DAILY NEWS Dec 20, 2013 9:29 AM - 0 comments

Warranty costs dragging Navistar's recovery, but order boards strengthening

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LISLE, Ill. -- In an earnings call today, Navistar CEO Troy Clarke said the company’s Q4 loss was in part due to “unanticipated pre-existing warranty adjustments” for its EGR-only engines, but that the company is halfway through the maximum warranty exposure for those engines.

By the end of 2015, the EGR-only engines will have worked their way through standard and extended warranty coverage, Clarke said. He said the company is looking to reduce warranty costs to an industry standard 2.5% of revenue, which Clarke said the company is on track to achieve with its SCR engines.

In all, Clarke said Navistar met many of the objectives laid out in its turnaround plan in 2013.
“Navistar is a much better company today than we were a year ago,” he said.

In 2013, Navistar: installed a new leadership team; met all product launch dates; received EPA certifications for the MaxxForce 13L with SCR; added the Cummins ISX and ISB; rebuilt and reinforced quality processes; reduced material costs to help offset SCR costs; exceeded its structural cost goal; and reduced working capital and met or exceeded cash guidance for the last five quarters.

Clarke said early results are showing “significant quality and fuel economy improvements” in the company’s SCR products. However he acknowledged there was “more work to do in the areas of warranty and market share.”

Clarke said it took longer than expected to gain traction with customers in the Class 8 market. However, on the medium-duty side, Clarke said customers were quick to respond to Navistar’s addition of the Cummins ISB engine.

Clarke said Navistar enters 2014 with a significantly better order backlog than it did 2013.

Jack Allen, executive vice-president and COO with Navistar, said “it’s very frustrating this (warranty) issue has overshadowed our progress, because a lot of good work has been done this year all across our business.”

He pointed out Navistar is not seeing similar warranty-related issues with its SCR products.

“We believe the high levels of initial quality we’re seeing with today’s SCR engines will equate to higher levels of quality throughout their life-cycle,” Allen said.

Looking to 2014, Allen said Navistar expects to see “modest growth” in Class 8 truck demand, to 220,000-230,000 units.

Navistar’s order board is improving, Allen pointed out. Its Q4 Classes 6-8 truck orders were up 12% compared to the third quarter, and up 34% compared to the fourth quarter of 2012. Its Q4 backlog is 26% better than it was a year ago. Its Q4 Class 8 retail market share was 16%, the highest it has been all year.

In his closing remarks, Clarke vowed “2014 will be a better year for Navistar.”

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