Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Cathy Mattison - Lippert/Heilshorn & Associates, Inc.

Matthew Beale – President and Secretary

Bill Larkin – Chief Financial Officer, Chief Accounting Officer

Analysts

Robert Brown – Craig-Hallum Capital

John Quealy – Canaccord Adams

Ronald Oster – Broad Point

Graham Mattison – Lazzard Capital Markets

Andre [Robert] – [Rice Bolkum]

Steve Emerson – Emerson Investment Group

George Taylor – OC Capital

Matt Quigly – No Company Listed

[Seneal Cashek] – Soundpost Partners

Fuel Systems Solutions, Inc. (FSYS) Q3 2008 Earnings Call November 7, 2008 1:00 PM ET

Operator

Welcome to the third quarter 2008 Fuel Systems Solutions earnings conference call. At this time all participants are in a listen-only mode. (Operator Instructions)

I would now like to turn the call over to your host for today, Mrs. Cathy Mattison. Please proceed Ma’am.

Cathy Mattison

Thank you for joining the call today. With me today from management are Matthew Beale, President and Bill Larkin, Chief Financial Officer. Matthew will provide an overview. Bill will follow with the financial detail and then Matthew will conclude with closing remarks and open the call for questions.

Before I turn the call over to the team I would like to remind everyone of the Safe Harbor statement included in the earnings press release issued yesterday. If you have not received a copy of the release and would like one please call Lippert/Heilshorn and Associates at 415-433-3777 and we will send one to you.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements including statements made during the course of today’s call. Such forward-looking statements are based on the company’s current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by Fuel Systems Solutions. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company and subject to change based upon various factors.

For a more detailed discussion of some of the ongoing risks and uncertainties of the company’s business I refer you to the company’s various filings with the Securities and Exchange Commission. With that it is my pleasure to turn the call over to Matthew Beale. Please go ahead.

Matthew Beale

Good morning everyone. On behalf of Mariano Costamagna, Bill Larkin and myself welcome to Fuel Systems Solutions third quarter 2008 conference call. Thank you for joining us today. We reported another strong quarter driven by the performance of our transportation business.

Revenue of $105.5 million increased 62% year-over-year and EPS was $0.75 compared to a loss of $0.02 per share last year which included $0.18 related to our voluntary historical stock option expense review.

Even with difficult market conditions, the third quarter represents our fourth consecutive quarter of growth and our achievements over the last 12 months clearly demonstrate the continued medium term business momentum and earnings potential of Fuel Systems. Fuel Systems is meeting increased global demand for gaseous fueled vehicles generally and growing OEM interest in our bio-fuel or dual fuel technology in particular. With the recent fluctuation in the price of crude oil impacts pump prices, the significant advantage to using healthy G and CNG still exists outside the U.S. and continues to drive the trend to alternative fuel in vehicles.

In addition, government incentives for alternative fueled vehicles continue in Europe and in other regions. Regulations requiring lower emissions are increasing. Visibility of natural gas as a transportation fuel in the U.S. continues to grow and efforts to stimulate the regulatory change necessary for the market to develop are evident. Now I’ll review our transportation business.

As our 62% revenue growth demonstrates, the strength of the transportation market was confirmed in the third quarter. Obviously the energy price trend has changed since our last call and it continues to fluctuate. Energy prices are a key market driver and sustained weakness in crude prices would have an impact on our transportation business. However, it is important to note that in much of the world commodity prices and pump prices are not perfectly correlated.

We have taken steps to internationalize the delayed OEM model we established for the Italian market and put in place commercial arrangements necessary to serve the broader European market from a dedicated operation in Poland. Europe continues to contribute the largest share of revenue driven by continued favorable price differentials for alternative fuels, growing OEM participation in the market and extensive public refueling infrastructure.

