Navistar’s Decision to Add SCR Sparks Questions From Analysts

By Rip Watson, Senior Reporter 

This story appears in the July 16 print edition of Transport Topics.

Navistar International Corp.’s new plan to meet federal emissions standards by adding an engine technology it previously disparaged is raising a wide range of questions, according to industry analysts.

Navistar, Lisle, Ill., said July 6 it would seek Environmental Protection Agency approval for a 13-liter engine using “liquid aftertreatment,” or selective catalytic reduction (SCR), in addition to exhaust gas recirculation (EGR), to help curb emissions.

SCR is used by every other original equipment manufacturer in North America and previously had been heavily criticized by Navistar CEO Daniel Ustian and other Navistar executives.

“The engines that our customers have been buying will be identical,” Ustian said July 6. “What we will get from [the new approach] with the aftertreatment and with improved technologies will be fuel economy. It’s capable of not only meeting the emission standards but exceeding those standards.”

Navistar said EPA and the California Air Resources Board were “supportive” of its new approach, dubbed “In-Cylinder Technology plus,” or ICT+. The company predicted early 2013 approval for the new 13-liter engine, with a 15-liter version to follow.

Navistar would not disclose to Transport Topics how much officials expected fuel economy to improve, when its new emissions application would be filed or the status of its current EPA application for a 13-liter engine, which uses only EGR.

However, Troy Clarke, Navistar’s newly appointed president of truck and engine operations, said: “ICT+ does truly represent the best of both worlds. We have a high degree of confidence in the certainty of certification. We actually have some trucks running right now to model the engine calibration of this solution. From what we’ve seen, we are pretty excited.”

In the meantime, Navistar will keep selling trucks through a combination of federal credits earned from previous emissions compliance and the continued payment of noncompliance cash penalties.

EPA last week refused to say whether Navistar’s original EGR application is still under review, referring the question to Navistar. In response, Navistar spokeswoman Karen Denning said, “At this time, we’re not making announcements about that.”

Analysts said that they were a bit perplexed.

“There are a lot of questions,” Jeff Kauffman, an analyst for Sterne Agee Group Inc., Birmingham, Ala., told TT on July 12. “Will they eventually get EPA certification? Is it an existing solution, or is there something new?”

“They didn’t deliver a timeline of confidence and a sense that this is a solution that is easy to do,” Kauffman said. “So we are left with a question of whether this is a good solution.”

While saying he believed they will get approval eventually, he added: “There should have been a Plan B. These guys didn’t plan properly.”

However, Kauffman noted Navistar’s customers do like its ProStar truck and that eventual emissions approval should boost sales.

Brian Sponheimer, an analyst at Gabelli & Co. in Rye, N.Y., told Bloomberg News that Navistar’s announcement “begged more questions than it answered.”

“A key question, in our view, is what happens to the residual value of current trucks with advanced EGR engines?” Ann Duignan, an analyst for J.P. Morgan Chase & Co in New York, wrote in an investor note. “Why would customers buy current models versus wait until next year’s SCR engines are available?”

While Duignan said in her report that Navistar’s technology “looks workable” and is being used on smaller engines in Brazil, she raised additional issues.

“Navistar’s big-bore engines will still have to be tested for millions of miles,” she said. “EPA and CARB are apparently supportive of management’s strategy, though this does not imply automatic approval.”

Also to be determined is the outcome of a lawsuit brought by competitors that aims to force

EPA to increase the penalties it assesses Navistar for selling engines that do not comply with 2010 emissions requirements.

A federal judge last month threw out the agency’s interim rule that established the existing penalties after the competitors filed the lawsuit. The case is still being litigated (6-18, p. 1).

“The ongoing use of noncompliance penalties and elevated engineering costs [to design the new emissions system] are likely to weigh on margins,” Duignan said.

“The penalties likely will be much higher . . . and could cost an addition $190 million if there is an increase,” Duignan said in her report.

Navistar didn’t specify how much ICT+ would affect earnings. Last month, Navistar reported a fiscal second-quarter loss and cut its earnings forecast.

“Management credibility remains an issue,” Duignan said, noting investor skepticism.

That skepticism drove Navistar’s stock as low as $21.95 a share last week. The shares have fallen 39% this year.

As the stock fell, investors moved in last week.

Investor Mark Rachesky’s MHR Fund Management LLC raised its stake to 14.9% from 13.8%. That amount is the maximum he could hold before triggering Navistar’s “poison pill,” approved last month to deter a hostile takeover. The hedge fund manager has been pushing for changes at the company.

Carl Icahn, another investor, raised his ownership to 13.2% from 11.9%.

Also, Franklin Templeton Investments raised its ownership to 18.8% from 12.4%. The investor’s filing didn’t trigger the anti-takeover provision because Frank-lin Templeton didn’t indicate an interest in taking an active role in Navistar’s management.

Those three investors now own 46.9% of Navistar’s outstanding shares.


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