Fuel Systems' (FSYS) CEO Mariano Costamagna on Q1 2014 Results - Earnings Call Transcript

| About: Fuel Systems (FSYS)

Fuel Systems Solutions, Inc. (NASDAQ:FSYS)

Q1 2014 Results Earnings Conference Call

May 8, 2014 11:00 AM ET


Carolyn Capaccio - LHA, Investor Relations

Mariano Costamagna - Chief Executive Officer

Pietro Bersani - Chief Financial Officer

Tim Standke - Executive Director


Alex Potter - Piper Jaffray

Rob Brown - Lake Street Capital

Aaron Spychalla - Craig-Hallum

John Quealy - Canaccord Genuity

Matthew Blair - Macquarie


Good day, ladies and gentlemen. And welcome to the Fuel Systems’ First Quarter 2014 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

As a reminder, today’s conference is being recorded. I would now like to introduce your host for today’s conference call, Me. Carolyn Capaccio with LHA. You may begin, ma’am.

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 the operations of FSS Automotive and FSS Industrial, and Pietro will follow with the financial detail and open the call for questions.

If you have not received a copy of the press release and would like one, please call LHA’s at (415) 433-3777 we will send one to you. The release 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.

These 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, good evening to everyone. Thanks for joining us on the first quarter 2014 conference call. First quarter results were essentially as expected. Revenue of $81.3 million decreased from last year, reflecting the factors we have discussed with you, reduced DOEM and OEM volume for the conclusion of our specific program, highly competitive European aftermarket and transition in mobile industrial engines.

We continue to have a productive discussion with automotive and industrial OEMs to develop future opportunities and began working with a new industrial OEM and a new customer for APU programs. We made progress in negotiations to reduce our automotive workforce in Italy and expect to complete this by year end to reduce our 2015 cost base.

For 2014, we remain focused on improving efficiencies wherever possible, on extending and diversifying our technological leadership into the new source of growth. In all, we actually increased our cash flow from operations from last year by over $1 million despite down adjusted EBITDA.

Fuel Systems remains a technology leader. 2014 is indeed challenging and we are addressing those challenges in all areas of our business. We are working hard to reduce overall costs of our products to compete more aggressively, particularly in the aftermarket. We are marketing our products effectively and winning new pieces of business.

We are pursuing opportunity for growth through internal development and through possible strategic and opportunistic mergers and acquisitions. We are working to diversify our range of products to serve additional growing markets.

Our objective for this year is to defend our EBITDA in the best -- the best that we can, while developing growth beyond 2015. Our first quarter results are solid in this direction and in this respect.

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 first quarter 2014 revenues of $54.4 billion -- million, which in constant currency decreased 16.9% from the prior year, reflecting decreases in both aftermarket and OEM/DOEM volumes that were partially offset by increases in compressor sales. Automotive operating loss was $2.3 million.

In Europe, DOEM volumes were a total of 3,597 vehicles in Q1. The major makers converted in our Livorno and Cherasco conversion centers continued to be Nissan, Hyundai and Kia. Notably, the drop in volumes from last year is related to the unexpected withdrawal of Chevrolet from Europe -- European markets in addition to the insourcing of OEM programs as we have previously disclosed.

Our Ford Transit Connect Taxi program is proceeding according to plan. The first 30 units are planned to roll out from our Cherasco plant in May and we expect to convert another 1,500 vehicles in 2014. The new concept taxi is currently under evaluation for markets outside Hong Kong.

In our OEM business, 10,426 kits or sets of components were supplied worldwide in the first quarter. Maruti Suzuki remained the largest customer in terms of volumes, while Ford Europe is currently the biggest OEM customer in terms of revenue.

In India, CNG prices have trended down in the market. Although, volumes become unstable, beginning to fluctuate because of the political uncertainty related to the elections currently in process.

Turning to the aftermarket in which conditions remain difficult. As we are committed to protecting market share in our core business markets in Italy and all of Western Europe, we are increasing our competitive position by beginning to selectively adjust our pricing.

To compensate, we continue to run a lean operation and are working on lowering component costs by redesigning some key components, preserving their functionality while improving their cost profile.

The aftermarket business in Eastern Europe is stable. In South America, Argentina aftermarket continues to do well, among the other South American markets doing well, we can mention Peru and Colombia, Mexico and Chile all have positive trends.