Demand in many Asian markets and Australia continues to be robust. While Latin America has been an early adopter in alternative fuel technology and enjoys an extensive refueling infrastructure the near term outlook in the region continues to lag other markets. The U.S. remains a great long-term opportunity; however regulation and refueling infrastructure remain the primary obstacles to proliferation of alternative fuel vehicles. In the near term we will continue to focus on fleet opportunities. Our technology and U.S. manufacturing facility provide a strong base and we are positioned to be a leader as the market evolves.

Turning to our industrial business we are experiencing continuing softening as economic pressures impact our customers. Companies are cutting capital expenditures and this has resulted in the delay of new purchases. Businesses are choosing to maintain existing equipment and this has resulted in an increase in component sales which is offsetting some of the decline in OEM sales.

Even with the current downturn we continue to build on the strengths of our industrial business. Our long-term customer relationships provide visibility enabling efficient operations. Our partnerships with OEM’s over the regulatory emissions cycle which in certain key product segments the last three years provides stability. We continue to pursue international market opportunities in existing and new product segments where emission compliance certification is being introduced and the trend to certification is gaining traction.

In summary, over the last four quarters our achievements have demonstrated the growth earnings and cash generation potential of our business. We have responded to rapid demand increases and scaled our production. Our consolidated financial position provides a sound footing to pursue growth opportunities both organically and through acquisitions. While the weak global economic climate dictates increased caution regarding short-term revenue visibility we remain optimistic about the median term outlook for our business.

Now we’ll turn the call over to Bill for the financial review.

Bill Larkin

Thank you Mathew. I’ll begin with a review of the third quarter ended September 30, 2008.

Total revenue was $105.5 million, up 61.8% from the third quarter 2007 driven by significant growth in the transportation business. Gross profit for the quarter reached $30.7 million or 29.1% of revenues compared to $15.7 million or 24.1% of revenue a year ago. The increase is attributable to greater revenue volumes and leveraging our existing operations.

Operating expenses for the quarter were $12.5 million or 11.9% of revenue as compared to $12.3 million or 18.8% in the third quarter 2007. SG&A expense for the quarter was $9.7 million compared to $10.2 million in the year-ago quarter. Operating income was $18.2 million compared to $3.4 million a year ago. Operating income was 17.2% of our total revenue for the quarter as compared to 5.2% in the 2007 third quarter.

Income tax expense for the quarter was $6.8 million primarily representing foreign taxes at an effective rate of 34% as compared to $2.2 million a year ago. Reduction in our effective tax rate is primarily due to the decrease in the statutory tax rates in Italy where we generated a substantial portion of our profits.

Our third quarter net income was $11.9 million or $0.75 per diluted share which included $200,000 extraordinary gain associated with the purchase of the 49% minority interest in our IMPCO Netherlands subsidiary. This is compared to a loss of $359,000 or $0.02 per share in the 2007 third quarter which included our voluntary stock option review and restatement charges of approximately $2.8 million.

For the three and nine month periods ending September 30, 2008 non-U.S. operations accounted for approximately 86% and 83% of our revenue respectively. The impact on our revenue due to changes in foreign currency when translating our foreign subsidiary financial statements into the U.S. dollar resulted in an increase of 6% and 9% during the three months and nine months ended September 30, 2008 respectively when compared to the prior year periods.

For the nine months ended September 30, 2008, total revenue was $298.4 million as compared to $185.6 million for the first nine months of last year. Net income for the first nine months of 2008 was $22.7 million as compared to $1.1 million in the same period last year. Earnings per diluted share for the first nine months of 2008 was $1.44 compared to $0.07 in the year earlier period. At September 30, 2008 our cash and cash equivalent balance was $34.3 million and we had working capital of $88.1 million.

Onto our financial guidance. Based on our assessment of near-term market trends we are increasing our full-year 2008 consolidated revenue guidance to approximately $385 million. Gross profit margin to approximately 29% and operating margin to approximately 14%. Our annual guidance reflects our uncertainty regarding the near-term revenue impact of recent trends for crude oil, global economic conditions and the strengthening of the U.S. dollar against the Euro. However, as Matthew mentioned we remain optimistic about our ongoing growth opportunities.

