Navistar International Corp  (NYSE: NAV) Q1 2020 Earnings Call Transcript

Navistar International Corp  (NYSE: NAV) Q1 2020 Earnings Conference Call

Final Transcript

Corporate Participants:

Marty Ketelaar — Vice President of Investor Relations

Troy A. Clarke — President, Chief Executive Officer and Chairman

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

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

Analysts:

Andy Casey — Wells Fargo Securities — Analyst

Brian Sponheimer — Gabelli Funds — Analyst

Ann Duignan — JPMorgan — Analyst

Erin Welcenbach — Baird — Analyst

Rob Wertheimer — Melius Research — Analyst

Rob Salmon — Wolfe Research — Analyst

Jeff Kauffman — Loop Capital Markets — Analyst

Jerry Revich — Goldman Sachs — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Navistar First Quarter 2020 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Marty Ketelaar, Vice President of Investor Relations. Thank you. Please go ahead.

Marty Ketelaar — Vice President of Investor Relations

Thanks Jimmy. Good morning, everyone, and thanks for joining us for Navistar’s first quarter 2020 earnings conference call. Today, we will discuss the financial performance of Navistar International Corporation for the fiscal period ended January 31, 2020.

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

Before we begin, I’d like to cover a few items. A copy of this morning’s press release and the presentation slides has been posted to the Investor Relations page of our website for reference. The non-GAAP financial measures discussed on this call are reconciled to the US GAAP equivalents, 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 the Safe Harbor statement and other cautionary notes disclaimer presented in today’s material for more information on this subject.

As you all 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 the offer, and we have no further updates for you at this time. Today’s call will only cover our first quarter results, and we won’t respond to any questions regarding the TRATON offer.

With that, I’d like to turn the call over to Troy Clarke for opening comments. Troy?

Troy A. Clarke — President, Chief Executive Officer and Chairman

Thank you, Marty. Good morning, and thanks for joining us this morning. I’ll open with a few highlights on the quarter and then provide some thoughts on the balance of 2020, then I’ll hand it over to Walter to walk you through the details. Okay, first quarter results.

As I mentioned during our fourth quarter call in December, our fiscal first quarter fell right on top of the industry’s transition period, where we came off two extremely strong years, and are now transitioning to replacement-level demand. This is reflected in the results you’ve seen this morning. Revenues are lower year-over-year, and we implemented actions to lower costs as noted in our last call. Yet lower industry volumes caused us to incur a loss in the quarter. This was not a surprise to us. We remain on plan to achieve the guidance we provided in December, but are monitoring developments related to the coronavirus closely in the event it begins to impact our operations more meaningfully.

During the quarter, we continued to see strong share gains in school bus and severe service. In the medium and heavy segments, we are seeing the impact of weaker rental and leasing purchases that we also discussed in September — in December. We have a higher penetration in these segments, which supported some of our share growth in 2018 and ’19. Today, demand for new trucks from large leasing and rental companies is lower. Their orders are expected to be down as much as 50% from 2019.

In 2020, US GDP is projected to grow around 2%. That’s the basis of an industry at replacement demand. The strong labor market is supporting robust consumer confidence and spending, solid construction and housing starts, and easing recessionary signals. These items are offsetting weaknesses in manufacturing and other economic uncertainties. As the economy works through these uncertainties, the positive factors lead us to be optimistic for a stronger second half.

Record deliveries of new trucks over the past two years, has increased supply of used trucks, depressing their prices. There is just a lot of truck capacity right now, chasing a relatively constant number of loads, pressuring rates. This is the classic truck cycle. The freight market will still take a few more months to work through this. However, recent spot rates have stabilized, an important step, signaling capacity is beginning to adjust to demand.

Q1 industry orders were weak. Industry order activity will accelerate going forward, as the freight market works through this excess capacity, used truck prices stabilize, and as economic uncertainties dissipate. With that being said, January orders were up, nominally for the first time, since October 2018. Recently, we’ve cleaned up our order board, eliminating some slots that were held for certain dealers and customers, and we’ve also seen some recent cancellations. Over the balance of the year, our results will improve from what we experienced in the first quarter, and we expect that the second half of 2020 will be stronger than the first.

