Navistar International Corp (NAV) Q3 2020 Earnings Call Transcript

Navistar International Corp  (NYSE: NAV) Q3 2020 earnings call dated Sep. 09, 2020

Corporate Participants:

Marty Ketelaar — Vice President of Investor Relations

Persio V. Lisboa — President and Chief Executive Officer

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

Analysts:

Stephen Volkmann — Jefferies — Analyst

Ann Duignan — JPMorgan — Analyst

Brian Sponheimer — Gabelli Funds — Analyst

Brendan — RBC Capital Markets — Analyst

Jerry Revich — Goldman Sachs — Analyst

Andy Casey — Wells Fargo — Analyst

Steven Fisher — UBS — Analyst

Rob Salmon — Wolfe Research — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to Navistar’s Third Quarter Earnings Results Conference Call. [Operator Instructions]

I would now like to turn the call over to Marty Ketelaar. Please go ahead.

Marty Ketelaar — Vice President of Investor Relations

Good morning, everyone. Thank you for joining us for Navistar’s Third Quarter 2020 Earnings Conference Call. Today we will discuss the financial performance of Navistar International Corporation for the fiscal period ended July 31, 2020.

With me today are Persio Lisboa, President and Chief Executive Officer; Walter Borst, our Executive Vice President and Chief Financial Officer. After concluding our prepared remarks, we will take questions from participants.

Before we begin, I’d like to cover a few items. A copy of this morning’s press release and presentation slide have been posted to the Investor Relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued this morning, as well as 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 those suggested by our comments made here.

For additional information concerning factors that could cause actual results to differ materially from those included in today’s presentation, please refer to our most recent SEC filings. We would also refer you to our Safe Harbor statement and other cautionary notes disclaimer presented in today’s material for more information on this subject.

As you know, on January 30, 2020, we received an unsolicited offer from TRATON to purchase the remaining shares of the Company for $35 per share in cash. Navistar’s Board of Directors is evaluating this offer and we have no further updates for you at this time. Today’s call will only cover our third quarter results and we won’t respond to any questions regarding the TRATON offer.

With that, I like to turn the call over to Persio Lisboa for opening comments. Persio?

Persio V. Lisboa — President and Chief Executive Officer

Thank you, Marty. Good morning, everyone and thank you for joining us today. It’s a pleasure to talk to you today and this is my first call, where I’m addressing you as a new CEO of 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 a believer in our Navistar 4.0 strategy and its goals, having developed many of its founding principles. Today, I’m committed to accelerating the pace of progress towards those goals. And we are excited to share with you that our strategy is progressing very well.

The development of our next generation of trucks and buses is an initiative we call Project Compass [Phonetic]. This initiative is on track to deliver significant reduction in suppliers and parts, as we expand our modular architecture across several platforms, that will further reduce our average material costs for several models, starting in 2022.

Our manufacturing strategy is also on track to deliver benchmark conversion costs from the cost of materials and logistics to the costs of assembly in less than 24 months from now. Our new San Antonio plant launches in the spring of 2022. We are please to announce today that our first model to be produced in 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 are also re-calibrating our resource allocation through optimized shareholder returns. As a result of the pandemic, we had the opportunity to revisit our investment portfolio. The result was to retain non-critical low return programs and to cancel programs that will create a 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 makes the best use of our Company resources.

One key appointment is Bob Walsh, Vice President of Emerging Technologies, Strategy and Planning. Bob will oversee the development of Navistar’s newest business unit NEXT eMobility Solutions. And he is in charge also of our Autonomous platform. Related to autonomous technologies, during the third quarter we announced our strategic partnership with TuSimple. Our development of Level 4 trucks is now entering its final phase and we expect to launch the technology production in 2024. Just as with our electric trucks, this vehicle will be fully-integrated into our assembly process.

In the area of electric technology, our business units NEXT eMobility Solutions signed an agreement with In-Charge Energy, an energy solutions company based in Los Angeles, California, to provide charging infrastructure and consulting services further aligning our four seats [Phonetic] approach of offering complete immobility solutions for our customers.

And in the area of connectivity, we have announced new partnerships with selective telematics service providers, including Samsara and Geotab to provide customers with front line access to their choice of flip management solutions using our factory-installed device. Subscriptions and services, will include remote diagnostics and vehicle health monitoring.

