Q2 2020 Navistar International Corp Earnings Call
[music].
Quarter 2020 earnings conference call.
All participant lines will remain muted until the question and answer session.
At this time I'd like to turn the call over to Marty Ketelaar, Vice President of Investor Relations and communications to begin the call. Please go ahead.
Good morning, everyone and thank you for joining us for Navistar second quarter 2020 earnings Conference call.
Today, we will discuss the financial performance of Navistar International Corporation for the fiscal period ended April 30, 2020 with me today, our 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 including our prepared remarks, we'll take questions from participants.
Before we begin I'd like to cover a few items.
A copy of this mornings press release in 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 it can be found in the press release that we issued this morning as well as in the appendix of the presentation slide deck.
Today's earnings press release, Investor presentation, and our prepared remarks 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 no suggested by our comments made here.
Additional information concerning factors that could cause actual results to differ materially from those included in todays presentation. Please refer to our most recent FCC 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 this subject.
With that I'll turn the call over Detroit Clark for opening comments dry.
Okay. Thanks, Marty good morning, and thanks for joining us.
We have a lot to cover today. So we will try to keep her comments brief.
Adequate time for your questions.
It's very unique in a very busy corner.
Like many businesses, we've worked hard to keep our team say.
Understand the changes the trucking industry.
As appropriate.
Unfortunately, the wind down of the economy due to the cold pandemic played out during our Q2.
With the quarter ending in the middle of the stay at home phase of the crisis.
We look forward to Q3 with more sections of the economy moving into the re opening phase.
The next few months will provide insight into the nature of the recovery phase, which will extend to the remainder of our fiscal year and into the next.
Well, let's take this in pieces.
I will comment on the subject of orders cancellations in the backlog.
The manufacturing and supply chain.
Truck and parts sales and the dealer network.
Cash conservation actions and Navistar 4.0, and finally, a trade Todd Alliance.
First orders.
Classy industry order intake in the U.S. and Canada averaged over 3000 per week in February.
First month of our second quarter.
Dropped to around 2000 per week for the month of April.
I remind you industry orders were already down in Q1 to levels that were less than replacement demand due to the strong deliveries in 2019.
He said previously orders would strengthen throughout the year with the second half better than the first.
It is freight demand declined in the quarter truck utilization dropped in rates fell.
With excess trucking capacity, new orders fell off as companies reassess their needs in light of the sudden drop in demand.
He has been especially true in the general freight rental leasing and private fleet segments.
Some deals in the pipeline had been delayed retimed pushed off.
In April we incurred a handful of classic cancellations as well about 300 units or 2.5% of the order backlog.
Earlier in the here, we had cleaned up our order for so we've not seen the need for large adjustments.
Our order share approved as we progressed through the quarter.
Be it in an environment of low overall industry orders.
We ended the quarter with a backlog of per class six through a truck orders of over 18000 units.
Down about 12% from the end of Q1.
We continue to just line reached a demand managing a backlog is still represents over 25 weeks of plant build slots.
Production schedules are filled through Q3, and even at todays lower order rate, we expect to fill Q4 and enter 2021 with a workable backlog.
It's too early to provide a precise order forecast for the remainder of the year.
We expect orders to increase as the reopening of the economy continues.
Freight volumes are starting to increase in spot rates across dry van refrigerated and flat that are coming off their bottoms with modest improvements.
Used truck volumes are down with fewer new trucks being delivered across the industry.
Used pricing, which is a leading indicator of new truck orders is down 20% year over year.
And for used trucks will increase with improved fleet utilization.
As demand improves prices will as well.
Our current view indicates this could be in the fourth quarter of the calendar year.
Of course that depends on the nature of the recovery.
Turning to manufacturing and any central industry, we had the ability to run our plants during the quarter.
Or moderately successful keeping our plants open and producing.
It's required developing effective safety protocols to keep the corona virus out of our plants and our distribution centers.
Protocols implemented meet or exceed government and health care authority guidelines.
You can the plants operating also required working with our suppliers several of them were impacted directly by the code pandemic required to curtail operations due to local state requirements.
It was particularly true with suppliers located in Mexico.
Fortunately, we developed processes and procedures to track and engage the supply base during the industry shortages experienced in 2018.
So we cranked up the war room and worked our way through it again.
We encountered some disruptions have we lost about 50 plant days of production across our three assembly plants in the quarter.
That half of the lost days came from the suspension of production at our Springfield plan on March 20, Threerd and not returning to work until the second week of pay.
As the GMV plant that provides engines for the class four or five trucks and the caps for the cutaway G.
Close.
The remaining days lost for largely due to issues with suppliers in Mexico, where stand on requirements were implemented later than here in the U.S.
Some of these suppliers are still though and we will ramp up to full production over the next few weeks as we work through the remaining supply issues.
Let's talk about truck deliveries and market share.
