Navistar International (NAV) CEO Troy Clarke on Q2 2020 Results - Earnings Call Transcript

Navistar International Corporation (NYSE:NAV) Q2 2020 Earnings Conference Call June 4, 2020 9:00 AM ET

Company Participants

Troy Clarke - President, Chief Executive Officer

Walter Borst - Executive Vice President, Chief Financial Officer

Persio Lisboa - Executive Vice President, Chief Operating Officer

Marty Ketelaar - Vice President, Investor Relations

Conference Call Participants

Stephen Volkmann - Jefferies

Erin Welcenbach - Baird

Ann Duignan - JP Morgan

Felix Boeschen - Raymond James

Jerry Revich - Goldman Sachs

Andy Casey - Wells Fargo Securities

Joe O’Dea - Vertical Research

Operator

Ladies and gentlemen, welcome to the Navistar International Corporation second quarter 2020 earnings conference call. All participant lines will remain muted until the question and answer session.

At this time, I’d like to turn the call over to Marty Ketelaar, Vice President of Investor Relations and Communications to begin the call. Please go ahead.

Marty Ketelaar

Good morning everyone and thank you for joining us for Navistar’s second quarter 2020 earnings conference call. Today we will discuss the financial performance of Navistar International Corporation for the fiscal period ended April 30, 2020.

With me today 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 have 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 U.S. 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 our Safe Harbor statement and other cautionary notes disclaimer presented in today’s material for more information on this subject.

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

Troy Clarke

Okay, thanks Marty. Good morning and thanks for joining us. We have a lot to cover today so we will try to keep our comments brief to allow adequate time for your questions.

It’s been a unique and a very busy quarter. Like many businesses, we’ve worked hard to keep our team safe, understand the changes to the trucking industry and adapt as appropriate. Unfortunately, the winddown of the economy due to the COVID pandemic played out during our Q2 with the quarter ending in the middle of the stay-at-home phase of the crisis. We look forward to Q3 with more sections of the economy moving into the reopening phase. The next few months will provide insight into the nature of the recovery phase, which will extend through the remainder of our fiscal year and into the next.

Let’s take this in pieces. I will comment on the subject of orders, cancellations and backlog, the manufacturing and supply chain, truck and parts sales and the dealer network, cash conservation actions and Navistar 4.0, and finally the TRATON alliance.

First, orders. Class 8 industry order intake in the U.S. and Canada averaged over 3,000 per week in February, the first month of our second quarter, then dropped to around 1,000 per week for the month of April. I would remind you industry orders were already down in Q1 to levels that were less than replacement demand due to the strong deliveries in 2019. We said previously orders would strengthen throughout the year with the second half better than the first.

As freight demand declined in the quarter, truck utilization dropped and rates fell. With excess trucking capacity, new orders fell off as companies reassessed their needs in light of the sudden drop in demand. This has been especially true in the general freight, rental leasing and private fleet segments.

Some deals in the pipeline have been delayed, re-timed and pushed off. In April, we incurred a handful of Class 8 cancellations as well, about 300 units or 2.5% of the order backlog. Earlier in the year, we had cleaned up our order board, so we have not seen the need for large adjustments. Our order share improved as we progressed through the quarter, albeit in an environment of low overall industry orders.

We ended the quarter with a backlog of firm Class 6 through 8 truck orders of over 18,000 units, down about 12% from the end of Q1. We continue to adjust line rates to demand, managing the backlog that still represents over 25 weeks of plant build slots. Plant production schedules are filled through Q3 and even at today’s lower order rate, we expect to fill Q4 and enter 2021 with a workable backlog.

It’s too early to provide a precise order forecast for the remainder of the year, but we expect orders to increase as the reopening of the economy continues. Freight volumes are starting to increase and spot rates across drive-in, refrigerated and flatbed are coming off their bottoms with modest improvements.

Used truck volumes are down with fewer new trucks being delivered across the industry. Used pricing, which is a leading indicator of new truck orders, is down 20% year over year. Demand for used trucks will increase with improved fleet utilization. As demand improves, prices will as well. Our current view indicates this could be in the fourth quarter of the calendar year, but of course that depends on the nature of the recovery.

Turning to manufacturing, as an essential industry, we had the ability to run our plants during the quarter. We were moderately successful in keeping our plants open and producing. This required developing effective safety protocols to keep the coronavirus out of our plants and our distribution centers. The protocols implemented meet or exceed government and healthcare authority guidelines.

Keeping the plants operating also required working with our suppliers. Several of them were impacted directly by the COVID pandemic or were required to curtail operations due to local stay-at-home requirements. This was particularly true with suppliers located in Mexico.

Fortunately, we developed processes and procedures to track and engage the supply base during industry shortages experienced in 2018, so we cranked up the war room and worked our way through it again. We encountered some disruptions and we lost about 50 plant days of production across our three assembly plants in the quarter. More than half of the lost days came from the suspension of production at our Springfield plant on March 23 and not returning to work until the second week of May as the GM plant that provides engines for the Class 4/5 trucks and the cabs for the cutaway G-van were closed.

