Q3 2020 Navistar International Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to now the first quarter earnings results Conference call.
This time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star <unk> number one on your telephone keypad. If you require any further assistance. Please press star zero I would like to turn the call over to Marty.
Adelaar. Please go ahead.
Good morning, everyone. Thank you for joining us for Navistars third quarter 2020 earnings conference call.
Today, we will discuss the bathroom performance of Navistar International Corporation fiscal period.
July 31 2021.
With me today are Persio, Lisboa, President and Chief Executive Officer, and Walter Borst, Our executive Vice President and Chief Financial Officer.
After completing our prepared remarks, we'll take questions from participants.
Before we begin I'd like to cover if you like.
A copy of this mornings press release and presentation slides posted Dean Investor Relations page or what played for reference.
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 in the appendix presentation slide deck.
Today's earnings press release Investor presentation in 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 L. suggested by our comments made here.
Additional information concerning factors that could cause actual results to differ materially snows included in todays presentation. Please refer to our most recent SEC filings.
We would also refer you to our safe Harbor statement in other cautionary notes disclaimer present in today's material for more information on the subject.
As you know on January 32020, we received an unsolicited offer from freight to purchase the remaining shares on the company for $35 per share in cash.
Navistars Board of directors is evaluating this offer and we have no further updates for you at this time.
Today's call will only cover on third quarter results and we won't respond to any questions regarding the trade and offer.
With that I'd like to turn the call over to Persio Lisboa for opening comments personal.
Thank you Marty good morning, everyone and thanks for joining us today.
It's a pleasure to talk to you today abuse, My first call, where I'm at thrashing U.S. and you'll see off Navistar.
I want to thank our loyal customers employees dealers and partners for their support and their dedication to navistar and our brands.
Before discussing the quarter I want to spend a few minutes outlining some of my thoughts as CEO.
I am I believe right now Napster 4.0 strategy and its goals having developed many up its founding principles.
Today, I'm committed to accelerating the pace of progress towards those goals.
We are excited to share with you that our strategy is progressing very well.
The development of our next generation off trucks and buses is an initiative we call project Compass.
This initiative is on track to deliver a significant reduction in suppliers in parts as we expand our modular architecture across several platforms.
That will further reduce our average material cost for several models starting 2022.
Our manufacturing strategy is also on track to deliver benchmark conversion costs.
From the cost of materials and logistics, so the cost of assembly in less than 24 months from now.
Our Nielsen and sort of planned launches in the spring of 2022.
We're pleased to announce today that our first model to be producing that plant will be a full electric truck.
100% built on the core Assembly line.
San Antonio will be capable of building, both diesel and fully electric trucks with the same robust manufacturing process with no offline assemblies.
Finally.
We're also recalibrating, our resource allocations to optimize shareholder returns.
As a result of depend damage, we had the opportunity to revisit our investment portfolio.
The result was to retire known created call low return programs enter castle programs that we're creating redundant offerings in our product portfolio.
By streamlining our investments in conventional programs, we were able to free up significant capacity.
These will be redeployed into advanced technology platforms, and strategic partnerships that accelerate the pace of our progress.
Recent executive appointments and other announcements emphasize this shift as we prioritize the investments and partnerships that make the best use off for a company resources.
One key appointment as Bob Walsh, Vice President off emerging technologies strategy and plenty.
Bob We will oversee the development off Navistars newest business unit next E mobility solutions and is in charge also offer a thought on this platform.
Related to autonomous technologies during the third quarter, we announced our strategic partnership with two simple.
Our development off level for trucks is now entering its final phase and we expect to launch the technology production in 2024.
Just as with our electric trucks. This vehicles will be fully integrated into our assembly process.
In the area for electric technology, our business units next see mobility solutions signed an agreement with Inc. charge energy.
An energy solutions company based in Los Angeles, California.
To provide charging infrastructure and consulting services further aligning our foresees approach off offering complete emobility solutions for our customers.
And in the area productivity, we have announced new partnerships with selected telematics service providers, including Sem, Sarah and Geo path to provide customers with streamlined access with their choice off fleet management solutions, using our factory install device.
Subscriptions and services will include remote diagnostics and vehicle health monitoring.
Another key executive appointments expansion offering bowman's role after pending retirement off Michael capacity area.
As president of sales marketing and after sales Frederic will now be responsible for the complete commercial process for customers and dealers.
In his tenure as the leader off after sales framework has introduced a comprehensive plan to consolidate the leadership of the international dealer network as the strongest in North America.
We call it vision 2025.
And it has to support to finance our network as we think the necessary steps to implement this vision.
Under Frederick I'm confident that our Navistar 4.0 growth goals will fully materialize in the coming years.
With that let's move to the quarter, we have a lot to cover so let's take the isn't pieces.