The loss of production days in April impacted charge outs in the quarter.
Market share is lower year over year, yet it did improve sequentially from Q1.
As noted on the March call medium and heavy shares down primarily due to the follow up in business from the Retold leasing segment.
And other large fleets.
Severe service market share is up in the quarter, both good and bus share are up year to date.
We're working with our dealers to help them manage through these circumstances assisting them in working through the trucks out their lives.
Company and dealer inventories are down 4% at the ended the quarter, which represents about 127 days at the trailing sales rate, which is slightly above the normal range.
During the quarter, we launched international cares, which for a limited time features no payments for six months free access to international through 60, and worry free vehicle service coverage.
We also teamed up with our dealers to provide meals coupons and personal protective equipment to truck drivers of all mix. So that they can safely deliver goods and essential services.
In addition, our dealers have remained focused on uptight.
No deterioration in repair rates.
Part sales for the quarter were down in line with the industry at a little over 20%.
Oncommand connection data indicates the number of trucks on the road in the segments of general freight haulers or leasing and rental is down 6% to 8%.
Tom that school buses are idle as most schools have closed.
Fewer miles driven means fewer part sales.
Fleet utilization increases, resulting in more trucks on the road with more miles driven part sales will increase returning to normal levels.
Good news stories that last year, we introduce in E Commerce channel four parts sales and as you can imagine the use of this sales channel is gaining traction.
On cash we ended the second quarter with 1.5 billion up manufacturing cash.
Walter will provide more details in his comments, but we took a number of actions to conserve cash reduce cost and enhance liquidity in the quarter.
This was necessary to ensure we could proceed with our plans for Navistar 4.0.
These actions will assure we have the liquidity and resources to endure the current crisis and position the company for profitable growth as demand returns.
With regards to trade Todd.
As you know they offer $35 a share to acquire the remaining shares of navistar that they don't know.
It was public but we decided early on to not conducted discussions in the public Forum.
Board is managing these discussions, but frankly, the cobot pandemic has slowed the process.
But I can say is the offer remains on the table. It has not been accepted nor rejected.
Discussions continue.
With the state homeowners ending the economy is opening and the recovery basis you got.
Or many references and speculation on the shape of the recovery is being of B.W., you or even a swish.
We have modeled these scenarios and we will modifier plans accordingly, as the nature of the recovery becomes clear.
I think the recovery starts are gradually.
Gains momentum throughout the balance of the year.
Army is driven by the consumer and consumption will return.
The recovery will require trucks and trucking.
Increasing fleet utilization.
I think orders will improve modestly and then strengthen in the fourth quarter of the calendar year for trucks to be delivered.
2021.
2021 will be a better year.
It may not returned to 2018 or 2019 levels.
But as an effective covert vaccine or treatment has developed and becomes available.
So the recovery could quickly.
So in summary.
Orders have fallen off but will improve as the recovered proceeds.
Our plants are running and we have a workable backlog our dealers are managing through this and we're working to support them.
Part sales were down with lower miles driven and will increase through the balance of the year.
We've taken actions to lower cost, while ensuring we have to cash resources to proceed with our alliance project and Navistar 4.0.
So let me turn it over to Walter to walk you through the financials.
Thanks dry yes. These are unprecedented times, but navistar as well equipped to handle these challenges.
Before discussing our second quarter earnings.
Please let me first make a few comments about our liquidity position.
Important cash flow activities in the quarter and our financial services operations.
Let's start with our liquidity position.
We ended the second quarter of 2020 with a strong manufacturing cash balance of $1.5 billion.
During the quarter, we took several steps to bolster our liquidity position.
First with financing activities.
In April we completed the issuance of $600 million of senior secured notes maturing in 2025.
We believe this offering provides sufficient liquidity to our operations for the foreseeable future on a reasonable operating scenarios.
And we don't have significant near term manufacturing debt maturities until our term loan comes due November 2024.
That can be operating actions.
In April we also announced that we implemented a series of actions to conserve over $300 million of cash this year without significantly jeopardizing our strategic plans.
Actions include one.
Deferring pension contributions of $162 million and employer payroll tax payments.
Divisions of the cares Act.
Two.
Postponing, 30% of capital expenditures and spending on information technology projects.
And three.
Deferring non represented salaried us base salaries.
10% to 35%.
Next let's turn to some of the important free cash flow drivers in the quarter.
By the key drivers during a shutdown is working capital.
As an essential business our operations team is doing a great job working with our supply chain to keep our production facilities and distribution centers operating to serve our customers and dealers during the covet pandemic.
As Troy mentioned.
Then there and our Springfield plant, we have been moderately successful and keeping our plants operating.
Be it at lower volumes.
Nevertheless, we have experienced a deterioration in working capital due to these lower production volumes.
This is because we run what we call it negative working capital model.
