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Fuel Systems Solutions, Inc. (NASDAQ:FSYS)

Q4 2013 Earnings Conference Call

March 14, 2014 11:00 ET

Executives

Carolyn Capaccio - Investor Relations, LHA

Mariano Costamagna - Chief Executive Officer

Pietro Bersani - Chief Financial Officer

Tim Standke - Executive Director

Analysts

Eric Stine - Craig-Hallum

Chip Moore - Canaccord

Rob Brown - Lake Street Capital

Colin Rusch - Northland Capital Markets

Operator

Good day, ladies and gentlemen and welcome to the Fuel Systems’ Fourth Quarter and Year End 2013 Results Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Carolyn Capaccio of LHA. You may begin.

Carolyn Capaccio

Thank you very much, operator and thank you all for joining the call today. With me today from Fuel Systems’ management are Mariano Costamagna, CEO; Pietro Bersani, CFO; and Tim Standke, Executive Director. Today, Mariano will provide an overview, Tim will review operations of FSS Automotive and FSS Industrial, and then Pietro will follow with the financial detail and open the call for questions.

If you have not received a copy of the press release that was issued today and would like one, please call LHA’s offices at 415-433-3777, we will send one to you. The release that was issued this morning has been posted to the Investor Relations tab on Fuel Systems’ website at www.fuelsystemsolutions.com as have the copy of management’s prepared remarks that you can follow along.

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 that was issued today. 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 in the company. There could 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.

The forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company and are 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.

And now, it’s my pleasure to turn the call over to Mariano Costamagna, CEO. Please go ahead, Mariano.

Mariano Costamagna

Thank you, Carolyn and good morning and good evening to everyone. Welcome to Fuel Systems Solutions’ 2013 fourth quarter and year end conference call. Overall, Fuel Systems’ 2013 results demonstrate our efforts to maintain and extend our market leadership while controlling costs. Our fourth quarter revenue of $92.6 million reflected, in particular, challenges we are seeing in our market, including reduced volumes for programs ending with specific automotive OEMs in Europe and Asia.

As we look to the future, alternative fuel vehicle adoption continues to grow around the world and this presents opportunities for Fuel Systems. The underlying drivers of price differentials, government subsidies, and regulatory environment remain very positive overall, but are factors that are hard to predict. Adding to the volatility of the economics and regional political situation over which we have no control, in the current market, the aftermarket and OEM channels we serve are evolving in different ways. Both demonstrate that we are some degrees victim of our success.

In the aftermarket, aggressive price has become the status quo in our core markets in Italy and in Europe, especially there. And as more new, small players are entering the market and competition now is very strong. In the environment – and in this environment, we are doing all we can do in order to reduce the cost and protect our margin. We have a larger global presence and maintained our market leading position even in most challenging markets.

In our OEM, in our OEM consist of CNG and LPG application. CNG has been primarily an Asian and South American market for us with maintained high level competition, such as Bosch, Nikki and Keihin. As volumes increase and automotive technology become more complex, some large OEMs are moving to more integrated design and development process for successful programs. As a result, they are sourcing differently and using a smaller pool of suppliers. As we reported in Q3 call, our 2013 CNG OEM programs with China Volkswagen and Honda Thailand were not renewed. The success of this program factored into Honda’s decision to use more closely affiliated suppliers.

Now, CNG is emerging as a growth market in the U.S. We have a leading position in the U.S. CNG fleet vehicle market for both OEM and Aftermarket. At our Union City plant we have the technical capabilities and facilities to offer OEMs turnkey CNG system installation, as well as via our network of Certified Installation Partners throughout North America.

LPG is primarily a European market. Because of our technological lead we see a good long-term opportunity with this fuel of type. We also anticipated the move away from the port injection to direct injection. We believe this is a leap forward for automotive market and invested in the development of LPG direct injection technology. Our direct injection system is now in production. KIA has already adopted it for the Soul and Sportage. The Hyundai will also use our system very soon. We are also getting a lot of interest from our other OEMs and we are encouraged by the OEMs attention this new system is attracting.