2020 began as we expected. The market is in transition, and absent a meaningful impact from the coronavirus issue, I’m optimistic on the outlook for the economy, as well as our industry and Navistar. We are maintaining our 2020 guidance, as I’m confident succeeding quarters will improve sequentially.

So, let me turn it over to Walter.

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

Thanks, Troy. As Troy indicated, headwinds from the industry transition impacted our results this quarter. We’re taking steps to improve our performance over the balance of the year, and we’re on track to achieve our fiscal 2020 guidance, pending any changes to our operations from the impact of the coronavirus, which I’ll briefly touch on shortly. With that introduction, let’s dive into the results.

For the first quarter, consolidated revenues were $1.8 billion, down 24% from last year. Core chargeouts were 39% lower, consistent with our guidance, reflecting soft industry conditions. Worldwide, we produced 16,000 units in the quarter, down 23% year-over-year, as Class 4/5 sales, partially offset the decline in core volumes.

First quarter 2020 gross margin was 16.8%, down from last year due to industry headwinds impacting both truck and parts volumes, and higher reserve adjustments against used truck inventories.

Structural costs, including SG&A expenses and engineering costs, were $268 million, down both sequentially and year-over-year. Interest expense declined 24% to $65 million, reflecting debt repayments in 2019.

In total, we incurred a net loss of $36 million in the first quarter or $0.36 per diluted share. In the prior year, we had income of $11 million or $0.11 per diluted share. Excluding one-time items, on an after-tax basis, the adjusted net loss was $33 million in Q1. Adjusted EBITDA was $59 million in the first quarter, after excluding one-time items on a pre-tax basis.

Moving to the segment results. The Truck segment was impacted by weaker industry conditions. In Q1, the Truck segment reported sales of $1.2 billion, and a loss of $58 million. Compared to the prior year, worldwide chargeouts decreased 23%, reflecting the weaker rental and leasing sales mentioned by Troy, partially offset by the ramp-up of sales of our new Class 4/5 trucks. EBIT margin was impacted by the lower volume and reserve adjustments to proactively manage used truck inventories.

Warranty expenses increased year-over-year, as the prior year benefited from favorable preexisting warranty adjustments and higher supplier recoveries. Additionally, the prior year benefited from a $54 million gain related to the sale of 70% of the Navistar Defense business, which also impacted year-over-year sales and segment profit comparisons.

Sales in our Parts business were $493 million, down 10%, which was representative of weaker conditions in the parts industry as a whole. Segment profit decreased to $119 million, reflecting the lower parts volumes.

The Global Operations segment maintained breakeven profitability on revenues of $68 million. Revenues were lower year-over-year, due to softer volumes and unfavorable foreign exchange rate movements. Additionally, the profit in the prior period includes a $5 million gain related to the sale of our interest in the China joint venture.

Lower truck volumes also impacted the Financial Services operations. Segment revenues were $57 million, and segment profit was $17 million. The weaker year-over-year results were due to lower originations and average receivable balances.

We ended the first quarter with nearly $1 billion of manufacturing cash. During the quarter, working capital was a net use of cash, due to seasonality as well as increased inventories, as we prepare for higher production volumes in Q2. This, together with cash used to make interest payments, capital expenditures, and pension contributions, more than offset EBITDA generated by our operations.

Also note that during the quarter, we received final approval of the MaxxForce EGR engine legal settlement in the US. As a result, we funded the cash portion of the settlement, which totaled $85 million in the beginning of our fiscal second quarter.

Before moving forward, let’s take a moment to share some thoughts on the coronavirus. We’re monitoring our supply chain, and have been able to mitigate minor disruptions to date. We’re working closely with our suppliers, including expediting freight and part substitutions in certain circumstances to maintain our production schedules. If the status were to change, our guidance may require a revision.

With that said, let’s look over the balance of 2020. We expect our results to improve throughout the year, due to several factors. One, improving Class 8 industry conditions, as Troy mentioned, resulting in higher sales in the second half of the year. Two, stronger vocational and school bus sales, as we enter important seasonal periods for these product segments. Three, more robust revenues and profits from our parts and international operations, which typically have stronger results in the second half of the year. Four, lower manufacturing costs through ongoing assembly and logistics efficiencies, as well as overall greater stability and production scheduling. Five, material cost savings from new long-term contracts with suppliers that want to participate in our Navistar 4.0 strategic vision. And six, benefit from implementing the cost actions discussed on the December call, including adjustments to our worldwide staffing levels. These factors will allow us to improve upon the first quarter performance.