While we have discussed this on prior earnings calls. Please let me briefly explain how this works.
Manufacturing operation sale or more appropriately factor the receivables they generate through our financial services operations.
This typically occurs shortly after a vehicle is produce.
When we experienced lower production volumes.
Causes the Paydown accounts payables that are associated with higher volumes from the prior period.
Exceed the inflow of cash from units produced in the current period.
This results in an unwind of working capital.
Historically, we tend to see this impact more materially in the first quarter.
Given the lower production days compared to the prior fourth quarter.
However, we also experienced this phenomenon in late March and April as the impact of the Corona virus spread.
Causing supply chain disruptions and lower production volumes.
As a result in the second quarter consolidated accounts payable fell approximately $250 million as we continue to honor our trade payables to suppliers.
Offsetting the net use of cash for accounts payable were net inflows as we effectively worked inventories and trade receivables lower by approximately $100 million in total.
The impact of the Corona virus continued to impact our operations in May.
Today, our factories are gradually ramping up production as the supply chain comes back online.
As production increases, we'd expect working capital to rewind as well.
Source of cash.
Additional cash outflows during the quarter included $85 million to fund the previously announced Maxxforce EG our engine legal settlement in the us.
$31 million of capital expenditures.
$28 million of interest payments.
In annual incentive compensation payments.
Finally, please let me share some thoughts on our financial services operations.
Financial services operations are well capitalized with strong underwriting standards and history of managing through downturns.
Typically these operations inherently increased liquidity during periods of lower volumes as assets liquidate.
From time to time, the financial services operations use excess liquidity.
And low leverage to advance funding to the manufacturing operations.
Either in the form of loans.
Or through a reduction in trade payable balances.
During the second quarter total loans from financial services to manufacturing increased by $121 million to $422 million.
Principally the facility secured by used truck inventories.
The increase loans improved overall manufacturing liquidity and only slightly increased financial services leverage.
As debt to equity leverage increased from 2.8 times at the end of January to 3.1 times at the end of April.
Our dealer body has remained fully operational.
And several owners have taken advantage of government funding opportunities under the cares Act.
And as see offers wholesale floor planning for our dealers in the us in Mexico and has experience no dealer credit losses state.
Moreover, in May and SCS successfully extended the maturity on its variable funding notes by year.
While maintaining its capacity of $350 million and AAA credit rating for the securitization.
On the retail side, we partner with bank of Montreal, or BMO to provide financing options for customers in the us in Canada.
Here, we have a loss sharing agreement with BMO.
PMO generally takes a first loss of up to 10% to 15% of the amount finance.
Navistars proportion of the loss generally ranges from one third to two thirds of the total losses.
Im also provides wholesale financing to our dealers in Canada.
In Mexico.
NFC provides retail financing as well.
Overall, the portfolio quality remains good.
Well, we have provided some extended terms our holidays for certain customers given the pandemic as required by Mexicos banking regulatory authority.
Now, let's review our results.
Results at the beginning of the quarter were in line with their plans.
But weekend in late March and April as the impact of the Corona virus intensified.
Second quarter revenues were $1.9 billion down 36% from last year.
Core Chargeouts were 14200 units down 40%.
Gross margin in the second quarter was 15.6%.
Lower from last year due to industry headwinds and the impacts of the current a virus.
Which resulted in lower truck and parts volumes.
Structural costs, including SGN and engineering expenses.
Well to $248 million.
Down both sequentially.
And year over year.
The prior year included $159 million charge for the Max foresee GR engine legal settlement.
Even after excluding this onetime charge structural cost fell $41 million.
Over the balance of the year, we should continue to experience as Genie savings from lower employee expenses reduce contractor work weeks.
And information technology projects then.
As well as reduced expenses for advertising and other marketing events.
Interest expense declined 23% to $63 million.
Acting debt repayments in 2019.
In subsequent quarters, we expect manufacturing interest expense to increase due to the issuance of the new senior secured notes in April.
In total we incurred a net loss of $38 million in the second quarter.
Or 38 cents per diluted share count.
Compared to a loss of $40 million.
Our 48 cents per diluted share in the prior year.
Excluding onetime items on an after tax basis.
The adjusted net loss was $10 million and the second quarter.
Adjusted EBITDA was $88 million in Q2, after excluding onetime items on a pre tax basis.
Moving to the segment results.
Worldwide volumes in the truck segment fell 40% year over year as a result of weaker industry conditions.
Truck segment sales declined to $1.4 billion and incurred a loss of $51 million.
Arts industry is also being negatively impacted by the front of Iris.
Less repairs and service due to lower truck and bus utilization.
As a result parts segment sales decreased 23% to $443 million and profit was $103 million.
The global operations segment was impacted by weaker conditions in Brazil that led to lower volumes and unfavorable foreign exchange rate movements.
Resulting in revenues of $51 million.