I'll start with a quick overview off our third quarter results.
Next I'll discuss the economy and the trucking industry.
And our market share.
Finally, I'll touch on our cost saving it savings actions.
First our results our fiscal third quarter open in the middle off many stay at home orders and ended with sections of the economy reopening.
Our results reflect these as both truck and parts volumes were lower sequentially and year over year.
Third quarter revenue was $1.7 billion and we incurred an adjusted net loss of $8 million.
Our manufacturing operations generated strong positive free cash flow and maintain strong liquidity Walter will walk you through more details shortly.
The economy as you know is gradually recovering pumping them and closed in April and May.
We have seen employment improve.
The unemployment rate is still well above prefund nemec levels.
Consumer confidence and spending have also been impacted.
I assume manufacturing index has been above 50, the past three months, indicating businesses, our reopening and restocking.
The next stage up recovery depends on several factors, including the rate up new Cobiz cases, and the development off an effective treatment or if exceed.
The trucking industry. These also gradually recovering.
Fourth rates and volumes have steadily improved since April.
Resulting in improved carrier profits.
We still see appear dividing the trucking industry.
Carriers with dedicated routes hauling dry and refrigerated goods as well as flatbeds have seen increased volumes.
However utilization continues to be depressing, the rental vizient general freight products segments.
Moreover, these in a moment.
Additionally, this school bus the industry has loads as school districts are pursuing a variety of instructional approaches for this fall.
Some are using traditional classroom education.
Well, others are using virtual learning methods and few others a combination of both.
The situation remains fluid.
Plessey industry orders have gradually strengthening since April.
Reflecting the improvement in economic conditions.
As production continued to exceed orders industry backlogs have come down.
Used truck pricing has shown signs of stabilizing.
Reflecting improved demand ballast with improved inventory levels.
To summarize the economy is recovering but it is rebounding from the pandemic lows. We are cautiously optimistic about the road ahead for the trucking industry, but there are fewer number of uncertainties economy and the industry needs work through.
Our medium and heavy share continues to be impacted by dividing the trucking sector I mentioned earlier.
And it is down year over year.
This is largely due to lower business from the rental and leasing product segment.
Let me provide some color.
The rent on leasing segment is an area he starts trends for the international Brad.
2019, this product segment represented about a quarter of the classics through a trucking industry.
Thus far in 2020 total industry registrations off class six through eight trucks are Dol around 30%.
With that amount.
Rents on leasing is down 55% why would the other segments combined are down 20%.
These products segment has been more heavily impacted by the slowdown of the economy and by the Cobiz pandemic, but we have be successful and maintaining our share of the rent on leasing segment in the class six through eight space.
We believe that our overall market share will improve once volumes in this segment rebound.
The construction and government products segments have performed better than the overall industry and our superior service market share continues to grow up two points both year over year asked the question.
Turning to our dealers.
We remain close contact assisting them to work through the trucks on their lives.
We continue to work down company and dealer inventories.
However, lower retail sales caused our days sales inventory on hand to increase to 140 days above our normal rich.
The fourth quarter volumes are expected to improve any inventories to continue to trend down.
Causing the days sales inventory ratio to come down as well.
With respect to after sales part sales are recovering.
This year industry part sales are down nearly 20%, which aligns with our year to date performance.
We continue to be impacted by lower utilization off rent on leasing the goals and the school buses.
Fewer miles driven means fewer parts sales.
The good news is that we have seen recovery since April.
As discussed in the last call, we have taking a number of factions to call sort of cash and bolster our liquidity.
These actions have been successful as we ended the third quarter with $1.6 billion off manufacturing cash.
Additionally, our next Gen eight declined nearly 30% during the quarter.
We are focused now on driving increased and sustainable employee productivity and efficiency.
Based on the learnings of the pandemic.
So the takeaway is that we're not done.
We're transitioning from temporary cash conservation actions to sustainable cost saving actions.
While maintaining total focus on the strategic priorities off Navistar for funnel.
Walter will provide more details.
Today, the trucking industry is gradually recovering.
As our volumes for both trucks and parts.
The exact based self improvement will be closely tied to depend Danny and a vaccine or an effective treatment.
But we continue to take actions on matters, we can't control.
Targeted investments in advanced technologies, combined with sustainable cost saving actions, we will lead to even more improvements in the future.
We are accelerating the pace of progress on that so far for an all so we can pull forward its benefits and take full advantage off stronger industry conditions Wendy arrived.
Let me now I'll turn it over to Walter will walk you through the financials Walter.
Thanks for sale.
Start performed admirably during our fiscal third quarter, considering it began in may when a number of stay at home orders were in place.
As the economy began to recover business conditions gradually improved as well.