We expect to run the — close to breakeven levels for the first half of 2020, at the adjusted net income level. Then operating performance accelerates in the second half as market conditions improve.

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

Questions and Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Andy Casey with Wells Fargo Securities. Your line is now open.

Andy Casey — Wells Fargo Securities — Analyst

Thanks, good morning.

Troy A. Clarke — President, Chief Executive Officer and Chairman

Good morning.

Andy Casey — Wells Fargo Securities — Analyst

On the coronavirus, could you quantify maybe how much exposure you have on an annual basis to China manufacturing through your supply chain? And then also, what are your customers telling you about kind of the potential disruption to their business operations, primarily focused on North American truck? And then separately, I appreciate the comments about used truck, but have you seen any sort of stabilization post quarter end? Thanks.

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

Okay. Hey, Andy, this is Persio Lisboa. On the — I probably won’t be specific on the exposure as the nominal spend, but we don’t have –we have suppliers in the region. We don’t have many suppliers in the Hubei province. Actually, most of the supply base is, the direct supply base in the surroundings of the area, and we’ve been monitoring 100% of them for what we can see. Obvious that we need to monitor what happens with Tier 2 and Tier 3 suppliers through our suppliers that provide components to us. And we have, I think, a good monitoring process for that as well. So as Troy alluded, we are monitoring this. We need to understand what happens. But from a supply chain standpoint, we haven’t seen major disruptions, and we keep rolling almost a month ahead of us our readiness for production, which is as far as we can see today based on the facts that we know. So that’s the first one. I think from customers, I think part of what you’re seeing is slowdown. We can’t say that directly is attributed to the uncertainty on coronavirus, but there are conversations on the impact on the economy and how that may impact our business. So we will need to monitor that a little bit as well.

And the third question was? [Speech Overlap]

Troy A. Clarke — President, Chief Executive Officer and Chairman

Used truck prices stabilizing.

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

Yes, I think, here is how we like to think about used trucks. We have — wholesale and action prices are still coming down. I know that it is early to say anything about retails. We saw an uptick from retail sales in January, but it’s just one data point, so we wouldn’t make a case that prices are stabilizing. Our model indicates that we’ll still see price reductions in used trucks through the summertime.

Troy A. Clarke — President, Chief Executive Officer and Chairman

Yeah. So on used trucks, we think that bottoming out of used truck prices happens in the middle of the summer, plus or minus at this particular point in time. With regards to the coronavirus, the only thing that I would add is in some regards, we already see some tightening of the transportation network. As material starts to flow in and fill in the pipeline, there is probably going to be a surge for — a need for additional transportation sources, especially as the coronavirus gets behind us, and then all the supply chains being to refill, not just for industrial and manufacturing goods, but — because we’re using some premium transportation in some cases, but also for our commercial goods as well. So a really good sign, I think, that this is really getting behind us will be things like improvements in spot rates and things like that. So there will be a lot of telltale indicators when this starts to slip behind us.

Andy Casey — Wells Fargo Securities — Analyst

Okay. Thanks very much.

Operator

Thank you. Our next question comes from Brian Sponheimer with Gabelli Funds. Your line is now open.

Brian Sponheimer — Gabelli Funds — Analyst

Hi, good morning, everyone. I appreciate the commentary that there will be no commentary about the TRATON bid. I guess, I’m just curious as to whether there’s been any change in customer behavior in the last month or so since this full bid was announced?

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

Brian, this is Persio. No, I can say, obvious, that we get questions from many stakeholders, but no change in behavior at all, business as usual.

Brian Sponheimer — Gabelli Funds — Analyst

Okay. And then, as you think about both your inventory and dealer inventory in the field, with the caveat that we all know that days on hand is a backward looking figure, where are you as far as where you want to be regarding under-production in order to make sure dealer inventory is at the level you want it?