The segment also took a charge of $12 million to impair certain assets.
Excluding this onetime item.
Results would have been near breakeven.
Lower truck volumes also impacted the financial services operations.
Segment revenues were $64 million and segment profit was $24 million.
The weaker year over year results were due to lower originations and average receivable balances.
Before we open the call to your questions I want to share some thoughts as we move forward.
May the first month of our third quarter opened amidst many of the states stay at home orders.
In June states restrictions have begun needs.
It should lead to a gradual sequential recovery.
Albeit from a low base.
We've modeled various recoveries scenarios.
However, the current environment continues to rapidly evolve, causing outcomes to remain uncertain.
As a result, with holding 2020 financial and industry guidance.
In summary, we are managing through this crisis and Navistar maintains strong liquidity with no near term manufacturing debt maturities.
Company has weathered several storms throughout its history.
Our management team is confident we will successfully navigate and emerged stronger from this situation as well.
And longer term, we believe navistar is taking the right actions.
To preserve our goals.
Grow margins under Navistar 4.0.
With that I'll turn it back to the operator to begin the couponing.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Joe Your question press, the pound or hash key please standby it will be compiled the Q and a roster.
Your first question comes from Stephen Volkmann with Jefferies. Your line is open.
Great Good morning, guys.
Morning seems good morning.
Maybe just sort of a top down question around kind of cost savings and cash conservation actions. It seems like most of those are somewhat temporary.
I'm, assuming they will kind of.
Continue throughout this fiscal year, but how do we think about the sort of the pace of those maybe some of them or even contractual I don't know they may come back at some point.
And then any commentary about any of them that would be more permanent in nature would be helpful. Thanks.
Sure.
Hi, Steve and everybody else.
As Walter.
So.
The cash conservation actions that we've taken the approximately $300 million in total.
Three biggest pieces of that as we indicated in our.
Remarks are deferral of pension contributions.
Thats, a $162 million those are being deferred out till 2021.
We are watching in Washington, as there's the possibility for additional pension relief.
In the next.
Phase of the stimulus support.
From DC.
The second piece relates to capital expenditures that was a 30% reduction or about $65 million.
We do intend to continue with those projects we've just.
Retime them in a way that we could.
Largely keep those projects on track, but those expenditures will occur.
In the future fiscal years.
And the third piece that was related to a deferral of.
Salaries for our salaried non represented workforce.
We expect to pay those out by March 15 2021.
So that just relates to the timing of the cash conservation.
Actions that weve that we've taken.
Within that.
There are some expense reductions during the course of the year.
As a as we mentioned.
We've been.
Until late traveling less and.
We have also a reduced the number of hours that our contractors work.
I anticipate the there'll be some impact on incentive compensation as well this year due to the lower results.
And it also things like marketing events and so on have been them have been reduced so we will see some expense savings.
As a result of these actions and other actions as well and.
We'd of course taken actions already pre pandemic back in December were.
Through line rate reductions.
Fishing season, our salaried headcount.
To take in we have taken headcount down by more than 10%.
This year and of course will continue to monitor the situation going forward and we'll be prepared to take additional actions as necessary.
Steve is try I think thats, that's the key I mean.
Sure.
Messing, but we've modeled various recovery scenarios. There are recover scenarios that we think this spend patterns suits very well and allows us to remain very much on track with that type of things we want to spend money on so that we can.
Further or accelerate.
The benefits of Neps, our 4.0 and things were doing to improve our revenue and margin on other hand, there are scenarios that portend, we have to take these what some of these like you said temporary interim into permanent okay and.
Those are actions were very familiar with and as those circumstances manifold, we'll we'll take those actions as appropriate.
Great and then the quick follow up has there been any change in the pace or the scope of the projects that you're working on with trade time in terms of.
Sourcing and parts commonality et cetera.
Those that those activities continue and we'd like to accelerate them, where we can.
Still on track and most Walter indicated we love to accelerate and pull those benefits.
Into a more immediate timeframe.
Thank you.
Your next question comes from David Leaker with Baird. Your line is open.
Good morning, MRD Erin Wilson back on for David asked My first question is just on what you're seeing in terms of the pace of orders in production. The last call. It four to five weeks that perhaps any color you can share on what you're seeing in categories like delivery versus kind of freight hauling vehicles any any color. Thank you.
Well you know interesting the quarter. This is probably the quarter ended basically until at the low point I think were orders were.
Startlingly low both for the industries and for ourselves.
Since that point in time as the economy as reopening we see a number of very positive factors more trucks being on the road more miles being driven.
And.
And also I would tell you we were starting to see more orders and so we are off of a bottoms that we were I think in the April timeframe and for the last several weeks.
Orders have.
Marginally nominally modestly you can use whatever as efficient like there.
Have improved and appear that they will continue to improve for some period of time. So again the basis of my comment that says I think orders will continue to improve.
