The overall tone of FSYS’ Q2 conference call was positive, in my opinion. Negative factors that impacted Q2 should not be as evident in Q3. For example, Q2 sales in Venezuela were suspended due to the country’s lack of foreign exchange, but FSYS management expects sales to return in Q3. The shutdown of Honda and Mitsubishi in Thailand due to the aftermath of last year’s devastating floods should diminish in Q3. And, a technical issue that suspended aftermarket sales in the US has been resolved. The slowdown in industrial mobile equipment, on the other hand, is likely to continue until the North American economy strengthens. The net result is probably “a low single-digit constant currency growth rate” to quote a questioner whose name I did not get.
A major positive trend for FSYS has been the marked increase in both DOEM and aftermarket kit sales in Italy and the rest of Europe. Increases in demand for both stationary power generators and APU’s is also a strong positive that should continue in subsequent quarters.
The biggest news to me, however, was that there was a significant technical issue with FSYS’ US aftermarket kits... retrofit kits had to be sent to affected customers. My read is that the issue was substantial enough to catalyze the administrative shakeup announced in June (see #msg-77045496). According to management, the issue has been resolved and should not be significant factor in the future.
I have been particularly keen to hear more about FSYS’ research concerning direct injection technology (see #msg-75935365). There was a brief mention of this technology in this CC; i.e. they implied substantial progress regarding direct injection systems for propane vehicles. But over all, little has been said publicly about FSYS’ direct injection program.
Selected quotes:
1. Regarding increased DOEM activity...
Timothy Standke, Chief Technology Officer, IMPCO Technologies in prepared remarks: In Europe, delayed-OEM volumes increased 66% to an average of 3,300 units per month and had a positive impact on our profitability. This is particularly true in Italy. Chevrolet volumes were strongest with Nissan, Mitsubishi, Hyundai, Kia, Ssangyong and Ford all contributing. The price differential between alternative and traditional fuels continues to drive demand and offer an attractive payback in this region. As a result, OEMs are expanding the number of CNG and LPG vehicles they offer.
Mariano Costamagna, CEO in prepared remarks: This higher delayed-OEM activities particularly benefited our gross margin of 27%. During the quarter, despite our continued near-term investment in technologies in order to continue to execute our long-term growth strategies, our operating margin has slightly improved due to revenue shift toward delayed-OEM.
2. Regarding aftermarket volumes...
Timothy Standke, Chief Technology Officer, IMPCO Technologies in prepared remarks: Aftermarket volumes grew approximately 25% in Italy as the price of fuel in Italy and European economic woes make the economics or conversion very attractive. We expect this trend to continue through the rest of the year.
Pietro Bersani, CFO in prepared remarks: Inventory has increased since the 2011 year-end, as we invest in the North American automotive market and as we are experiencing growth in aftermarket business and due to an acquisition at BRC. We continue to recognize the importance in managing our inventory levels, and believe that we will address this challenge, with new global management organization structure and we have already initiated plans and goals to reduce inventory by year-end.
3. Regarding technical issue with US aftermarket kits...
Timothy Standke, Chief Technology Officer, IMPCO Technologies in prepared remarks: In North America, Q2 was mainly driven by aftermarket sales and by the shuttle bus market. During the quarter, we chose to hold back some aftermarket kits while we work to resolve the technical issue. This has been resolved, and we provided retrofit kits to affected customers. During Q2, the level of revenues basically recovered to the values before the technical issue. Aftermarket kit sales in July have been according to our expectations and we expect aftermarket performance to improve in the second half. In the OEM segment, we expect to begin shipping units for GM’s bi-fuel pickup program toward the end of the year. Similarly, we expect an important increase in the volumes of the GMT 610 model van during Q4 2012.
Pietro Bersani, CFO in prepared remarks: We are also reorganizing our customer support service to announce communication and responsiveness. A sample of this was the communication around aftermarket technical issues Tim mentioned about. While we took the appropriate actions to support our customers, our actions could have been better communicated. This is now corrected.