Now I’ll turn the call back over to Matthew.

Matthew Beale

Over the past year our company has met growth challenges and delivered. The step change in business volumes created critical mass. We scaled our business to meet demand, improved our financial position significantly and demonstrated our strength underlying earnings potential. We are focused on capturing the sustained medium term growth opportunity offered by our markets and do not measure our success in doing so based on sequential quarterly revenue expansion.

Our financial strength and cash generation capacity enables us to look further into the future and invest in sustaining business momentum and end-user markets served by our products and technology.

With that we are ready to begin the question-and-answer session.

Question-and-answer Session

Operator

(Operator Instructions) The first question comes from Robert Brown – Craig-Hallum Capital.

Robert Brown – Craig-Hallum Capital

You talked about some of the near term uncertainty. Can you give a sense for what you have seen thus far in Q4 and how the trends kind of changed so far and then any sense you can give on how that looks for 2009?

Matthew Beale

I think in our guidance reflects what we have seen month to date in October. As I mentioned in our guidance during the third quarter the Euro was pretty much at an all time high against the U.S. dollar. We have kind of seen the Euro trend down in the fourth quarter and I think this morning it was about $1.28. So with that it would have an impact on our fourth quarter revenues. We have already kind of reflected that in our fourth quarter guidance.

Robert Brown – Craig-Hallum Capital

You did a good job controlling operating expenses over Q2. Do you see this as the level operating expenses should stabilize at or maybe grow slightly? Looking forward how do you sort of see operating expenses trending?

Matthew Beale

We focus on our operating expenses and try to control those costs. I think our run rate was about $10 million for the third quarter with research and development costs roughly $2.7 million. We believe this is a normal run rate given the status quo.

Robert Brown – Craig-Hallum Capital

How do you see capEx trending? You said a little bit about building out some capacity but what do you see capEx trending to in 2009?

Bill Larkin

I don’t think we would expect to see any significant increases in our capital expenditures as compared to this year. Principally it consists of normal maintenance of our existing capital. To increase our business in the OEM lines or operations here in the U.S. it doesn’t take a significant capital investment to expand those operations. So next year will just be normal recurring maintenance.

Robert Brown – Craig-Hallum Capital

This year was a little elevated. Is normal maintenance about $8-9 million a year?

Bill Larkin

That is correct.

Operator

The next question comes from John Quealy – Canaccord Adams.

John Quealy – Canaccord Adams

First, in the transportation business can you characterize a little bit more about the upside in the quarter or the consistency in the quarter between geography, delayed OEM, after market? Can you give us a little bit more transparency for what went on for transportation in the quarter?

Matthew Beale

I think the third quarter we have looked at seasonality in our business. We have talked a lot about seasonality. I think the third quarter would have been traditionally a trend. There are some seasonal impacts as it relates to the holiday period for both production and the sales and marketing side but there was a big run up and I think the third quarter was an extraordinary quarter as a result. We wouldn’t point to any particular segment if we were talking about the third quarter as having out performed any other. Both the after markets and delayed OEM or OEM segments were strong.

John Quealy – Canaccord Adams

With regard to guidance for the remainder of the year, you were fairly conservative with guidance in Q2. What is it about the current dynamics in Q4 that are causing you to be still somewhat cautious? Is it specific channel inputs or is it more of a precautionary macro disposition?

Matthew Beale

I think it is a couple of things and you touched on one of them. Kind of the uncertainty in the current macro environment. Two, you had to look at during the third quarter the average Euro rate was in the $1.50’s. Now the Euro is about $1.28 which is roughly a 17% decrease and that is reflected in that revenue guidance.

Bill Larkin

Another thing to consider here, if you look at automotive sales in Europe this year they will be down 15%. Next year the estimates I have seen are around 10%. Are we directly correlated to the new vehicle market? Probably not. But those are trends that obviously encourage some kind of caution.