The remaining days lost were largely due to issues with suppliers in Mexico, where stay-at-home requirements were implemented later than here in the U.S. Some of these suppliers are still down and we will ramp up to full production over the next few weeks as we work through the remaining supply issues.

Let’s talk about truck deliveries and market share. The loss of production days in April impacted charge-outs in the quarter. Market share is lower year over year, yet it did improve sequentially from Q1. As noted on the March call, medium and heavy share is down primarily due to the fall-off in business from the rental and leasing segment and other large fleets. [Indiscernible] service market share is up in the quarter and both it and bus share are up year-to-date.

We’re working with our dealers to help them manage through these circumstances, assisting them in working through the trucks on their lots. Company and dealer inventories are down 4% at the end of the quarter, which represents about 127 days at the trailing sales rate, which is slightly above the normal range.

During the quarter, we launched International Cares which for a limited time features no payments for six months, free access to International 360, and worry-free vehicle service coverage. We also teamed up with our dealers to provide meals, coupons and personal protective equipment to truck drivers of all makes, so that they can safely deliver goods and essential services. In addition, our dealers have remained focused on up time with no deterioration in repair rates.

Parts sales for the quarter were down in line with the industry at a little over 20%. On-command connection data indicates the number of trucks on the road in the segments of general freight haulers or leasing and rental is down 6% to 8%. On top of that, school buses are idle as most schools have closed. Fewer miles driven means fewer parts sales. As fleet utilization increases resulting in more trucks on the road with more miles driven, parts sales will increase, returning to normal levels. The good news story is that last year we introduced an ecommerce channel for parts sales, and as you can imagine, the use of this sales channel is gaining traction.

On cash, we ended the second quarter with $1.5 billion of manufacturing cash. Walter will provide more details in his comments, but we took a number of actions to conserve cash, reduce costs, and enhance liquidity in the quarter. This was necessary to ensure we could proceed with our plans for Navistar 4.0. These actions will assure we have the liquidity and resources to endure the current crisis and position the company for profitable growth as demand returns.

With regards to Traton, as you know, they offered $35 a share to acquire the remaining shares of Navistar that they don’t own. The offer was public, but we decided early on to not conduct discussions in the public forum. The board is managing these discussions, but frankly the COVID pandemic has slowed the process. What I can say is the offer remains on the table. It has not been accepted nor rejected. Discussions continue.

With the stay-at-home orders ending, the economy is opening and the recovery phase has begun. There are many references and speculation on the shape of the recovery as being a V, a W, a U, or even a swoosh. We have modeled these scenarios and will modify our plans accordingly as the nature of the recovery becomes clearer. I think the recovery starts out gradually, then gains momentum throughout the balance of the year. The economy is driven by the consumer and consumption will return. The recovery will requires trucks and trucking, increasing fleet utilization. I think orders will improve modestly and then strengthen in the fourth quarter year for trucks to be delivered in 2021.

2021 will be a better year. It may not return to 2018 or 2019 levels, but if an effective COVID vaccine or treatment is developed and becomes available, the pace of the recovery could quicken.

In summary, orders have fallen off but will improve as the recovery proceeds. Our plants are running and we have a workable backlog. Our dealers are managing through this and we’re working to support them. Parts sales are down with lower miles driven and will increase through the balance of the year. We’ve taken actions to lower costs while assuring we have the cash and resources to proceed with our alliance projects and Navistar 4.0.

Let me turn it over to Walter to walk you through the financials.

Walter Borst

Thanks Troy. Yes, these are unprecedented times, but Navistar is well equipped to handle these challenges.

Before discussing our second quarter earnings, please let me first make a few comments about our liquidity position, important cash flow activities in the quarter, and our financial services operations.

Let’s start with our liquidity position. We ended the second quarter with 2020 with a strong manufacturing cash balance of $1.5 billion. During the quarter, we took several steps to bolster our liquidity position. First with financing activities, in April we completed the issuance of $600 million of senior secured notes maturing in 2025. We believe this offering provides sufficient liquidity to our operations for the foreseeable future under reasonable operating scenarios, and we don’t have significant near term manufacturing debt maturities until our term loan comes due in November 2024.

Second via operating actions, in April we also announced that we implemented a series of actions to conserve over $300 million of cash this year without significantly jeopardizing our strategic plans. Actions include: one, deferring pension contributions of $162 million and employer payroll tax payments on provisions of the CARES Act; two, postponing 30% of capital expenditures and spending on information technology projects; and three, deferring non-represented salaried U.S.-based salaries by 10% to 35%.

