What does Navistar loss portend for other truck manufacturers?

International construction truck

Navistar International Corp.’s second-quarter fiscal loss from COVID-19-disrupted production in April points to worse numbers for truck manufacturers that will report pandemic-addled results for the April-June quarter.

For Navistar (NYSE: NAV), things likely will get worse in its third quarter, which covers May-July. Its second-quarter report on Thursday, June 4, pointed to the difficulties that manufacturers and suppliers will unpack when they report their second quarter results in July.

None of the publicly traded manufacturers, including Navistar, are providing financial guidance because of the uncertainties created by the pandemic. 

Orders fall

On a conference call with analysts, Navistar Chairman, CEO and President Troy Clarke shared insight into the early impacts of the health crisis.

Class 8 truck orders fell from about 3,000 per week in February to 1,000 a week in April. The drop off was on top of already slowing orders because fleets took so many deliveries of new trucks in 2018 and 2019. Just 4,100 new Class 8 orders were placed in April across the industry.

“As freight demand declined in the quarter, truck utilization dropped and rates fell,” Clarke said. “With excess trucking capacity, companies reassessed their needs, especially in the general freight, rental leasing and private fleet segments.”

About 300 orders, or 2.5% of the company’s backlog, were canceled in April. It has about 25 weeks of Class 6-8 trucks and buses to build based on its backlog of 18,000 units, which was down 12% from the end of the first quarter,

“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,” Clarke said.

Used trucks

The dearth of new truck deliveries took a toll on the used truck market, too. Pricing was 20% below a year ago, but the lack of trades muted demand. Navistar, which sells a lot of trucks to leasing companies like Penske and Ryder, took an additional hit because those companies converted rental trucks into leases, delaying new truck purchases.

Dealer inventories fell 4% in the quarter, leaving a slightly higher-than-average 127-day hangover.

Lost production

Navistar lost 50 days of production between February and April. Shutdowns of plants in Springfield, Ohio; Tulsa, Oklahoma; and Escobedo, Mexico. Those idlings continued into May and will show up in Navistar’s third quarter results.

“More than half of the lost days came from the suspension of production at our Springfield plant,” where idled General Motors (NYSE: GM) provides engines for Class 4-5 pickup trucks and cabs for the cutaway G-van chassis built there, Clarke said. 

The other lost days were due to issues with suppliers in Mexico, where stay-at-home requirements came later than in the U.S.

By the numbers

Navistar reported a $38 million loss in the quarter, narrower than the $48 million loss reported a year ago when the truck maker took a $159 million charge to settle complaints over defective Maxxforce engines in trucks built in the previous decade.

Revenues in the quarter were $1.9 billion, down 36% from nearly $3 billion in the year-ago quarter. New vehicle deliveries of its core Class 6-8 trucks and buses in the United States and Canada were nearly 40% below a year ago, primarily due to COVID-19.

Earnings before interest, taxes, depreciation and amortization (EBITDA) were $61 million, compared to $55 million in the second quarter of 2019.  

Navistar cut $300 million in costs and issued $600 million in new debt during the quarter to leave it with $1.5 billion in cash and marketable securities as of April 30.

Open issues

  • Parts sales fell 20% in the quarter because freight demand was weak, leading to a dramatic drop in miles driven. With schools closing, buses did not need parts either.

“[Navistar] On-command connection data indicated the general freight hauling and leasing and rental was down 6% to 8%,” Clarke said. “As fleet utilization increases, parts sales will increase, returning to normal levels.”

  • The TRATON Group’s $2.9 billion offer January 30 to purchase the 83% of Navistar it does not already own is still on the table.

“The board is managing these discussions, but frankly the COVID pandemic has slowed the process,” Clarke said. “It has not been accepted nor rejected. Discussions continue.”

  • As to his own role as CEO, Clarke would not discuss whether an extension beyond July would occur. The board voted in April to extend Clarke’s tenure for a third time with an understanding that he would remain non-executive chairman for two years.

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