John Quealy – Canaccord Adams

Within the Italian business can you tell us what Zavoli’s contribution was and how the Livorno facility is ramping?

Matthew Beale

Our Livorno facility has definitely ramped up to full operating capacity and we got a full quarter of output from that operation. Zavoli has definitely exceeded our expectations in the third quarter. We are looking at the beginning of the current year and that has been principally driven by the unprecedented demand we have seen in the market recently.

John Quealy – Canaccord Adams

Is it comparable, I think it was $11 million in the U.S. in Q2…is it a comparable number?

Bill Larkin

Yes, that is about the run rate in the third quarter.

John Quealy – Canaccord Adams

Matthew, if you can expand a bit more on your comment about getting a bigger presence on the delayed OEM side in Poland. Can you talk about that please?

Matthew Beale

We had established this model in Italy and it was successful for a number of reasons which we have talked about on past calls. We see opportunities to expand it in other geographic regions. We have put in place a structure necessary, really kind of an outsourcing structure that will allow us to pursue this opportunity with some of our OEM partners on a European basis.

I think looking forward we are optimistic and we think there is an opportunity there. We will see that in terms of its contribution as probably a Q1 2009 event.

John Quealy – Canaccord Adams

I imagine with cash flow for the full year, M&A still remains an option in that locale as in others?

Matthew Beale

M&A remains an option. I think it is very difficult to execute transactions in this climate. I think it is the best of times and the worst of times to the extent you have asset values coming down but we are also in a capital constrained environment. I think the M&A opportunities in our segment are clear.

Operator

The next question comes from Ronald Oster – Broad Point.

Ronald Oster – Broad Point

I just wanted to ask you about that follow-up question on the OEM business. Expanding beyond Italy, Poland you mentioned as one area. Any other countries you can identify and just to clarify you mentioned the timing as first quarter 2009 type of event?

Matthew Beale

I think Poland is not necessarily the Polish market. The partners we are working with you really want to be logistically near to production facilities. There is quite a big nucleus of production in Poland, particularly southern Poland. That is an opportunity to serve Poland as well as adjacent markets. Just where we are, we would expect to see this and really evaluate the contribution of this initiative probably in the first quarter. We’ll take a look at further opportunities to internationalize it.

Ronald Oster – Broad Point

What is the capital cost should you set up another similar assembly center in Southern Poland or other areas? What would the capEx requirement be for that?

Matthew Beale

If we do it in outsourcing it is nothing. But the capital cost were we to put in place our own facility would again, I don’t think it is really material in the context of what we are talking about.

Ronald Oster – Broad Point

Can you comment, I know you have gone from one labor shift to three? Are you guys at the point where you are bursting at the seams or do you have excess capacity? What type of utilization rates are we looking at?

Bill Larkin

Manufacturing is one of our core competencies. We do have flexibility within our manufacturing capacity to expand and contract with current operations. Obviously we would point to what we have been able to do this year as being indicative of our ability to manage a ramp up in volumes. There has really been a step change this year.

Ronald Oster – Broad Point

I know you mentioned the tax rate coming down in Italy. Is there any guidance in terms of what we should be modeling going forward in terms of the tax rate?

Bill Larkin

I think within our guidance we are kind of looking at a high 30’s or 40% range we are looking at.

Ronald Oster – Broad Point

SG&A you said would stay around the $10 million levels even though the top line continues to grow?

Bill Larkin

If our operations…if we were doing significant expansion I think that is a normal run rate. If we make another step change in operations that would definitely impact our G&A expenses.

Ronald Oster – Broad Point

Lastly, is there a certain foreign exchange rate you have factored into your guidance for Q4? Is it based on today’s current levels?

Bill Larkin

It is based on current levels and how we look at the market.

Operator

The next question comes from Graham Mattison – Lazzard Capital Markets.