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

Well, we are right where we planned to be for the quarter. Actually, you remember that last — in the December, we talked about adjusting our production in the first quarter to 40% down, that’s actually where we ended up at 39%. So we were on top of the plan. And we said that we were going to do that to monitor and maintain dealer inventory stable. Dealer inventory is 8% lower in absolute numbers, although when you look at the number of days of supply, the days of supply went up to 137 days, a little bit off our range, but that was where we knew it was going to be, because of the lower retail sales that was part of the calculation. Second quarter, we’re going to be back within range.

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

Yes, I just might add the inventory portion of that ratio calculation actually declined about 10% in the first quarter. It’s just that the denominator declined a lot more because of the lower DTUs.

Troy A. Clarke — President, Chief Executive Officer and Chairman

So we anticipate to be back within that 80-day to 120-day range by the end of the second quarter.

Brian Sponheimer — Gabelli Funds — Analyst

Understood. Thank you very much.

Operator

Thank you. Our next question comes from Ann Duignan with JPMorgan. Your line is now open.

Ann Duignan — JPMorgan — Analyst

Hi, good morning. Just carrying on that, you had expected to have cut production sufficiently in Q1, if orders picked up in January, February, March, but we just got the February orders last night, and they were not very — not great, not good. So how much confidence, how much visibility do you really have into H2 at this point?

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

Well, I think we feel positive, Ann, although the February numbers came down — came lower in Class 8, as you saw, our total order intake and share of orders went up, as we planned to be. So we saw recovery in medium. We saw recovery in severe, and we saw recovery in bus. Heavy is where, I think, we still have some constraints in the overall industry. But I think we are within the industry momentum here. So actually, sequentially, our first quarter in orders is 14% better than the fourth quarter. So, and then you know that our first quarter ended in January. So February is up from January, so we are still supporting the forecast and the production that we have for the second quarter with the orders that we see ahead.

Troy A. Clarke — President, Chief Executive Officer and Chairman

And basically production schedules are filled for the second quarter, so the orders that we’re talking about taking in today, would impact or lack of, third quarter, fourth quarter kind of time frame.

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

Well, and if I may add to that, I think Troy alluded to some clean-ups that we did in our order board. Actually, we did that because of leasing and rental. And leasing and rental coming down, we usually have some reservations loss in our order board. We just decided to take it down. So even with that, our net orders, in the quarter, is sequentially 14% higher than fourth quarter, which I think places us in the right place for what we need for second quarter and entering the second half.

Ann Duignan — JPMorgan — Analyst

And just to clarify, you said 14%, not 40%?

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

14%, 1-4, 14%.

Ann Duignan — JPMorgan — Analyst

14%. Okay, I just wanted to make sure. And then on the used equipment prices, our used database does say that used values continue to fall significantly. And Troy, on top of that, you’ve got the Celadon liquidation through Ritchie Bros. through the course of this month. I mean, were you a supplier of trucks to Celadon? Will your brand be impacted by the number of trucks that are being liquidated this month?

Troy A. Clarke — President, Chief Executive Officer and Chairman

We have been a supplier to Celadon, and there’s some number of our trucks coming through there, but it hasn’t caused a very specific problem for us. It’s not that volume. We look at the Celadon liquidation as being more — it’s just contributing to the industry pricing trend, not specifically impacting our pricing trend. The volume of units that are ours going through there are not that significant.

Ann Duignan — JPMorgan — Analyst

Okay. And on TRATON, I know, you’re not going to comment, but anything on timing?

Troy A. Clarke — President, Chief Executive Officer and Chairman

No. I think, we’ll just let the Board continue to work through this, Ann. And we’ll just let the process work. We won’t spend any time commenting on this call, thanks.

Ann Duignan — JPMorgan — Analyst

Okay, thank you. I appreciate it.

Operator

Thank you. Our next question comes from David Leiker with Baird. Your line is now open.

Erin Welcenbach — Baird — Analyst

Good morning. This is Erin Welcenbach on for David.

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

Hey, Erin.

Erin Welcenbach — Baird — Analyst

My first question is, if you could just extrapolate a little bit about what’s going on in the Parts business. I know you mentioned some lower industry volumes there in general. Just any color you can provide on that?