Because they start from such a low base and then Andy intelligence, we Havent talking's with some of our customers is.
The recover proceeds as they expect.
In the fall.
What would traditionally be there the time, where they enter the market to lineup orders for delivery in the coming year.
There will be looking and determining how many trucks. They ordered that at that particular point in time. So gives us I'm confident that the orders will continue to recover get lot of things have happened economy, you got to reopen.
Excess capacity in the trucking industry that existed prior to the pandemic has got to work its way through that has an impact on used trucks watch used truck pricing because as you start pricing improves as kind of an indication that spot rates are improving as well, we see all of those things happening again between now and and largely the ended the year.
So.
We are we're guardedly optimistic that.
Enemies is starting to move again, and we are hopeful that the recovery will be faster than.
A lot of people.
Okay and then secondly, just wondering if you can help us think through your R&D spending in your philosophy towards that especially given obviously your pension for cash conservation at this point, how you balance that we kind of your long term investment.
Future. Thank you.
Yeah, you're in as Walter again, as I mentioned also on Capex those to really go hand in hand, we want to continue our our projects Navistar 4.0, we we believe that's the right strategy.
You know the key thing is the strategy hasn't changed the actions.
We're planning to take actions that we discussed back on our Investor day, we.
We obviously do need to to follow demand as Troy you alluded to.
And that could that could impact timing, but we've tried to find a way to conserve cash in the short term.
Ill.
Being able to continue to move forward with those projects because they are important for.
Where we want to take the company in the future in into continue to improve our financial performance for our shareholders.
Alright, great. Thanks for taking my question and this is pursuing just complementing I think with Walter said as we set priorities and EPS or for putting always look at R&D specific our development in the fourth quarter just 4%.
Year over year, which is a testament that we continue to accelerate and try even to pull ahead as much as we get in the key strategic initiatives with having the company.
Your next question comes from and doing with JP Morgan Your line is open.
Hi, good morning, everybody its end agnon.
Hi Inn and.
Learning and maybe you could talk a little bit about that.
The analyst meeting you hand done at recession scenario, where you're breaking volumes were 55000 units or roughly 13750 units per quarter.
Versus 14200 in fiscal Q2.
Which to renovate should be break above breakeven that I know, we're going to extraordinary times, but maybe you could comment on.
Is this scenario analysis, Florida or was Q2 just.
Such an anomaly that.
It just doesn't fit the normal downside case for essentially if you could just against that that'd be helpful.
Sure and it's Walter mentioned that gets a couple of things one.
We did take another look here recently at what we had shared with respect to our breakeven volumes back in.
September at Investor Day, and we standby.
Okay to their that we've been able to reduce that below 55000 units.
And if we take that can take additional cost reduction actions that are more permanent in line with Steve's questions earlier than that will continue to track down.
To your point.
The second quarter was.
An anomaly right. It's a it's been a difficult time for or many companies. Obviously, some additional costs have crept in there that.
Wouldn't be part of our normal breakeven calculation.
We've had some supply disruptions that's resulted in some manufacturing inefficiencies, but we're very proud of.
Our team for continuing to keep.
Many of our plants running for for a big part during the quarter, but production obviously.
Would have impacted breakeven and then thirdly I just mentioned that as we had looked at that and as we look at breakeven volumes, we look at that over the course of the year.
And in a typical year.
The second half is.
Tends to be a little stronger.
The first quarter, we have.
We have the shutdown over the holidays and here obviously, we lost.
So production days as well so.
No. It wasn't breakeven that surely continues to be our objective is to be at breakeven through all parts of the cycle, but I think we can probably all agree that the second quarter was and into the third quarter here. It was an unusual time.
For for all industries.
The number of unforeseen events.
Okay, so you'd expect to be above breakeven in the back half.
The normal seasonal basis is that what we should take from your comments.
I think should take from our comments that we.
There are still going to be breakeven at all points of the cycle and we havent provided guidance here for volumes or profitability in the second half of the year at this point.
That's fair point and I appreciate.
Based on what that which scenario the various scenarios that were running.
Manifest themselves in the second half the year.
Okay, and then just a follow up and in light of those comments exactly could you just talked about the different segments of your business between school bus classic seven class eight heavy.
I'd say, it's fair service.
Which which of those markets production volumes would you expect to recover faster and which wouldn't you expect to lag.
Thank you.
And this first show.
Let me start with the school bus School bus up this is the time off the year were really no school districts would be purchasing a lot of buses, we haven't seen thats now, but the third quarter for us is protected in terms of production. So.
This is one of these segments that we will monitor the next few months is because they are important for the end of the year. So we understand how we've come out of the year was the orders.
No receiving the next few months.
So if your services being pretty steady.
We've seen some reduction in some no no government DVD, but in general utilities construction is being no supported what I. We're noticing now is that the long backlogs that used to be indeed, no truck equipment manufacturer pipeline they are getting reduced so.