Graham Mattison – Lazzard Capital Markets

I wanted to hit a couple of questions on the margins, particularly the gross margin in the quarter. This is the third quarter you have been able to stay at this run rate. How sustainable do you see this? Is there the potential that as manufacturing grows that margin could grow further?

Matthew Beale

I think we have made a lot of leaps and bounds over the last year and that is filling into our same capacity. We are definitely pleased with the existing gross margins we have. Is it sustainable? If the market remains consistent, yes. However, in these difficult markets it is hard to say but we think that is a good goal for us to continue to maintain those gross margin levels.

Graham Mattison – Lazzard Capital Markets

A year ago you were talking about additional competition weighing on margin. But in that time you shifted the business and it is sort of a different operating model. Is that a good way to look at it?

Matthew Beale

No, I think as we communicated before, we have grown into our manufacturing operation and we are absorbing a lot more of that overhead.

Graham Mattison – Lazzard Capital Markets

Looking at the performance of the margins in the industrial and transportation segment would they be about the same as they were in the prior quarter?

Matthew Beale

I don’t see any marked changes in the margin.

Graham Mattison – Lazzard Capital Markets

On the industrial side, what would it take to get this business back and growing? Is there any milestones or EPA regulations out there that you could see that could help kick start the business?

Matthew Beale

A lot of it is just to look at the current economics. One of our largest customers, 2009 is going to be a challenging year for the industrial business.

Graham Mattison – Lazzard Capital Markets

For everyone I think.

Matthew Beale

Yes.

Operator

The next question comes from Andre [Robert] – [Rice Bolkum].

Andre [Robert] – [Rice Bolkum]

Could you shed a little light on your transportation business as far as the mix between OEM and after market distributors? Also, the typical lead time between order and when you deliver the product?

Bill Larkin

In terms of the split between after market and OEM it does fluctuate as the way that the markets are moving now and looking forward at the channels, if the mix would be somewhere in the range of 20-30% that wouldn’t surprise us. 20-30% being the OEM side of the market. In terms of delivery time it is slightly different by channel. Again, the underlying product is the same but in the after market distributor business it is a turns business and we are delivering product almost immediately to our channel which we have spoiled rotten. This is not an order driven business, it is really a turn’s business.

Andre [Robert] – [Rice Bolkum]

You mentioned obviously the stronger dollar and weaker Euro in the past couple of months. The precipitous drop off in diesel prices and gasoline prices if you were to measure your business to both of those channels on an average sales per month can you give an idea of what your recent experience has shown with the weaker fuel prices as far as they pertain to demand for your products?

Bill Larkin

Is the question what is the impact of foreign exchange on revenues?

Andre [Robert] – [Rice Bolkum]

More so the impact from your customer’s perspective as we have seen the drop off in diesel prices and drop off on gasoline prices.

Bill Larkin

What the impact of fuel prices on our business? Fuel prices, if you look at the long-term trend we peaked at $150 and if you draw the grass, fuel prices the long-term trend is clear. The thing with fuel prices that is important, in the states we are used to seeing almost a direct correlation between crude prices and pump prices. That is not the case in most other parts of the world where honestly fuel is used as a way to implement fiscal policy. So you see less of a movement in pump prices through the movement of the underlying commodity prices. So the differential, and that is really one of the key drivers, of demand remains a significant one and an attractive one in most of the markets where we sell.

Andre [Robert] – [Rice Bolkum]

Matt, if you look at the recent announcements today, GM and Ford are obviously having their own financial difficulties. Have you seen any order cancellations from those customers or any other significant cancellations you could talk about?

Matthew Beale

We have not. As you know they are very localized, the automotive OEM’s and we work with them to a certain extent globally but to a much more concentrated extent in Europe. So that has not been something we are seeing up until now.

Operator

The next question comes from Steve Emerson – Emerson Investment Group.