Even today however, the coven 19 pandemic continues to weigh on our operating segments and results.
I'll begin my comments by reviewing our liquidity position and the effectiveness of the actions we took on that front.
I'll then review results for the third quarter.
And wrap up my remarks, some thoughts on the fourth quarter and next year.
First liquidity.
We ended the third quarter with $1.6 billion of manufacturing cash.
The actions, we implemented in April, including raising $600 million of senior secured notes.
Have been effective in maintaining a strong liquidity position.
And as production increased during the quarter net working capital became a source of cash.
Attributing $190 million a positive cash flow.
This positive net working capital together with EBITDA was partially offset by cash used for interest payments.
And warranty spend in excess of expense.
Resulting in a $154 million of manufacturing free cash flow in the quarter.
Following the close of the quarter, we completed the refinancing of our recoveries on bonds.
Which resulted in a lower interest rate of two full percentage points, while maintaining their 2040 maturity date.
Now, let's review the results for the third quarter.
While Mays results for weakened by the impact to the current a virus.
Orders for trucks and parts gradually improved through the balance for the quarter as the underlying economy recovered from pandemic lows.
It also bears, noting that the prior years comparable quarter reflects result at the peak of our prior industry cycle.
Third quarter 2020 revenues were $1.7 billion down 45% from last year in core Chargeouts were 11400 vehicles down 53%.
Gross margin in the third quarter rebounded from Q2 to 17.1%.
Essentially flat year over year, despite half the truck volume.
Structural costs, including as Cheney, and engineering expenses fell to $214 million.
Down both sequentially and year over year.
Prior year has seen a included $31 million release of an accrual related to certain legacy engine litigation.
After excluding this onetime gain in the prior period SG NFL approximately 30%.
Savings largely came from lower employee expenses shorter contractor work weeks reduce spending on information technology projects.
Lower travel related expenditures and curtailed advertising and marketing activities.
Interest expense was $71 million.
Lower year over year.
Driving the lower expense was financial services, where interest expense fell 40% due to lower average debt balances and lower rates.
This was partially offset by higher manufacturing interest expense.
Due to the issuance of the new senior secured notes in April.
All in we incurred a net loss of $37 million in the third quarter or 37 cents per diluted share.
Excluding onetime items on an after tax basis.
Adjusted net loss was $8 million in the third quarter.
Adjusted EBITDA was $104 million after excluding onetime items on a pre tax basis.
Moving to segment results.
Worldwide volumes and the truck segment fell 53% year over year as a result of weaker industry conditions.
Truck segment sales declined to $1.2 billion, resulting in a segment loss of $22 million.
During the third quarter, we lost 27 plant production days.
Half the days lost during the second quarter.
The current a virus continue to negatively impact the parts industry.
As lower vehicle utilization resulted in reduced repairs and service for our dealers.
This was particularly true for rental and leasing vehicles school buses.
Additionally, economic uncertainty has led to dealers conserving cash as they manage their own working capital.
As a result.
Segment sales declined 27% to $440 million and segment profit was $97 million.
The global operations segment remained near breakeven despite revenues falling 48% to $47 million.
As the segment benefited from cost actions taken earlier this year.
Lower truck volumes also impacted our financial services operations.
Segment revenues fell 34% to $49 million and segment profit was $10 million.
The weaker year over year results were due to lower originations and lower average receivable balances.
The overall portfolio, including credit quality remains good.
Certain customers, who receive payments deferrals during the pandemic are now beginning to make payments again.
As we move forward.
I'm proud how our team has worked together to respond to a number of challenges.
From the turn of the trucking industry to the covered 19 pandemic.
Our response really began in 2019.
In December we announced a 10% reduction and global headcount as we anticipated the industry cyclical downturn in 2020.
That has been accomplished.
Then in April we implemented a series of near term actions to conserve cash in response to the Corona virus.
These actions have been successful as well.
On September 1st we ended the employee salary deferral program, given our strong cash balance.
Now, we're turning our attention to further sustainable cost saving fashions.
Employee efficiency rose during the pandemic as with automated and streamlined processes and eliminated non value added work.
This has prompted us to evaluate other opportunities.
Such as reducing the size of our facilities footprint. Since work can also be done from home offices.
Revisiting activities that can be done with fewer personnel or move to shared service centers.
Flattening, our organizational structure as we push accountability lower in the organization to accelerate decision making.
And pursuing cost savings from third party service providers, who also experienced productivity improvements and lower expenses.
Our goal is to align our cost structure with market conditions. So that we can be profitable at all points in the cycle.
We plan to maintain SGN expenses between 7% to 9% of revenues, while simultaneously supporting our strategic plans on announced our 4.0.
Before we open up the call to your questions I want to share some thoughts on the balance of 2000 22021.