It's not no in fact, it directly the business up from Oems, but we see that there will be more room, probably with dmps as we get closer to the second half, which is a positive thing.
On a heavy side really general flake general freight, Louisiana rent, though are really depressed at this point in time.
We know that that's that's an area that we need to see the reopen the off the market. This Roy alluded I think we have the expectation that orders will come from the will start to recover as snow the economy restarts, but that's one of the segments. If you have to monitor closely and on a medium duty really housing is.
Is that and construction is still a little bit off a positive news for us so although no into in this side over the medium duty segment. The one that is more on the retail sales, we see a little bit off more stability.
But leasing and rental drags the segment down that's you know that losing a rent was almost 50% of being caught a medium duty market index in those days and you still very constrained and that is a mix off all the used truck values residual values impacting leasing the de fleeting from rentals were leasing companies.
Moved their stock off rental units to full few requirement for a lease contract instead of buying a new truck from an OEM like so we haven't seen any no material recovery on leasing and rental at this point in time.
Okay. Thank you very much for the color I'll leave it there in the interest of 10 patients.
Segment.
Your next question comes from Felix motion with Raymond James Your line is open.
Hey, good morning, Thanks for the time everybody.
[music].
Hi, Good morning, I was so I was hoping we could talk about the parts segment for a bit.
Revenue down 23% or so in the quarter is there will weighted this aggregate how much blue diamond impacted this number.
And then any way you could share how parts, maybe tracked by month or what you're seeing into may and states reopened.
Okay, well I think that we can talk about parts now if you look at the evolution off the quarter, let's let's understand that we're not in the calendar quarter right. So we we have our quarter right in the mid all depend dammit no. We started with the contraction off the market and we saw daily rate saw.
On parts really dropping significantly in the latter part of March into full month of April. So April was the trough off the performance and if you look at even Medicaid data it would indicate that the industry in general dropped 20% postponed damage.
The good news for US at this point in time is that we're seeing that the beginning of May the daily rates of parts are starting to recover so is not a full recovery from no where we were in a pre pandemic crisis, but at this point in time, where we see that I.
I think our fast a point, where dealers were managing to reduce their inventories and the fact that the park off vehicles running is not 100% active and therefore not consuming parts did they were not generating.
As for US. So we believe that April was the trough I think Mays recovery.
We are seeing them more positive trends on that side and we hope that that continues as the economy reopens.
I will walk through if you want to comment on Blue Diamond specifically.
Yeah Blue Diamond continues to be one of the elements that.
That we've been talking about on prior calls as well as pursue indicated here in this particular quarter cobot.
Surely was a big piece of the decline year over year as well.
I'd have to take a look at where the.
Where the.
PDP revenues are.
These days, but I think there.
Submitting probably around 300 million of revenues these days at an annualized basis. So.
We've continued to see the runoff there in that.
In that business over time, but that means that gives you some directional input.
Yes, no that's super helpful. And then maybe maybe as a follow up on you had kind of talked about some some capex deferrals.
Im curious if you have an update on your San Antonio facility, if the rollout of the construction if that has been at all impacted.
Or if it's simply a bit too early to tell at this point. Thank you.
Look we really have no analysis to make in that regard our major capital projects with the cash conservation actions with the top up from the market that are.
That we did during the course of the quarter. The purpose of that was to try to keep these programs on track. So we really don't have any announcements we want to make that at this point in time.
Highlights maybe just programming call I think Walter as you just say with me kind of a good way to think about it won the actions that we described navistar corporate or the exact rate actions that were dedicated to make those actions happen too.
There are dozens of action plans within those and.
The timing of execution against those is important and is being changed but we are changing and very thoughtful manner. So.
The ones that are critical to to the progress that we intend to make.
That those stay that those stay on track.
The real third part of it which kind of gets to the point that we're really not providing guidance is the fact that as we make these improvements to the business through both product investments.
Operational investments and other investments you eventually the return on those is a function of volume that gets thrown against those okay and so the nature of the recovery and how that plays out over the next handful years becomes critically important.
To us so when you think about it in those three pieces. The thing we can talk about is the actions are right timing still works.
And then to see how the economy plays out over the next handful of years.
And hopefully.
We are confident it will play out on such manner that will still be able to deliver.
Thank you appreciate the color.
Your next question comes from Jerry Rabbits, with Goldman Sachs. Your line is open.
Yes, very good morning, everyone.
And your true I'm wondering.
Sure I'm wondering if we can just to expand the comment you made a moment ago would conclude.
Your supply chain and.
As you folks look at what we've learned over the course of dealing with that.
Okay and then they can we looked at what business looks like for you folks two to three years down. The line are we at a point, where it does supply chain strategies different there at all or are we talking about more suppliers just as a secondary source.
Just stepped through.