Steve Emerson – Emerson Investment Group

To follow through on Andre’s last question, could you hazard a guess in Italy what the differential price per liter or gallon was when oil was high? The comparison to propane and how much that differential has come down?

Bill Larkin

The differential has been historically, and even with the spike and some of the volatility in crude prices, that differential has remained staunchly in the 40-60% range. Natural gas typically, and again it is difficult to generalize, tends to be at a higher discount than traditional fuels and propane a little bit to a lesser extent but they both have really remained in that range of 40-60% which is one of the conditions, in addition to some measure of refueling infrastructure, that drives interest in our products and it represents a market for us. That is true in 70 countries right now at least.

Steve Emerson – Emerson Investment Group

Has there been any changes in the Italian subsidy program? Typically your subsidies run out. The subsidies to individual conversions tend to be used up early in the year and the commercial vehicles just keep going. Has there been any difference in the demand factors from the usual?

Matthew Beale

I think the subsidy program overall clearly that is not the foundation of our business model here. It is the attractiveness of our product relative to alternative fuels relative to traditional fuels. From what we are able to see at the moment what we expect the 2008 subsidy program in Italy at least to be repeated in 2009. The way it rolls out we have not seen, for example in this latter part of the year, in the subsidies available for retrofit conversions we haven’t seen that as being some kind of seasonality related to where you are in the annual cycle relative to the subsidies that are available.

Operator

The next question comes from George Taylor – OC Capital.

George Taylor – OC Capital

In the past you have given the actual dollar contribution to revenues from the Euro depreciation. Can you provide that for the most recent quarter?

Bill Larkin

I don’t have the actual dollars. I just have the percentages. If you compare 2008 third quarter versus the 2007 third quarter the contribution was roughly 6% and for the year-to-date it was 9%.

Operator

The next question comes from Matt Quigly – No Company Listed.

Matt Quigly – No Company Listed

I was wondering if you would be able to break out IMPCO versus BRC revenues in the quarter.

Bill Larkin

IMPCO revenues were roughly $22 million this quarter and our BRC operations were approximately $83.5 million.

Matt Quigly – No Company Listed

I was wondering if you could talk about you did have unconsolidated operating business segments if I’m correct. I was wondering if you could talk about the cash position of IMPCO and IMPCO U.S. versus BRC?

Bill Larkin

On a consolidated level we are sitting on roughly $34 million in cash. There are some disparities between where that cash sits and we are not concerned about it because we have options or opportunities to move cash around if needed.

Matt Quigly – No Company Listed

Do you see within the next couple of quarters the opportunity to fully consolidate those two business segments or will they continue to have separate financial accounts?

Bill Larkin

Just to be clear on this, our unconsolidated operations primarily would be in our transportation business. Again these are not areas where we would tend to leave a lot, or any, if necessary if you will capital. I think there is possibly come misunderstanding. Our financial position is concentrated with the operations we consolidated.

Matt Quigly – No Company Listed

I was going back and looking at your previous Q trying to understand. I think there was a specific loan made to IMPCO U.S. by MTM and there is an interest on the ability of IMPCO U.S. to specifically pay that back to MTM but I concluded from that the operations were somewhat separate. Maybe you could then comment on with the weakening revenue position of IMPCO in Q3 if that affects in any way the ability for IMPCO U.S. to pay back that loan to MTM?

Bill Larkin

It is an inter-company loan so it gets eliminated in consolidation so you’re not going to see that on the face of our financial statements. We do have the ability to move cash around to address that.

Operator

The next question comes from John Quealy – Canaccord Adams.

John Quealy – Canaccord Adams

On the industrial side, can you give us an update…I think you are working on some new fuel injection products on the industrial side.

Matthew Beale

We are obviously excited being able to offer in the subsequent or next regulatory cycle of products which is the fruit of development between our automotive and industrial businesses where we are leveraging the injection technology that was developed for automotive activities into the industrial market. Clearly we are excited about that. We are working with our OEM partners and looking for the beginning of implementation in the beginning of the next regulatory cycle.