Another key executive appointment is expansion of Friedrich Baumann’s role after extending retirement of Michael Cancelliere. As President of Sales, Marketing and Aftersales, Friedrich will now be responsible for the complete commercial process for customers and dealers. In his tenure, as the leader of Aftersales, Friedrich 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 the support of our entire network as we take the necessary steps to implement this vision. Under Friedrich, 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 this in pieces. I’ll start with a quick overview of our third quarter results. Next, I’ll discuss the economy and the trucking industry, then our market share. And finally, I’ll touch on our cost saving and savings actions.

First our results. Our fiscal third quarter opened in the mid of many stay at home orders and ended with sections of the economy reopening. Our results reflect this, 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 from pandemic close in April and May. We have seen employment improve, but the unemployment rate is still well above pre-pandemic levels. Consumer confidence and spending have also been impacted. The ISM Manufacturing Index has been above 50 the past three months, indicating businesses are reopening and restocking. The next stage of recovery depends on several factors including, the rate of new COVID cases and the development of an effective treatment or vaccine.

The trucking industry is also gradually recovering. Spot rates and volumes have steadily improved since April, resulting in improved carrier profits. We still see a clear divide in the trucking industry. Carriers with dedicated routes haul in dry and refrigerated goods as well as flat beds have seen increased volumes. However, utilization continues to be depressed in the rental, leasing and general freight product segments. More on this in a moment.

Additionally, the school bus industry has slowed, as school districts are pursuing a variety of instructional approaches for this fall. Some are using traditional in-classroom education, while others are using virtual learning methods, and few others, a combination of both. The situation remains fluid.

Class 8 industry orders have gradually strengthened since April, reflecting the improvement in economic conditions. As production continue to exceed orders, industry backlogs have come down. Used truck pricing has shown signs of stabilizing, reflecting improved demand balance 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 still a number of uncertainties in the economy and the industry need to work through.

Our medium and heavy share continues to be impacted by the 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 rental and leasing segment is an area of historic trend for the international brand. In 2019, this product segment represented above the quarter of the Class 6 through 8 truck industry. Thus far in 2020, total industry registrations of Class 6 through 8 trucks are down around 30%. With that amount, the rental and leasing is down 55%. But with the other segments combined are down 20%. This product segment has been more heavily impacted by the slowdown of the economy and by the COVID pandemic, but we have been successful in maintaining our share of the rental and leasing segment in the Class 6 through 8 space. We believe that our overall market share will improve, once volumes in this segment rebound.

The construction and government product segments have performed better than the overall industry and our severe service market share continues to grow up two points both year-over-year and sequentially.

Turning to our dealers, we remain in close contact, assisting them to work through the trucks on their lots. We continue to work down company and dealer inventories. However, lower retail sales caused our day sales inventory on hand to increase to 140 days above our normal range. In the fourth quarter, volumes are expected to improve and inventories continue to trend down, causing the day sales inventory ratio to come down as well.

With respect to Aftersales, truck sales are recovering. This year, industry parts sales are down nearly 20%, which aligns with our year-to-date performance. We continue to be impacted by lower utilization of rent on leasing vehicles and in 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 taken a number of actions to conserve cash and bolster our liquidity. These actions have been successful, as we ended the third quarter with $1.6 billion of manufacturing cash. Additionally, our SG&A 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 are not done. We are transitioning from temporary cash conservation actions to sustainable cost saving actions, while maintaining total focus on the strategic priorities of Navistar 4.0. Walter will provide more details.

Today, the trucking industry is gradually recovering as are our volumes for both trucks and parts. The exact pace of improvement will be closely tied to the pandemic and a vaccine or an effective treatment. But we continue to take actions on matters we can control. Targeted investments in advanced technologies, combined with sustainable cost saving actions, will lead to even more improvements in the future. We are accelerating the pace of progress on Navistar 4.0, so we can pull forward its benefits and take full advantage of stronger industry conditions when they arise.

Let me now turn it over to Walter, who will walk you through the financials. Walter?

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

Thanks, Persio. Navistar 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 COVID-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 with 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 contributing $190 million of 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 $154 million of manufacturing free cash flow in the quarter.

Following the close of the quarter, we completed the refinancing of our recovery zone 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 May’s results were weakened by the impact of the coronavirus, orders for trucks and parts gradually improved through the balance of the quarter, as the underlying economy recovered from pandemic lows. It also bears noting that the prior year’s comparable quarter reflects results at the peak of our prior industry cycle.