How.
That part of the strategy.
Has evolved if at all over the course of this management.
Jerry Great question, let me take that into pieces I'll take the first because I don't want to cost of the pursuit for the second but the first piece of that is.
We have not.
Finished it yet, but certainly I think everybody in our industry and related type industries are asking those exact questions.
From what we've experienced and learn through the pandemic what implications are there for our supply chain strategy, that's something that's going to take us a few more weeks here to finish assessing it and determining what might be the alternatives that we could consider going going forward.
Supply chain is something that you change in a short period of time, it's more like your stock portfolio right. You you you move it to particular direction through incremental decisions many of which are associated with production allocation or or new product programs. So we are in the middle of we're involved in today asking ourselves.
Sales and doing analysis to answer those exact question. So I know it doesn't give you an answer but it is in fact.
Part of part of what we're doing and I think we kind of anticipated that that might be of interest. The second thing, however, though and probably more importantly, as we're trying to get these plants up and running and back into.
Second we charge off mode is managing through the risks that the pandemic immediately presents to the supply base because those risks are those are direct risks to us as well so.
Really really pleased with the effort that we have here with us pursuit of your comment.
Yes sure right.
[music].
In reality, what we are doing is nothing new there are lot far no kind of analytics have taught us how to really manage the supply base at multiple layers actually today, we can see several layers of the chain and provide that in that provides a good no understanding off where the chain can break which is typically where.
No you can be compromise with your production flow.
Sorry, I alluded, we have a supply chain financial risk process in place and just to give you a perspective for instance, we have totally in a company more than 20000 no suppliers. When you could you add all the parts suppliers, but do you think active suppliers for production. We are around 14 to 1500 suppliers and we just know plus all of them.
In the big matrix and reassess the risk and now what we notice is that now from the pre pandemic due to both pandemic you doubled the risk into top lower quadrants of suppliers that could be at exposure, but from a direct standpoint that today's 47 supplies. So there are 47 suppliers that we have our hands on.
We know exactly what's going on with them, we are providing support where we have to provide some support so it's a pretty transparent process and pre no proactive process. So we don't waste the problem to happen to react we just take action as we see the leading indicators.
It really appreciate the color in.
It seems like your natural inclination will be to move.
Some areas towards dual supplied at least they seem to be it really conclusions that some companies are coming through especially.
Within the region supply is that.
And I appreciate that it certainly.
Would you agree with that.
So I speak.
The call I can't tell you I think it is dealt in the past if you take 10 years ago. This strategy up dual sourcing everything was the one that would put back to the most but is the one that consumes the biggest working cap, though in the company no today the power of analytics is so strong that.
You understand the supply chain. The more you take these mark decisions on where you have to dual source. So I think depend damage is just forcing us to use even more the analytics to define our sourcing strategy. So to your point I think there will be cases, where we have no no dual sources and no tooling duplications and things like that.
But they are all bazin really thorough assessment and powerful analytics to that we have yet and I would just add to that Jerry I mean, I think another thing that.
Yes.
We're currently involved it look there's there's a look at the supply chain as it relates to tier one suppliers that is a fairly straightforward look and to your point. We can say, we can use strategies, such as dual sourcing or relocated closer to operations or moving from Asia to two to North America the really.
Issue for Us, where we have seen a lot of issues is actually tier two tier three suppliers.
Where fortunately the tools that persio references let us look into the tier two supply base now also into the tier three supply base, because I think theres a lot of work to be done there. It's okay to have a final assembly is something.
On in North America within a couple or drive a facility, which is we would seem to be ideal, but at 20% of content comes from.
Asia.
And comes in and see containers that.
Nobody ships, a single see container you're going to ship alluded to containers. That's the kind of thing that makes makes this analysis that you're referencing which is the right question a little more complex and a little more involved and yet look we're upward we're making those analysis right.
I appreciate the insight thank you.
Your next question comes from Andy Casey with Wells Fargo Securities. Your line is open.
Thanks, Good morning, everybody.
I was wondering if it looked at the 10-Q Theres a comment in there about cobot impacts.
Expected to be more significant in Q3.
Can you help us interpret that is that related to escobedo.
Potentially being.
Shutdown most of May even though it.
Kind of held its own in April.
How should we look at that comment.
Yeah, and it's Walter it does relate to what we've seen here in the course of May already and we have we did have some supply disruptions from Mexico in particular as the.
Pandemic hit there and that did impact our.
Escobedo facility.
Weve.
The Springfield facility as well continues to have some down days.
It's down this week, but we expect it to come back up next week as we wait for some supply.
And the line to in Springfield.
Hasn't started up yet pose pandemic, but is coming back online in I think the week after next.
[music].
So, but it's at both our Escovedo in Springfield facilities, I should add for us to be though.
Largely running at rate there in the in the meantime, yes, we are.