John Quealy – Canaccord Adams

Also, can you give us an indication…you have shied away from heavy duty and diesel applications in the past. I assume mostly from a product feature set, but can you comment given the capabilities you have about the relative attractiveness of those markets longer term?

Matthew Beale

If you look at our business in general, the IMPCO business, what we are doing today and taking very much a systems approach began in the early part of this decade with the implementation of ever more stringent certification requirements and it stands to reason when you are dealing with equipment that operates indoors and in a work environment that has now been extended into more power generation applications where certification is required and that is clearly an opportunity for us to expand our potential working with our existing OEM customers.

John Quealy – Canaccord Adams

Lastly, perhaps it is helpful if you could just provide a bit of an overview on the Italian subsidies seen with regard to the OEM incentives but mostly the after market incentive and what the proposals are to potentially increase that? There seems to be a bit of misconception in the market place there.

Matthew Beale

Our read, and none of this has been put into the official budget yet, but our read is the amounts and levels would be…at overall absolute levels rather, would be conferred in 2008 and in 2009. Just a quick recap, on the after market retro fit conversions depending on whether it is propane or natural gas it ranges between 350 and 500 Euro’s. On the delayed OEM side or the OEM side if you will the amount is 1,500.

Operator

The next question comes from [Seneal Cashek] – Soundpost Partners.

[Seneal Cashek] – Soundpost Partners

On your SG&A, I just wanted to get a sense of what exactly drove your reduction in SG&A and compared to the last year quarter it seems like the percentage of revenue was trailing from the mid teens to the high teens and now you are in single digits. I just want to get some sense of that.

Bill Larkin

When you look at our G&A in absolute dollar terms and compare it year-over-year it is fairly consistent. In the first half of the year we incurred some additional G&A with respect to some lingering stock option investigation costs and costs incurred for the restatement. So those were non-recurring costs we didn’t see in the third quarter.

[Seneal Cashek] – Soundpost Partners

I was just looking back a few years and of course now you have higher operating leverage so on a go-forward basis you feel, I know you mentioned on the call you are comfortable with a 10-12% range, I’m just trying to get a sense if that is your target level?

Bill Larkin

For operating expenses compared to revenues? I kind of look at it in kind of absolute dollar terms. Because our revenue has increased significantly which would reduce that percentage though kind of in a status quo that would be an ideal range. Roughly in the $10 million range.

[Seneal Cashek] – Soundpost Partners

With respect to geography where you are seeing sales going up, I’m trying to get a sense for whether it is more of Asia, Latin America or Europe?

Bill Larkin

I think Europe has been very strong as has Asia. As we mentioned in our opening comments, Latin America is a relatively mature market. At least near term the growth has lagged somewhat other areas of the world where possibly the infrastructure is less developed.

[Seneal Cashek] – Soundpost Partners

On a percentage basis, I’m trying to get some sense there. Can you break that out?

Bill Larkin

It does fluctuate quite a bit. Europe would be our largest market, followed by Asia and Australasia and then followed by Latin America.

[Seneal Cashek] – Soundpost Partners

On a percentage growth basis?

Bill Larkin

It depends on how you define your geographic regions. I would say our two largest segments growth has been pretty much across the board and Latin America has been less so.

Operator

The next question comes from Ronald Oster – Broad Point.

Ronald Oster – Broad Point

Matthew, you mentioned your cautiousness for the guidance is maybe not so much from price differential or fuel savings declining but more associated with overall economic conditions. Is that fair?

Matthew Beale

I think the overall economic conditions are both important. I think where we have even greater uncertainty relates to the overall economic conditions. Capital is constrained and even retail capital is constrained. These are things I think during this quarter and the following quarter I don’t think it is going to be clear to anybody how things are going to shake out here.

Ronald Oster – Broad Point

In other words, is the pay back period still 6-12 months for a retro fit?

