Navistar International (NAV) Q3 2020 Earnings Call Transcript

Navistar International (NAV)
Q3 2020 Earnings Call
Sep 09, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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, 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; and 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 has been posted to the investor relations page of our website for reference. The non-GAAP financial measures discussed in this call are reconciled to the U.S.

GAAP equivalent 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 the 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 trade and offer.

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

Persio 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 as this is my first call where I'm addressing you as the 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 toward 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. This initiative is on track to deliver a significant reduction in supplies and parts as we expand our modular architecture across several platforms, that will further reduce our average material cost 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 cost of assembly in less than 24 months from now. Our new San Antonio plant launches in the spring of 2022.

We are pleased 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 off-line assemblies. Finally, we are also recalibrating our resource allocations to optimize shareholder returns. As a result of the pandemic, we had the opportunity to revisit our investment portfolio.

The result was to retime noncritical low-return programs and to cancel programs that were creating redundant offerings in our product portfolio. By streamlining our investments in conventional programs, we were able to free up significant capacity. This will be redeployed into advanced technology platforms and strategic partnerships that accelerate the pace of our progress. Recent executive appointments and other announcements emphasize this shift as we prioritize the investments and partnerships that make the best use 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 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 in production in 2024.

Just as with our electric trucks, these vehicles will be fully integrated into our assembly process. In the area of electric technology, our business unit 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 Cs approach of offering complete e-mobility solutions for our customers. And in the area of connectivity, we have announced new partnerships with selected telematics service providers including Samsara and Geotab, to provide customers with streamlined access to their choice of fleet management solutions using our factory-installed device. Subscriptions and services will include remote diagnostics and vehicle health monitoring.

Another key executive appointment is the expansion of Friedrich Baumann's role after pending retirement of Michael Cancelliere. As president of Sales, Marketing & 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 these 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. Finally, I'll touch on our cost-saving and savings actions. First, our results. Our fiscal third quarter opened in the middle 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 maintained 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, hauling dry and refrigerated goods as well as flatbeds, have seen increased volumes. However, utilization continues to be depressed in the rental leasing and general freight product segments. More on these 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 a 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 continued to exceed orders, industry backlogs have come down.

Used truck pricing has shown signs of stabilizing reflecting improved demand balanced 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 the economy and the industry need to work through. Our medium and heavy share continues to be impacted by the divide in 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 products segment. Let me provide some color. The rental and leasing segment is an area of historic strength for the international brand. In 2019, this product segment represented above a 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 on leasing is down 55%, while 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 2 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 to continue to trend down, causing the day sales inventory ratio to come down as well. With respect to aftersales, parts sales are recovering. This year, industry part sales are down nearly 20% which aligns with our year-to-date performance.

We continue to be impacted by lower utilization of rental and leasing vehicles and school buses. Fewer miles driven means fewer part 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're not done.

We're 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 truck 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 arrive. Let me now turn it over to Walter, who will walk you through the financials.

Walter?

Walter 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 2 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 chargeouts 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 accrual related to certain legacy engine litigation. After excluding this onetime gain in the prior period, SG&A fell approximately 30%.

Savings largely came from lower employee expenses, shorter contractor work weeks, 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, where interest expense fell 40% due to lower average debt balances and lower rates. This was partially offset by higher manufacturing interest expense due to the issuance of the new senior secured notes in April.

All in, we incurred a net loss of $37 million in the third quarter or $0.37 per diluted share. Excluding onetime items on an aftertax basis, adjusted net loss was $8 million in the third quarter. Adjusted EBITDA was $104 million after excluding onetime items on a pre-tax basis. Moving to segment results.

Worldwide volumes 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 of 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 $414 million, and segment profit was $97 million. The global operations segment remained near breakeven despite revenues falling 48% to $47 million as the segment benefited from cost actions taken earlier this year.