Troy A. Clarke — President, Chief Executive Officer and Chairman

Yeah. Couple of things. Parts, as you indicated, Erin, we’re seeing this kind of across the industry. We’re down 10%. I think it was actually a little lower of a decline than what we saw in the industry overall. We look at things like McKay studies to see that information. We’ve been trying to understand what that is as well. It has been a milder winter, so that’s one factor. And secondly, the fleet is fairly new, so our customers have other products that they can use, while they’re waiting to repair these vehicles. That said, we do expect that the parts industry as a whole, will be relatively flat year-over-year. So we would except — expect that to accelerate, sales to accelerate over the course of the year, in particular in the second half of this year.

Erin Welcenbach — Baird — Analyst

Okay, thanks. And then my second question is just on the market share growth in both kind of the school bus segment and severe service. Can you just dig into the factors driving that as well?

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

I think that — this is Persio, Erin. First, on bus, we have a full complete line of alternative power trains. We’ve basically refreshed all of the safety features. We have the strongest, I think, collision mitigation system in the marketplace today, the only active collision mitigation system available in the industry, and the customers are feeling that. So we are seeing that as a very positive driver of penetration in bus. Vocational, construction market is overall pretty good right now. And what we’ve been doing is, since we launched our last HV, which was part of the Horizon platform, the product is performing significantly better. Customers are really excited about that. And we have, I think, picked up a lot of momentum in terms of some specific customers. So I think it’s just hard work and the products are performing very well.

Erin Welcenbach — Baird — Analyst

Great. Thanks for taking my questions.

Operator

Thank you. Our next question comes from Rob Wertheimer with Melius Research. Your line is now open.

Rob Wertheimer — Melius Research — Analyst

Thanks and good morning. My first question is just on the pullback in ordering, and leasing and rental in the medium duty that you mentioned. Can you characterize that versus prior downturns? Is that perfectly typical behavior? Or is there any excess caution visible due to economic uncertainty or otherwise?

Troy A. Clarke — President, Chief Executive Officer and Chairman

No, I mean, I think it’s a little bit different than in years past. But I think these are very astute business people. And so what happens is, when there is kind of a contraction or, in this particular case, this excess capacity in the market, there is less need for rental trucks. And so then the large rental leasing agencies or companies, they’ll use rental trucks to supply lease truck needs. Okay. So they’re actually taking trucks from their rental fleet and putting them into the lease fleet, because they’re being under-utilized in rental, and they can be fully utilized in the leasing fleet. And they’re actually very sophisticated in how they do this. They have a very good line of sight on it. And in a market like today, where there is slots available, it’s a low-risk proposition for them, because they do have some orders that they have given us. So they can work with the timing of those orders to fill any needs in, when the market starts to come back.

For us, how we see this is, it’s kind of a double whammy, right. We don’t sell as many to them in rents because they have lower rental needs, and then they’re putting a rental on a lease. So we’re not selling a truck to them for a leasing need. So it’s kind of an exaggerated impact when you have a larger portion of their business. So in some regards, we understand it very well, and it’s a good problem to have because, in our particular case, it really demonstrates the success we’ve had at providing superior products and service to a really critical portion of the market. And I would just highlight to you, I’m going to look over to Michael Cancelliere here, but I think the two largest rental companies, they occupy about 40%, I think, of the total medium duty trucks that are purchased in the medium duty industry in a year. So a good thing is, we’ve made a big footprint in that particular part of the business. But our share now is going to ride that wave a little bit. But I’d rather ride that wave than not.

Rob Wertheimer — Melius Research — Analyst

Perfect. And if I understand the first part of what you said, I mean, instead of being more efficient in managing that, and therefore, timing up orders more this cycle than in past downturns if you could see?

Troy A. Clarke — President, Chief Executive Officer and Chairman

Well, I think in our particular case, as we indicated on our fourth quarter call, we began to make production cuts early and we became very aggressive on cleaning up our order board because we want to have a very — we want to have a good backlog. Some of the manufacturing and material cost reductions that Walter noted is really a function of the fact that we’re managing our capacity and how we interpret orders into that capacity to have a tight backlog, so that we can make the right kind of production plans and keep our costs in line. So, yeah, I think we’re managing in, I think, a little more aggressively than we had in years past.

