptime, all those things that contribute to customer value, shareholder value. And at the end of the day if someone stepped up and said, 'You guys ought to be part of a different company,' we'll just see how that goes. The things we're doing are the right things to do under any circumstances. I couldn't be more proud of their effort.

HDT: With the financial situation, Navistar essentially put new product development on hold. Are things improved to the point where you can put the engineers back to work on new products rather than fixing existing ones?

Clarke: That's a great question. We're getting through that re-spending on our engine strategy and skewing it towards new truck product going forward. You probably saw a year or two ago at the Mid-America Trucking Show we showed a concept truck we called Horizon. That was kind of a design demonstration that captured a lot of ideas on what we think the next generation Prostar might be.

We have a "Project Horizon," which is the renovation, the renewal of our entire Class 6 through 8 truck product line, with lots of innovation, lots of quality improvements, functional enhancements, fuel economy improvements, advanced telematics, all the good stuff. Certainly between now and MATS next year we'll be making some more definite announcements, especially with regards to timing. It is something we're very excited about and with the kind of performance we had in this quarter it gives us more confidence.

HDT: Looks like the company has come a long way. What do you think is the biggest challenge you still face?

Clarke: I think the biggest challenge we face is continuing to get in front of our customers, asking for the opportunity to demonstrate what we believe to be a superior product. How I think about it is in terms of a purchasing funnel: The upper part is awareness and product consideration, the lower part of the funnel is tender quotes, as it goes through dealers and traditional sales effort. Going forward we have to improve the consideration of our product.

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