[noise], providing official guidance during this time is inherently difficult.
And the situation remains fluid.
But if we assume the economy continues to recover an.
Three production has not impacted by further plant shutdowns or supply chain disruptions.
Then we'd expect 2020 industry volumes to range between 305000 325000 units.
This includes class eight industry volumes between 200002 hundred 15000 units.
And class six seven and bus volumes between 105000 110000 units.
As it relates to navistar the downturn is impacting certain key areas of our operations, where we are market leaders.
Particularly in the rental and leasing.
School bus product segments.
Due to the volume impact on these products segments, our participation in the overall industry recovery has been slower to date.
That is expected to continue for the balance of the year.
Possibly into next year for bias.
Nevertheless, we expect both our truck and parts segment volumes to increase in Q4.
And our truck segment and overall consolidated company results to be profitable for the quarter.
In 2021, we believe the recovery and the trucking industry will continue.
And that the rents on leasing products segment will rebound, allowing us to participate even more meaningfully.
In summary.
We are managing effectively through the pandemic.
And have maintained strong liquidity.
However continues to impact certain areas of our business.
We are further adjusting our cost structure to align with the market realities.
This will allow us to improve our results more meaningfully as industry conditions improve.
Position us to deliver I don't Navistar 4.0 goals.
With that I'll turn it back to the operator to begin the QNX.
At this time, if anybody but like ask a question. Please press star one on your telephone keypad [laughter] not like be star one on your telephone keypad. Your first question comes from Stephen Volkmann from Jefferies. Your line is open.
[laughter].
Good morning too.
So.
Well first doing well try to get people quite a bit about additional cost opportunity.
Great.
Sure.
[laughter] like.
Here so.
Investment opportunities. So you took a write or maybe you.
Just curious maybe <unk>.
[laughter].
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You mean.
Steve you're you're breaking up quite a bit.
[laughter].
Okay.
You're breaking up quite a bit Steve So we missed but I think that just to your question is what are kind of a major buckets of the cost savings actions that you're thinking about taking that you mentioned in your prepared remarks.
[laughter].
Right.
Yes, yes, yes, okay, sorry, we're having a little both difficulty with the audio so I mean, I guess first of all you know what we've been doing here during Kogut is I'm, having a watchful eye on cost and as we indicated no cost for.
Produced about 30%.
After you exclude a onetime gain last year year over year.
You know, but number those measures are temporary in nature, including some of our.
Employee expenses and contractor expenses travel at 90 related.
Investments so what we're focusing on so I should say I guess you know when you take a look at it we're already in the 7% to 9% range as junaid divided by I revenues or we want to do is turned those temporary measures into sustainable long term cost reductions.
So we are starting to take a look at other things, including our facilities footprint because we found that.
Folks can work from home and so do we need to have all the locations that we presently have.
Or can we downsize other facilities, where we're currently working as we prepare for the workforce so the of the future.
A second area that we're taking a look at is whether we can outsource more activities and we think theres more that we can do there and again the recent experience demonstrates.
That we don't need to do all those activities in our home office.
And then thirdly, we're looking to increase our.
Our decision, making capabilities improve our speed and of the decision making to given that the market does also moving pretty quickly these days and trucking.
And so one way to do that is to push decision, making down in the organization that will give us the opportunity to take a look at and just how many layers of management and so on that we that we have and whether we can streamline our organizational structure.
So those are areas that we're looking at we would do ought to be profitable at all points of the cycle.
And where take a look at what we can make more permanent as opposed to just temporary during this period.
And the benchmark you know I guess, a 7% to 9% of that we've kind of focused on is based on some benchmarking activities that we've done with best in industry, and we think that would put us.
In the first quartile of up costs and we're already you know much better than the median given the cost savings actions and cost reduction actions, we've taken over the last several years.
[laughter].
And your next question will come from and go from JP Morgan Your line is open.
Yes, hi, good morning, and can you talk a little bit more about 10 days on hand hundred 40 days, that's well above the normal range.
It and talk about what you're going to do in Q4 in terms of Underproducing retail in order to reduce that and do you expect to have that back in the range you need it by end of Q4, and then you know what does that mean for producing above the ore at retail going into fiscal <unk>.
Anyone or do you think theres going to be more work just based on.
The little volumes retail activity, especially in some of your like leasing rental and maybe even school bus segment. Thanks.
Hi, and his first open and good morning. Thank you for the question.
What first of all the 140 days sales is array showed that actually is in fact, it also for lower sales that be we built the dealer experienced the dealer network express in the quarter. So we expect that as market is rebounding in no sales are no getting back to I wouldn't say its normal but they are growing.