Third quarter 2020 revenues were $1.7 billion, down 45% from last year and core charge-outs were 11,400 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 SG&A and engineering expenses fell to $214 million, down both sequentially and year-over-year. Prior year SG&A included a $31 million release of an approval related to certain legacy engine litigation. After excluding this one-time gain in the prior period, SG&A fell approximately 30%.

Savings largely came from lower employee expenses, shorter contractor workweeks, reduced 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, with interest expense up 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 and $0.37 per diluted share. Excluding one-time items on an after-tax basis, the adjusted net loss was $8 million in the third quarter. Adjusted EBITDA was $104 million after excluding one-time items on a pre-tax basis.

Moving to segment results. Worldwide volumes in 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 coronavirus continued 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 and school buses. Additionally, economic uncertainty has led to dealers conserving cash, as they manage their own working capital. As a result, parts segment sales declined 27% to $440 million and segment profit was $97 million.

The global operation segment remained near breakeven, despite revenues falling 48% to $47 million, as the segment benefited the 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 received payment deferrals during the pandemic, are now beginning to make payments again.

As we move forward, I am proud how our team has worked together to respond to a number of challenges from the turn in the trucking industry to the COVID-19 pandemic. Our response really began in 2019. In December, we announced a 10% reduction in global headcount as we anticipated the industry’s 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 coronavirus. These actions have been successful as well. On September 1st, we ended the employee salary deferral program given our strong cash balance.

Now, turning our attention to further sustainable cost savings actions. Employee efficiency rose during the pandemic as we 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 moved 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 of the cycle. We plan to maintain SG&A expenses between 7% to 9% of revenues, while simultaneously supporting our strategic plans on our Navistar 4.0.

Before we open up the call to your questions, I want to share some thoughts on the balance of 2020 and 2021. Providing official guidance during this time is inherently difficult and the situation remains fluid. But if we assume the economy continues to recover and the industry production is not impacted by further plant shutdowns or supply chain disruptions, then we would expect 2020 industry volumes to range between 305,000 and 325,000 units. This includes Class 8 industry volumes between 200,000 and 215,000 units and Class 6/7 and bus volumes between 105,000 and 110,000 units.

As it relates to Navistar, the downturn is impacting certain key areas of operations where we are market leaders, particularly in the rental and leasing and school bus product segments. Due to the volume impact of these product segments, our participation in the overall industry recovery has been slower to-date. That is expected to continue for the balance of the year and possibly into next year for bus.

Nevertheless, we expect both our truck and parts segment volumes to increase in Q4 and our truck segment in overall consolidated company results to be profitable for the quarter. In 2021, we believe the recovery in the trucking industry will continue and that the rental and leasing product 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, it 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 and position us to deliver at our Navistar 4.0 goals.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Stephen Volkmann from Jefferies. Your line is open.

Stephen Volkmann — Jefferies — Analyst

Hi. Good morning, everybody.

Persio V. Lisboa — President and Chief Executive Officer

Good morning, Steve.

Stephen Volkmann — Jefferies — Analyst

So, firstly on Walter, I guess you both talked quite a bit about additional cost opportunities, but I guess, I am not quite clear on sort of what we are thinking about. So it feels like there is buckets here which had some investment opportunities, I guess that you [Technical Issues] or maybe give a handful of [Technical Issues]?

Persio V. Lisboa — President and Chief Executive Officer

Steve, you are breaking up quite a bit.

Stephen Volkmann — Jefferies — Analyst

[Technical Issues]

Persio V. Lisboa — President and Chief Executive Officer

You are breaking quite a bit, Steve. So we both have the —

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

I think that just your question is, what are kind of the major buckets of the cost savings actions that you are thinking about taking that you mentioned in your prepared remarks?

Stephen Volkmann — Jefferies — Analyst

Yes. Exactly.

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

Is that right?

Stephen Volkmann — Jefferies — Analyst

Yes, yes, yes.

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

Okay. Sorry, we are having a little bit of difficulty with the audio. So I mean, I guess first of all, what we have been doing here during COVID is having a watchful eye on cost. And as we indicated, costs were reduced about 30% after you exclude our one-time gain last year — year-over-year. But none of those measures are temporary in nature, including some of our employee expenses and contractor expenses, travel and IT related investments. So what we are focusing on, I should say, I guess when you take a look at it, we are already in the 7% to 9% range SG&A divided by revenues, all we want to do is turn 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 are currently working as we prepare for the workforce of the future.