Matthew Beale

Depending on what the price differential is it continues to be an accelerated pay back and that is certainly true in the time period you cite. That is certainly true in many of the markets in which we operate.

Ronald Oster – Broad Point

In the U.S. market you mentioned potentially pursuing fleet market opportunities. Can you comment on what you have done thus far and when we could potentially see some contribution from your U.S. transportation operations to the revenue line?

Matthew Beale

Clearly what we have done is we have established a team that is focused on this opportunity. We are out in the market place and we have the production capabilities. We have begun to deliver product. We expect this will gradually take hold. We are focused on very specific markets. Given the current regulatory environment and refueling infrastructure I think it would be difficult to expect that the U.S. market would suddenly become a material portion of revenues. We are very focused on the medium term prospects.

Ronald Oster – Broad Point

So it is already contributing to revenues? You have products that have been sold already with the U.S. transportation market?

Matthew Beale

We are active in the U.S. market, yes.

Operator

The next question comes from Steve Emerson – Emerson Investment Group.

Steve Emerson – Emerson Investment Group

Since the end of the quarter, what kind of a decline if any in order rate or shipment requests or sales from in the BRC division are you seeing or decline from the September quarter rate? Any way you can give me a flavor for that as a response to this credit crisis tough times, etc.?

Matthew Beale

I think our fourth quarter guidance reflects the activity that we have seen through October. It really depends on compared to what. I think the third quarter was definitely an exceptional quarter for us and one that gives us a lot of confidence in what we are able to achieve going forward. If you compare the fourth quarter to the second quarter or the first quarter or third quarter you get a slightly different answer. I think we feel the momentum is there and it gives us a lot of optimism about the medium term trends.

Steve Emerson – Emerson Investment Group

So medium term you are referring to after next year or for next year?

Matthew Beale

Medium term…just over the next 2-3 years which we do spend a lot of time thinking about where we are going to be in 2010, 2011 and positioning 2011. Positioning ourselves to capture the opportunity we perceive. Medium term to us means out certainly not the next quarter and certainly not the next six months.

Steve Emerson – Emerson Investment Group

Do you want to give us a ballpark range of what you see your capacity at? Or this intermediate term objective in any way?

Matthew Beale

I wouldn’t know in what context we would be looking at that. If we were looking at 2009 I think it is too early to look at 2009, but again we are very focused on medium term and what is going to be happening in the forward years here. The trend, we don’t see anything that has changed the outlook for our business over the medium term, however you define medium term.

Steve Emerson – Emerson Investment Group

Going to IMPCO and the state of California, I know in the past you have been unable to tackle the California market because you didn’t have any certified engines since your engines are fuel switching and California requires mono fuel, natural gas engines. Are you planning on certifying some of your engines or are you seeing movement on their part to change the regs?

Matthew Beale

Generically speaking we believe that dual fuel technology is what is going to make this market in the U.S. develop whether that be in California or elsewhere. Mono fuel in a context where you have very limited infrastructure obviously makes it very difficult for the market to develop in any meaningful sort of way. California has some very specific regulatory hurdles and I think you summarized them quite well. We certainly have the ability and the technology to operate on a mono fuel basis as well, to the extent the market opportunity justifies it we have the product and technology to respond to that.

Operator

At this time there are no further questions in the queue. I’d like to turn the call back over to Matthew Beale for closing remarks.

Matthew Beale

We reported another strong quarter driven by the performance of our transportation business. While the recent fluctuation in the price of crude oil impacts some prices, a significant price advantage to using LPG and CNG still exists outside the U.S. and continues to drive the trend to alternative fuel vehicles. Our solid consolidated financial position provides a sound footing to pursue growth opportunities both organically and through acquisitions. We remain, as we have said, very optimistic about the outlook for our business. Thanks to all of you for joining us today. We look forward to speaking with you again on our next call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Fuel Systems Solutions, Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts