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Fuel Systems Solutions, Inc. (NASDAQ:FSYS)

Q3 2012 Earnings Call

November 8, 2012 11:00 a.m. ET

Executives

Carolyn Capaccio - Investor Relations, LHA

Mariano Costamagna - Chief Executive Officer

Tim Standke - Executive Director

Pietro Bersani - Chief Financial Officer

Analysts

Steven Dyer - Craig-Hallum Capital

Chip Moore - Canaccord Genuity

Matthew Blair - Macquarie

Shawn Severson - JMP Securities

Rob Brown - Lake Street Capital Markets

Jeff Osborne - Stifel Nicolaus

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 Third 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) I will now like to turn the call over to Ms. Carolyn Capaccio of LHA. Please go ahead, ma’am.

Carolyn Capaccio

Thank you very much, Bony, and thank all of you for joining the call today. With me today from Fuel Systems Solutions’ 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 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 this morning and would like one, please call LHA’s offices at 415-433-3777 and we will send one to you.

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 on the company. There can be no assurance that future developments affecting the company will be those anticipated by Fuel Systems Solutions. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company and 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 2012 third quarter conference call. Today, we reported third quarter revenue of $89.6 million. Our automotive revenue was essentially unchanged in constant currencies with sales reflecting increase in some European countries that were offset by softer aftermarket and OEM demand in Latin America and Asia.

Regarding US Automotive, we will be talking later and we will answer more in details about this important emerging market. We also experienced slowing in our global industrial business where the end markets are weak. This in turn affected our margin performance. Because of the above factors, we have reduced our 2012 outlook. In order to recover this reduction, we are implementing an update on our current plan to performance improvement and it is expected that we can reduce our cost structure and expenses, improve operating efficiencies and forecasting, and provide synergies that will enable us to manage our business well during this slower end-market demand.

We remain focused on the execution and new product development, as well as we continue to invest in the future growth for bi-fuel and mono-fuel systems worldwide on propane and natural gas engine application. Tim and Pietro will provide our outlook in there prepared remarks. Now I will turn the call over to Tim Standke for update on both automotive and industrial business. Tim?

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 US Automotive unit, which was formerly a part of the IMPCO division.

Automotive posted third quarter 2012 revenues of $61.2 million, a decrease of $10.6%. In constant currency, automotive revenue was comparable to the prior year. Delayed OEM volumes increased but were offset by declines in the aftermarket outside of Italy, particularly in certain European and Asia Pacific markets. Operating margins were essentially unchanged at less than 1% versus negative 0.6% in the 2012 third quarter.

In Europe, the challenging economic conditions are actually playing in our favor. The price differential of natural gas compared to diesel or gasoline, continues to drive demand by creating a very attractive payback benefit for the consumer. In fact, the share of alternative fuel vehicles continues to increase in Europe’s extremely depressed automotive market. To win market share, OEMs are more aggressively marketing and communicating natural gas vehicle advantages as well offering extended longer term warranties.

Delayed OEM volumes continued at an average of 3,300 units per month and are trending upwards. In particular, with Korean manufacturers Hyundai, Kia and Ssangyong, as well as Chevrolet, Ford, Nissan, Peugeot, Mitsubishi and Citroën. Aftermarket continued to be strong in Europe, although certain countries slowed including Poland, Argentina and Pakistan.

Now, I will review some highlights for other strategic growth regions. In Indian and China, our volumes remain stable with Maruti Suzuki units in India steady at 5000 per month and Shanghai Volkswagen steady in China at 1,000 units per month. The situation in Thailand improved in Q3 as volumes with Honda increased and are expected to continue to do so while Mitsubishi is taking longer to recover. At this point we do not expect new Mitsubishi orders until the new model year begins in mid-2013.

In Latin America, the foreign money supply issue in Venezuela has been resolved and the recent election confirmed the country’s direction towards natural gas vehicle adoption. Order flow has resumed at healthy rates from this country. Aftermarket volumes in Peru and Chile continued to increase. Latin America overall continues to be an important region for both OEM and aftermarket. In North America, our CNG pickup program with GM significantly raises the bar for bi-fuel trucks. We are excited to be GM’s partner in offering a bi-fuel solution that we believe has the most potential to drive adoption in this emerging market.

We have received our Environmental Protection Agency certification and California Air Resources Board Executive Order, commonly known as EPA and CARB certifications, for our OEM 6-liter bi-fuel pickup program with GM. We have begun production on the new GM 2500 bi-fuel CNG pickups from our assembly line in Union City, Indiana, and are only awaiting on ship to commerce notification from GM. This is the first major milestone which will provide an increasingly efficient process for certifying additional vehicles.