A second area that we are taking a look at is, whether we can outsource more activities. And we think there’s 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 are looking to increase our decision making capabilities, improve our speed. And the decision making, given that the market is also moving pretty quickly these days in 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 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 are looking at, we do want to be profitable at all points in the cycle. And we are taking a look at what we can make more permanent as opposed to just temporary during this period.

And the benchmark I guess the 7% to 9% that we have kind of focused on is based on some benchmarking activities that we’ve done with the best in the industry and we think that would put us in the first cortile of costs, and we are already much better than the median given the cost savings actions and cost reduction actions we have taken over the last several years.

Stephen Volkmann — Jefferies — Analyst

[Technical Issues]

Operator

And your next question will come from Ann Duignan from JPMorgan. Your line is open.

Ann Duignan — JPMorgan — Analyst

Yes. Hi, good morning. Can you talk a little bit more about based on 10 to 140 days that’s well above the nominal range. Talk about what you are going to do in Q4 in terms of under producing retailer in order to reduce that. And do you expect to have that back in the range you need by end of Q4 and what does that mean for producing above or at retail going into fiscal ’21 or do you think there is going to be more work just based on the low volume of retail activities, especially in some of your like leasing rental and maybe even school bus segments? Thanks.

Persio V. Lisboa — President and Chief Executive Officer

Hi Ann this is Persio. Good morning. Thank you for the question. What first of all the 140 days sale is a ratio that actually has impacted also for our lower sales that we — the dealer experienced, the dealer network experienced in the quarter. So we expect that as market is rebounding and no sales are getting back to I wouldn’t say its normal but they are growing the last few sequential markers that we are following. And one of our plan is, for Q4 is we will see a slight reduction on our production rates in the range of 5% to 6%. And that was planned since the beginning actually, you know that we have been managing production rates consistently with demand. And the way we cover for additional volume is with potential overtime. We’ll do that again in Q4.

And also Q4 is lowered not only because of this adjustment, but because of seasonality, traditionally the bus business has a lower rate in the fourth quarter. We know that bus — the bus segment as I mentioned in my remarks is under more pressure than the truck segment at this point in time. So we are monitoring closely the activity in that area.

But as the back to your point, we do expect that in Q1 we are picking up again on the rates and it is actually bringing us higher than where we are today. We were in Q3 in the first quarter. Obviously, that you have to account for lower days of production in the first quarter but the line rates will be back up, because right now we are seeing the order intakes supporting a stronger backlog and that makes us support actually the decision and the production for the first quarter.

Ann Duignan — JPMorgan — Analyst

Okay, I think…

Persio V. Lisboa — President and Chief Executive Officer

Day of sales — day sales, I think we should expect this coming down closer to the upper end of the range in — by the end of Q4.

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

I think the other thing in there is, obviously, there is a numerator and denominator in that calculation and the inventory levels are in much better shape. The retail sales, which has been denominator, are still low, but improving and so that’s what will drive that ratio back into our normal range.

Ann Duignan — JPMorgan — Analyst

Yeah, I appreciate that. It’s a three-month moving average of retail sales. And if you could talk similarly then about the Silverado, because I am assuming those don’t go into dealer lots or dealer inventories, what are you anticipating in terms of builds for Silverado in Q4 versus Q3 and any outlook for — into fiscal ’21?

Persio V. Lisboa — President and Chief Executive Officer

I think, we are seeing Q4 and Q3 pretty flat for now. And that’s probably the visibility that we have, we are not seeing any major changes in that line specifically.

Ann Duignan — JPMorgan — Analyst

Okay. And the announcement by Nikola to partner with GM yesterday, but you don’t expect that to impact the Silverado business or would you be considered as a producer or contract manufacturer at one of your facilities for the badger or will that be done in-house for GM? And I [Indecipherable].

Persio V. Lisboa — President and Chief Executive Officer

We don’t see any risk to the contract manufacturing agreement that we have with GM right now, that’s — it’s the long-term agreement. So, we really look forward to continuing that relationship with GM as it is today.

Ann Duignan — JPMorgan — Analyst

Okay, thank you. I appreciate that. I will get back in line.

Persio V. Lisboa — President and Chief Executive Officer

Okay, thank you.

Operator

Your next question comes from Brian Sponheimer from Gabelli Funds. Your line is open.

Brian Sponheimer — Gabelli Funds — Analyst

Good morning, Persio. Good morning, Walter and hi, Marty, how are you?

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

Good morning.

Marty Ketelaar — Vice President of Investor Relations

Good morning.

