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Executives

Carolyn Capaccio – IR

Mariano Costamagna – President and CEO

Tim Standke – Executive Director

Pietro Bersani – CFO

Analysts

Graham Mattison – Lazard Capital Markets

Steven Dyer – Craig-Hallum

Rob Brown – Light Street

Shawn Severson – JMP Securities

Colin Rusch – ThinkEquity

John Quealy – Canaccord Genuity

Matthew Blair – Macquarie

Fuel Systems Solutions Inc. (FSYS) Q2 2012 Earnings Call August 8, 2012 11:00 AM ET

Operator

Good morning. My name is Bony and I will be your conference operator today. At this time, I would like to welcome everyone to the Fuel Systems Second Quarter 2012 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Participants please limit yourselves to one question and one follow-up and then regain access to the queue.

Thank you. I will now like to turn the call over to Ms. Carolyn Capaccio of LHA. Ma’am, you may begin.

Carolyn Capaccio

Thank you, operator. Good morning, everyone 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 of results. Tim will review operations of FSS Automotive and FSS Industrial and Pietro will follow with the financial detail and he will then conclude with closing remarks 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 at 415-433-3777 and we will send one to you.

Before I turn the call over to the Fuel Systems team, I would like to remind everyone of the Safe Harbor statements included in the earnings press release 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 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 company’s control and are subject to change based on 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 the Fuel Systems Solutions 2012 second quarter conference call. On this call, we’re introducing Tim Standke, who is IMPCO’s Chief Technology Officer and the Executive Director of Fuel Systems Solutions, who work with me in the advanced technologies. He also represents the company at worldwide technical area and in our long efforts. And we will be speaking on our quarterly call today.

Since we spoke to you on our last call, we have accomplished quite a bit. We announced that we update our management structure, reclassified our segment reporting, which matched how we are managing this business and completed study for our U.S. automotive operation. We will update on this and our revised on today’s call.

Our new organizational structure provide key advantages, improving attention and response to the customers feedback, encouraging innovation and R&D coordination, managing operation more efficiently and driving cost efficiencies across the organization.

Today, we reported second quarter revenues of over $109 million, reflected an increase of our automotive volume, particularly DOEM volumes in Italy. This higher delayed OEM activities particularly benefited our gross margin of 27%.

During the quarter, despite of continued near-term investment in technologies in order to continue to execute our long-term growth strategies, our operating margin is slightly improved due to revenue shift towards delayed OEM.

Now I turn the call over to Tim Standke for an update of both division business. Tim?

Tim Standke

Thank you, Mariano. Good morning, everyone. I will start with the automotive division, which consists of the companies OEM passenger and light duty commercial transportation, automotive aftermarket, transportation infrastructure operations as well as the U.S. automotive unit, which was formerly a part of the IMPCO division.

Automotive posted second quarter 2012 revenues of $78.3 million, a decrease of 6%. In constant currency, the automotive revenue increased 4.2%. Operating margins improved to 7% versus 5% in Q2 2012, due to a shift in revenue mix for delayed OEM revenue to last year.

In Europe, delayed OEM volumes increased 66% to an average of 3300 units per month and had a positive impact on our profitability. This is particularly true in Italy. Chevrolet volumes were strongest with Nissan, Mitsubishi, Hyundai, Kia, Ssangyong and Ford all contributed. The price differential between alternative and traditional fuels continues to drive demand and offer an attractive payback in this region.

As a result, OEMs are expanding the number of CNG and LPG vehicles they offer. Our competitive positioning in this region remains very strong. We are unique in offering a complete systems that generate significantly higher revenue per vehicles then selling much larger volumes of components to OEMs.

Fuel Systems is competing effectively to be the OEM and delayed OEM partner of choice in all our geographies and our share of this global opportunity remain strong. Aftermarket volumes grew approximately 25% in Italy as the price of fuel in Italy and European economic woes make the economics or a conversion very attractive. We expect this trend to continue through the rest of the year.

Now, I will review some highlights for other key geographies where we are strategically positioned. Our OEM channel in India and China remain stable with Maruti Suzuki units in India steady at 5,000 per month and Shanghai Volkswagen steady in China at 1,000 units per month.

In Thailand after the flooding that took place last year, we were invoicing our first kit to Honda, with building volumes expected in Q3. And we expect our top partnership with Mitsubishi to recover and begin contributing in the fourth quarter.

While Latin America continued to be a strong region for both OEM and aftermarket. We have seen a slowdown in Venezuela due to foreign money supply problems in that country, which have affected shipments of the Ford Fiesta.

The availability of foreign currency in the country should allow the restart of the program in September. Despite two months of stopped production, we do not foresee any important impact on this year’s revenues in Venezuela, which remained the largest export market in that region in 2012.

Peru aftermarket shipments continued to strengthen in the second quarter with volumes tripling and demand continues to increase into the third quarter, while Chile demand dipped temporarily in Q2, but resumed in Q3. We expect volumes in Chile and Argentina to remain steady at the same level in the second half of the year.

In North America, Q2 was mainly driven by aftermarket sales and by the shuttle bus market. During the quarter, we chose to hold back some aftermarket kits while we work to resolve the technical issue. This has been resolved, and we provided retrofit kits to affected customers. During Q2 the level of revenues basically recovered to the values before the technical issue.

Aftermarket kit sales in July have been according to our expectations and we expect aftermarket performance to improve in the second half. In the OEM segment, we expect to begin shipping units for GM’s Byfield pickup program toward the end of the year. Similarly, we expect an important increase in the volumes of the GMT 610 model bank during Q4. 2012.

Next, I would like to provide an overview of the industrial division, which consists of the company’s industrial mobile and stationary and auxiliary power units or APU and a heavy-duty commercial transportation operation. FFS industrial reported revenue of $30.7 million, and was down approximately 8.4% compared to the prior year quarter, primarily due to lower volumes at U.S. industrial and in constant currency, industrial revenue decreased 4.6%. Operating income also declined due to the lower revenue and profit mix.

Our mobile markets experienced weaker demand in North America as well is in Europe due to the poor economic outlook while other markets remain stable. Stationary industrial market in general is experiencing growth due to escalating diesel prices, fear for regulatory requirements, failing infrastructure, increased power needs and the increased availability of natural gas. We are currently diversifying our system’s offerings to further capture this opportunity.

Our APU business continues experiencing strong sales for North America Class Eight trucks. Our new APU comfort complementary product line positions us to penetrate high-volume fleet markets. Asia offers the largest growth opportunity for our commercial vehicles and we are increasingly focusing our investments on programs in India, Thailand and Southeast Asia, as well as the heavy duty bus market in China.

In summary, FFS, automotive our industrial are well positioned to serve the demand for natural gas solutions for vehicles – vehicle markets and industrial applications.

Now, I would like to turn the call over to Pietro.

Pietro Bersani

Thank you, Tim. Before I review the numbers, I would like to briefly walk you through our new management structure, and review our U.S. automotive cost and revenue outlook that we complete in the second quarter.

In our June 27 press release, as I have already discussed with many of you, we announced that we adjusted our management structure, assigning key functions and reported lines to increase the effectiveness of the organization.

Our new executive committee includes Mariano, myself and five executive directors overseeing operation supply, marketing and sales and engineering. This structure and the adjustments that we made to the composition on our two divisions streamlined product development and increases responsiveness throughout the organization.

Also, as we announced on June 27, we performed a study of our U.S. automotive operations as we wanted to better evaluate the projected acceleration of revenue in the U.S. market, our cost structure supporting our growth strategy and the efficiency of our global automotive resources infrastructure.

Fuel Systems occupied the number one position in the emerging U.S. market for kit users for conversion and we wanted to ensure that we were approaching this opportunity appropriately as the company grows larger.

This study examines U.S. automotive sales and marketing, engineering, technology and operation and supply functions and how each operated within the company as a whole. As part of the evolution of the organization, including the update we made to our management structure, we were prepared to apply these status recommendations throughout the organization.

The study showed that Fuel Systems has invested in our U.S. automotive opportunity appropriately but that we could better support our growth and achieve greater efficiency by improving reporting and functional responsibilities in our marketing and customer communications. Therefore, we are taking the following actions that are described in today’s press release.

Technical and engineering functions now had a stronger internal ownership throughout the organization and that's directly supervised by the executive committee. This leads to efficiency and the sharing of technical information on a global basis.

We are moving our U.S. aftermarket activities out of our Santa Ana California industrial facility, and concentrating all U.S. automotive operations within our Sterling Heights and Union City facilities.

To ensure we are maximizing our space and marketing opportunities, we are refining U.S. automotive aftermarket and OEM sales and marketing strategies. As part of these at the corporate level, in order to be responsive to our OEM partners request, each OEM will now have a single global FSS point of contact.

As I mentioned, Fuel Systems has built and defended the leading position in the market and we continue to compete effectively. We are also reorganizing our customer support service to announce communication and responsiveness. An example of this was the communication around aftermarket technical issues, Tim mentioned above. While we took the appropriate actions to support our customers, our actions could have been better communicated. This is now corrected.

Finally, in order to better support our revenue forecasting and associated technologies spending, we are incorporating better market data into sales and marketing plans. This may not always increase visibility, but should give us more rigor in our discipline.

These actions overall are designed to ensure greater consistency across the entire company and better coordination on our U.S. and global automotive team’s skill sets with ownership responsibilities. As I mentioned, we have begun implementing the recommendation of the study and would expect to have all actions effective by the third quarter of this year. We are focusing on serving our growing customer base and maximizing our returns on our investment.

Now, let’s discuss the results for the second quarter ended June 30, 2012, as compared to the second quarter of 2011. Total revenue was 109 million, compared to 116.6. Second quarter 2012 revenue increased 1.7% on a constant currency basis.

Automotive represented 72% of revenues and industrial represented 28% of revenues Compared to 71% and 29%. The Americas, North and South delivered 43% of group revenue and represented our largest single macro geographic region for the seven quarter running. North America at 24% and the Latin America at 19%, this level compares to only 39% of revenue during the second quarter of 2011. Europe accounted for 42% of consolidated revenue with Asia delivering the remaining 15%.

Fuel Systems revenue base remains diversified and on a macro global regions. Foreign currencies fluctuations negatively impacted revenues in the second quarter by 9.6 million. Euro average rate for the second quarter 2012 decreased by 10.7% compared to the euro average rate for the second quarter 2011.

Gross profit was at 29.1 million, or 27% of revenues, compared to 27.1 million or 23% of revenues and reflects the automotive business mix change and increase OEM and DOEM contributions. Operating expense was a 8.3 million, compared to 7.2 million. The increase, primarily attributable to costs for new projects in the U.S. and next innovation development costs in Italy.

SG&A expense was $14.6 million compared to 13.5 million. SG&A includes, by segment, in the fuel segment industrial division increase relates primarily to slightly higher compensation and related expenses, severance costs, consultancies and costs associated with the full period of alternative bill system acquisition in May 31, 2011.

With regard to FSS automotive, the increase relates primarily to an allowance for a non-collectible loan, the absence of the credit for PCI contingent consideration partially offset by weaker local currency and lower services and consulting fees.

Total operating expenses were 22.9 million, or 21% of revenue compared to 20.7 million, or 18% of revenue. Operating income was 6.2 million, or 5.7% of revenue, compared to 6.4 million, or 5.5% of revenue. Income tax benefit was 0.6 million, compared to income tax expense of 3.1 million.

Our second quarter income tax does reflect the current mix of income and rates by jurisdiction as well as their recognition of a tax benefit of approximately $5 million or $0.25 per share related to the release of our evaluation allowance in Canada, as we determine that the net deferred tax assets in these entities were recoverable.

We now expect a full year 2012 effective tax rate to be approximately 30% with approximately 35% in the second half. Net income was $7.1 million or net income of $0.36 per diluted share, compared to net income of 3.8 million, or net income $0.19 per diluted share.

Now, on to the balance sheet. At June 30, 2012, our cash and cash equivalents balance was $53.9 million, compared to $96.7 million at December 31, 2011. Cash provided by operations during the quarter ended June 30, 2012 was 16.4 million, compared to 17.8 million, in the same period a year ago, approximately 2.9 million provided by industrial and 16.1 million provided by automotive. Inventory was at 110.5 million at June 30 compared to 103.4 million on December 31, 2011.

Inventory turns were 2.9 times. Inventory has increased since the 2011 year-end, as we invest in the North American automotive market and as we are experiencing growth in aftermarket business and due to an acquisition at BRC. We continue to recognize the importance in managing our inventory levels, and believe that we will address these challenges, with new global management organization structure and we have already initiated plans and goals to reduce inventory by year-end.

Accounts receivable at June 30, 2012 was 76.4 million, compared to 62.6 million at December 31, 2011. The increase in our accounts receivable is primarily attributable to increasing volumes in our automotive business, particularly the growth in OEM and DOEM, AP business and in the aftermarket in Italy.

As our business needs changed, our concentration change and we have larger accounts receivable balances with longer payment terms with the OEMs then we had with our aftermarket customers.

Days sales outstanding were 75 compared to 67 at 2011 year-end. We remain diligent in our collection of dividend and are certainly aware of its impact on our cash flow. Total assets as of June 30, 2012 were 445.7 million compared to 450 million at December 31 2011.

Now on to our financial guidance, the company outlook. As we indicated we reported Q1, we have performed an update to our outlook for 2012, taking into account the findings of the U.S. automotive cost and revenue outlook review. Our revised outlook includes the following assumptions normal second-half seasonality and the anticipated continued negative effect of foreign exchange translation.

Automotive division, revenue contributions are expected from OEM programs planning to begin to roll out in the second half of the year in Thailand and certain Latin American automotive markets.

Growth in the European aftermarket product and the revenue contribution from U.S. automotive at levels higher than in the first half of the year, although at the lower rate of acceleration than originally anticipated.

Industrial division, expect continued growth in stationary equipment and if use offset to some extent by lower mobile industrial equipment. Based on the a aforementioned factors, the company now expects full year 2012 revenue to be between 405 million and 420 million and continues to expect 2012 gross margin of 23% to 25% and 2012 operating margin of 3% to 5%. This concludes our prepared remarks.

Operator, now I would like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Graham Mattison of Lazard Capital Markets.

Graham Mattison – Lazard Capital Markets

Hi, good morning, everyone.

Mariano Costamagna

Hi, Graham.

Graham Mattison – Lazard Capital Markets

Hi.

Mariano Costamagna

Good morning.

Graham Mattison – Lazard Capital Markets

Throw me just a little bit more color on the U.S. automotive side. What has changed in your outlook specifically from where we are today versus where we were when you give the guidance initially?

Mariano Costamagna

When we talk about U.S. automotive, is often a matter in terms of visibility, visibility meaning the orders, timing and the evolution. Now, this is the right time now we are entering the summertime, we do have more information and as a result of the study and the visibility that we have, we can confirm that we expect the revenue contribution from the U.S. automotive at levels definitely higher than in the first half of the year.

After completing the U.S. automotive study that we just mentioned and commented during the call as well as in the press release, and taking into account the pause in aftermarket sales in Q2, restarting aftermarket sales in Q3 and the lower rate of OEM revenue acceleration in Q4, than we previously forecast, we now anticipate a full year 2012 revenue contribution from this business unit that is roughly comparable to last year.

Graham Mattison – Lazard Capital Markets

In any case, you’re saying the U.S. OEM program, is that pushing out, or I mean, do you see orders shifting into 2013? I guess, could you give some outlook on how you see that developing in 2013?

Pietro Bersani

Well, we confirm that we expect to begin shipping units for the GM (inaudible) programs toward the end of this year and at the same time, we expect an important increase in volumes for the GM to extend their model during Q4.

Of course, in order to experience a greater increase in the growth rate for the U.S. automotive, next year, we’ll be providing a more positive impact in terms of contribution of U.S. automotive to the company business. There is no doubt about that.

Graham Mattison – Lazard Capital Markets

All right, great. And then just to follow-on, if you can just give us your thoughts on your consolidated company EBITDA, in the past you had said that you expected that to be in the mid-teens, is there something you still expect in short and medium-term.

Pietro Bersani

That makes sense. In the medium-term standpoint that make sense. Right now, we’re talking about approximately 9.8% at the company consolidated level, of course. There are certain differences between automotive industrial 11.3% compared to 9.9% in the second quarter this year. But that makes sense, yeah.

Graham Mattison – Lazard Capital Markets

Okay. Great. Thank you very much.

Operator

Thank you. Our next question comes from Steven Dyer of Craig-Hallum.

Steven Dyer – Craig-Hallum

Wondering if you could comment a little bit on the DOEM business in Italy and in other areas as well. It looks like things are firming there. Is that a trend you expect to see continue?

Mariano Costamagna

Yeah. First of all, as a first comment, I’d say that we do expect this trend to continue. And when I say trend, I am referring to the fact that we did execute it very well, and we continued to execute it very well with respect to the DOEM.

At the same time, aftermarket volumes in Italy are continuing to grow. And the key reason for that being the price differential, the significant price differential between alternative fuels and traditional fuels. This continued to be a very, very strong catalyst, not just for that country only, I mean, Italy, but also for most of the geographies where we do make our business.

Steven Dyer – Craig-Hallum

Okay. And then wondering if you could touch a little bit on the aftermarket business, you haven’t said a lot about it. In my notes, correctly that you expect that to improve a bit in the second half of year or maybe a little more color there?

Pietro Bersani

Of course. The market driver is always the same and then the price differential between gasoline and gas. The more there is an economic squeeze, the more the people are trying to save money, using cheaper fuel. That’s today in general not just in Italy, but in general this is our, let’s say, advice about it.

Mariano Costamagna

On the geographic standpoint, there are some short term differences. Italy is executing very well. There is a number of other countries, for example, in Latin America where for contingent situation, right now there have been kind of a slowdown. But we think that by the end of the Q3, there will be full recovery to the situation that we’re forecasting. I am basically making reference to the Venezuela country where due to foreign mining shortage there has been some negative impact. You probably know that one of the strongest problems that we do have in the country with Ford in particular with Fiesta so we confirm that we expect to recover those volumes by Q3.

Steven Dyer – Craig-Hallum

Okay. So do you expect that business to be up in the second half of the year versus the first half?

Mariano Costamagna

That would be basically a steady effect, steady result, because of the results of the (inaudible). So under a global standpoint, taking into consideration what we have been saying for Italy, what we have been saying – what we are experiencing for Latin America, as well as with some important countries in Asia like Thailand, is definitely something which makes sense.

Steven Dyer – Craig-Hallum

Okay. And then last question the auxiliary power unit, what was the revenue in that business this year and then maybe any commentary looking forward there?

Mariano Costamagna

Well, we are talking about something not definitely material. It is under the FSS industrial division standpoint; it does account for approximately 30% of the industrial revenue. We are experiencing, especially for certain specific models that Tim mentioned to you, excellent performance and it continues to be a very strong catalyst, why I am saying this is because you may be aware of the anti-idling legislation in the U.S. which is a strong factor, especially for the APUs for the trucks. So it’s something which is important – extremely important under an industrial standpoint and also getting pretty much significant for the company’s business.

Steven Dyer – Craig-Hallum

Okay. Thank you.

Operator

Okay. Thank you. Our next question comes from [Rob Brown of Light Street](ph).

Rob Brown – Light Street

Good morning.

Mariano Costamagna

Hi Rob.

Rob Brown – Light Street

Hi. You talked about a low single-digit constant currency growth rate, if you just kind of step back, how do you see the global industry for all fuel? What is the growth rate in the industry as it sits today? And, how do you see it going in the next couple of years?

Mariano Costamagna

This is something which is – that’s a very good question, of course. And the appropriate response to that is geography by geography. In other words, a common industry factor for the business which is – which does apply for most geography if not all the geographies, the strong price differential between alternative fuels and traditional fuels.

The more you have such a spread, the easier is it to continue to experience a growth in volumes, which means that if we continue to experience more than 50% of price differential you can imagine how effective can be the cost savings by end-users. And, as I like to draw to your attention, Rob, even if in a geography where the economic situation is bad like Europe right now, still we say people are paying more attention in connection with regard to any cost-saving action. So the good news is that Fuel Systems with such industry dynamics, with such catalysts, is in a position to execute very well also in the troubled economic regions like Europe right now.

On a global basis or at least looking out other important geographies, for example if you think about in North America and particularly U.S., U.S. there is plenty of financial gas reserves U.S. supposed to become pretty much soon the first export country for the natural gas. And you personally know what is the difference in terms of price – in terms of commodity price between oil and natural gas.

So all these factors put together, make it clear that the future of this business is definitely something very, very interesting and due to our diversification of our business, due to our business operating model, due to the fact that we are where we need to be in order to catch every opportunity of increase, I think that Fuel Systems is in a very I would say in an excellent position, excellent position to benefit from that. And this is something which applies in all the three key geographies around the world where natural gas is becoming really very practical and real and cost savings resource.

Rob Brown – Light Street

Thank you. And then just a follow-up on Graham’s question on the U.S. automotive business. You’ve talked about ramping later this year but just remind us again what models you’ll be on, sort of what your capacity is and could you give us a sense of what the unit volumes are starting out at and sort of what you think they could be next year?

Tim Standke

Well, in terms of models, we have, we try to cover a good ground, in other ways we are trying to make sure that we have pickup trucks and we have bands and we have passenger cars. And we try to make sure that we have a good variety of kits for the aftermarket to be able to build the installers and operators as well as putting together programs for things like our QVM program. We do Ford pickup trucks, and we do Ford vans. We have dedicated systems and bio-fuel systems.

So in terms of the suite of products, there is quite a bit out there and it’s kind of ironic because if you get one or most of the companies out, they only have one or two products to offer, so they can focus on those products. We get about – I don’t know 12 or 14 or something like that different products that we have on the market to offer, get one problem with any of them and it becomes a very big issue. But overall, the market seems to move pretty smoothly and we have the ability to supply a lot of the components into the system.

You have to consider also what kind of a market base we are looking at. We have to be careful not to go into areas where we cannot recover the income or cannot recover the expenses that we incurred by developing a system. So we do avoid, say for example in the United States market, the U.S. automotive market, the smaller vehicles, we don’t do very many but I don’t think we offer any certified systems for really small passenger cars. And the reason for that is the economics of driving it right now. However, we do offer things in the medium duty and we offer things in the light duty pickup trucks.

So, in terms of keeping things busy on our end, if I recall, we also make sure that we keep our assembly plant in Indiana busy, we want to make sure that we have enough systems and products that they can provide into the marketplace but from a capacity standpoint, we’re running basically just one ship which means that we have quite a tremendous amount of capacity available from manufacturing standpoint.

Rob Brown – Light Street

And then specifically the GM business in Indiana, are you – how should we think about the volumes ramping in that business sort of the rest of this year and into next year?

Mariano Costamagna

It’s an assumption that as we said, I mean we do expect to start with the volumes to ramp up in Q4 of this year, but mostly the fact would be effective from the next year. This is something that we can confirm. And when we talk about GM, we are basically making a reference to our two main problems that we do with GM we do with Jim Q4 this year and then next year.

Rob Brown – Light Street

Okay. Thank you.

Mariano Costamagna

You’re welcome.

Operator

Thank you. Our next question comes from Shawn Severson of JMP Securities.

Shawn Severson – JMP Securities

Okay, good morning.

Mariano Costamagna

Hi Sean.

Shawn Severson – JMP Securities

Hi. I was wondering if you could expand a little bit on the R&D and the technology roadmap obviously the spending continues to pick up I just wanted to get an idea of kind of where is that going, any new key technologies on the horizon and whether we should expect it to continue at this rate from this quarter going forward for the rest of the year?

Mariano Costamagna

Yes, I think it’s a very good question, thanks for that. The biggest thing that we have to take into consideration from our company is the long-term effects. We have to consider where is – what are the technologies that we are going to need to meet when the future comes down. News we referred to as enabling technologies. Enabling technologies are things that allow us to adapt and build-in. A good example is we have developed and have been developing over the last few years direct injection systems for propane vehicles in Italy.

We have a direct injected propane solution; we’ve got other things that will be going into the future. We have a very substantial R&D center in Italy that we’ve commissioned about two years ago, I think it started to commission. And the facility is absolutely fantastic, and the target of this thing is to anticipate the needs of the future and to be able to have the equipment, to have the people, to have all the resources necessary to implement and build those enabling technologies. Sometimes those enabling technologies require that we cooperate with other customers say like the automakers but in many other cases, we are pretty much on our own to try to develop them. And we use what we know about the market industry and about what technologies are necessary to evolve into those directions.

Pietro Bersani

Sean, we need to continue to invest because that’s our future of course so whatever the project that you mentioned as well as next-generation development project for our platform for our product availability range is something which is absolutely key. And so in terms of run rate of the R&D costs, for the next, for the future at the end of trend even they may want to continue to think something around the current rate something like that.

Shawn Severson – JMP Securities

And are there any ambitions or moving into the medium duty as far as the market segment for you?

Pietro Bersani

Sean.

Shawn Severson – JMP Securities

The medium duty engine category or strictly light duty with your R&D programs?

Pietro Bersani

Are you referring to things like the 6-liter diesel type of market?

Shawn Severson – JMP Securities

Yes.

Mariano Costamagna

At this time we’re not pursing anything specific or at least I cannot talk about anything we’re pursuing specifically in that type of market space. We are in that market around the world but I’m presuming right now you’re talking about the U.S.?

Shawn Severson – JMP Securities

Yes. Okay. And then just my follow-up, any update on the competitive environment in the aftermarket kit business and especially particularly in Europe?

Mariano Costamagna

In Europe, yes. I mean, there is no doubt that the fact that the competition is strong. You know that’s Fuel Systems for BRC brand is a very strong market position. We have around 25% in the market in Italy. You know that Italy is our number one market in our geography where we do make our business. We are head of our main competitor whose name is Shoris Derman Rento. I would say that Fuel Systems continues to be very strong appreciated brand and it is something that makes clear when we look at the contribution that we can get by selling our product.

Of course as I said that doesn’t – this does not mean that we are not experiencing a strong competition that would be not correct we are expanding competition. There may be also some kind of pricing pressure in some areas, but it’s something that we think we believe that we can definitely manage in a proper way to continue to – so that the company may continue to grow in that respect.

Shawn Severson – JMP Securities

But suffice to say it hasn’t changed much from the last call let’s say this study hasn’t very much over the last couple of months?

Mariano Costamagna

Yeah. But when you make this kind of comparison, I would suggest you look at the expansion of the OEM business that we experience in Italy. As a matter of fact, if we compare the quarterly units that we are converting right now, with those one that we were making for example in Q1 this year, you can actually experience a very nice interesting. As a matter fact right now we are around 9500 less 10,000 units and a quarter basis which is a significant improvement from the previous quarter where the run rate was approximately around 5,506,000 a quarter basis.

Shawn Severson – JMP Securities

Right. Thank you.

Mariano Costamagna

Welcome

Operator

Thank you. Our next question comes from Colin Rusch of ThinkEquity

Colin Rusch – ThinkEquity

Can you just give us a bit more color on the gross margin guidance given the performance year-to-date. It seems like it have to be relatively low kind of in the 22% 23% range in the backup to get the full year guidance. Can you talk about any specific driving that line?

Mariano Costamagna

Well, Colin, the more you – I mean the more if you does experience a change in its revenue and of course the more the gross profit will be impacted. What does it mean? It means that due to the increase in OEM and OEM volumes that we have been experiencing in Q2. That is why the more you see that impact on gross profit.

Now, really a very diversified situation, think about what we just said about Italy, think what we said about Latin America. Think about the fact that depending on the different regions we do have different contributions from aftermarket or OEM compared to the same business in other geographies.

So profitability for aftermarket OEM and in Europe is quite different from the profitability that you can get for example in the U.S. where we talk about aftermarket and OEM. So it’s really a result of the mix of factors having a specific impact in this kind of assumption. So by taking the appropriate consideration all the assumptions that we mentioned to you we can definitely confirm that raise between 23 and 25%

Colin Rusch – ThinkEquity

Okay, great. And then as you consider all the OEM programs in Asia and Latin America ramping into 2013, I know you talked a little bit about, little about Venezuela but could you talk about what the rate run rate is so thinking about that an inflection point and one we might build to see some more meaningful growth?

Mariano Costamagna

Colin, are you referring to the Asia geography?

Colin Rusch – ThinkEquity

Yeah, both Asia and Latin America.

Mariano Costamagna

Well, in Asia, what’s going on is that after the same results of the – or the flooding we are definitely in a recovering situation. When I said this, I am making particular reference to Honda like Tim said.

We started to recover the units. The contribution from both Honda and Mitsubishi were extremely poor of course, this was six months of this year. But like we said you know, the second half of the year will be definitely better.

And there is a number of OEM programs that are planned to allowed in Latin America. You probably know that we do make business with General Motors, with Ford as well as with Mitsubishi. Toyota is also very important we aim but not our customer. This is (inaudible) customer.

We have an excellent product offering for such a key OEM players in Latin America. And remember, we are not talking about Venus there. When I said, when I mentioned Ford, I am talking about Ford Fiesta, which is one of the best seller in that market. We are talking about the S350 as well as the Range. So we definitely are in a pretty nice position.

Colin Rusch – ThinkEquity

Thanks so much.

Operator

(Operator Instructions) Our next question comes from John Quealy of Canaccord Genuity.

John Quealy – Canaccord Genuity

Hi. Good afternoon.

Mariano Costamagna

Hi, John.

John Quealy – Canaccord Genuity

First question. And I’m sorry if you said this. The percentage mix between aftermarket and OEM and delayed OEM for the quarter and your outlook.

Mariano Costamagna

If you – I would say, right now, and when I say right now I am referring to the second quarter of this year, aftermarket, that accounted for approximately 58% of the FSS Automotive total revenues. And this is up from last year – sorry, this is a little bit down compared to last year because of the growth of DOEM and OEM business. Right now the DOEM and OEM business into the Automotive division, that account for 35%, which is up from 25% of last year.

So the information that we have right now are definitely confirming this trend of – in terms of the growth of DOEM which is good news, because of the positive impact at the gross profit level. And a consolidation – further consolidation of aftermarket volumes in certain geography making possible to offset some lower rate in other countries.

John Quealy – Canaccord Genuity

Okay. Thank you. And my follow-up, in terms of the North American market, can you talk about the potential for transferring some of your relationships, for example, with KIA or Nissan here to the U.S. Is that a potential or you’re just focused on some of the models that you had talked about previously for North America? Thanks.

Pietro Bersani

Hey, John. Actually, I’m glad that you asked that question because it brings up a topic that needs to – will probably answer your – that will probably answer your question and something that probably needs to be understood. Part of our reorganization is to be able to globalize our company with respect to how our automaker partners are globalized. In fact, we’ll find in lot of our reports that not only are we changing our structure, but we changed the structure at the request and at the – not only have the automakers and things to request us to change the structure, but we’ve also done research and ask about what would be a more appropriate way to manage these customers globally.

So, our relationship with the OEMs has changed and that that we’re now aligning ourselves up globally, not just in the U.S., not just in Venezuela, not just in Korea, but we’re trying to align ourselves up in a mechanism where we can help from all of our locations any customers and any location. So as I bring that around to where the Kia and any of the other manufacturers out there, we’re now in a position to be able to help them and coordinate it globally.

In the past many things, just like the automakers were, we were regionally originally in control, but now as they globalize, we need to make that shift and globalize ourselves. A good example of these coordinated programs might be things like our Ford Venezuela program or GM Venezuela program where we had parties across the world collaborating to make things happen.

And we need to line up with our customers. GM North America, for example, is in charge of the program, engineering happens about at both North America and in Venezuela. From our standpoint, engineering happens both in Argentina, it happens in Italy, it happens here in North America, customer relations, all those things. The complexities of the global market now require that we structure ourselves to be able to manage our customers in parallel. Does that make sense?

John Quealy – Canaccord Genuity

It does. Thank you.

Operator

Thank you. Our next question comes from Matthew Blair of Macquarie

Matthew Blair – Macquarie

Hi, thanks. If I’m doing mine correctly, it looks like Asian revenues are about 10 million lower this quarter compared to the second quarter of last year. Is this entirely attributable to the flooding in Thailand? Or are there other markets in Asia that are slowing down?

Mariano Costamagna

You’re right.

Pietro Bersani

You’re right. Roughly four Thailand. Thailand just recovery this moment and we expect also to start with the program, the program with Honda, and then more than 2,000 complete kits on and monthly budgets in the second part of the year while the last year and then – also that. And Mitsubishi start to be now and while last year was very strong – 2004 monthly basis last year is the reason.

Mariano Costamagna

So Matthew, your assumption is correct.

Matthew Blair – Macquarie

Okay. Thanks. And then Pietro, could you provide the gross income for the automotive and industrial segments for both this quarter as well as the second quarter of last year? Thanks.

Pietro Bersani

As a matter of fact, you can see how the revenues change. Think about the geographical split that we did provide, that’s extremely helpful. We’re seeing now the automotive represents 72% of revenue, industrial were presented 28% of the revenues.

In terms of the potential of the growth for the automotive business, the key factors are exactly those one that we have described. On industrial standpoint, we continue to expect a strong contribution by auxiliary power units, as well as stationary equipment at the lower rate for mobile. That these are the key trends in order to look at the growth income trends for both the divisions.

Matthew Blair – Macquarie

Okay. But can you provide the – your total gross margin was 27% this quarter for the whole company. What was the breakout between automotive and industrial?

Mariano Costamagna

Well, you’re right in terms of the total gross profit which was 27%. The contribution it does reflect is in the same region approximately of the split at revenue level between automotive and industrial, same proportion.

Matthew Blair – Macquarie

Okay. Thanks.

Operator

Thank you. At this time there are no further questions. I’ll turn the call back over to Mr. Bersani.

Pietro Bersani

Okay. So before closing, we will attend the Canaccord Genuity Annual Growth Conference in Boston, August 16th and we hope to see some of you there. Thank you all for your participation and we’ll speak with you next quarter.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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