Our technology leading position gives us an absolutely competitive advantage. Volumes now are very small but as we are still in the early adoption, but we expect consistent growth in 2015 and beyond. We are also optimistic that market dynamics may become more favorable for Fuel Systems after January 2016, when the new Euro 6 emissions standard for the registration and sale of new cars becomes mandatory for all the European Union countries. All vehicles equipped with a diesel engine will be required to substantially reduce their emissions, adopting sophisticated and expensive aftermarket – after treatment system. This is expected to cause a negative impact on the diesel car market through the overall cost for small diesel engines. This will most likely expand the use of gasoline engines of direct injection version, and boosted the use of alternative fuels such as LPG or CNG that don’t require any specific type of treatment. Based on our past experience, we believe a more favorable regulatory environment could support a possible market evolution, both for aftermarket and OEM.

While 2014 will be a challenging year, as we look at 2014 and beyond we are positioned to emerge a leading suppliers of direct injection system as this technology trend gains traction, including in the U.S. CNG market. We have also demonstrated our ability to win new business driven by subsidies and regulatory standards. In 2014, we will continue to focus on execution and reducing our product and run rate costs. We are forming strategies to expand the value of our trademarks and product portfolio in our markets, as well as to extend and diversify our technological lead. We are also examining all opportunities for capital deployment before us as we pursue new opportunities and develop new products for wider application, adoption and consider opportunistic M&A.

Now, I will turn the call over to Tim for an operational review of Automotive and Industrial.

Tim Standke

Thank you, Mariano. I will start with the Automotive Division, which consists of the company’s OEM passenger and light duty commercial transportation, automotive aftermarket, and transportation infrastructure operations, as well as the U.S. Automotive unit. Automotive posted fourth quarter 2013 revenues of $64.4 million and in constant currency decreased 7.1% from the prior year reflecting decreases in both aftermarket and OEM volumes. Automotive operating loss was $2.7 million. In Europe, DOEM volumes were a total of 4,852 vehicles in Q4, for approximately 34,000 in 2013. The major makers converted in our Livorno and Cherasco conversion centers continued to be Nissan, Hyundai, Chevrolet, Peugeot and Kia.

In December 2013, GM announced its plans to discontinue the Chevrolet brand in Europe in 2015. This will reduce our volume, 2014 volumes to less than 10% of our 2013 units. Our new Ford Transit Connect Taxi program with Ford Germany is on track to receive the first batch of vehicles for conversion in May. The total contract is for approximately 14,000 vehicles for the Hong Kong market. We have already begun working on certifications for a dedicated CNG Ford Transit Connect Taxi for the U.S. and see opportunity for this program in other geographies.

In our OEM business, 23,422 kits or sets of components have been supplied worldwide in the 2013 fourth quarter for approximately 105,000 for the 2013 year. Maruti Suzuki remained the largest customer, followed by Shanghai Volkswagen and by Ford Europe Fiesta and Focus LPG. The decrease of volumes from last quarter is mostly connected with the ending of the Honda program and the decrease of the Maruti Suzuki volumes, because of the high price of CNG in India. So far in 2014, however, CNG prices have been trending lower in India and are positively affecting demand. In fact, Maruti Suzuki has already slightly increased their volume forecasts for the CNG models equipped with our components.

Turning to aftermarket, we continue to operate in a tough environment. Our volumes were down primarily due to the negative impact of continued depressed new vehicle sales in our core markets of Italy and Europe. In markets, where there is very intense competition, because of economic weakness, we have begun to selectively lower prices, which has helped us maintain our share. Going forward, we are reducing operating expenses at the same time, which is helping us support our margins. We continue to work on redesigning certain components to lower our manufacturing cost and work with our supply chain to remove production costs. The aftermarket business is growing in Poland, Eastern Europe and Russia, where the economies have been stronger. In Southern America, Argentina, Chile and Colombia are doing well showing revenues roughly aligned with the ones in 2012.

Now, I will review some highlights for other strategic growth regions. In Asia, volumes in the OEM passenger car segment were 19,022 vehicle conversions in Q4, for 2013 units of approximately 89,000. In China, volumes for Shanghai Volkswagen were 5,400. As previously noted, the 2013 Volkswagen program was not renewed and the 2013 Honda Thailand program has ended. In India, our investment in Rohan BRC is progressing as planned. In November, we began to localize our manufacturing, which should proceed through this year and expect production to begin in early 2015. Again, volumes have been low in India due to the high price of CNG. However, CNG prices are now trending down and we are positioning Fuel Systems for growth in the medium to long-term.

In Latin America, both our OEM and aftermarket solutions volumes decreased. Venezuelan political instability has heavily affected local operations and the market as shortages of foreign currency have dramatically impacted imports of components offsetting local car makers’ volumes. As a result, our volume forecast for 2014 will depend on how quickly the situation improves, which we cannot predict at this time.

In North America, the CNG vehicle market remains positive and is mainly driven by OEM. The market is approximately 95% commercial fleet vehicles with the remaining 5% consisting of retail consumer passenger vehicles and shuttle buses. Fuel Systems is the leader in supplying CNG bi-fuel and dedicated solutions for this market.

In 2013, GM’s 610 van and 911 pickups produced and sold were approximately 2,900 units inclusive of the first tranche of extended crew cab sold by year end. GM’s Sierra and Silverado CNG bi-fuel pickups produced and sold in 2013 were approximately 1,600. We have obtained CARB certification for the 2015 model year, and are converting Silverados and Sierras in Union City and expect to receive ship-to-commerce soon.

GM’s CNG-dedicated Chevrolet Express and GMC Savana cargo vans produced and sold in 2013 were approximately 1,300 units. During 2013 we reinforced our position and strengthened our relationship with GM. We are working well with GM to develop the market for 2014 and beyond. We expect modest growth in 2014 programs. We have begun working with GM on the extension of key programs. These include the K2 program, which was formerly known as the 911 program, for the Silverado and Sierra models and the 610 van program, which we are working on extending from 2016 to 2020.

In the U.S. market aftermarket, we continued to develop new certifications, such as the Chevy Cruze we discussed last quarter. The aftermarket overall was suffering from a lack of product offerings. Fleets want a 0.5 ton pickup and we are working to develop two aftermarket platforms for 2015. These include a bi-fuel CNG kit for the Ford F150 5 liter engine and a bi-fuel CNG fuel system for the Chevy 1500 Silverado direct injection engine. This is the first direct injection offering of its kind in the U.S. market, and is in its final phase of development. IMPCO plans to release this complete fuel system throughout its nationwide Certified Installer network, pending validation and EPA and CARB compliance, beginning the last quarter of 2014.

We are also working on Gaseous Fuels Qualified Vehicle Modifier, or QVM certification for a dedicated CNG Ford Transit Connect Taxi for 2015. We are in discussions with OEMs on products for the shuttle bus business and another OEM for a passenger fleet vehicle. We will update you on these as they gain traction, but they give us directional confidence.

Our investment in the North American Automotive market is bearing fruit. We are excited about the many opportunities we are pursuing. Our infrastructure division continued to perform as planned. We are in line with the budgeted revenues. In the U.S. market we have increased our presence and expect volumes in 2014 to double from the current small base.

Next, I will provide an overview of the Industrial Division, which consists of the company’s industrial mobile and stationary and auxiliary power unit or APU, and the heavy duty commercial transportation operations. FSS Industrial reported revenue of $28.2 million. In constant currency, Industrial revenue decreased 2.3% from the prior year, reflecting the slight decrease in heavy duty and stationary engine volumes. Industrial operating income was $1.3 million.

In our Mobile markets, Brazil was a strong market in the quarter and for 2013 owing to a large program with Nacco. In 2014, customer transitions in the mobile business, including the conclusion of our program with Nacco, will reduce volumes. We expect volumes to begin improving in the latter part of the second half.

In our Stationary industrial market, we anticipate new revenue streams as a result of several new programs that are beginning to launch in the first quarter of 2014. In the APU market segment, the truck APU business exceeded expectations all year long. We expect this trend to continue into 2014. For the commercial vehicles segment our lead heavy duty customer in Japan placed more emphasis on diesel truck production, which resulted in lower volumes for 2013. In 2014, a program with a local large customer has been put on hold because of a change in local political priorities. We are working to have this program reinstated for 2015. In summary, the industrial business performed well in 2013. The impact from our mobile customer transition in 2014 will be short-term as we are gaining more profitable business.

Now I will turn the call over to Pietro.

Pietro Bersani

Thank you, Tim. First, I will discuss results for the fourth quarter ended December 31, 2013, as compared to the fourth quarter of 2012. Total revenue was $92.6 million, compared to $98 million. Fourth quarter 2013 revenue decreased 5.6% on a constant currency basis. Automotive represented 70% of revenues and industrial represented 30% of revenues, the same as Q4 2012.

The Americas North and South delivered 44% of group revenue. North America was 29% and Latin America was 15%. This level compares to 39% of revenue during the fourth quarter of 2012. Europe accounted for 44% of consolidated revenue, with Asia delivering the remaining 12%.

Fuel Systems’ revenue base remains diversified among macro global regions. Foreign currency translation had insignificant impact on revenues in the fourth quarter. Gross profit was $17.6 million or 19% of revenues compared to $21.3 million or 21.8% of revenues. The lower gross margin dollars primarily reflect the lower revenue and cost increases in automotive, primarily related to inventory and outside services.

R&D expense was $6.9 million compared to $6.4 million. FX impact on R&D in Q4 2013 was unfavorable by approximately 1.5%. The increase is primarily attributable to additional costs for the industrial business as we continue to invest in existing products as well as look to expand our current offering with new solutions.

SG&A expense was $13.9 million compared to $13.7 million. The increase in SG&A includes by segment, in FSS Industrial, $3.4 million in Q4 2013 compared to $2.8 million in Q4 2012. The increase being primarily from higher compensation costs, which were partially offset by lower outsides service expenses. In FSS Automotive, $8.8 million in Q4 2013 compared to $9.4 million in Q4 2012. The decrease is mostly due to the prior year’s allowance for bad debts that did not occur in 2013.

FX impact in Q4 2013 is 4.2% unfavorable. Total operating expenses were $20.8 million or 22.5% of revenue compared to $42.1 million or 42.9% of revenue in Q4 2012, which included a $20 million non-cash goodwill and asset impairment charge. Operating loss was $3.2 million or 3.4% of revenue compared to $20.8 million or 21.2% of revenue in Q4 2012, including the non-cash charge. FX impact on operating income is insignificant. Income tax benefit was $0.3 million compared to income tax benefit of $1.2 million. Our fourth quarter income tax reflects the current mix of income and rates by jurisdiction. The company expects its effective tax rate for 2014 to be comparable to 2013.

Net loss was $3.3 million or net loss of $0.16 per diluted share compared to a net loss of $21 million or a net loss of $1.05 per diluted share. Last year’s fourth quarter net loss included the aforementioned $22 million non-cash impairment charge.

Now on to the balance sheet, at December 31, 2013, our cash and cash equivalents balance was $81 million compared to $75.7 million at December 31, 2012. Cash provided by operations during the quarter ended December 31, 2013 was $11.8 million compared to cash provided by operations of $10.4 million in the same period a year ago. Cash used in investing activities was $5.7 million. During the quarter ended December 31, 2013, $3.7 million was used for fixed asset purchases and no cash was used for financing activities.

Inventory was $95.1 million at December 31 compared to $104.1 million on December 31, 2012. Inventory turns were 3.3 times. Inventory is $9 million lower than at December 31, 2012 and decreased from Q3 2013 by $10.9 million, which reflects lower purchases due to lower revenue volumes, better inventory management focus and some additional write-offs. Clearly, inventory management remains a key initiative for the management team as we strive to operate in an efficient manufacturing platform.

Accounts receivable at December 31, 2013 was $65 million compared to $75.2 million at December 31, 2012. Accounts receivable is down primarily due to the seasonality. Accounts receivable reflect the relative quarterly size of revenues, the timing and mix of OEM and aftermarket as well as infrastructure business levels.

Days sales outstanding was 65.5 compared to 78.5 at 2012 year end. We remain diligent in our collection activities and are certainly aware of its impact on our cash flow. Total assets as of December 31, 2013 were $415.3 million, compared to $419.8 million at December 31, 2012.

Now, on to our financial guidance. We are aggressively reducing costs and our guidance takes into account savings in labor costs and other outside services. The company expects full year 2014 revenue to be between $340 million and $360 million, 2014 gross margin of 21% to 23%, and positive cash flow as defined by EBITDA of between $14 million and $20 million.

This outlook is based upon the following expectations: automotive operations, slower global transportation market given increasingly aggressive competition and the difficult economies in developing countries in Latin America and Europe, including the previously disclosed loss of certain OEM and DOEM programs in Asia and Europe, and the discontinuation of the Chevrolet brand in Europe. The slower markets will be partially offset by continued positive margin improvements and contributions from the U.S. market and the anticipated maintenance of the company’s leading market share in the European aftermarket.

Industrial operations, the loss of the large customer is expected to be partially offset by new engine programs beginning in late 2014 and early 2015 and by modest growth in the APU and mobile markets. A comparable margin performance in 2014 relative to 2013 on lower volumes given the expected revenue mix as the company continues to implement cost reductions and focus on achieving greater operational efficiencies. The company expects its effective tax rate for 2014 to be comparable to 2013 resulting from the anticipated mix of business by tax jurisdiction.

In terms of capital strategy going forward, we are examining all strategic opportunities for capital deployment before us. This will clearly include the new product development as part of our mandate to continue to innovate and may also include opportunistic acquisitions. In addition, we are in process of discussion with our lenders to renew our credit facility to support our capital decisions. This concludes our prepared remarks.

And operator, I would like to open the call for questions. Thanks.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Eric Stine of Craig-Hallum. Your line is now open.

Eric Stine - Craig-Hallum

Hi, good morning guys.

Pietro Bersani

Hi, Eric. Good morning.

Eric Stine - Craig-Hallum

Maybe just you mentioned that the success of the programs that you have got globally that means that at times use OEMs either taking out to use local suppliers. Just thoughts on what you can do to kind of counteract that, I know you mentioned the LPG direct injection, but is it kind of transitioning to more of a supplier or I mean is this kind of a dynamic that you just feel like you are going to have to live with going forward?

Pietro Bersani

Well, Eric, there are different factors you place here. There is straightening move from (indiscernible) your OEM at least with respect with the best platforms for which they are making certain in-sourcing decision. This is not always depending on which global OEM we are referring to. Certainly, what we are experiencing is it continues the interest by given the large OEM for smaller platforms as well as for an increasing number of small OEM willing to entering into the alternative fuel market. Certainly, for the very big ones that we may consider this year, a much more significant component kind of be the smaller other than Fuel Systems’ full kits of component and business model, but that’s certainly kind of the transition, which is not concerned in the company and the management, because the way that we are able to leverage our technology and to develop new platform and new system like the direct injection and also at the same time in very important key geographies like Asia and the U.S. should make clear what are the opportunities out there for us.

So the more we continue to be able to deploy our technology and develop a new product, which we will be putting in a few systems in even better position to address the new development, the improvements from the OEM side, the more we continue to be successfully. Although this is not the mistake, we have been clear, very much clear as in the Q3 earnings call, this will be from a financial perspective, from a revenue perspective kind of transition year, because we have a bunch of new programs, which will be starting that will be impacting both the automotive as well as the industrial side we will be starting this year and most of them by year end and we certainly be able to increase our operation, especially from next year.

Eric Stine - Craig-Hallum

Got it. So, I mean, just so from your perspective, what happened at the end of 2013 with this happening with three or four customers, you view that as more of an anomaly than a long-term trend?

Pietro Bersani

Exactly, especially because if you consider that in the bunch of new programs that they were referring to, it’s about the multi-year program, so we are not talking about short-term opportunities, we are talking about mid long-term perspective and opportunities.

Eric Stine - Craig-Hallum

Okay, that’s helpful. Maybe just turning to GM and you have talked about that the dedicated vans that you have got that business, it sounds like through – at the end of 2015, can you just remind us if there are terms on this year in the Silverado and so whether there are terms, but is that more of a year-over-year decision?

Pietro Bersani

No. I will say the fact that we have been successfully transitioning from the end of GM 911 programs to the K2XX program, it is clearly demonstrating that, just like I said on a global – for a global basis, we are in a position to continue to expand our relationship in this case with General Motors. So it’s not about our capability to continue to work and develop the next model year for the Sierra and Silverado, but (indiscernible) which is a van program. So, in terms of coverage, we are very well-positioned for the next years in this respect. And last but not least, of course, the importance of again in the U.S. market as well for the development of the direct injection, so think about the Silverado direct injection, which we had been mentioning in our press release we sent out a couple of days ago.

Eric Stine - Craig-Hallum

Yes, got it. Okay. Last one for me is just about Chevy in Europe, just can you talk about the current business with Opel and is there the opportunity to expand that business going forward? Thank you.

Pietro Bersani

Certainly, there is a lot of opportunity to expand that will be in Italy and Europe. And I think that the key factors are two. The first one is our expectation with very positive results so far from our direct injection program, which is going to affect the very important global OEM, which is Kia and Hyundai. And the second one just like Mariano said, it’s about the new Euro 600 regulations, so standard emission, excuse me, becoming mandatory from January 1, 2016. And I think that, that will be a very important impact, positive impact for our performance in that geography, because ultimately that will make – we expect an increasing cost for the diesel engine in order for them to be compliant – in compliance with the use stricter regulations. As a result of that, we see increased opportunities for alternative fuels meaning both CNG and LPG in order to do, which we will be able to capture that demand, the reason being that there is no absolutely challenge for the CNG and LPG technology to meet with those anti-emissions standard. So that will be a very positive impact that we are also considering in that geography.

Tim Standke

Alright. From a technological standpoint, keep in mind also that direct injected engines or spark-ignition engines narrow the gap between fuel economy of diesel and gasoline engines. So as those emission standards go higher at the same time, the direct injection engines narrow the gap of fuel economy, the attractiveness of the diesel vehicle goes down. And as the attractiveness of the direct injection engines goes up that should see our market also increase. With our new technology on the LDI system, we will also be in a position to have fewer competitors as there is not as many people who have evolved direct injection solution as there are people who have evolved into the port injection engines.

Eric Stine - Craig-Hallum

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Chip Moore of Canaccord. Your line is now open.

Chip Moore - Canaccord

Good morning. Thanks. I guess on industrial just given from the dynamics you outlined for next year or this year, I should say, it sounds like we should be looking for results to be a little more back half weighted, do you think that segment is going to be down on a year-over-year basis or how should we be thinking about that?

Pietro Bersani

Well, there is certainly an impact on the fact that we are at the end of the macro program. I think it is extremely important to mention that we have two specific – two important programs with Ford and Nissan, which on the mid to long-term perspective we know that we will be able to more than offset than missing the revenues with macro. There is important opportunity not only coming from those two important programs, but also because we have very interesting initiatives in Asia, in particular in China, when it comes to both liquids as well as good engine for power gen application. So in this respect, you may want to consider again like for automotive putting us as well, the 2014 be kind of a transition year, but the programs that I mentioned to you should make clear that the company will be able to offset those missing revenues from this year. And overall, we see an increasing opportunity when it comes to engine dressing in industrial business.

Chip Moore - Canaccord

Okay, that’s helpful. Thanks. And then on the new emission standards in Europe coming in ‘16 are you seeing that increased dialog with automotive manufacturers already or is that a bit too early?

Pietro Bersani

No, we started talking about that. We started to develop our product just to fulfill the request of the new rules on 2016 and considering that some, I’d say, want a decrease of 50% and this is not easy also to reach, also these standards, but we are working in conjunction with the carmaker in order to let’s say to prepare the correct components to avoid problem on the future rules this way.

Tim Standke

Now, through our connections with the automakers, they are definitely aware of where we are going and we haven’t seen any hint that the direction is incorrect.

Chip Moore - Canaccord

Perfect. Thanks folks.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Rob Brown of Lake Street Capital. Your line is now open.

Rob Brown - Lake Street Capital

Hi, good morning.

Pietro Bersani

Good morning, Rob.

Rob Brown - Lake Street Capital

You said you want to take some cost out to sort of deal with the pricing pressure, could you give us a sense of how much cost reduction you are targeting sort of this year than maybe on a full year run rate in ‘15? And then maybe step back also and give us a sense of what the ultimate margin goal you think you can get to, is there a new level of margins now we should think about or do you still think that kind of mid-teens operating margin is where you can get back to?

Pietro Bersani

Well, starting from your second question, Rob, you want to look at 2014 as a year with profitability, which is comparable with the ones that we have in 2013 and that despite also as you noted the revenue decreased. So the action that the management is making – is taking – our primarily focus on targeting as reducing the workforce and to reduce some outside service cost. We’re thinking about (tanking) in a seven digit region, kind of region. And that would be another example of how the management is adopting the company to the reduced size – to the temporarily reduced size of these operations and revenues.

I think that’s another signal that we expect there’s a reduction of our inventory because we’re having – I think a very prompt reaction to the changes – to the difference that we’ve seen in the external business environment. So to summarize think about this year as an year where Fuel Systems will be experiencing lower revenues with the same level of profitability and with a bunch of new programs and which will put a company very nice position in particular from 2015 moving forward. And certainly we believe that the profitability will be coming interesting in this respect because of these reasons.

Rob Brown - Lake Street Capital

Okay, good. And then you talked about sort of modest growth in the GM business, but also the North American volumes increasing. Could you just give us a sense of sort of clarify what you see for growth in the North American market? Should GM double as well or is that the aftermarket business?

Pietro Bersani

Well certainly the biggest part and the most promising growth segment of the automotive, of the U.S. Automotive is about the OEM. And that the key programs that I just mentioned with GM are the key factors, the key programs. It’s always a little bit difficult having a discount at this time of the year, certain visibility about the programs and the units. What is more important of this – in a multi-year, a couple of multi-year programs, that we have – there are no volume commitment to discuss the multi-year programs, but the fact that we’re expanding our product offering and we’re starting with a direct injection as well like for example the one for the Silverado 1500. Our key indicators that definitely U.S. market is going to expand. How fast is very difficult as usual to say to predict, but given the feedback that we’re having in Asia that remain a project, that definitely that you may want it to expect. So keep growing, gain traction. In terms of the growth rate again is a little bit difficult but that is an extremely important geography and this is one of the most promising geography in the world when it comes to kind of this U.S. in particular as you know CNG.

Rob Brown - Lake Street Capital

Okay, great. Thank you. I’ll turn it over.

Operator

Thank you. And our next question comes from the line of Colin Rusch of Northland Capital Markets. Your line is now open.

Colin Rusch - Northland Capital Markets

Thanks so much. Could you talk a little bit about markets that you’re discounting for 2014 that may surprise you and why and I’m looking for surprises the upside in terms of volumes and adoption of the technology?

Pietro Bersani

Well I mean if you look in I mean on a global – from a global perspective there are certain geographies regionally. For example South America where because of the external factors, political factors, political instability and some difficult economic situation like the one in (indiscernible) where those factors together would be impacting of course our business, our performance. I would say that overall and I continue to repeat that overall the fact that we’re so much diversified and we’ve a very good mix of geographies. Some of them which are very well promising in growth rates, some of them not much because of specific contingent situations. Overall I think that, that is a key factor maybe in times of significant royalty is to the company we’re at full year or much more concentrated on geography of course the performance, the growth, would be – that be bigger. But due to the fact of those high growth rate region would be basically assessing other regions like for example right now Venezuela and Argentina to mention a few or other geographies like in Asia where because of the end of the two programs, couple of programs that we’re experiencing some OEM mix in revenues, still putting together the company is still there with a significant amount of business. Does this answer your question or you’re more focused on some specific local situations.

Colin Rusch - Northland Capital Markets

If there are specific local situations I’d love to know about it, but maybe we can take that off-line. And then I guess the next follow-up is consolidation in the industry. What are you guys seeing in terms of additional moves there and where you could see some potential synergies in terms of (pairing) out platforms at this point?

Pietro Bersani

Well in terms of consolidation if you mean a consolidation from an operational perspective you may want to proceed that level internally and externally. Internally I think this is the direction for the company is moving forward is moving too. This is something which already started to work on in the past and we’re seeing and working on that. And the positive impact is on the cost side of our income we’re paying of course so it’s not just a matter of cost revenue opportunities from the reduction workforce as well as an outside services but also the internal synergy and efficiency that we can get from that kind of corporation.

From an external perspective certainly there could be certain consolidation opportunities but we say that there are more focus on certain business payment. There are not so many inter business segment consolidation in other words between heavy duty and light duty. There is something happening for example in Italy heavy duty business think about the U.S. for example is something more about light duty or passenger track but not really as it had much. However from our side we certainly continue to look around for any opportunities if this is what you’re referring to and that we’re paying it off of attention that we mentioned in some looking around for potential possible and many opportunities in M&A I think that’s something that you may want to consider.

Colin Rusch - Northland Capital Markets

Okay, perfect. Thanks a lot guys.

Pietro Bersani

You’re welcome.

Operator

Thank you. And our next question comes from the line of Bill (indiscernible). Your line is now open.

Unidentified Analyst

Yes, good morning.

Pietro Bersani

Good morning.

Unidentified Analyst

You talked about strategic options in the release I mean have you considered a stock buyback I mean is that about $95 million in cash or in investments, no real debt I mean we have a lot of capital spending needs, your big discount to book value. Could you comment on that?

Pietro Bersani

Sure. Well the fact that we mentioned that the strategic priorities that we put that we mentioned in our release is peering up because we believe that continue to invest in our company in order to provide shareholders with a significant return is one of the number one priority. Now the fact that in the current, in the light of the context or the current external environment in order to experience a significant growth you might want to consider opportunistic M&A that makes clear why we mentioned that. The fact that we continue to invest in developing our technology that we’re looking around for M&A opportunities is the number one priority. That doesn’t mean that in the future the company may want to consider a share buyback certainly. But certainly our board, our management focus on experience the shareholder value, their return primarily started from investing our business and again trying to expand the company including looking around for M&A opportunities.

Unidentified Analyst

Okay. I understand that, but I mean couldn’t you put a buyback in place and you don’t have to buy the stock. I noticed your competitor this morning they announced a buyback plan and you’re in a much stronger financial position?

Pietro Bersani

Yes, in that respect I can’t confirm it to you that we can certainly consider a share buyback program.

Unidentified Analyst

Okay.

Pietro Bersani

This is not something which is also our table.

Unidentified Analyst

Okay. So there is no structure or reason you couldn’t do it.

Pietro Bersani

Right.

Unidentified Analyst

Okay. Thank you.

Pietro Bersani

Yes. You’re welcome.

Operator

Thank you. And our next question is from the line of Suzanne Franks of (indiscernible) Research. Your line is now open.

Unidentified Analyst

Yes. I have two questions. The first is what percentage of your revenue for 2014 might be at risk for in-sourcing.

Pietro Bersani

Well there is nothing which is at least right now, which is not already convened to the guidance. So I think that we have mentioned in the Q3 earnings call what is the size of the missing OEM to OEM revenues. In addition to that, we have been informed about the GM decision to take out from Europe, the Chevrolet brand. All those factors, including the macro and the program for industrial, having already discounted and considered in our guidance. So that’s our guidance, which is again between $340 million and $360 million and has been included and that’s where we are.

Unidentified Analyst

Okay. And then the second question is what percent of your revenue is exposed to the – what seems to be a very competitive aftermarket?

Pietro Bersani

Well, when you mention the very competitive market, you basically may want to think of Europe and Italy where because of the economic situation, because of the pricing competition, especially from some competitors, we are suffering a little bit. We are not that much concerned in terms of market share. So I will say that our brand technology kind of strategy is paying, is paying off because we see that we are no longer, we have not as a matter of fact experienced a market share liquidity as the same from the revenue perspective. So when it comes to Europe, which is primarily LPG, we are satisfied about our leading market share position. We are satisfied about revenues. We are not that much concerned in terms of any significant further revenue decrease in Italy and in Europe as well. I mentioned in the past that the fact that there are capital countries in Eastern Europe, in particular, Poland and Turkey where those factors have been particularly significant, but I think that now we see – we have started to see a little bit improvement in that respect. So that’s why we are not that much concerned.

Unidentified Analyst

Alright, thank you so much.

Pietro Bersani

You are welcome.

Operator

Thank you. And I am showing that’s all the time we have for questions. I would like to hand the call back over to Mr. Bersani for any closing remarks.

Pietro Bersani

Well, thank you all for your participation and we speak with you next quarter. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.

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