Lower truck volumes also impacted our Financial Services operations. Segment revenues fell 34% to $49 million, and segment profit was $10 million. The weaker year-over-year results were due to lower originations and lower average receivable balances. The overall portfolio including credit quality, remains good.

Certain customers who received payment deferrals during the pandemic are now beginning to make payments again. As we move forward, I'm proud how our team has worked together to respond to a number of challenges from the churn 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 1, we ended the employee salary deferral program given our strong cash balance.

Now we're 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 move to shared service centers, flattening our organizational structure as we push accountability lower in the organization to accelerate decision-making and pursuing cost savings from third-party service providers, who've 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 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 industry production is not impacted by further plant shutdowns or supply chain disruptions, then we'd 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 our operations where we are market leaders, particularly in the rental and leasing and school bus product segments. Due to the volume impact on 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 and 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 products segment will rebound, allowing us to participate even more meaningfully. In summary, we are managing effectively through the pandemic and have maintained strong liquidity; however, 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 on our Navistar 4.0 goals. With that, I'll turn it back to the operator to begin the Q&A.

Questions & Answers:

Operator

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

Stephen Volkmann -- Jefferies -- Analyst

All right. Good morning everybody.

Persio Lisboa -- President and Chief Executive Officer

Good morning Steve.

Stephen Volkmann -- Jefferies -- Analyst

So both Persio and Walter. I guess you both talked quite a bit about additional cost opportunities. But I guess, I'm not quite clear on sort of what you are thinking about. So it seems like there's buckets here we've had some investment opportunities I guess that you pushed to the right or maybe a few that you've canceled.

I'm just curious maybe can you touch on that a little bit. [Inaudible]

Persio Lisboa -- President and Chief Executive Officer

Steve, you're breaking up quite a bit.

Stephen Volkmann -- Jefferies -- Analyst

[Inaudible]

Walter Borst -- Executive Vice President and Chief Financial Officer

You're breaking up quite a bit, Steve, so we missed both of...

Persio Lisboa -- President and Chief Executive Officer

I think the gist to your question is what are kind of the major buckets of the cost savings actions that you're thinking about taking that you mentioned in your prepared remarks. Is that right?

Walter Borst -- Executive Vice President and Chief Financial Officer

Is that right?

Stephen Volkmann -- Jefferies -- Analyst

Yes. Yes.

Walter Borst -- Executive Vice President and Chief Financial Officer

OK. I'm sorry, we're having a little bit of difficulty with the audio. So I mean I guess first of all, what we've been doing here during COVID is having a watchful eye on costs. And as we indicated, the costs were reduced about 30% after you exclude a onetime gain last year, year over year.

But a number of those measures are temporary in nature including some of our employee expenses and contractor expenses, travel and IT-related investments. So what we're focusing on -- so I should say I guess when you take a look at it, we're already in the 7% to 9% range, SG&A divided by revenues. What 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't work from home.

And so do we need to have all the locations that we presently have or can we downsize other facilities where we're currently working as we prepare for the workforce of the future. A second area that we're 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're looking to increase our decision-making capabilities, improve our speed and -- of 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 and that will give us the opportunity to take a look at just how many layers of management and so on that we have and whether we can streamline our organizational structure. So those are areas that we're looking at. We do want to be profitable at all points of the cycle.

And we're 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've 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 quartile of costs. And we're already much better than the median given the cost-savings actions and cost-reduction actions we've taken over the last several years.

Operator

And your next question will come from Ann Duignan from J.P. Morgan. Your line is open.

Ann Duignan -- J.P. Morgan -- Analyst

Yes. Hi. Good morning. Can you talk a little bit more about days on hand, the 140 days, that's well above the normal range.

Talk about what you're going to do in Q4 in terms of underproducing retail in order to reduce that? 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's 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 Lisboa -- President and Chief Executive Officer

Hi Ann. This is Persio. Good morning. Thank you for the question.