The last few sequential month is up here no. Following what their plan is for Q4 is we will see I was like reduction on our production rates in the range of 5% to 6% and that was planned seems to begin the actually you know that you'd be managing production rates consistently with the man.
And the way we cover for additional volume is.
With book facial overtime, we'll do that again in Q4 and also Q4 is Lord not only because of this adjustment, but because of seasonality traditionally the bus business has a lower rates into fourth quarter. We know that bus. The bus segment as I mentioned in my remarks is under more pressure than the truck second.
And at this point in time. So we we are monitoring closely the activity in that area, but that's still back to your point, we do expect that in Q1, we're picking up again on the rates and it is actually no bringing us higher than where we are today. We were in Q3 into first quarter obvious that you have to account for lower days off.
Production into first quarter, but the line rates will be back up because right now we're seeing the order intake supporting a stronger backlog and that makes us.
Support actually the decision into production for the first core.
Okay, Thanks, Dave and nascent digital sale. They sales I think that we should expect is coming down closer to different right Oprah enough. The range in by the end of Q4.
And I think the other thing and there is obviously, there's a numerator and denominator in that calculation the inventory levels are and much better shape.
The retail sales, which is going to dominate are still low, but improving so thats, what will drive that ratio back into our normal range.
Yeah I appreciate that that's a three month moving average unit retail sales and and if you could talk.
Similarly, then about the silver I don't because I'm, assuming those don't go into dealer lump certain dealer inventories here. What are you anticipating in terms of builds for silver idling Q4 versus Q3, and you know any outlets for into fiscal 21.
I think we're seeing Q4 in Q3 pretty flat and for now.
And that's probably the visibility that we have we are not seeing any major changes in that line specifically.
Okay, and the announcement by Nicolette to partner with GM yesterday that new you don't expect that to impact the sobriety no business or would you be considered as a producer a contract manufactured one of your facilities for that badger or will that be done enhance the GM.
And I leave it there.
We don't see any risk to the contract manufacturing agreement that we have yeah right now that solve it is a long term agreements. So we really look forward to contain it no relationship with Jim as is today.
Okay. Thank you I appreciate I'll get back in line.
Okay. Thank you.
Your next question comes from Brian Sponheimer from Gabelli signs your line is hoping.
Good morning, first Joe Good morning, author and I'm already how are you.
Right.
So you've got a lot of exciting thing here you found some.
Costs that were temporary cuts that can be structurally dismissed you got an easy plant on the rise.
You have conductivity you have autonomy.
HM.
And you have a $35 cascade from from trading so I mean, I guess I guess the point is that what's the argument for giving up the upside from here.
With is the benefit I guess the vote of a larger.
Company owned and new given the brighter days or.
Coming soon.
Yes, sorry.
As Mark indicated we're not going to comment on the trade a bit our job is the management team has to continue to put points on the board and.
I think you are paying attention you referenced a variety of things we're working on so we think theres a lot more than we can do.
On the cost side, we'll continue to grow the revenues in the business and we're excited about our partnerships on the advanced technology space. So I'm glad you took note of all those things.
All right I don't know.
And at anything to Walters comments, but no. Thank you for an always seem to change the improvements maybe on the advanced technologies, because that's an area that we've been investing a lot any does inc., an integral part of foreign AFS or 4.0 spread.
Thank you I appreciate.
The the commentary just a question on Huntsville any changes there about the the new engine plant.
Or is that still all systems go.
No. That's a that's pretty much stable, Brian we know and who is getting prepared than we we have or global platform that being developed with the alliance partner on track actually summer tasks are running right now very exciting results. So far so everything is on track we look forward to completing that.
So the development off Huntsville, and what is going to be no into future for us. So.
The plan is on track as I mentioned in my remarks, we made changes in terms of revisiting the portfolio investments.
But to be protected all the NAV sort of 4.0 strategic projects and this is one of them. So it's pretty pretty much on track.
All right, great well best wishes to your Persio and look forward to speak with you all later.
Thank you very much right.
Your next question will come from Seth Weber from RBC capital markets. Your line is open.
Hi. Thanks. This is Brendan on first that's my first is can you just talked to what you're seeing right now and the used truck market, particularly related to.
Inventory levels and pricing.
Yeah, no absolutely well first I think used trucks is starting to stabilize in terms off overall volume or if you just take the marketing two pieces the retail sales and I'll give you a data point.
Retail activity for used trucks quarter over quarter during Q3 was 60% higher for for Navistar.
But at the same time wholesale was six so we see wholesale being 16% lower and one is kind of offsetting each other mainly from a pricing standpoint to we can see that there is now some stuff yeah stabilizing pricing on used trucks, we're not seeing declines any further.
And we have reasons to believe that the retail activity growth growth is in an early indicator that we will start seeing some opportunities on pricing going up as well.