Next, let’s turn to some of the important free cash flow drivers in the quarter. One of the key drivers during the shutdown is working capital. As an essential business, our operations team is doing a great job working with our supply chain to keep our production facilities and distribution centers operating to serve our customers and dealers during the COVID pandemic. As Troy mentioned, other than at our Springfield plant, we have been moderately successful in keeping our plants operating, albeit at lower volumes.

Nevertheless, we have experienced a deterioration in working capital due to these lower production volumes. This is because we run what we call a negative working capital model. While we’ve discussed this on prior earnings calls, please let me briefly explain how this works.

Manufacturing operations sell, or more appropriately factor the receivables they generate through our financial services operations. This typically occurs shortly after a vehicle is produced. When we experience lower production volumes, it causes the pay down from accounts payables that are associated with higher volumes from the prior period to exceed the inflow of cash from units produced in the current period. This results in an unwind of working capital.

Historically, we tend to see this impact more materially in the first quarter given the lower production days compared to the prior fourth quarter; however, we also experienced this phenomenon in late March and April as the impact of the coronavirus spread, causing supply chain disruptions and lower production volumes. As a result, in the second quarter consolidated accounts payable fell approximately $250 million as we continued to honor our trade payables to suppliers. Offsetting the net use of cash for accounts payable were net inflows as we effectively worked inventories and trade receivables lower by approximately $100 million in total.

The impact of the coronavirus continued to impact our operations in May. Today our factories are gradually ramping up production as the supply chain comes back online. As production increases, we’d expect working capital to re-wind as well and be a source of cash.

Additional cash outflows during the quarter included $85 million to fund the previously announced MaxForce EGR engine legal settlement in the U.S., $31 million of capital expenditures, $28 million of interest payments, and annual incentive compensation payments.

Finally, please let me share some thoughts on our financial services operations. Financial services operations are well capitalized with strong underwriting standards and a history of managing through downturns. Typically these operations inherently increase liquidity during periods of lower volumes as assets liquidate. From time to time, the financial services operations use excess liquidity and low leverage to advance funding to the manufacturing operations, either in the form of loans or through a reduction in trade payable balances.

During the second quarter, total loans from financial services to manufacturing increased by $121 million to $422 million, principally via facilities secured by used truck inventories. The increased loans improved overall manufacturing liquidity and only slightly increased financial services leverage as debt to equity leverage increased from 2.8 times at the end of January to 3.1 times at the end of April.

Our dealer body has remained fully operational and several owners have taken advantage of government funding opportunities under the CARES Act. NFC offers wholesale floor planning for our dealers in the U.S. and Mexico and has experienced no dealer credit losses to date. Moreover, in May NFC successfully extended the maturity on its variable funding notes by a year while maintaining its capacity of $350 million and triple-A credit rating for the securitization.

On the retail side, we partner with Bank of Montreal, or BMO to provide financing options for customers in the U.S. and Canada. Here we have a loss sharing agreement with BMO. BMO generally takes a first loss of up to 10% to 15% of the amount financed while Navistar’s proportion of the loss generally ranges from one-third to two-thirds of the total losses. BMO also provides wholesale financing to our dealers in Canada.

In Mexico, NFC provides retail financing as well. Overall, the portfolio quality remains good, but we have provided some extended terms or holidays for certain customers given the pandemic, as required by Mexico’s banking regulatory authority.

Now let’s review our results.

Results at the beginning of the quarter were in line with our plans but weakened in late March and April as the impact of the coronavirus intensified. Second quarter revenues were $1.9 billion, down 36% from last year, and core charge-outs were 14,200 units, down 40%. Gross margin in the second quarter was 15.6%, lower from last year due to industry headwinds and the impact of the coronavirus, which resulted in lower truck and parts volumes.

Structural costs, including SG&A and engineering expenses, fell to $248 million, down both sequentially and year-over-year. The prior year included a $159 million charge for the MaxForce EGR engine legal settlement. Even after excluding this one-time charge, structural costs fell $41 million. Over the balance of the year, we should continue to experience SG&A savings from lower employee expenses, reduced contractor work weeks, and information technology project spend, as well as reduced expenses for advertising and other marketing events.

Interest expense declined 23% to $63 million, reflecting debt repayments in 2019. In subsequent quarters, we expect manufacturing interest expense to increase due to the issuance of the new senior secured notes in April.

In total, we incurred a net loss of $38 million in the second quarter or $0.38 per diluted share, compared to a loss of $48 million or $0.48 per diluted share in the prior year. Excluding one-time items on an after-tax basis, the adjusted net loss was $10 million in the second quarter. Adjusted EBITDA was $88 million in Q2 after excluding one-time items on a pre-tax basis.

Moving to the segment results, worldwide volumes in the truck segment fell 40% year-over-year as a result of weaker industry conditions. Truck segment sales declined to $1.4 billion and incurred a loss of $51 million. The parts industry is also being negatively impacted by the coronavirus with less repairs and service due to lower truck and bus utilization. As a result, parts segment sales decreased 23% to $443 million and profit was $103 million.