Now I will review some highlights for other strategic growth regions. In Asia, volumes in the OEM passenger car segment were 6,645 vehicle conversions in Q1. In India, the localization program for Rohan BRC is going well. We are producing the new single-stage CNG regulator for Maruti Suzuki and they are excited to be working with us. Again, while CNG prices have trended down in that market, which is positive, we will have a better view on the direction for CNG prices after the elections in May.

In China, we are currently establishing a local branch under the Fuel Systems name and should have a dedicated automotive commercial presence operating soon.

In Latin America, our results during the first quarter were mixed. Aftermarket volumes increased in the key markets of Peru, Brazil and Colombia. Argentina is a large market for Fuel Systems and as I already mentioned, aftermarket volumes are healthy.

Venezuela political instability continues to create an uncertain situation, while the outlook has improved somewhat, we anticipate it will take longer until we can resume operations locally.

In North America, the CNG vehicle market continues to be mainly driven by OEM and we are the leader in this emerging market. In the 2014 first quarter, GM’s 610 van and K2, formally 911 pickups, ordered book -- orders booked were approximately 1,037 units, including the extended crew cab model.

AT&T announced it has completed its commitment to deploy 8,000 CNG vehicles for its fleet in Q1 2014. While AT&T remains committed to alternative fuel vehicles, it is currently assessing its return on investment for the program and formulating plans for the future.

However, as a consequence of the fulfillment of AT&T program, we do not foresee other orders for the 2014. We had previously included about 500 conversions this year. We remain ready to work with AT&T again once they complete their assessment of the fleet already deployed.

We continue to work closely with GM to develop the market for 2014 and beyond and are very pleased with the support GM has dedicated to market the 2015 model year program vehicles.

In our relationship with GM, we continue to leverage Fuel Systems technology leadership and capitalize on our investment in our OEM automotive conversion facility in Union City, Indiana. Our teams are also consulting on supplying high-pressure components for GM’s 2015 Impala bi-fuel sedan.

Promisingly, we are in discussions with other North American OEMs for possible future programs. While we cannot predict outcomes, we are very encouraged by this recognition of the Fuel Systems leadership in the emerging U.S. marketplace for automotive alternative Fuel Systems.

In the U.S. aftermarket, the lack of product offering from the OEM side for aftermarket vehicles is depressing the market. Currently, commercial and retail fleet preferences for CNG or LPG converted vehicles lean toward a half-ton pickup such as the F150 5 liter or the 3 -- 5.3 liter Silverado and Tahoe.

However, neither platform is available since last year given the lack of the CNG/LPG prep engine. We continue to work on a bi-fuel CNG kit for the Ford F150 5 liter engine and a bi-fuel CNG fuel system for the Chevrolet 1500 Silverado direct injection engine.

Our infrastructure division won a contract for 28 refueling stations in Turkey, which is largest ever order for Fuel Systems. We view this win as extremely important because Turkey is still developing and supports the CNG market.

We also won a number of small contracts for compressors in different countries, including Sweden, Italy, Russia and Israel, where CNG will be one of the main energy sources of the future.

Next, I’ll 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 reported revenue of $26.9 million. In constant currency, industrial revenue decreased 11.8% from the prior year, primarily reflecting lower volumes in our mobile business.

Industrial operating income was $1.9 million. In our mobile markets, we have several new mobile engine programs in development that are expected to begin launching late this year and early 2015.

In our Stationary industrial market, our new programs for power generators began contributing volumes this quarter. In the APU market segment, we are expecting another year of robust sales.

Navistar is now certified to install our units, giving us an efficiency advantage in the market. We began selling directly to Penske Truck Lease, one of the largest truck leasing firms in North America today, improving our opportunities for capturing more of their business.

To keep our position in rail, we are working with GE to redesign our Rail APU.

For the commercial vehicles segment, our program with a heavy duty customer in Japan for a large customer continues to be on hold. This will reduce our volumes for 2014.

In summary, industrial business has a variety of new programs that will have a positive impact, as they launch and move into full production in the latter half of 2014 and into 2015.

Now, I’ll turn the call over to Pietro.

Pietro Bersani

Thank you, Tim. First, I will discuss results for the first quarter ended March 31, 2014, as compared to the first quarter of 2013. Total revenue was $81.3 million, compared to $98.6 million. First quarter 2014 revenue decreased 15% on a constant currency basis.