Really inventories have been reduced and most off what's happening on inventory being reduced is a function off lower receipts are most off the receipt. So news trucks. They they usually happen the related to carriers that are trading units as well and this activity golf reduced in Q2, two and.
Q3, the ink the receipts gawked lower although the sales and our season are picking up as I. Just mentioned so we are seeing some reduction in inventory, but as the big carriers get back into markets now and they start placing their trades in new purchases that they are executing.
We are going to see receipts going up and that may level, a little bit inventory.
Okay. Thank you and then a any color you can provide I guess on on the current strength view our supply chain has that largely rebounded from the impacts of cold it or do you see still.
Being a little strain.
No actually it's been it's being fairly reasonable say, we have a few cases, but no I would say less than a handful of cases that we monitor closely although we always put we have our risk management assessment, where we take a look at the supply base a health overall.
Overall, and we morning throw a lot of those suppliers, but in terms off any any supply chain disruptions, we having seen anything that as much as being material for us in the last quarter. So actually the good rebound from Q2, where most off companies, where the closing their shutdowns and really not up radiant supporting production.
It's been a stable for us at least.
Okay. Thank you I'll leave it there.
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Your next question comes from Jerry Revich from Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone in personal care congratulations.
Thank you Jeremy.
Personally I'm wondering if you could talk about the ability to maintain expenses at the current run rates. When in addition to electric vehicles, obviously companies planning for hydrogen fuel cells can you talk about how we should be thinking about R&D in those areas to what extent you plan to leverage the betrayed townpark.
Sure. So supply base can you just expanding on those points in terms of the sustainability of the current levels of R&D as opposed to needing to take R&D higher given the technology.
Evolution here.
Sure sure Gerry No first of all I think as I mentioned, we really started doing independent make with this process off revisiting a lot of for projects in priorities.
And it wasn't very good those beginning now for our Weve now our overall review off where the investments are going in general on not only on R&D, but capital as well.
And what started at the beginning as the cash conservation process ended up being a food revision off our portfolio for two reasons first because we really want to make sure that we could.
Operate profitably, but the second being the marketplaces changing significantly and a one off I think the virtues that we have here in the leadership team off Navistar is that we cannot definite just quick no pretty quickly. So as we see the market changes that you just mentioned in terms of advanced technologies. We are we.
I see that we have to be providing even more resources. So those are strategic areas of the business and make sure that we take a look at what we had planned before and if there are things that we have to remove we ended up doing that so you heard that in the quarter. We made some we bought some projects. We retired some others and actually we cancel some projects and more.
So if those resources there are not just be held so that driven down to the bottom line what were doing is where redeploying those resources into advanced technologies.
That's why we're saying you heard us talking about the relationship with two standpoint, our announcement on the level for availability and 2024, that's part of it you heard US talk it up all the connectivity launches that we had today with some sabra and yield that France says, but more more than that that is in was enabled by a joint program.
With trading on the connectivity modules that goes into all our trucks today, which was basically no across a module that came from the alliance with trade.
You heard us talking about electrification and now sudden folio, we're taking someone's going to from the new footprint that was a big part a far strategic cost go back conversion cost reduction plan now suddenly going to abuse of plant that is capable of dual building fully electric vehicles and diesel vehicles. So all of those.
So things are coming from the redeployment off the resources that I just mentioned before.
Very excited about it I think we we know that we can't call, Dave that would deem to the forecasted budget that we have planned in our strategic plan and we'll keep doing that as we see the marketplace changes and being very dynamic at speed as it is being in the last many many months.
[laughter] pursue the company so to us on deals. So it has been really driven by the strong dealer network and then the strong designs on the truck side can you talk about what you view as the company's differentiating factors for.
Electric vehicles hydrogen fuel cell vehicles.
<unk> dealer network is there, but I'm wondering what aspects of the products.
Do you expect to differentiate damn starting a type of water, but compared to no older to manage the keeps you folks who delivered on <unk> side.
Yeah, well I think first of all the touched in something very important the strength of our dealer network makes a big difference when we talk about support to customers.
I'll give you. An example, the first delivery off our school electric school buses for nine Bridget.
British Columbia, it's really not just the delivery off throw off buses, we had a comprehensive well support to the local authorities to the school district. So there's no through our dealers locally there is special connectivity controls that we're putting in place for those buses that will be delivered so.
There is a pretty much got pretty comprehensive oh, playing around the electrification in how we delivered those products not just us probably thats brought us services and the way we are able to support the services that go with the proceeds if this trend so far do their network. So we see that as a big differentiation the second one data.
Say is what I just mentioned the fact that we will have the capability to build our products in a production lie they'll provides us a tremendous amount of scale and they'll robustness in terms of quality.