4. Regarding Venezuela & Thailand...
Timothy Standke, Chief Technology Officer, IMPCO Technologies in prepared remarks: ... we have seen a slowdown in Venezuela due to foreign money supply problems in that country, which have affected shipments of the Ford Fiesta. The availability of foreign currency in the country should allow the restart of the program in September. Despite two months of stopped production, we do not foresee any important impact on this year’s revenues in Venezuela, which will remain the largest export market in that region in 2012.
Timothy Standke, Chief Technology Officer, IMPCO Technologies in prepared remarks: In Thailand, after the flooding that took place last year, we were invoicing our first kit to Honda, with building volumes expected in Q3. And we expect our top partnership with Mitsubishi to recover and begin contributing in the fourth quarter.
Matthew Blair – Macquarie Capital (USA), Inc. Hi, thanks. If I’m doing my math correctly, it looks like Asian revenues are about $10 million lower this quarter compared to the second quarter of last year. Is this entirely attributable to the flooding in Thailand or are there other markets in Asia that are slowing down? Pietro Bersani, CFO You’re right. Mariano Costamagna, CEO .... Thailand is just recovering this moment and we expect also to start with this program, the program with Honda, and then more than 2,000 complete kits on a monthly basis in the second part of the year, while last year and then – and also that. And Mitsubishi start will be now and while the last year was very strong in – more 2,000 kits on a monthly basis last year is the reason. Pietro Bersani, CFO So, Matthew, your assumption is correct.
5. Regarding industrial markets...
Timothy Standke, Chief Technology Officer, IMPCO Technologies in prepared remarks: Our mobile markets experienced weaker demand in North America as well as in Europe due to the poor economic outlook while other markets remain stable. Stationary industrial market in general is experiencing growth due to escalating diesel prices, fear for regulatory requirements, failing infrastructure, increased power needs and the increased availability of natural gas. We are currently diversifying our systems offerings to further capture this opportunity. Our APU business continues experiencing strong sales for North American Class 8 trucks. Our new APU complementary product line positions us to penetrate high-volume fleet markets. Asia offers the largest growth opportunity for our commercial vehicles and we are increasingly focusing our investments on programs in India, Thailand and Southeast Asia, as well as the heavy duty bus market in China.
6. Regarding R&D...
Shawn Severson – JMP Securities LLC Hi. I was wondering if you could expand a little bit on the R&D and the technology roadmap. Obviously the spending continues to pick up, I just wanted to get an idea of kind of where is that going, any new key technologies on the horizon, and whether we should expect it to continue at this rate from this quarter going forward for the rest of the year? Timothy Standke, Chief Technology Officer, IMPCO Technologies Yeah. I think it’s a very good question, thanks for that. The biggest thing that we have to take into consideration, from our company is, the long-term effects. We have to consider where is – what are the technologies that we are going to need to meet when the future comes down. These we refer to as enabling technologies. Enabling technologies are things that allow us to adapt and build in. A good example is, we have developed and have been developing over the last few years direct injection systems for propane vehicles in Italy. We have a direct injected propane solution. We’ve got other things that will be going into the future. We have a very substantial R&D center in Italy that we’ve commissioned about two years ago, I think it started to commission?
7. Regarding Guidance....
Pietro Bersani, CFO in prepared remarks: Our revised outlook includes the following assumptions: normal second-half seasonality and the anticipated continued negative effect of foreign exchange translation, automotive division revenue contributions are expected from OEM programs planned to begin to roll out in the second half of the year in Thailand and certain Latin American automotive markets; growth in the European aftermarket product and the revenue contribution from U.S. automotive at levels higher than in the first half of the year, although at a lower rate of acceleration than originally anticipated, Industrial division expected continued growth in stationary equipments and APUs offset to some extent by lower mobile industrial equipment. Based on the aforementioned factors, the company now expects full year 2012 revenue to be between $405 million and $420 million and continues to expect 2012 gross margin of 23% to 25% and 2012 operating margin of 3% to 5%.