The global operations segment was impacted by weaker conditions in Brazil that led to lower volumes and unfavorable foreign exchange rate movements, resulting in revenues of $51 million. The segment also took a charge of $12 million to impair certain assets. Excluding this one-time item, results would have been near breakeven.

Lower truck volumes also impacted the financial services operations. Segment revenues were $64 million and segment profit was $24 million. The weaker year-over-year results were due to lower originations and average receivable balances.

Before we open the call to your questions, I want to share some thoughts as we move forward. May, the first month of our third quarter, opened amidst many of the states stay-at-home orders. In June, states’ restrictions have begun to ease, which should lead to a gradual sequential recovery, albeit from a low base. We have modeled various recovery scenarios, however the current environment continues to rapidly evolve, causing outcomes to remain uncertain. As a result, we are withholding 2020 financial and industry guidance.

In summary, we are managing through this crisis and Navistar maintains strong liquidity with no near term manufacturing debt maturities. The company has weathered several storms throughout its history. Our management team is confident we will successfully navigate and emerge stronger from this situation as well. Longer term, we believe Navistar is taking the right actions to preserve our goals to grow margins under Navistar 4.0.

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

Question-and-Answer Session

Operator

[Operator instructions]

Your first question comes from Stephen Volkmann with Jefferies. Your line is open.

Stephen Volkmann

Great, good morning guys.

Troy Clarke

Good morning Stephen.

Stephen Volkmann

Maybe just a top-down question around cost savings and cash conservation actions. It seems like most of those are somewhat temporary. I’m assuming they will continue throughout this fiscal year, but how do we think about the pace of those? Maybe some of them are even contractual, I don’t know. They may come back at some point. Then any commentary about any of them that would be more permanent in nature would be helpful, thanks.

Walter Borst

Sure. Good morning Stephen and everybody else, it’s Walter. The cash conservation actions that we’ve taken, approximately $300 million in total. The three biggest pieces of that, as we indicated in our remarks, are deferral of pension contributions - that’s $162 million. Those are being deferred out till 2021. We are watching in Washington as there is the possibility for additional pension relief in the next phase of the stimulus support from D.C. The second piece that relates to capital expenditures, that was a 30% reduction or about $65 million. We do intend to continue with those projects, we’ve just re-timed them in a way that we could largely keep those projects on track, but those expenditures will occur in future fiscal years. The third piece, that was related to deferral of salaries for our salaried non-represented workforce. We expect to pay those out by March 15 of 2021. That just relates to the timing of the cash conservation actions that we’ve taken.

Within that, there are some expense reductions during the course of the year. As we mentioned, we’ve been until late traveling less, and we have also reduced the number of hours that our contractors work. I anticipate there will be some impact to incentive compensation as well this year due to the lower results, and also things like marketing events and so on have been reduced. We will see some expense savings as a result of these actions and other actions as well.

We’d of course taken actions already pre the pandemic back in December through line rate reductions, efficiencies in our salaried headcount. We had planned to take and we have taken headcount down by more than 10% this year, and of course we’ll continue to monitor the situation going forward and we’ll be prepared to take additional actions as necessary.

Troy Clarke

Stephen, this is Troy. I think that’s the key. I don’t want to say we’re guessing, but we’ve modeled the various recovery scenarios. There are recovery scenarios that we think this spend pattern suits very well and allows us to remain very much on track with the type of things we want to spend money on, so that we can further or accelerate the benefits of Navistar 4.0 and the things we’re doing to improve our revenue and margin.

On the other hand, there are scenarios that portend we have to take these, like you said, temporary and turn them into permanent, and those are actions we’re very familiar with. As those circumstances may unfold, we’ll take those actions as appropriate.

Stephen Volkmann

Great, then a quick follow-up, has there been any change in the pace or the scope of the projects that you’re working on with Traton in terms of sourcing and parts commonality, etc.?

Walter Borst

Those activities continue and we’d like to accelerate them where we can.

Troy Clarke

Yes, those are still on track, and as Walter indicated, we’d love to accelerate them and pull those benefits into [indiscernible].

Operator

Your next question comes from David Leiker with Baird. Your line is open.

Erin Welcenbach

Good morning, this is Erin Welcenbach on for David. My first question is just on what you’re seeing in terms of the pace of orders and production the last, call it four to five weeks, and perhaps any color you can share on what you’re seeing in categories like delivery versus freight hauling vehicles, any color on that. Thank you.

Troy Clarke

This is Troy. The quarter ended basically at the low point, I think, where orders were startlingly low, both for the industry and for ourselves. Since that point in time as the economy is reopening, we see a number of very positive factors - more trucks being on the road, more miles being driven, and also I would tell you we were starting to see more orders. We are off of the bottom that we were, I think in the April time frame, and for the last several weeks orders have marginally, nominally, modestly - use whatever adjective you’d like there - have improved, and it appears that they will continue to improve for some period of time.