Persio V. Lisboa — President and Chief Executive Officer

Good morning, Brian.

Brian Sponheimer — Gabelli Funds — Analyst

So, you have got a lot of exciting things here. You found some costs that were temporary cuts that can be structurally dismissed. You have got an easy plant on the rise. You have connectivity. You have autonomy. Then you have a $35 cash bid from trading. So I mean, I guess the point is that what’s the argument for giving up the upside from here, which is the benefit I guess of a larger company owning you, given these brighter days are coming soon?

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

Yes, I will start. Look, as Marty indicated, we are not going to comment on the TRATON bid. And our job as the management team is to continue to put points on the board. And I think, you are paying attention, you referenced a variety of things we are working on. So we think there is a lot more than we can do. On the cost side, we’ll continue to grow the revenues in the business and we are excited about our partnerships in the advanced technology space. So, I am glad you took note of all those things.

Persio V. Lisboa — President and Chief Executive Officer

I don’t know if I can add anything to Walter’s comments here, but thank you for noticing the change, the improvement is maybe on the advanced technologies because that’s an area that we have been investing a lot and it is an integral part of our Navistar 4.0 strategy.

Brian Sponheimer — Gabelli Funds — Analyst

Thank you. I appreciate the commentary. Just a question on Huntsville. Any changes there about the new engine plant or is that though all systems go?

Persio V. Lisboa — President and Chief Executive Officer

No, that’s pretty much stable, Brian. We — Huntsville is getting prepared and we have our global platform being developed with the alliance partner on track actually summer tests are running right now, very exciting results so far. So, everything is on track. We look forward to completing that, the development of Huntsville and what is going to be now in the future for us. So, the plan is on track.

As I mentioned in my remarks, we made changes in terms of revisiting the portfolio of investments, but we protected all the Navistar 4.0 strategic projects and this is one of them. So, it’s pretty much on track.

Brian Sponheimer — Gabelli Funds — Analyst

And I will pray my best wishes to you, Persio and look forward to speaking with you all later.

Persio V. Lisboa — President and Chief Executive Officer

Thank you very much, Brian.

Operator

And your next question will come from Seth Weber from RBC Capital Markets. Your line is open.

Brendan — RBC Capital Markets — Analyst

Hi, thanks. This is Brendan on for Seth. My first is, can you just talk to what you are seeing right now in the used truck market, particularly related to inventory levels and pricing?

Persio V. Lisboa — President and Chief Executive Officer

Yes, absolutely. Well, first I think used trucks is starting to stabilize in terms of overall volume. If you just take the marketing two pieces, the retail sales and I will give you a data point, retail activity for used trucks quarter-over-quarter in Q3 was 60% higher for Navistar. But at the same time wholesale — we see wholesale being 16% lower and one is kind of upsetting each other maybe from a pricing standpoint that we can see that there is now some stabilizing pricing on used trucks. We are not seeing declines any further. And we have reasons to believe that the retail activity growth is an early indicator that we will start seeing some opportunities of pricing going up as well.

Really, inventories have been reduced and most of what’s happening on inventory being reduced is a function of lower receipts. Most of the receipts on used trucks they usually happen related to carriers that are trading units as well. And as activity got reduced in Q2 and Q3, the receipts got lower, although the sales are peeking up as I just mentioned. So we are seeing some reduction in inventory. But as the big carriers get back in the market now and they start placing their trades and new purchases that they are executing, we are going to see receipts going up and that made level, a little bit in the inventory,

Brendan — RBC Capital Markets — Analyst

Okay, thank you. And then any color you can provide I guess on the current strength of your supply chain and has that largely rebounded from the impacts of COVID or do you see still being a little strained?

Persio V. Lisboa — President and Chief Executive Officer

No, actually, it’s been fairly reasonable to 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 health overall and we monitor a lot of those suppliers. But in terms of any supply chain disruptions, we haven’t seen anything that is being material for us in the last quarter. So actually a good rebound from Q2 where most of companies were closed and they the shutdowns and really not operating and supporting production. It’s been stable for us at least.

Brendan — RBC Capital Markets — Analyst

Alright, thank you. I will leave it there.

Operator

And your next question comes from Jerry Revich from Goldman Sachs. Your line is open.

Jerry Revich — Goldman Sachs — Analyst

Yes, Hi, good morning, everyone. And Persio, congratulations.

Persio V. Lisboa — President and Chief Executive Officer

Thank you, Jerry.