And so we aren't Olson that's well at this point and tells our bus plant in Brazil.
Okay. Thank you and then.
In the excuse me in the prepared remarks.
You indicated used prices are down about 20% year to year.
Could you discuss if those are still falling sequentially or have you seen any stabilization I mean, even.
Even into May.
The.
Just first show.
Andy.
We haven't seen a.
Turning flexion I thought I think the last couple of weeks some level of civilization, but steel prices are significantly lower in the year over year basis, which is the referenced is 20% that you're seeing here.
Oh, we're seeing a little bit off more traffic on at least the online applications I think Christina and increases in applications I think the biggest challenge that we have with used trucks today is really lending lending availability I think thats Selwyn credit no the credit.
For the customers that want to getting to the new no. They used truck business at this point time, so inventories ours to up but I think they are kind of no. They moderate because the amount of trades off new for North Fork trucks that were basically coming through the used truck inventory.
Sorry for north raise with new gawk reduced as the NAMIC hit in deliveries snow got reduced as well. So there are monitoring is truck as well as Troy indicated.
We don't have a forecasted in a short term this is going to be materially changing but does depend the recovery no happens in the second half theres an opportunity for us to see some price recoveries at end of the by the end of the year I mean, I think it's an interesting phenomenon here with the high unemployment rate, we see a number of those folks have.
Sales and had driven truck previously and so.
So we see in these applications people coming trying to come back in the market I can find a low now by truck and Syntel instant spot rates are starting to increase.
Driving to truck Amphadase week is better than than doing anything. So this is this.
This credit issue that.
The first you have notes its compared to chicken to that kind of thing there, but we think that it's it's an interesting phenomenon and is positive and I think it's probably a precursor to the stabilization of those.
Used car prices.
Okay. Thank you very much.
Your next question comes from Joe O'dea with vertical research your line is open.
Hi, good morning.
Just related to what you're anticipating on production picking up over the course for the quarter can you give any sense of what that means from a from a charge out perspective, just kind of high level.
If things go according to plan, what kind of charge at Williams, you would be looking at.
And in that type of scenario, assuming that working capital is not a drag what is the through manufacturing free cash flow experiences that.
Modest outflow.
Type of scenario.
Yes Walter.
As Weve indicated couple of times, we're not really providing any guidance on volumes, but.
I Dare say the volumes in Q3 will be lower than in Q2.
Because.
He has been impacted by production as we as we indicated and we wouldn't expect demand to.
To come back up as we had seen.
In June and July as we've seen in the months prior to covert in our fiscal quarter.
Two which began in began in February.
You're right about.
About working capital to that against a function of the volumes at some point as.
As demand improves we would expect some of the working capital unwind that we saw in Q2 to two rewind or be a source of cash.
Over the over the balance of the year, but we'll have to see how that plays out and the key thing is that we ended the quarter with $1.5 billion of cash and we expect and the the next quarter end the year with very strong cash balances as well in excess of $1 billion, which is kind of a number that we've.
No I always look to to make sure. We can continue to manage the business. So.
I'm not seeing is going to drop to those levels, but when were in excess of those levels. We're in pretty good shape and so the.
Borrowing that we did.
Here a month ago.
Little over a month ago now is.
Bolstered our liquidity balances and.
We will help us.
Over the balance of the year.
And to continue with our key capital spending programs that announced or 4.0 as well.
Okay and then.
Sure you recently extended your services term CEO until July 1st and just given the fluidity in uncertainty of the current environment is that something that you will consider extending longer and if not how do you envision your role as chairman is that more of a CEO hybrid Roland.
How should we think about succession announcement timing.
Yes, I don't think want to make any announcements today, but.
At the right time.
The appropriate communications look we were my contract ended technically in April 21st we're in the middle of the low point of the crisis.
Having weekly and sometimes twice a week for calls as the board is executing their their duty to for to provide oversight on behalf of the shareholders didn't feel like the right thing to do them would be to force the subject of CEO succession.
To that onto that onto that agenda. So, but it is largely domain to the board will will.
Well keep you guys praise, but theres no. There's no one else wants to be made today felt it was a prudent thing to do at the time.
We have no further time for questions I will now turn the call back over to Troy Clarke for closing remarks.
Okay. Thanks, I really want to thank the navistar team for stepping up in these very difficult times, our suppliers as well a lot of heroes in that in that part of the business for us our dealers.
Other partners and and all of us in our dedication support of our customers and the drivers who are really vital and keeping America moving during these difficult times look navistars in solid financial position as the economy works through different phases of recovery, we're making the right plans, we're going to pick the right access to these times, we will emerge stronger and be in a puzzle.
Mission to deliver on the goals of Navistar 4.0, which grows revenue and margin. If you have any questions or follow ups. Please reach out to the IR team for any additional questions and again. Thank you very much for your interest in our company.
Great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].