Again, this is the basis of my comment that says I think orders will continue to improve because they start form such a low base, and then the intelligence we have in talking with some of our customers is if the recovery proceeds as they expect, then in the fall in what would traditionally be the time where they enter the market to line up orders for delivery in the coming year, they’ll be looking and determining how many trucks they order at that particular point in time. It gives us some confidence that the orders will continue to recover.

Again, a lot of things have to happen. The economy has got to reopen, excess capacity in the trucking industry that existed prior to the pandemic has got to work its way through, that has an impact on used trucks. Watched used truck pricing, because as used truck pricing improves, it’s kind of an indication that spot rates are improving as well. We see all of those things happening again between now and largely the end of the year. Again, we are guardedly optimistic that the economy is starting to move again and we are hopeful that the recovery will be faster than a lot of people have written.

Erin Welcenbach

Okay, then secondly, just wondering if you can help us think through your R&D spending and your philosophy towards that, especially given obviously your penchant for cash conservation at this point. How do you balance that with your long term investments for the future? Thank you.

Walter Borst

Yes Erin, it’s Walter. Again as I mentioned also on capex, those two really go hand-in-hand. We want to continue our projects - Navistar 4.0, we believe that’s the right strategy. The key thing is the strategy has changed. The actions--you know, we’re planning to take actions that we discussed back on our investor day. We obviously do need to follow demand, as Troy alluded to, and that could impact timing, but we’ve tried to find a way to conserve cash in the short term while being able to continue to move forward with those projects because they’re important for where we want to take the company in the future and to continue to improve our financial performance for our shareholders.

Erin Welcenbach

Great. Thanks for taking my questions.

Persio Lisboa

This is Persio. Just complementing I think what Walter said, as we set priorities in Navistar 4.0, if you look at R&D specifically, our development in the quarter is 4% up year over year, which is a testament that we continue to accelerate and try even to pull ahead as much as we can the key strategic initiatives we have in the company.

Operator

Your next question comes from Ann Duignan with JP Morgan. Your line is open.

Ann Duignan

Hi, good morning everybody, it’s Ann Duignan.

Troy Clarke

Hey Ann, good morning.

Ann Duignan

Morning. Maybe you could talk a little bit about--you know, at the analysts meeting, you had done a recession scenario where your breakeven volumes were 55,000 units, or roughly 13,750 units per quarter, versus 14,200 in fiscal Q2 which theoretically should be above breakeven. I know we’re going through extraordinary times, but maybe you could comment on is the scenario analysis flawed or was Q2 just such an anomaly that it just doesn’t fit the normal downside case for a recession. If you could just address that, that’d be helpful.

Walter Borst

Sure Ann, it’s Walter. I’ll mention, I guess, a couple of things. One, we did take another look here recently at what we had shared with respect to our breakeven volumes back in September at investor day, and we stand by what we’d indicated there. We’ve been able to reduce that below 55,000 units, and we can take additional cost reduction actions that are more permanent, in line with Steve’s questions earlier, then that will continue to track down.

To your point, the second quarter as an anomaly. It’s been a difficult time for many companies. Obviously some additional costs have crept in there that wouldn’t be part of our normal breakeven calculation. We’ve had some supply disruptions and that’s resulted in some manufacturing inefficiencies, but we’re very proud of our team for continuing to keep many of our plants running for a big part during the quarter, but production obviously would have impacted breakeven.

Thirdly, I would just mention that as we had looked at that and as we look at the breakeven volumes, we look at that over the course of the year, and in a typical year the second half tends to be a little stronger. The first quarter, we have the shutdown over the holidays and here obviously we lost some production days as well. I know it wasn’t breakeven - that surely continues to be our objective, is to be breakeven through all parts of the cycle, but I think we can probably all agree that the second quarter and into the third quarter here was an unusual time for all industries, and with a number of unforeseen events.

Ann Duignan

Okay, so you’d expect to be above breakeven in the back half on a normal seasonal basis, is that what we should take from your comments?

Walter Borst

I think you should take from our comments that we are still looking to be breakeven at all points in the cycle, and we haven’t provided guidance here for volumes or profitability in the second half of the year at this point.

Ann Duignan

Fair point, and I appreciate the--

Walter Borst

It will be a function of which of the various scenarios that we’re running manifest themselves in the second half of the year.

Ann Duignan

Okay. Then just to follow up, in light of those comments exactly, could you just talk about the different segments of your business, between school bus, Class 6/7, Class 8 heavy, Class 8 severe service? Which of those markets or production volumes would you expect to recover faster, and which would you expect to lag? Thank you.

Persio Lisboa

Hey Ann, this is Persio. Let me start with the school bus. School bus, this is the time of the year where really school districts would be purchasing a lot of buses. We haven’t seen that now, but the third quarter for us is protected in terms of production, so this is one of the segments that we will monitor the next few months because they are important for the end of the year, so we understand how we come out of the year with the orders that we’ll receive in the next few months.