First of all, the 140 day sales is a ratio that actually is impacted also for lower sales that the dealer experienced -- the dealer network experienced in the quarter. So we expect that as market is rebounding and sales are getting back, I wouldn't say it's normal, but they are growing in the last few sequential months that we are following. And what 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've been managing production rates consistently with demand. And the way we cover for additional volume is with potential over time. We'll do that again in Q4. And also, Q4 is lower 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 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 -- 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. Obvious 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 intake supporting a stronger backlog and that makes us support actually the decision and the production for the first quarter.

Ann Duignan -- J.P. Morgan -- Analyst

OK. Thanks. And then...

Persio Lisboa -- President and Chief Executive Officer

So day sales, I think that we should expect it's coming down closer to the upper end of the range by the end of Q4.

Walter Borst -- Executive Vice President and Chief Financial Officer

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

Ann Duignan -- J.P. Morgan -- Analyst

Yeah. I appreciate that. That's a 3-month moving average of retail sales. And if you could talk similarly then about the Silverado because I'm 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 Lisboa -- President and Chief Executive Officer

I think we're 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 -- J.P. Morgan -- Analyst

OK. And the announcement by Nikola to partner with GM yesterday, that -- you don't expect that to impact the Silverado business or would you be considered as a producer, a contract manufacturer at one of your facilities for the badger or will that be done in-house at the GM? And I'll leave it there.

Persio Lisboa -- President and Chief Executive Officer

First, we don't see any risk to the contract manufacturing agreement that we have with GM right now, that's solid. It is a long-term agreement. So we look forward to the continued relationship with GM as it is today.

Ann Duignan -- J.P. Morgan -- Analyst

OK, thank you. I appreciate and I'll get back in the line.

Persio Lisboa -- President and Chief Executive Officer

OK, thank you.

Operator

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

Brian Sponheimer -- The Gabelli Dividend and Income Trust -- Analyst

Good morning Persio. Good morning Walter and hi Marty. How are you?

Marty Ketelaar -- Vice President, Investor Relations

Good morning.

Persio Lisboa -- President and Chief Executive Officer

Good morning Brian.

Brian Sponheimer -- The Gabelli Dividend and Income Trust -- Analyst

So you've got a lot of exciting things here. You found some costs that were temporary cuts that can be structurally dismissed. You've got an EV plant on the rise. You have connectivity.

You have autonomy. And 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 with the benefit I guess of a larger company owning you given the brighter days are coming soon?

Walter Borst -- Executive Vice President and Chief Financial Officer

Yeah. I'll start. Look, as Marty indicated, we're not going to comment on the TRATON bid. Our job, as a 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're working on. So we think there's a lot more that we can do. On the cost side, we'll continue to grow the revenues in the business.

And we're excited about our partnerships in the advanced technology space. So I'm glad you took note of all those things.

Persio Lisboa -- President and Chief Executive Officer

I don't know if I can add anything to Walter's comment here. But thank you for noticing the change -- the improvements, mainly on the advanced technologies because that's an area that we've been investing a lot. And it is an integral part of our Navistar 4.0 strategy.

Brian Sponheimer -- The Gabelli Dividend and Income Trust -- Analyst

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

Persio 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 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 -- The Gabelli Dividend and Income Trust -- Analyst

All right. Great. Well best wishes to you Persio and look forward to speaking with you all later.

Persio 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.

Unknown speaker

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

Persio Lisboa -- President and Chief Executive Officer

Yeah, well absolutely. First, I think used trucks is starting to stabilize in terms of overall volume. If you just take the market in two pieces, the retail sales, and I'll 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 offsetting each other, mainly from a pricing standpoint.

We can see that there's 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'll start seeing some opportunities on 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 picking 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 start placing their trades and new purchases that they are executing, we are going to see receipts going up, and that may level a little bit the inventory.

Unknown speaker

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

Persio Lisboa -- President and Chief Executive Officer

No. Actually, it's being 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 has been material for us in the last quarter. So actually, a good rebound from Q2 where most of companies were closed and there were shutdowns and really not operating and supporting production.

It's been stable for us at least.

Unknown speaker

OK, thank you. I'll 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 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 the 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 take R&D higher given the technology evolution here?

Persio 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 a very good beginning of our overall review of where the investments are going in general, not only on R&D, but capital as well.

And what started at the beginning as a 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. But 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 had planned before. And if there are things that we have to remove, we ended up doing that. So you heard that in the quarter, we made some -- we host some projects, we retimed some others, and actually, we canceled some projects. And most of those resources, they are not just being driven down to the bottom line.

What we are doing is we're redeploying those resources into advanced technologies. That's why we're 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 had today with Samsara and Geotab, for instance.

But more than that that is -- was enabled by a joint program with TRATON on the connectivity module that goes into all our trucks today which was basically a module that came from the alliance with TRATON. You heard us talking about electrification. And now, San Antonio, we are taking San Antonio from the new footprint that was a big part of our strategic 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. So we're 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'll 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'm wondering what aspects of the products do you expect to differentiate Navistar in that type of environment compared to all of the domain expertise you folks have delivered on the diesel side?

Persio Lisboa -- President and Chief Executive Officer

Yeah. Well I think first of all, you touched on something very important, the strength of our dealer network makes a big difference when we talk about support to customers. I'll give you an example. The first delivery of our electric school buses for British Columbia is really not just the delivery of buses.

We had a comprehensive support to the local authorities, to the school district, to 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 -- a 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 have the capability to build our products in our production line provides 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 -- start-ups are basically taking a small approach in terms of getting a product that is developed in a diesel platform, tear it apart, put it back together in an electrified platform. What we're 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're 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 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 lower -- that will be driving a lot of lower cost by taking that approach versus what competitors are doing today.

Jerry Revich -- Goldman Sachs -- Analyst

All right. I appreciate the discussion. Thanks.

Operator

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

Andy Casey -- Wells Fargo Securities -- Analyst

Thanks. Good morning everybody and congratulations, Persio.

Persio Lisboa -- President and Chief Executive Officer

Thanks.

Andy Casey -- Wells Fargo Securities -- Analyst

You're welcome. I wanted to follow up on Jerry's question a little bit. Can you discuss if you're 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 bore engine co-development program?

Persio Lisboa -- President and Chief Executive Officer

Well, we are seeing that, first of all, there are market trends indicating that, but there are also regulatory changes and they are going to promote that. If you just take the Air Clean Act that was recently approved in California, there's a real requirement on penetration of diesel products -- or electric products, I mean. So when we take those two forces, and by the way, not just that, but the fact that we are seeing technology getting more advanced, the cost of batteries continue to come down. And we believe that there will be an early adoption.

We're 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 a Class 8 truck when you get into 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 Securities -- Analyst

OK. 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 that might be really to seed the market. Do you expect a period of kind of market development through favorable financing programs to get this stuff off the ground?

Persio Lisboa -- President and Chief Executive Officer

Well, 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 there is probably a trend of using more of leased batteries, part of the deal that will be seeding the market I would say when it's first launched. So there are different models that can be adopted. We are not going to open that right now, Andy, but that's absolutely something that should be considered, and we are considering as we go-to-market with our electric products, not only the sale of the product with the regular financing, but the leasing of the unit and eventually even leasing of the batteries if it is the case.

Andy Casey -- Wells Fargo Securities -- Analyst

OK, thanks. And then a very, very short-term question and that will 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 exiting Q3 or is it -- you're just looking at the trends and expect growth?

Persio Lisboa -- President and Chief Executive Officer

I think on the parts side, we have still -- we're still seeing on the parts side a swoosh type of recovery. It's been pretty steady, and we see that we have an increase in Q4 that is happening. So when you look at overall, if you just take in perspective, I think our Q4 parts will be I would 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 going up for the last I would say 90 days.

Walter Borst -- Executive Vice President and Chief Financial Officer

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

Andy Casey -- Wells Fargo Securities -- Analyst

OK, 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 your thinking has changed on any aspects of that plan? Which targets you think are most achievable and that you're most focused on? I know you talked about trying to accelerate some of those. If you can just kind of frame that a little bit.

Thank you.

Persio Lisboa -- President and Chief Executive Officer

Sure. Well, I think we remain, as I said, we protected Navistar 4.0 in our overall revision of our investments in capital. We are still targeting to get to our 4 points of additional EBITDA by 2024. That's on track.

Piece -- if I just break the Navistar 4.0 strategy in small pieces, we have Project Compass which is I think I was able to communicate during our investor call a year ago or so. We have this concept of platform that is going to be very modular. And by doing that, we're going to reduce a lot of cost. We have an aggressive target on reduction of parts that we used in those products.

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 we feel pretty good about that as well. And then we have all the advanced technologies and everything that I've mentioned that are actually being materialized through the approach of taking partnerships -- strategic partnerships, as you probably could see during the quarter.

And that's how we're going to keep doing it in the future as well. So we see all the building blocks 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, 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 had a 10% margin targeted for of 2022. I guess what I was wondering is sort of if you're 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?

Persio Lisboa -- President and Chief Executive Officer

Yeah. I think it is really tied to where the industry is going to be as well. So we have all the actions that support that. Obvious that, well, you can't take a straight percentage and say that's how we always perform.

When we get into replacement demand, 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're 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 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?

Persio Lisboa -- President and Chief Executive Officer

Correct.

Steven Fisher -- UBS -- Analyst

OK. Terrific. Thank you.

Persio 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 overall impact of some of these actions looking forward?

Walter Borst -- Executive Vice President and Chief Financial Officer

I think we'll probably do that in December as we look forward to the next year, but we do expect to end 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 would be the time where we typically talk about some of the breakeven levels going forward.

Rob Salmon -- Wolfe Research -- Analyst

OK. 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're expecting it to remain depressed in the fourth quarter. But I'm curious, are you starting to see that uptick in parts activity to that end market?

Persio Lisboa -- President and Chief Executive Officer

Well, I probably comment on the rental and leasing segment as a truck segment overall, first, 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 defleeting 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 a new asset, a new truck. And that's when basically is 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 of the year.

It's happening since last year. But we are seeing that. I think, it's coming to an end right now. In conversations with our large customers, they are indicating that they are getting to -- very close to stop -- to the end of the defleeting 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'll see that probably in the next -- coming months which is traditionally when they get into the fleet season and we see more of the rental and lease packages coming as well. We'll be monitoring that.

But so far, the indications are positive. And we assume that as that happens, there is an opportunity for a 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 Lisboa -- President and Chief Executive Officer

Thank you Rob.

Operator

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

Persio Lisboa -- President and Chief Executive Officer

OK. Well, thank you. So to summarize, Navistar is effectively managing through the pandemic while supporting our customers and the drivers who keep American moving. As we close, let me reinforce this mission.

We, the Navistar leadership team, are 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 goals 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 signoff]

Duration: 58 minutes

Call participants:

Marty Ketelaar -- Vice President, Investor Relations

Persio Lisboa -- President and Chief Executive Officer

Walter Borst -- Executive Vice President and Chief Financial Officer

Stephen Volkmann -- Jefferies -- Analyst

Ann Duignan -- J.P. Morgan -- Analyst

Brian Sponheimer -- The Gabelli Dividend and Income Trust -- Analyst

Unknown speaker

Jerry Revich -- Goldman Sachs -- Analyst

Andy Casey -- Wells Fargo Securities -- Analyst

Steven Fisher -- UBS -- Analyst

Rob Salmon -- Wolfe Research -- Analyst

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