What we're seeing today in the market is that the several several companies are no startups are basically taking oh, the small approach in terms off getting a product that is developed into digital platform series apart put it back together electrified platform, what they're doing is completely different the assembly plant will be.
40 capable to deliver if the electric vehicles that will come out of San Antonio and the reason why we're doing that is because we want to be able to scale fast and as long as we can get supplies and customers. So we'll be able to scale production fast and with a very reliable production process I think thats, a differentiation as well and I have to assume that that.
We will be driven also lower floor request the will be driving a lot of lower costs like taking that approach versus what competitors are doing today.
I appreciate that discussion thanks.
Your next question will come from Andy Casey from Wells Fargo. Your line is open.
Thanks, Good morning, everybody and congratulations persio.
I wanted to follow.
You're welcome I wanted to follow up on.
Jerry's question a little bit.
Can you discuss if you're expanding expecting a faster post 2023 market adoption rate for.
Zero missions equipped vehicles.
Specifically given some of the development program changes you made including canceling the big for engine co development program.
Well, we are seeing that first of all of their nor market trends, indicating that but then there are also regulatory changes Andy the are are going to promote that you should just take the air Clean Act that was recently approved in California, There's a real requirement on the penetration of diesel products already left.
Products I mean, so when it so we take those two forces and but then by the way not just that but the fact that we are seeing technology getting more advanced the cost of batteries continue to come down and we believed that there will be a an early adoption, whereas too on the on the area.
Thinking that the biggest adoption comes in areas like school buses Friday assess which is a segment that is very.
Prepared for that and medium duty is probably come next but that will go up as up as a class eight truck when it gets into a fuel cell technology. So we believe that there is an acceleration it's hard to predict where we're going to be by the end of the decade or how much of that is going to be part of our over.
For all mix in 2025, but we're getting prepared for that so the ability to scale up inside of our facility as one of the reasons why we are.
Getting someone's going to prepare for that.
Okay. Thanks for that personal and then just an additional question on that some of the.
New competitors in that space I guess.
Pure.
Ready to offer some.
Fairly attractive financing programs for the customers.
It appears that might be really just seed the market do you expect a period of.
You know kind of market development.
You know through favorable financing programs to to get the stuff off the ground.
Well.
Well I don't think we'd have felt first of all there are many many costs of different concepts on how you go to market with electric vehicles, mainly because of residuals, which I think is even more important in the commercial vehicles than what you see today in that passenger cars car side. So that there is probably a tend to try.
Handoff using more off lease batteries, if part of the no deal that you will be ceding the market will say when it first loss. So there are different models that can be adopted we're not going to open that though right now and the but that's that's pretty that's absolutely something that should be call sooner than we are considering.
As we go to market with our electric products not owning that brought this sale off the problem with the regular financing, but they'll easing off the unit and no. Eventually you can leasing off the batteries. If it is a case.
Okay. Thanks, and then a very very short term question there will be done for me.
You mentioned the.
Q4 expectations for the parts segment is to grow was that segment growing out of run rate basis exiting Q3 or is it your just looking at the trends and expect growth.
So I think when a part side, we have still we're still seeing apart side to us Roche type off recovery, it's been pretty steady and we see that we have an increase in Q4 that is happening so.
When we look at overall, if you just take a perspective I think our Q4 parts will be Oh, let's say in the ballpark of 3% to 4% lower than the first quarter.
That's that's how we should think about our fourth quarter, but.
But it is pretty steady and they start month over month increase actually we follow daily rates and the daily rates have been steadily growing up for the last I'll say 90 days, we've actually seen the daily rates have been increasing since may.
So they've really been I'm, you know, what we call us foolish.
Recovery, but we've really got three months of that under our belt and.
Very aligned with our internal forecast, so we see that growth continuing into Q4.
Okay. Thanks very much.
Your next question will come from Steven Fisher from you'd be yes. Your line is open.
Thanks, Good morning, guys I just in terms of your Navistar 4.0 targets can you talk about how you're thinking has changed on any aspects of that plan, which targets. You think are most achievable and that you're most focused on I know you talked about trying to accelerate some of those are going to just kind of frame that a little bit.
Thank you.
Sure well I think we remain as I said that we've protected navistar for an all in our overall revision off our investments in capital.
We are still targeting to get to our four points off a additional EBIT up by 2024.
That's that's on track a piece the if I just break the the national footprint always strategy in they end up small pieces. We have project compass, which is I think I was able to communicate during our investor call a year ago or so we had we had we have this concept off platform that is gonna be very much.
Color and by doing that we're going to reduce a lot of cost we have a part an aggressive target all reduction of parts that we use in those products and actually would that it will come a reduction often in the amount of suppliers, providing parsed generating more scale for those who will stay with us. So that is very much on track it starts with a few launches.