Severe service has been pretty steady. We’ve seen some reductions in some government activity, but in general utilities, construction is being supported. What we are noticing now is that the long backlogs that used to be in the truck equipment manufacturing pipeline, they are getting reduced, so it’s not impacted directly the business from OEMs but we see that there will be more room probably with TEMs as we get closer to the second half, which is a positive thing.

On the heavy side, really general freight, leasing and rental are really depressed at this point in time. We know that that’s an area that we need to see the reopening of the market. As Troy alluded, I think we have the expectation that orders will come--will start to recover as the economy restarts, but that’s one of the segments that we have to monitor closely.

On medium duty, really housing and construction is still a little bit of positive news for us, although in this side of the medium duty segment, the one that is more on the retail sales, we see a little bit more stability, but leasing and rental dragged the segment down. That leasing and rental is almost 50% of the entire medium duty market, and that is still very constrained. That is a mix of all the used truck values, residual values impacting leasing, the de-fleeting from rental where leasing companies move their stock of rental units to fulfill requirements for a lease contract instead of buying a new truck from an OEM, like us We haven’t seen any material recovery on leasing and rental at this point in time.

Ann Duignan

I’ll leave it there in the interests of time. Appreciate it.

Operator

Your next question comes from Felix Boeschen with Raymond James. Your line is open.

Felix Boeschen

Hey, morning. Thanks for the time, everybody. I was hoping we could talk about the parts segment for a bit, revenue down 23% or so in the quarter. Is there a way to disaggregate how much Blue Diamond impacted this number, and then any way you could share how parts may be tracked by month or what you’re seeing into May as states reopen?

Persio Lisboa

Okay, well I think that we can talk about parts. If you look at the evolution of the quarter, let’s understand that we are not in a calendar quarter, right, so we have our quarter right in the middle of the pandemic. We started with the contraction of the market, and we saw daily rates on parts really dropping significantly in the latter part of March and the full month of April. April was the trough of the performance, and if you look at even MacKay data, it would indicate that the industry in general dropped 20% post pandemic. The good news for us at this point in time is that we are seeing at the beginning of May, the daily rates of parts are starting to recover, so it’s not a full recovery from where we were pre-pandemic, but at this point in time we see that--I think we are past the point where dealers were managing to reduce their inventories, and the fact that the part of vehicles of running is not 100% active and therefore not consuming parts, they were not generating business for us.

We believe that April as the trough. I think May is recovery. We are seeing more positive trends on that side, and we hope that that continues as the economy reopens.

I don’t know, Walter, if you want to comment on Blue Diamond specifically?

Walter Borst

Yes, Blue Diamond continues to be one of the elements that we’ve been talking about on prior calls as well. As Persio indicated here, in this particular quarter COVID surely as a big piece of the decline year over year as well. I’d have to take a look at where the BDP revenues are these days, but I think they’re approximating probably around $300 million of revenues these days on an annualized basis. We continue to see the run-up there in that business over time, so maybe that gives you some directional input.

Felix Boeschen

Yes, that’s super helpful. Maybe as a follow-up, you had kind of talked about some capex deferrals. I’m curious if you have an update on your San Antonio facility, if the rollout or the construction of that has been at all impacted or if it’s simply a bit too early to tell at this point. Thank you.

Troy Clarke

Yes, look - we really have no announcements to make in that regard. Our major capital projects with the cash conservation actions, with the top-up from the market that we did during the course of the quarter, the purpose of that was to try to keep these programs on track, so we really don’t have any announcements we want to make on that at this point in time.

I’d highlight maybe just for everybody on the call, I think Walter, as you just said, kind of a good way to think about, the actions that we describe in Navistar 4.0 are the exact right actions, and we’re dedicated to make those actions happen. Two, there are dozens of action plans within those, and the timing of execution against those is important and is being changed, but we’re changing it in a very thoughtful manner so that the ones that are critical to the progress that we intend to make, that those stay on track.

The real third part of it, which kind of gets to the point that we’re really not providing any guidance, is the fact that as we make these improvements to the business through both product investments and operational investments and other investments, eventually the return on those is a function of volume that gets thrown against those, so the nature of the recovery and how that plays out over the next handful of years becomes critically important to us.

When you think about it in those three pieces, the thing we can talk about is the actions are right, the timing still works, and then we have to see how the economy plays out over the next handful of years. We’re confident that it will play out in such a manner that we’ll still be able to deliver.

Felix Boeschen

Thank you, appreciate the color.

Operator

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

Jerry Revich

Yes, hi. Good morning everyone. Troy, I’m wondering if we can just expand the comment you made a moment ago to include your supply chain. As you folks look at what we’ve learned over the course of the dealing with the COVID pandemic, and we look at what the business looks like for you folks two to three years down the line, are we at a point where the supply chain strategy is different at all or are we talking about more suppliers just as a secondary source? Can you just talk through how that part of the strategy has evolved, if at all, over the course of this environment?

Troy Clarke

Yes Jerry, great question. Let me take that in two pieces. I’ll take the first piece, then I want to toss it to Persio for the second.

The first piece of that is we have not finished it yet, but certainly I think everybody in our industry and related type industries are asking those exact questions - you know, from what we’ve experienced and learned through the pandemic, what implications are there for our supply chain strategy? That’s something that’s going to take us a few more weeks here to finish assessing and determining what might be the alternatives that we could consider going forward.

As you know, supply chain isn’t something that you change in a short period of time. It’s more like your stock portfolio, right - you move it in a particular direction through incremental decisions, many of which are associated with production allocation or new product programs.

We are in the middle of and we are involved in today asking ourselves and doing the analysis to answer those exact questions. I know it doesn’t give you an answer, but it is in fact part of what we’re doing, and I think we kind of anticipated that that might be of interest.

The second thing, however, and probably more importantly as we’re trying to get these plants up and running and back into charge-out mode, is managing through the risks that the pandemic immediately presents to the supply base, because those risks are--those are direct risks to us as well. Really pleased with the effort that we have here, and I’d ask Persio to make a few comments.

Persio Lisboa

Sure Troy. In reality, what we are doing is nothing new. A lot of our analytics have taught us how to really manage the supply base at multiple layers. Actually, today we can see several layers of the chain, and that provides us a good understanding of where the chain can break, which is typically where you can be compromise with your production flow.

But as Troy alluded, we have a supply chain financial risk process in place, and just to give you a perspective, for instance, we have total in the company more than 20,000 suppliers when you add all the parts suppliers, but if you take active suppliers for production, we are around 1,400 to 1,500 suppliers. We just plop all of them in a big matrix and we assess the risk, and what we notice is that from pre-pandemic to post-pandemic, we doubled the risk in the top lower quadrants of suppliers that could be exposure. But from a direct standpoint, that today is 47 suppliers, so there are 47 suppliers that we have our hands on, we know exactly what’s going on with them, we are providing support where we have to provide support, so it’s a pretty transparent process and pretty proactive process. We don’t wait for a problem to happen to react to it, we just take action as we see the leading indicators.

Jerry Revich

Really appreciate the color. It seems like the natural inclination would be to move in some areas towards dual supply, at least those would be the early conclusions that some companies are coming to, especially within region supply. I appreciate that it’s early, but would you agree with that assessment by some others--

Persio Lisboa

I can’t tell you. I think it is, though, in the past if you take 10 years ago, the strategy of dual sourcing everything was the one that would protect you the most but is the one that consumes the biggest working capital in the company. Today, the power of analytics is so strong that the more you understand the supply chain, the more you take the smart decisions on where you have to dual source, so I think the pandemic is just forcing us to use even more the analytics to define our sourcing strategy.

To your point, I think there will be cases where we will have dual sources and tooling duplications and things like that, but they are all based in really a thorough assessment and the powerful analytics tools that we have implemented.

Walter Borst

I would just add to that, Jerry, I think the thing that we’re currently involved in--look, there is a look at the supply chain as it relates to Tier 1 suppliers. That is a fairly straightforward look, and to your point, we can say we can use strategies such as dual sourcing or relocating closer to operations, or moving from Asia to North America. The real issue for us, where we have seen a lot of the issues, is actually Tier 2 and Tier 3 suppliers, where fortunately the tools that Persio references lets us look into the Tier 2 supply base and now also into the Tier 3 supply base, because I think there is a lot of work to be done there. It’s okay to have a final assembly of something done in North America within a couple hour drive of a facility, which would seem to be ideal, but if 20% of that content comes from Asia and comes in sea containers that--you know, nobody ships a single sea container, you’ve got to ship a boatload of sea containers, that’s the kind of thing that makes this analysis that you’re referencing, which is the right question, a little more complex and a little more involved.

Look, we’re up for it. We’re making those analyses.

Jerry Revich

I appreciate the insights. Thank you.

Operator

Your next question comes from Andy Casey with Wells Fargo Securities. Your line is open.

Andy Casey

Thanks a lot. Good morning everybody. I was wondering if--you know, I looked at the 10-Q, there was a comment in there about COVID impacts expected to be more significant in Q3. Can you help us interpret that? Is that related to Escobedo potentially being shut down most of May, even though it held its own in April? How should we look at that comment?

Walter Borst

Andy, it’s Walter. It does relate to what we’ve seen here in the course of May already, and we have--we did have some supply disruptions from Mexico, in particular as the pandemic hit there, and that did impact our Escobedo facility. The Springfield facility as well continues to have some down days. It’s down this week, but we expect it to come back up next week as we wait for some supply, and line 2 in Springfield hasn’t started up yet post pandemic but is coming back online in--I think week after next.

But both our Escobedo and Springfield facilities--I should add for Escobedo, we’re largely running at rate there in the meantime.