Jerry Revich — Goldman Sachs — Analyst

Persio, I wonder if you could talk about the ability to maintain expenses at 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 do you plan to leverage that TRATON partnership, the supply base? Can you just expand on those points in terms of the sustainability of the current levels of R&D as opposed to needing to, to take R&D higher given the technology evolution here?

Persio V. Lisboa — President and Chief Executive Officer

Sure, Sure, Jerry. Now, first of all, I think as I mentioned, we really started during the pandemic with this process of revisiting a lot of our projects and priorities. And it was very good note, beginning of our overall review off where the investments are growing 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 full revision of our portfolio for two reasons.

First, because we really want to make sure that we could operate profitably, while the second being, the marketplace is changing significantly. And one of, I think, the virtues that we have here in the leadership team of Navistar is that, we can adapt and adjust pretty quickly. So as we see the market changes that you just mentioned in terms of advanced technologies, we see that we have to be providing even more resources to those strategic areas of the business and make sure that we take a look at what we have planned before. And if the 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 returned some orders. And actually we cancelled some projects. And most of those resources, they are not just being driven down to the bottom line, what we are doing is, we are redeploying those resources into advanced technologies. That’s why we are saying, you heard us talking about the relationship with TuSimple and our announcement on the Level 4 availability in 2024, that’s part of it.

You heard us talking about the connectivity launches that we have today with Samsara and Geotab, for instance, but more than that, that was enabled by a joint program with trading on the connectivity module that goes into all our trucks today, which was basically a module that came from the alliance with TRATON.

You have heard us talking about electrification and now at San Antonio, we are taking San Antonio from the new footprint that was a big part of our strategic cost — conversion cost reduction plan. Now, San Antonio is a plant that is capable of dual building, fully electric vehicles and diesel vehicles. So, all of those things are coming from the redeployment of the resources that I just mentioned before.

We are very excited about it. I think we know that we can contain that within the forecasted budget that we have planned in our strategic plan and we will keep doing that as we see the marketplace changes and being very dynamic as it has been in the last many, many months.

Jerry Revich — Goldman Sachs — Analyst

And Persio, the Company’s success on diesel side 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. Obviously, the dealer network is there. But I am wondering, what aspects of the products do you expect to differentiate Navistar in that type of environment compared to all the demand expertise you folks have delivered on the diesel side?

Persio V. Lisboa — President and Chief Executive Officer

Yes. Well, I think, first of all, you touched in something very important, the strength of our dealer network makes a big difference when we talk about support to customers. I will give you an example, the first delivery of our electric school buses for now at British Columbia, is really not just the delivery of buses, we had the comprehensive support to the local authorities, to the school district, to the — through our dealers locally, there is special connectivity controls that were put in place for those buses that will be delivered. So, there is a pretty much — pretty comprehensive plan around the electrification and how we deliver those products not just as products, but as services. And the way we are able to support the services that go with the products is the strength of our dealer network. So, we see that as a big differentiation.

The second one that I would say is what I just mentioned, the fact that we will have the capability to build our products in the production line that will provide us a tremendous amount of scale and robustness in terms of quality. What we are seeing today in the market is that several, several companies are — is not startups, are basically taking a small approach in terms of getting a product that is developed in the digital platform, theories apart, put it back together in a electrified platform. What we are doing is completely different. The assembly plant will be fully capable to deliver the electric vehicles that will come out of San Antonio. And the reason why we are doing that is because we want to be able to scale fast. And as long as we can get supplies and customers, we will be able to scale production fast and with a very reliable production process. I think that’s a differentiation as well.

And I have to assume that, that will be driven also a lot of work — we will be driving a lot of lower costs like taking that approach versus what the competitors are going to say.

Jerry Revich — Goldman Sachs — Analyst

I appreciate the discussion. Thanks.

Persio V. Lisboa — President and Chief Executive Officer

Thank you, Jerry.

Operator

And your next question will come from Andy Casey from Wells Fargo. Your line is open.

Andy Casey — Wells Fargo — Analyst

Thanks. Good morning, everybody and congratulations, Persio.

Persio V. Lisboa — President and Chief Executive Officer

Thanks.

Andy Casey — Wells Fargo — Analyst

You are welcome. I wanted to follow-up Jerry’s question a little bit. Can you discuss if you are expanding — expecting a faster post-2023 market adoption rate for zero emissions equipped vehicles, specifically given some of the development program changes you made including canceling the Big Four engine co-development program?

