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Navistar Reverses Course

The Wall Street Journal
By Bob Tita
Updated July 6, 2012 6:21 p.m. ET

Truck maker Navistar International Corp. NAV -2.26% said Friday it will adopt antipollution engine technology used by the rest of the industry, shifting from an alternative strategy that has undermined its credibility and share price.

Navistar plans to treat diesel-engine exhaust with a process known as selective catalytic reduction, or SCR. The process, which involves filtering exhaust through a urea solution, will be used in tandem with a treatment technology called exhaust-gas recirculation, or EGR. The combination is used by all truck manufacturers in North America except Navistar, which had planned to rely on EGR alone.

The company's revamped engines won't hit the market until next year, and the transition will require unspecified spending. That uncertainty unnerved investors Friday, as they sent Navistar's stock down 15% to $24.42.

The truck maker expects its 13-liter engine with SCR to reach the market early next year, with a 15-liter version set to follow. SCR components, which Navistar is expected to purchase from an outside supplier, will be added to truck exhaust systems.

"The engines our customers have been buying will stay the same," Chairman and Chief Executive Daniel Ustian said on a conference call with analysts. "We're going to take the technology we've developed and add after treatment to it."

Navistar faces the cost of engineering and integrating SCR into its production processes. Moreover, the SCR-equipped engines must pass muster with federal environmental regulators, an evaluation that is likely to take months.

Navistar's stock has slid 57% over the past year, and the company recently adopted a "poison pill"—an anti-takeover measure—as activist investors, including Carl Icahn, built stakes in the company.

"Given their past history of executing on things, people are skeptical," David Leiker, an analyst for Robert W. Baird & Co. in Milwaukee, said Friday. He said many investors would have preferred that Navistar forgo its own efforts and purchase engines from Cummins Inc. CMI -1.18% instead.

Navistar, which is based in Lisle, Ill., said some of its trucks in Brazil already use SCR, giving the company a head start on integrating the system into its North American engine lineup.

"We're fortunate to have a portfolio of engine technologies and experiences to deliver what believe will be the cleanest engines and the most fuel-efficient engines," said Troy Clarke, president of the company's truck, engine and parts operations.

Navistar, which manufacturers heavy and medium-duty commercial trucks, school buses and military vehicles, has been trying to meet the U.S. Environmental Protection Agency's 2010 emissions standard by using EGR alone. Navistar bet that it could use a cost advantage on EGR engines to capture market share from its competitors that had opted for the more-expensive SCR system.

But Navistar's inability to obtain EPA certification for its engines after more than two years has eroded customer confidence, causing the company's truck sales to drop in recent months.

Mr. Ustian and other executives had insisted the company wouldn't need SCR to satisfy the EPA's mandate for an ultralow level of smog-causing nitrogen oxide in diesel exhaust. Earlier this year, they predicted production of EPA-approved EGR engines would begin in June.

Analysts said Friday's announcement is an acknowledgment by Navistar that its EGR-only strategy has been a failure.

"They basically threw in the towel on the EGR engine," said Walt Liptak, an analyst for Barrington Research in Chicago. "If they'd done this in the first place, they'd be right where the rest of the industry is."

Navistar's addition of SCR, which was reported earlier this week in The Wall Street Journal, is expected to bring the company's engines into regulatory compliance and ease a two-year-old stalemate between Navistar, the EPA and the California Air Resources Board, which regulates air pollution in California and about 10 other states.

"Both agencies are encouraged by our plans," Mr. Ustian said. "We will continue to work with the agencies to ensure that our customers receive uninterrupted deliveries in all 50 states during this transition."

In the meantime, Navistar said it will continue to sell noncompliant engines and use previously acquired pollution credits, as well as fines, to cover its engines' lack of compliance. But the company will likely have to resort to steep discounts to induce truckers to buy the company's trucks, sacrificing Navistar's profit margins. Navistar has reported two straight quarterly losses stemming from lower truck sales and warranty claims on its new engines.


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