Persio Lisboa

Yes, we are, and so we are in Tulsa as well at this point in time.

Walter Borst

And Tulsa, our bus plant, yes. Thanks, Persio.

Andy Casey

Okay, thank you. Then in the prepared remarks, you indicated used prices are down about 20% year to year. Could you discuss if those are still falling sequentially or have you seen any stabilization, even into May?

Persio Lisboa

This is Persio, Andy. We haven’t seen an inflection. I think the last couple weeks, there’s some level of stabilization, but still prices are significantly lower on a year-over-year basis, which is the reference to the 20% that you’re seeing here. We are seeing a little bit more traffic on at least the online applications. I think we’re seeing an increase in applications. I think the biggest challenge that we have with used trucks today is really lending availability and credit, the credit for the customers that want to get into the used truck business at this point in time. Inventories are still up, but I think they are kind of--you know, they moderate because the amount of trades of new for trucks that were basically coming through the used truck inventory for trades with new, got reduced as the pandemic hit, and deliveries got reduced as well.

We’re monitoring used truck as well, as Troy indicated. We don’t have a forecast in the short term. This is going to be materially changing, but as the recovery happens in the second half, there is an opportunity for us to see some price recoveries by the end of the year.

Walter Borst

I think it’s an interesting phenomenon here with the high unemployment rate, we see a number of those folks have CDLs and have driven trucks previously, and so we see in these applications people trying to come back into the market - you know, if I can find a loan, I’ll buy a truck. Since spot rates are starting to increase, driving a truck a handful of days a week is better than not doing anything, so this credit issue that Persio notes, there’s a chicken and egg kind of thing there, but we think that it’s an interesting phenomenon and it’s positive. I think it’s probably a precursor to the stabilization of used truck prices.

Andy Casey

Okay, thank you very much.

Operator

Your next question comes from Joe O’Dea with Vertical Research. Your line is open.

Joe O’Dea

Hi, good morning. Just related to what you’re anticipating on production picking up over the course of the quarter, can you give any sense of what that means from a charge-out perspective, just kind of high level - you know, if things go according to plan, what kind of charge-out volumes you would be looking at? In that type of scenario, assuming that working capital is not a drag, what is the manufacturing free cash flow experience? Is that modest outflow type of scenario?

Walter Borst

It’s Walter. As we’ve indicated a couple times, we’re not really providing any guidance on volumes, but I daresay the volumes in Q3 will be lower than Q2 because May has been impacted by production, as we indicated, and we wouldn’t expect demand to come back up as we had seen in June and July as we had seen in the months prior to COVID and our fiscal quarter 2, which began in February.

You’re right about working capital, but that again is a function of the volumes. At some point as demand improves, we would expect some of the working capital unwind that we saw in Q2 to rewind or be a source of cash over the balance of the year, but we’ll have to see how that plays out. I think the key thing is that we ended the quarter with $1.5 billion of cash and we expect to end the next quarter and the year with very strong cash balances as well, in excess of a billion dollars, which is kind of a number that we’ve always looked to, to makes sure we can continue to manage the business. I’m not saying it’s going to drop to those levels, but when we’re in excess of those levels, we’re in pretty good shape, so the borrowing that we did here a month ago, a little over a month ago now has bolstered our liquidity balances and will help us over the balance of the year and to continue with our key capital spending programs that are in Navistar 4.0 as well.

Joe O’Dea

Okay, and then Troy, you recently extended your services term as CEO until July 1. Just given the fluidity and uncertainty of the current environment, is that something that you will consider extending longer, and if not, how do you envision your role as Chairman? Is that more of a CEO hybrid role, and how should we think about succession announcement timing?

Troy Clarke

I don’t think we’re going to make any announcements today, but at the right time we’ll have the appropriate communications. My contract ended technically on April 21. We were at the middle of the low point of the crisis. We were having weekly and sometimes twice a week board calls as the board is executing their duties to provide oversight, and on behalf of the shareholders it didn’t feel like the right thing to do then would be to force the subject of CEO succession onto that agenda. But it largely remains with the board and we’ll keep you guys appraised, but there’s no announcements to be made. We felt it was the prudent thing to do at the time.

Operator

We have no further time for questions. I will now turn the call back over to Troy Clarke for closing remarks.

Troy Clarke

Okay, thanks. I really want to thank the Navistar team for stepping up in these very difficult times, and our suppliers as well - a lot of heroes in that part of the business for us, our dealers and other partners, and all of us in our dedication and support of our customers and the drivers who are really vital in keeping America moving during these difficult times.

Navistar is in solid financial position as the economy works through different phases of recovery. We’re making the right plans, we’re going to take the right actions through these times. We will emerge stronger and be in a position to deliver on the goals of Navistar 4.0, which grows revenue and margin.

If you have any questions or follow-ups, please reach out to the IR team for any additional questions. Again, thank you very much for your interest in our company, and have a great day.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.