Persio V. Lisboa — President and Chief Executive Officer

While we are seeing that, first of all, there are market trends indicating that. But there are also regulatory changes and that are going to promote that. If you just take the Airclean Act that was recently approved in California, there is a real requirement on no penetration of diesel products or electric products, I mean. So when we talk — we take those two forces and by — by the way not just that, but the fact that we are seeing technology getting more advanced, the cost of batteries continuing to come down and we believe that there will be an early adoption. We are still on the area of thinking that the biggest adoption comes in areas like school buses for instance, which is a segment that is very prepared for that and medium duties probably come next. But that will go up as up as a Class 8 truck, when you get into a fuel cell technology. So, we believe that there is an acceleration. It’s hard to predict where we are going to be by the end of the decade or how much of that is going to be part of our overall mix in 2025. But we are getting prepared for that. So the ability to scale up inside of our facility is one of the reasons why we are getting San Antonio prepared for that.

Andy Casey — Wells Fargo — Analyst

Okay, thanks for that, Persio. And then just an additional question on that. Some of the new competitors in that space, I guess, appear, ready to offer some fairly attractive financing programs for the customers. It appears there might be, really deceit the market. Do you expect a period of, kind of, market development through favorable financing programs to get this stuff off the ground?

Persio V. Lisboa — President and Chief Executive Officer

I don’t think we have. First of all, there are many, many concepts, different concepts on how you go to market with electric vehicles mainly because of residuals, which I think is even more important in a commercial vehicle than what you see today in the passenger car side. So that there is probably a trend of using more fleeced batteries as part of the no deal that you will be proceed [Phonetic] in the market, would say, when it first launched. So there are different models that can be adopted. We are not going to open that right now but that’s pretty — that’s absolutely something that — it should be considered and we are considering as we go to market with our electric products, it’s not only the sale of the product, the regular financing, but the leasing of the unit and no eventually, even leasing off the batteries if it is the case.

Andy Casey — Wells Fargo — Analyst

Okay, thanks. And then a very, very short-term question and it’ll be done for me. You mentioned the Q4 expectations for the parts segment is to grow. Was that segment growing on a run rate basis of exiting Q3 or is it you are just looking at the trends and expect growth?

Persio V. Lisboa — President and Chief Executive Officer

I think on the parts side we have, still we are — still seeing the part side as [Indecipherable] type of recovery, it’s being 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 in perspective, I think our Q4 parts will be, I’ll say in the ballpark of 3% to 4% lower than the first quarter. that’s how you should think about our fourth quarter. But it is pretty steady and it’s a month-over-month increase. Actually we follow daily rates and the daily rates have been steadily growing up for the last, I would say, 90 days.

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

Yeah. We have actually seen the daily rates have been increasing since May. Yeah, so they have really been what we call a swoosh recovery, but we have already got three months of that under our belt and very aligned with our internal forecast, so we can see that growth continuing into Q4.

Andy Casey — Wells Fargo — Analyst

Okay, thank you very much.

Operator

Your next question will come from Steven Fisher from UBS. Your line is open.

Steven Fisher — UBS — Analyst

Thanks. Good morning, guys. Just in terms of your Navistar 4.0 targets, can you talk about how you are thinking has changed on any aspects of that plan? And which targets you think are most achievable and that you are most focused on? I mean, you talked about trying to accelerate some of those images to kind of frame that a little bit? Thank you.

Persio V. Lisboa — President and Chief Executive Officer

Sure. Well, I think we remain, as I said, we perfected Navistar 4.0 in our overall revision of our investments and capital. We are still targeting to get to our 4.0 software additional EBITDA by 2024. That’s on track. A piece, if I just break the Navistar 4.0 strategy in small pieces, we have project competence, 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 of a platform that is going to be very modular. And by doing that, we are going to reduce a lot of costs, we have an aggressive target on reduction of parts that we use in those projects. And actually with that, it will come a reduction also in the amount of suppliers providing parts generating more scale for those who will stay with us. So that is very much on track. It starts with a few launches in the next 12 months and we feel very good about that.

The second piece of the strategy is the manufacturing 4.0, which is in our San Antonio. I already talked at length about it here. And that plant is on track for the spring of 2022 launch, so I feel pretty good about that as well.

And then we have all the advanced technologies and everything that we have mentioned that are actually being materialized through the approach of taking partnerships — strategic partnerships as you probably perceived during the quarter. And that’s how we are going to keep doing it in the future as well.