Rob Wertheimer — Melius Research — Analyst

Perfect. Thank you for that clarification. And this one may be difficult to answer. And I know it’s day-to-day, but obviously, you had Chinese New Year, you had extended production shutdowns afterwards, and then you have this uncertainty that everyone is feeling around whether supply chain disruptions will be severe or manageable. I mean, are you able to say — are you — is it getting better at this point? Is it stable? Is it still completely uncertain? Or is it still getting worse on just the volatility on the supply chain?

Troy A. Clarke — President, Chief Executive Officer and Chairman

Well, given that that’s really difficult to answer, I’m going to give it to Persio.

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

Look, I think if we just talk about the — about China itself, I think it is contained and more visible and clear. I think it gets more difficult when you get country like Italy joining the areas of impact. And now we have another area, for instance, that we need to get into, okay, what are the Tier 2 suppliers, Tier 3 suppliers that are operating in those areas, and are there going to be further disruptions. So I think it got more complex as it spreads worldwide. But the way we monitor is the same way. So I think we have a good handle on what we see today. As Troy alluded, what we don’t see is, what is yet to come.

Rob Wertheimer — Melius Research — Analyst

Very helpful. Thank you, Persio. Thanks, Troy.

Operator

Thank you. Our next question comes from Rob Salmon with Wolfe Research. Your line is now open.

Rob Salmon — Wolfe Research — Analyst

Hey, good morning, and thanks for taking the question. With regard to the used truck adjustments that you made, is that kind of contemplating the average value? Did you mark it to market at the end of the quarter? What I’m trying to get a sense of, if used prices continue to degrade sequentially fiscal first quarter to the second quarter, should we be contemplating an incremental adjustment looking out?

Troy A. Clarke — President, Chief Executive Officer and Chairman

Yeah, let me start on that. So we have about a 25% reserve against our gross inventories, so about $50 million reserve against an overall used truck inventory of about $250 million. So we did increase that in the quarter. And we do take a look at that every quarter, and we take a look at market conditions at that time. And typically our controller staff also takes another look just before we publish our results to see if a further top-up is necessary or further adjustment is necessary. So I would say that our reserves are current. And we’ll take another look at that at the end of the second quarter. So if used truck prices were to continue to weaken, you could see some additional adjustments there over the course of the year. But we’re current as of today.

Rob Salmon — Wolfe Research — Analyst

That’s helpful. And shifting gears, in terms of the new pricing, the new truck pricing within the fiscal first quarter, could you give us a sense of how that trended on a year-over-year basis? And what you guys are currently seeing between your price/cost mix?

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

Well, this is Persio, Rob. What we’re seeing is, new truck pricing for model year is still holding, mainly because I think the new products that are in the market are very superior in terms of performance in few economies. So I think if I say, the new truck pricing itself is there, but now let’s not forget that there is a combination of factors when you talk about net pricing for a Company, which is in the case of trades, for instance, over-allowances are getting bigger than they were a year ago. So we try to balance that because, really, it is the average price or the blended price gets impacted by the changes in over-allowances that are somehow tied to the used truck price market. So we monitor that, and that’s why I think the industry is slowing down in the first quarter, is because there is more availability of used truck price, used truck prices come down. Now, trade — no companies that were going to trade their vehicles, they decide to postpone the trade, which is happening right now pretty much. Now customers are saying, well, we’ll wait for another quarter before we get into this, so we don’t take such a huge loss in the used truck rate.

Troy A. Clarke — President, Chief Executive Officer and Chairman

And that’s really how we’re thinking about it, and we’re managing it as well, right. So the fact that this happening in the first quarter, in the first part of the year, and the information that we have from our customers — look, we could lean into a number of deals where we take more used risk, which then would deteriorate our pricing goals for the year, and then potentially expose us to further write-downs, the previous questions, depending upon where that market goes. On the other hand, because we’re confident that the basics improve throughout the year, and the fact that there’s so much capacity in the market right now that they really don’t need a truck, we don’t feel the need to create that demand. We should just wait until used truck prices stabilize, and then ultimately begin to improve. And a lot of those deals are still available out there. And — but we can do that without having to damage our pricing or deteriorate our pricing so early in the year. And so, I think model year pricing is holding, as Persio indicated, because the products do demonstrate themselves to improve the operating results of the companies that acquire them. The real trick right now is this concept of over-allowance. And so we really don’t feel the need at this point in time to do much different than we’re doing, because it will improve as we go through the year, and as it does, it allows us to manage pricing better.