Next 12 month is and we feel very good up all that the second piece off the strategy is the manufacturing 4.0, which is our set and so I know I already talked the Atlanta about it here and that plants is on track. So for the spring of 2022 launch so I feel pretty good above that as well and then we have fault.
You know advanced technologies, and everything that I mentioned that are actually being materialize through the approach of taking partnerships as strategic partnerships as your crop you'd probably see during the quarter and that's how we're going to keep doing it in the future as well so.
We see all the building blocks off Navistar forefront all coming together in the right place I believe that there is a lots that we we're going to seen the next 24 month is that the products game. They get launched and we have to better cost and wants to planned launches we have a much lower conversion costs. So those things they support our goal.
Increase our our adjusted EBITDA as we get through 2024.
Thanks, and I guess, you had a 10% margin targeted for 2022 I guess when I was wondering is sort of if you're talking about accelerating some of the aspects here or are we thinking how are we thinking about that 10% margin in 2022, I know that was predicated on sort of a 12 billion.
Our revenue number.
How should we think about that that market I seek it is really tied to where the industries, but to be as well. So we have all the actions that support that obvious that well you can't take a straight percentage and say that's how we always performed when he gets into replacement demand no. We will have the structure of the business ready.
To that lever that level of performance that hasn't changed we still have to adding place and that's how we're thinking about 2022, but obviously that we need to know.
Wants or what's going on in a market and understand whether we will be close replacement demand or not by twenties ways in which we have no reason to believe that we will.
Got it and just a quick clarification.
Just to confirm I think I heard you say that you expect the truck segment to be profitable in Q4 is that right.
Correct.
Okay terrific. Thank you.
Your next question comes from Rob Salmon from Wolfe Research. Your line is open.
Hey, good morning, and thanks for taking the question I guess, Walter Piggy backing out on kind of the last comments and some of your earlier comments with regard to cost actions can you give us an update.
In terms of the cash breakeven levels for the truck truck segment more broadly as as we think about just the deal for all impact of some of these actions looking forward.
I think we'll probably do that in in December as we look forward to the to the next year, but we do expect too and the and the and this year with a strong cash balances you know not too dissimilar from the 1.6 billion of cash that we.
Posted on the manufacturing cash front here in Q3.
But that that that would be the time, where we typically talked about some of the breakeven levels going forward.
Okay, and I guess circling back in terms of the commentary about parts recovering nicely seen month over month, and even daily rates increasing since may.
You also seeing that underlying improvement within your rental and leasing customer segment, I know you'd mentioned that you're expecting it to remain depressed in the fourth quarter, but I'm curious restart and see that uptick.
In parts activity did that that end market.
Oh, probably comment on the rent on leasing segment as a truck segment overall for us because one off dirty indicate indications that we are seeing right. Now is that rental business is coming back and I'm sorry, if I go back to a few quarters ago when I basically started.
No framing that the biggest the biggest challenge that the Oems have with amazing and rental is really based the bids on the fact that when the markets come down all the lithium rental companies. They start the process, which they called de fleeting, which means they take their rental inventory that is not being.
Utilized and they trust for those units into the leasing operation. So they can fulfill the contracts without having to acquire new acid, the new fund new truck and that's when basically it's almost to the creation off a another OEM into market, where the support the leasing contract.
With their own used to the fleets off rental units.
That happened throughout I would say the first six months is off the is happening since last year, but we are seeing that I think is coming to an end right now in conversations with our large customers. They are indicating that they are getting too very close to stop due to the end up the de fleeting process and actually we are starting to see rent.
Oh packages coming back.
To the market, which is a very positive thing for Navistar, which is an area, where we play very strongly so we're seeing that happening. So we will see that probably in the next coming month is which is traditionally when it getting to the fleet season, and we see more off the rent on these packages coming as well.
We will be monitoring that but so far the indications are positive.
And we assume that asked that happens there is an opportunity for a more upside on parts as well.
The only in Q4, but as we get into the first quarter of next year.
Thanks for the time.
Thank you.
This brings us to the I guess why Q in a session I turn the call back over for closing remarks.
Okay well. Thank you. So then summarize navistar is effectively managing through the pandemic, while supporting our customers into drivers snow who keep American.
As we close let me reinforce this mission we the NAV start leadership team are focusing our time and resources on addressing our customers' needs.
This starts with listening to the customer understanding each customers business and delivering effective solutions to their requirements.
This focus we will accelerate the pace of our progress positioned the company to deliver on its navistar portmanteau goals and grow our margins longer term.
Please reach out to the Iraq IR team with any additional questions and thank you for your interest in our company and have a great day.
Thank you everyone. This now concludes today's conference call you may now disconnect.
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