So, we see all the building blocks of Navistar 4.0 coming together in the right place. I believe that there is a lot that we are going to see in the next 24 months is that the products game, they get launched and we have the better cost. And once the plant launches, we have a much lower conversion cost. So those things they support our goal to increase our adjusted EBITDA as we get through 2024.

Steven Fisher — UBS — Analyst

Thanks. And I guess you have had a 10% margin targeted for 2022, I guess, what I was wondering is sort of if you are talking about accelerating some of the aspects here, are we thinking — how are we thinking about that 10% margin in 2022? I know that was predicated on sort of a $12 billion revenue number. How should we think about that margin?

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

Yeah, I think it is really tied to where the industries were to be as well. So, we have all the actions that support that — obvious that, well, you can’t take straight percentage and say, that’s how we always perform. When we get into replacement demand though, we will have the structure of the business ready to deliver that level of performance. That hasn’t changed. We still have that in place. And that’s how we are thinking about 2022, but obvious that we need to monitor what’s going on in the market and understand whether we will be close to the replacement demand or not by 2022, which we have no reasons to believe that we will.

Steven Fisher — UBS — Analyst

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?

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

Correct.

Steven Fisher — UBS — Analyst

Okay, terrific. Thank you.

Persio V. Lisboa — President and Chief Executive Officer

Thanks.

Operator

And your next question comes from Rob Salmon from Wolfe Research. Your line is open.

Rob Salmon — Wolfe Research — Analyst

Hey, good morning and thanks for taking the question. I guess, Walter, piggybacking 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 segment more broadly as we think about just the deal the overall impact of some of these actions looking forward?

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

I think, we will probably do that in December, as we look forward to the next year, but we do expect to end the — this year with strong cash balances, not too dissimilar from the $1.6 billion of cash that we posted on the manufacturing cash front here in Q3, but that will be the time where we typically talk about some of the breakeven levels going forward.

Rob Salmon — Wolfe Research — Analyst

Okay. And I guess circling back in terms of the commentary about parts recovering nicely seeing month-over-month and even daily rates increasing since May. Are you also seeing that underlying improvement within your rental and leasing customer segment? I know you had mentioned that you are expecting it to remain depressed in the fourth quarter, but I am curious, are you starting to see that uptick in parts activity to that end market?

Persio V. Lisboa — President and Chief Executive Officer

Well, I will probably comment on the rental and leasing segment as a truck segment overall for us, because one of the early indications that we are seeing right now is that rental business is coming back. And as I — if I go back to a few quarters ago, when I basically started framing that — the biggest challenge that the OEMs have with leasing and rental is really based on the fact that when the markets come down, the leasing and rental companies they start the process which they call the fleeting, which means they take their rental inventory that is not being utilized and they transfer those units into the leasing operation. So, they can fulfill the contracts without having to acquire new asset, a new truck. And that’s when, basically it’s almost the creation of another OEM in the market where they support the leasing contracts with their own use fleet of rental units. That happened throughout, I would say, the first six months is that, it is happening since last year. But we are seeing that, I think, it’s coming to an end right now. The conversations with our large customers, they are indicating that they are getting to, very close to start to — to the end of the deflating process.

And actually we are starting to see rental 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 are seeing that happening. So, we will see that probably in the next coming months, which is traditionally when they get into the fleet season and we see more of the rent on lease packages coming as well. We will be monitoring that. But so far, the indications are positive.

And we assume that as that happens there is an opportunity for more upside on parts as well, not only in Q4, but as we get into the first quarter of next year.

Rob Salmon — Wolfe Research — Analyst

Thanks for the time.

Persio V. Lisboa — President and Chief Executive Officer

Thank you.

Operator

This brings us to the end of our Q&A session. I turn the call back over for closing remarks.

Persio V. Lisboa — President and Chief Executive Officer

Okay. Well, thank you. So to summarize, Navistar is effectively managing through the pandemic, while supporting our customers and the drivers, while we keep America moving.

As we close, let me reinforce this mission. We need the Navistar leadership team up focusing our time and resources on addressing our customers’ needs. This starts with listening to the customer, understanding each customer’s business and delivering effective solutions to their requirements. This focus will accelerate the pace of our progress, position the Company to deliver on its Navistar 4.0 growth and grow our margins longer term.

Please reach out to the IR team with any additional questions and thank you for your interest in our Company and have a great day.

Operator

[Operator Closing Remarks]