Automotive represented 67% of revenues and industrial represented 33% of revenues. The Americas, North and South delivered 44% of group revenue. North America was 28% and Latin America was 16%. This level compares to 43% of revenue during the first quarter of 2013.

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 a negative $2.3 million impact on revenues in the first quarter.

Gross profit was $17.4 million, or 21.4% of revenue, compared to $21.6 million or 21.9% of revenues. The FX impact on gross profit was $0.4 million unfavorable. The lower gross margin dollars primarily reflects the lower revenue and a shift in the mix of business.

R&D expense was $6.4 million, compared to $6.5 million. FX impact on R&D in Q1 2014 was not significant. The slight decrease relates to lower supplies expenditures and lower outside service expense in automotive, which were partially offset by 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 $13.3 million, compared to $14 million. The decrease in SG&A includes by segment. In FSS Industrial, $3.1 million in Q1 2014 compared to $3.5 million in Q1 2013. The decrease was primarily from lower compensation costs.

In FSS Automotive, $8.3 million in Q1 2014 compared to $8.9 million in Q1 2013. The decrease is mostly due to lower outside service and consulting expenses which were partially offset by higher compensation expense.

FX impact in Q1 2014 is 1.3% favorable. Total operating expenses were $19.7 million, or 24.2% of revenue, compared to $20.5 million, or 20.8% of revenue in Q1 2013. Operating loss was $2.3 million, or 2.8% of revenue, compared to operating income of $1.1 million, or 1.2% of revenue in Q1 2013.

FX impact on operating income for Q1 is $0.2 million unfavorable. Income tax expense was $0.3 million compared to income tax expense of $1.5 million. Our first 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 at $2 million, or net loss of $0.10 per diluted share, compared to a net loss of $0.7 million, or a net loss of $0.04 per diluted share.

Now on to the balance sheet, at March 31, 2014, our cash and cash equivalents balance was $81 million, compared to $81 million at December 31, 2013. Cash provided by operations during the quarter ended March 31, 2014 was $3.3 million, compared to cash provided by operations of $2 million in the same period a year ago.

Cash used in investing activities was $3.6 million. During the quarter ended March 31, 2014, $3.7 million was used for fixed asset purchases and no cash was used for financing activities. Inventory was $98.6 million at March 31, compared to $95.1 million on December 31, 2013.

Inventory turns were 3 times. Inventory is $3.5 million higher than at December 31, 2013, which reflects some increases for the build-up of the stock for stronger seasonal sales in the second quarter. Inventory management remains a key initiative for the management team, as we strive to operate in an efficient manufacturing platform.

Accounts receivables at March 31, 2014 was $56.8 million compared to $65 million at

December 31, 2013. Accounts receivable is down primarily due to seasonality and the lower level of current revenues. Accounts receivable reflect the relative quarterly size of revenues, the timing and mix of OEM and aftermarket and infrastructure business levels.

Day sales outstanding was 60.9 compared to 65.5 at 2013 year end. We remain diligent in our collection activities and are certainly aware of its impact on our cash flow. Total assets as of March 31, 2014 were $408.8 million, compared to $415.3 million at December 31, 2013.

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. As stated earlier by Mariano, we have been conducting negotiations to reduce our automotive workforce in Italy, as well as the number of hours worked. We expect to complete this process by year end to reduce our 2015 cost base.

The company outlook for 2014 is unchanged and expects full year 2014 revenue to be between $340 million and $360 million, 2014 gross margin of 21% to 23% and 2014 positive cash flow as defined by adjusted 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.

While we did not anticipate AT&T’s decision to stop and assess its CNG program, the removal of these conversions from our 2014 plan does not cause us to change our outlook. The slower markets I mentioned will be partially offset by continued positive margin contributions from U.S. market and the anticipated maintenance of the company’s leading market share in the European aftermarket.

Industrial operations -- the previously announced loss of a large customer is expected to be partially offset by new engine programs beginning in 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 the 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.

These will clearly include new product development as part of our mandate to continue to innovate and may also include opportunistic acquisitions. In addition, on April 30, 2014, the company renewed and expanded the amount of its credit facility to $20 million. The agreement with the New York branch of Intesa SanPaolo also extended the maturity date to April 30, 2015, ensuring an appropriate level of global liquidity.

And this concludes our prepared remarks. Operator, now we would like to open the call for questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Alex Potter with Piper Jaffray.

Alex Potter - Piper Jaffray

Hi guys. I was wondering if you could talk about the cadence of revenue going through the rest of the year. Obviously, in order to hit the revenue guidance we’ve got to start generating more revenue than you generated in Q1. Presumably, you mentioned there is going to be a seasonal uptick in Q2 and beyond. I was just wondering would it be fair to assume that Q1 is going to be the lowest revenue quarter of the year or how do you think revenue plays out for the rest of the year in percentage terms?

Pietro Bersani

Well, Alex, you are certainly right because the second quarter is the strongest one that we typically have. We believe this year will make no exception in that respect. In terms of the first quarter, we always have a kind of not-so-excellent performance because of the European seasonality in terms of vacations. So some facilities will be down for a number of weeks.

So overall, we definitely expect that Q2 and moving forward in the second half of this year will be able -- will be putting us on the right track in connection with the guidance that we provided. And ultimately, the net impact of revenues from all of these factors is exactly the one that we mentioned. So this is a trend that you may want to expect which again is not making such a huge difference with the recent past years.

Alex Potter - Piper Jaffray

Okay. I was wondering also if you could talk a little bit about compressors. You touched on compressor sales. I guess I have two questions there. Number one is the compressor sales all run through the automotive segment. Is that correct? And then the second question is what was the revenue contribution from compressors in the quarter. And where do you think that’s going to go two years, three years, five years down the line? Thanks.

Pietro Bersani

You’re welcome, Alex. Certainly the compressor business not related to the automotive business. It’s a business element which we see -- we are experiencing an expansion. A few months ago, we started to market the big compressors in the U.S. and we are seeing an interesting outcome with that.

There is a full range of products that we are deploying especially in certain European and Asian markets. And this is also similarly a powerful propeller because of the kinds of situation of the infrastructure in certain geographies like the U.S. as you are aware of. And then…

Mariano Costamagna

Sorry. More color, I think the same increase in quarter fee and with respect to Portugal in 2014, as we show the increase of 33% regarding also compared to the previous year. And we just mentioned Turkey that is a very important market in this moment for the compressors.

Pietro Bersani

And basically, Alex, in terms of incidence ratio percentage, you may want to consider the infrastructure business at around 5% to 7% of the automotive business. But we are expecting a growth in that percentage.


Thank you. Our next question comes from Rob Brown with Lake Street Capital.

Rob Brown - Lake Street Capital

Good morning.

Mariano Costamagna

Good morning Rob.

Rob Brown - Lake Street Capital

Your GM business in the U.S. has moved to a nice percentage of your revenue. How do you see that sort of trending over the next couple of years? Should it continue to grow nicely or have you reached a level where it maybe stabilizes? Maybe just give us a sense of how that business is trending?

Pietro Bersani

Well, I think that in the U.S. there is a clear maybe kind of distinction in terms of stagnate. I’m referring particular to the fleet rather than the aftermarket. Certainly, we believe that the U.S. commercial fleet there will continue to be the biggest opportunity in the U.S. And as you know, that’s why we believe that we are very well positioned in order to catch that opportunity.

That doesn’t mean that the aftermarket will continue to be negative such as more passenger. No, that’s not -- that will not be correct. But as a matter fact, even at the current level of infrastructure development, we believe that the commercial fleet and the opportunity to expand the gas stations connected with the commercial fleet will continue to be the strongest capital lease in the U.S.

People, Americans, private and consumers are very much aware of the cost saving opportunity for coming from CNG and LPG. But because of what we just said, we continue to believe that everybody in the U.S. significantly uses not so efficient from a fuel consumption perspective vehicles and possibly with high mileage and that is the perfect description of what are the fleet -- commercial fleet in the U.S. will be the strongest factor in this market. To create and to expand growth opportunity, you need to focus on the anchor customers which is providing us with a clear indication about the future.

Rob Brown - Lake Street Capital

Okay, good. Thank you. And I know this year is a transition period and you’re restructuring things but as that plays out, what’s your sort of long-term thinking on where you can get your operating margins to given the new environment, the pricing structures you talked about. Just sort of, I don’t know, you don’t need to put a timeframe on it but what sort of the operating margin goals you still have in mind, getting back to at this point?

Pietro Bersani

Well, in terms of 2014, we are talking about a comparable profitability and that’s what we are considering right now. In terms of from the longer perspective, it’s little bit more complex, of course. And you know that we are focusing on -- we are providing two basically, two primary profitability factors which is about gross profit and adjusted EBITDA.

Now the speed or the growth rates for those key factors is something which is not so easy to predict at this time. And we believe that this scenario will be definitely positive in that respect because of the multiyear programs that we have and that we are negotiating. When it comes to those specific operating margins that you mentioned, it’s always a matter of visibility in terms of the kind of the volume that will be coming up.

So that being said, I will recommend you look at the number of multiyear programs, the customer base and portfolio because that will be much or relatively easier to predict what could be the expectation. However, the expectation in these long-term perspective is that the profitability level that for this year due to the projects, it is a transition year, will be comparable with last year will be increasing.

Rob Brown - Lake Street Capital

All right. Thank you. I’ll turn it over.


Our next question comes from Eric Stine with Craig-Hallum.

Aaron Spychalla - Craig-Hallum

Good afternoon. This is Aaron Spychalla on for Eric.

Pietro Bersani

Hi Aaron.

Aaron Spychalla - Craig-Hallum

Maybe could you talk quick about the direction -- direct injection programs that you guys have going on, that seems to be a key area for you guys. Maybe how many programs are we looking at there and just anything on the timing side of things there?

Pietro Bersani


Mariano Costamagna

Of course, we have been the first manufacturer to adopt Kia Soul in relative system in our Sportage model, to each Sportage model. The Kia officially introduced at European press yesterday and last four week in Glasgow and by our presidency. So the press has been impressed by the car’s performance as well as by our organization and capabilities. We are confident that other manufacturers will follow soon. Hyundai and CNG system represent widest (indiscernible) technologies. We expect to sell this year 1,500 of LBI for Kia Sportage.

Pietro Bersani

And the interesting thing, Eric, is that this system is attracting the attention of other OEMs. So not just about the two ones that Mariano just mentioned, which is Kia and Hyundai but also other ones. And when I’m saying other ones, I’m referring also to other OEMs, which are currently not our customers.

Aaron Spychalla - Craig-Hallum


Mariano Costamagna

Of course and correct, Pietro and then, you know, you all know that (indiscernible) process about the European market will be focused on the direct investment. And this is what I said is really key milestone in development of gas fuel technologies. We are ready now to catch this market.

Aaron Spychalla - Craig-Hallum

Good, that’s good color. Thank you. And then maybe secondly on the industrial side of things, you mentioned the new OEM contract. Can you just maybe talk about visibility? You talked about a ramp in the second half of this year but maybe just talk about that and this new contract. I know that you mentioned discussions with other industrial OEMs. But how do we think about that business -- visibility there for the rest of this year and then what that could look like in 2015?

Pietro Bersani

Sure. As you correctly pointed out, Eric, it’s a matter of transition starting from the very beginning -- from basically the very end of this year and then moving forward in 2015. With Ford -- about the Ford mobile industrial engine and (indiscernible), we have a number of development engines being tested with some strategic focus OEMs. About the Nissan mobile industrial engine, again, the program is currently in the development phase. And it is projected to launch in Q1 2015.

In addition to that, we have a diesel converted to (indiscernible) Chinese development engine program as well, which is at this time running in the test sale. For this last one program, which is very important, we are anticipating calibration to be completed around Q3 and Q4 of 2013 so that the sales may begin at the very end this year and more probably from the beginning of next year. So from a mobile industrial perspective, this is what we have. This is a bunch of new main programs that over midterm will be able to offset the loss of the micro business.

Aaron Spychalla - Craig-Hallum

Okay, good. Thanks. I’ll hop back in the queue.

Pietro Bersani

All right. Thank you.


Our next question comes from John Quealy with Canaccord Genuity.

John Quealy - Canaccord Genuity

Hey, guys, how are you? First question, when you talk about the China expansion, can you give us timeframes and potential dollars needed to do that, what is the structure likely to be?

Pietro Bersani

Are you referring that -- John, are you referring to the expanding level of operation from a field system perspective, or are you talking about the specific business segment?

John Quealy - Canaccord Genuity

Yes, no, from a fuel system perspective; your comments about branded and a little bit more control?

Pietro Bersani

It’s an efficient and effective way we believe that we can deploy the Chinese opportunity. So from both an automotive standpoint, after the end of the Volkswagen Shanghai program, considering new opportunities that we have and from a loss perspective in commercial with the diesel conversions back in engine that we are developing, we believe that joint, let’s say, one common structure serving two different statement like industrial automotive would be similarly useful. We are not expecting dramatic level of investment in that. I mean, this is something that you may want to consider in approximately in 7 digit region. The timeframe is not seen in order to position us very well from 2015.

John Quealy - Canaccord Genuity

Okay, that’s helpful. And then, away from the established sort of automotive market in Europe, how are you folks faring on competitive wins? I realize Europe is margin constrained right now on the automotive side but how are you doing with some of the heavy duty and other industrial application competitiveness?

Pietro Bersani

Well, in terms of profitability opportunity, we believe that from an automotive still, let’s say the predominant business standard. We believe that through the deployment of additional programs, in particular for the LCD power units in industrial, we may to a certain extent increase that profitability. But don’t forget, John, that in terms of heavy duty, which is the program we have in Asia, which has been postponed, that’s a highly profitable program. So we expect that by next year, which is 2015, we hopefully may recall that program because of the local situations in Thailand. And that would make possible to increase significantly the profitability overall of the heavy duty, which is part of the industrial business.

So overall, I think that from a profitability standpoint and talking about industrial, the new programs that I mentioned will be when full regime and more profitable than the larger customer program that came to an end. And the restarting of the heavy duty business in Asia will also help. That being said, for automotive, especially considering the most growing geography of the U.S., that’s another story. And that’s very much opportunistic in terms of growth.

John Quealy - Canaccord Genuity

Okay. Thanks, Pietro.

Pietro Bersani

You are welcome, John.


(Operator Instructions) Our next question comes from Matthew Blair with Macquarie.

Matthew Blair - Macquarie

Good morning. I just want to touch on the M&A market. Can you offer any general commentary on M&A? Is it pretty active? Are you seeing a good number of potential deals? Also, any comments on pricing or multiples or any distressed sellers out there? Thanks.

Pietro Bersani

Matthew, when it comes to M&A opportunities, there is no doubt that, like we said during the Q4 earnings call, that’s where we are working, that’s where we are focusing and we are ready to catch any opportunities. In terms of possible direction, let’s take a look at our income statement. You know where the biggest part of revenue is coming. And for indirectly, you may have kind of a possible level of priority in terms of business segment. That does not mean that we are not looking around also at other segment that we are not considering us, not at all. It’s really a matter of (indiscernible) 360-degree approach to look at and to look for opportunities. Certainly, what we are doing is aimed at make sure that we best -- we can guarantee the best growth in terms of value to the shareholder. That’s what we are doing. That’s what we are focusing on. This is the number one priority…

Mariano Costamagna

Yes, you are right. And make you -- making the size company which product is complementary to us, to ours product and we’re looking for that in order to achieve opportunities and product on market level is our type of acquisition that we are looking for.

Matthew Blair - Macquarie

Great. Thank you. And then just want to follow up on Venezuela. From the prepared remarks, it sounds like you’re still down there. I know Ford was down for a couple of weeks but I thought they had started back up. How much longer do you think you’ll be down? How much of an impact is this going to be in the second quarter? And is it fair to say that Venezuela is your most important Latin American market? Thanks.

Pietro Bersani

Well, I would say the most important market in South America is Argentina more than Venezuela. You are right about the fact that right now we are still down in terms of sales to OEM. As a matter of fact, we had no units sold in Q1 2014. It’s difficult every time it comes to a tradition which is impacted by local political situation. However, I will not exclude that over the next few months that the situation could be positively evolved so that we can start again with those sales. This is overall what I can tell you. But really, Matthew, it’s a matter of how difficult can be a tradition which is primarily political driven.

Matthew Blair - Macquarie

Okay. Thank you very much.

Pietro Bersani

You are welcome.


I’m not showing any further questions at this time. I would like to turn the conference back over to Pietro Bersani for closing remarks.

Pietro Bersani

Thank you all for your participation and we’ll speak with you next quarter. Thank you very much for your time.


Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day. Speakers, please stay on the line.

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