Rob Salmon — Wolfe Research — Analyst

Appreciate the time, guys. Thanks.

Operator

Thank you. Our next question comes from Jeff Kauffman from Loop Capital Markets. Your line is now open.

Jeff Kauffman — Loop Capital Markets — Analyst

Thank you very much. Good morning and congratulations. Two quick questions. Ryder came out about two weeks ago with a cut in their capex of about 50%, more for company-specific reasons, but with your comments about rental and leasing being down by half, is it mostly based on the Ryder guidance? Are you seeing similar reductions at Penske and National Lease and the rest of the industry?

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

This is a national — all industry is not doing exactly the same, Jeff. We are not pointing to one customer specifically. It’s happening to all customers that operate both rental and leasing.

Jeff Kauffman — Loop Capital Markets — Analyst

Okay. And then, second question, if I kind of step back from the uncertainty of the current market and kind of look at Navistar 4.0 and the investments you’re making in the factories and some of these longer term supplier contracts you alluded to, is there anything you’re seeing to lead you to believe that you’re not capable of hitting that 10% or 12% EBITDA margin target for 2022/2024, or pick up market share as you were anticipating?

Troy A. Clarke — President, Chief Executive Officer and Chairman

Short answer would be, no. We are — as a matter of fact, we’re trying to be very measured on the call because we realize there’s a lot of important things that need to be explained on the call. But inside the Company, we’re even more excited about the prospects of Navistar 4.0 as we’re really creating traction in a number of very significant items. And I would just say, inside the Company, despite the fact that the first quarter was a difficult one, it was an expected one, and our plans prepared around that. We are full speed ahead and making great progress.

Jeff Kauffman — Loop Capital Markets — Analyst

So point being, if you believe that you are capable of executing this and the market eventually normalizes, you continue to believe that there is much larger earnings potential two years to three years out for this Company?

Troy A. Clarke — President, Chief Executive Officer and Chairman

Yes. Yeah. So we believe — I know I’m trying to think of a term here real quick that’s stronger than belief, right. This is a tremendous amount of excitement as we continue to peel the onion on the opportunities that we outlined in our Navistar 4.0 strategy. Our confidence continues to build.

Jeff Kauffman — Loop Capital Markets — Analyst

All right, that’s all I have. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Jerry Revich with Goldman Sachs. Your line is now open.

Jerry Revich — Goldman Sachs — Analyst

Yes, hi, good morning. Can you talk about the retail market share cadence that you expect to play out over the course of the next couple of quarters, and maybe expand on the slide showing market share coming down for the first time in a bit for Class 8 heavy trucks and Class 6-7 medium duty trucks, and expand on what drove the lower share from a retail standpoint this past quarter?

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

Okay. Well, I think — this is Persio. As we mentioned, the share in the quarter was mostly driven by the leasing and rental units and the slowdown in the heavy Class 8 market. That’s basically what drove that, and we are seeing that. And orders, actually they are a reflection of that as well. So I don’t think there is any more that we can elaborate other than seasonality, as Walter alluded, is a very strong element of our business. And traditionally, medium duty construction trucks and buses go up starting the second quarter, third quarter, so that’s just a natural part of the business. And we have a strong presence in those segments, as I mentioned to you. I think our order share in those segments are also picking up in January, February. So we feel positive about our forecast right now.

Jerry Revich — Goldman Sachs — Analyst

And Persio, I guess, the reason why it looks like there might have been a production issue or something along those lines, because I don’t remember seeing Class 8 heavy truck market share for you folks as low as 6%. So is there a customer concentration issue? Did we not get product out the door? And I appreciate the comment on seasonality, but I just haven’t seen you folks have that type of Class 8 heavy market share number before.

Persio V. Lisboa — Executive Vice President and Chief Operating Officer

Nothing specifically that I can point to. And no production issues. Actually, the production now was adjusted as we planned to happen. Let’s not forget also, Jerry, that November, December is the — was the end of the calendar year, fiscal year for most of our competitors, where they also printed a lot of notes, and have concentrated in our sales. But as we mentioned in December, we are really not driving significant pressure in the dealer to stock up or put more products in the marketplace. We didn’t want to do that, and in fact, it turned out to be the right thing to do as we see the dealer inventories where they are today. But we’re positive that we’re going to recover that probably in the second quarter as per the plan that we have.

Jerry Revich — Goldman Sachs — Analyst

Okay. And Troy, on the progress with the TRATON joint purchasing teams, can you just talk about how you’re tracking versus the cost savings targets that you laid out upon forming with the partnership? And just update us on timing? Are we seeing any benefit in ’20, and what’s the cadence in ’21 and ’22 of that expected benefit? Thanks.

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

Yeah, it’s Walter, Jerry. I’m happy to say we continue to be on plan with our projections that we have for the procurement joint venture. So we’re three years in actually this month, and we continue to be on pace to exit year five with $200 million of annual, and $500 million of cumulative savings.

Jerry Revich — Goldman Sachs — Analyst

And Walter, what are the expectations of the savings in ’20 embedded within the guidance?

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

We’ve not broken those out, but we do track them internally. So we’re into the second phase of our three-phase plan, which is to continue to work with our alliance partners to find those opportunities with the supply base. And I’m not going to break it out on the call, but we’re on target.

Jerry Revich — Goldman Sachs — Analyst

Okay, right. And lastly, can you just talk about your contingency plans from a facility standpoint, if you folks get to a point where employee absences, just step us through how you’re thinking about either inventory builds or other contingencies if we to get to that point.

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

Yes, I mean, obviously, we’ve been working really hard this week to develop those contingency plans. Let me just say this, they’re coming together very quickly. We’ve managed through issues like this before, maybe not potentially caused by the same thing, but caused by other things. You may recall like in 2018 with the market so high, we had a lot of issues with regards to suppliers’ inability to catch up and stuff. So we have all the tactics that we know, and we’re just kind of making sure that all those buttons, when we push them, work. One of the things that works really well for us is the flexibility that we have between our facilities. We basically have the ability to shift production rather quickly between our two plants, with the exception of the Class 4/5. And so please rest assured, we — just like we did in 2018 and even into 2019, we know how to work the supply chain, we know how to work our production capacity. And obviously, we — this is still — I don’t want to add to the sensationalism on the issue. This is still a very small issue, I believe, as far as those type of impacts. But we get paid to be prepared and we’ve spent a lot of time this past week just doing that.

Troy A. Clarke — President, Chief Executive Officer and Chairman

Yeah Jerry, just to add, we’ve done that both with the supply base as well as with our employment. So as recently as the beginning of this week, we’ve gone out to our employees to prepare them for any possibilities, similar to what you’re seeing from other industrial companies.

Jerry Revich — Goldman Sachs — Analyst

Thank you.

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

But you can assume hand washing went up about 10 times.

Jerry Revich — Goldman Sachs — Analyst

If you guys can spare any Purell, please send that over. Thanks, everyone.

Operator

Thank you. And I’m showing no further questions in the queue at this time. I’d like to turn the call back to Troy Clarke for any closing remarks.

Troy A. Clarke — President, Chief Executive Officer and Chairman

Okay. Hey, I’d really like to thank our customers, employees, dealers, and certainly all of you for your support and dedication to Navistar and our brands. I just want to reiterate, the industry is in transition, this was expected, this was planned for. I’m optimistic for a strong second half and our ability to deliver on our 2020 guidance. We do remain, and I’m glad we did get a question on this, on our Navistar 4.0 goals, they’re very exciting, certainly inside the Company. We’re going to take our annual adjusted EBITDA margin from the 8% range it was in, in 2019 to 10% by 2022, and 12% by 2024. Our plans are still on track. Today, we’re making the right decisions for us to achieve these goals. Hey, for any follow-ups, please reach out to the IR team for any additional questions, and thank you so much for your interest in our Company. And I just want to wish everybody a great day.

Operator

[Operator Closing Remarks]

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