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June 4, 2018 10:45 AM, EDT
Navistar Sees Market Share Gains as VW Considers Stronger Links
Christopher Dilts/Bloomberg News

Navistar International Corp. is pivoting from a largely complete turnaround effort to seeking greater share in a robust U.S. truck market, potentially paving the way for closer ties or even a merger with alliance partner Volkswagen AG.

A new 12.4-liter diesel engine based on a design from VW’s MAN unit should help the company build on its first-quarter market share gains, Navistar CEO Troy Clarke said in a phone interview. The powertrain provides a glimpse into the potential for a burgeoning technical and purchasing pact the two started forming in 2016. The companies are planning their first joint product presentation at the world’s largest commercial vehicle show, in Hanover, Germany, in September.

RELATED: VW truck division signals possible takeover of Navistar

VW’s sprawling heavy-truck division, which is focused mostly on Europe and South America, has signaled interest in raising its stake in Navistar as part of efforts to forge a powerhouse that could challenge global commercial-vehicle leaders Daimler AG and Volvo AB. A complete merger — which some analysts view as imminent — would combine the biggest emissions cheater in automotive history with a Lisle, Ill.-based truckmaker recovering from its own exhaust scandal.

Clarke said he had no new announcement to make on how this capital structure could evolve.

“They’ve consistently said from day one that all options are on the table,” Clarke said of VW. “But what I’m focused on is delivering great products and getting our quality to be even better.”

Earnings Recovery

Navistar captured 11.2% of Class 8 freight truck sales in the United States and Canada in the November-to-January quarter, up from 10% a year earlier. The company reported a small annual net profit for fiscal 2017 after five straight annual losses, and analysts are projecting significant gains for the following years. The results follow a deep restructuring in which Navistar trimmed more than a quarter of its workforce and 15 of 24 vice presidents.

“Our legacy issues are getting smaller and smaller in the rearview mirror and may not reach the level of materiality,”

Clarke said. “That’s allowing us to spend more time on other things, like new product launches.”

VW, which rigged emissions software on some 11 million diesel-powered cars, now holds a 16.85% stake in Navistar. Only Carl Icahn, at 16.95%, owns a greater share. The Wolfsburg, Germany-based company in April signed off on a plan to prepare its trucks unit to access capital markets, potentially by selling shares or bonds. The unit’s then-chief financial officer, Matthias Gruendler, told reporters that any deal to lift the stake in Navistar could be financed without additional proceeds from a potential initial public offering.

With brands including Audi, Bentley and Rolls-Royce, in addition to its namesake line, Volkswagen is the world’s largest automaker. Rival Daimler owns North American market leader Freightliner as well as the Mercedes-Benz brand of trucks and luxury autos; Volvo controls the Mack truck brand and is separate from Volvo Cars.

Navistar has scheduled its earnings release for the quarter that ended April 30 for June 4. Revenue may have jumped more than 15% from a year earlier, with EBITDA margin almost doubling to 6.5%, according to estimates from Bloomberg analyst Christopher Ciolino.

“The turnaround story is still intact here,” Ciolino said.

“The execution by management has been pretty good, and they’ve been getting help from heavy-truck sales that, for the last year or two, have been running at phenomenal rates.”

Waiting on VW

Now, investors are waiting for VW’s next move. “Navistar gives them an entry point into the North American market, where they really don’t have much of a presence,” Ciolino said.

While demand for Class 8 trucks could peak this year in the United States, Clarke doesn’t foresee a sharp drop-off.

“Whether it’s up 2% or down 3%, next year isn’t significant,” he said. “We’re still looking at a robust 2019.”

Navistar has mostly emerged from a near-death experience triggered by the 2007 choice of a different exhaust-treatment technology than its peers used. The Securities and Exchange Commission later accused the company of misleading investors about how the technology was progressing. Navistar paid a fine without admitting guilt, but by then it had lost half its Class 8 market share.

Balance Sheet

Navistar now has about $1 billion cash on hand. “We don’t need that much, but now we need to think, ‘How do we put the balance sheet in better order?’ ” Clarke said. An improving cash flow will help the company reduce its debt load.

The company’s unfunded pension and retiree health care liability — a potential obstacle to a closer tie-up with VW — has dropped to about $2.5 billion as of the end of October.

Rising interest rates in the United States should help improve the company’s position in this regard, and the pension should be fully funded by the middle of the next decade, Clarke said.

Navistar’s retiree health care liability is shared in part with a trust formed with the United Auto Workers union. The company has managed to limit cost increases to less than overall health care inflation, and now the total retiree population is set to decline.

“We’ve been able to manage that obligation,” said Clarke, who was a senior executive at General Motors until 2009, the year it restructured in bankruptcy. “It doesn’t represent the kind of risk for us today that it did for the auto companies in the mid-2000s.”