While we continue to be very positive about the U.S. market, OEM rollouts are evolving more slowly than we expected. Some orders we had forecasted for the second half have slipped into 2013 due to timing issues with AT&T and timing and development issues with GM. We continue to expect to begin shipping units for the GM bi-fuel program towards the end of the year. Our 2013 forecast with GM is encouraging and we are confident production will began to ramp in 2013.

Third quarter aftermarket kit sales in North America returned to stable comparisons to last year. We successfully resolved the technical challenges we experienced in the first half and are back to effective selling and fulfillment.

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 the heavy-duty commercial transportation operations. FSS Industrial reported revenue of $28.4 million and was down 9.3% compared to the prior year quarter, primarily due to lower volumes in U.S. industrial. In constant currency industrial revenue decreased 6.1%. Operating income also declined due to the change in the revenue mix relative to last year.

In a challenging global economy, we are developing new programs and product roadmaps in every segment. Our strategy is to capture market share and expand our markets when capital spending recovers. Our mobile markets continued to be impacted by the weaker demand from Europe and North America. While we had growth in some of our other markets, it did not offset slowdown in the major markets.

Our stationary industrial market has new development programs with engine manufacturers and OEMs, that we believe will expand our markets in the future. In our APU business, diesel and rail are down reflecting a softening market. We plan to launch our new low cost battery product in early 2013, filling out our APU line with a very popular offering. Our commercial vehicles contribution was driven by our Hino program in Japan and we are working on new development programs in India, Thailand and South East Asia, as well as the heavy-duty bus market in China.

In summary, FSS automotive is capturing the alternative fuel demand in Europe and has built strong positions in growth markets globally. Industrial is investing in new programs in every market segment to drive future growth.

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

Pietro Bersani

Thank you, Tim. Now let’s discuss results for the third quarter ended September 30, 2012, as compared to the third quarter of 2011. Total revenue was $89.6 million compared to $99.8 million. Third quarter 2012 decreased 1.7% on a constant currency basis. Automotive represented 68% of revenues and industrial represented 32% of revenues compared to 69% and 31%.

The Americas, North and South, delivered 41% of group revenue. North America was 26% and Latin America was 15%. This level compares to 43% of revenue during the third quarter of 2011. Europe accounted for 38% of consolidated revenue with Asia delivering the remaining 21%. Fuel Systems revenue base remains diversified and on a macro global regions.

Foreign currency translation negatively impacted revenues in the third quarter by $8.5 million. The euro average rate for Q3 2012 decreased by 11.6% compared to euro average rate for the Q3 2011. Gross profit was at $18.8 million or 21% of revenues compared to $23.9 million or 23.9% of revenues and primarily reflecting the change in the margin profile of our business and increase in cost of $0.8 million associated with warranties and inventory write-downs.

R&D expense was $6.8 million compared to $7.1 million. FX impact on R&D was 0.4 positive. The decrease is primarily attributable to the positive FX mentioned above, partially offset by increasing compensation expenses in industrial division. SG&A expense was $11.8 million compared to $15 million. The decrease in SG&A includes by segment. In FSS Industrial, the decrease relates primarily to lower outside services. The FSS Automotive, the decrease relates primarily to higher bad debt expense of $0.8 million incurred in 2011. Approximately $0.6 million of reserves for potential [liable] claims from former, the OEM employees in 2011, as well as approximately $0.8 million of cost associated with relocation of one of our Netherland subsidiaries in 2011.

Total operating expenses were $18.6 million or 20.8% of revenue compared to $22.2 million or 22.2% of revenue. Operating income was $0.2 million or 0.2% of revenue compared to $1.7 million or 1.7% of revenue. FX impact on operating income is approximately $0.5 million negative. Income tax expense was $1.8 million compared to income tax expense of $2.0 million. Our third quarter income tax reflects a current mix income and rates by jurisdiction. We now expect our full-year 2012 effective tax rate to be approximately 55%.

Net loss was $0.6 million or net loss of $0.03 per diluted share compared to net loss of $0.4 million or net loss of $0.03 per diluted share. Now on to the balance sheet. At September 30, 2012, our cash and cash equivalents balance was $54.6 million compared to $96.7 million at December 31, 2011. Cash usage by operations during the quarter ended September 30, 2012, was $1.1 million compared to $6.9 million in the same period a year ago.

During the quarter ended September 30, 2012, $4.2 million was used for fixed asset purchase and this $5.1 million was used for financing activities. Inventory was $114.5 million at September 30, compared to $103.4 million on December 31, 2011. Inventory turns were 2.7 times. Inventory has increased since the 2011 year-end as we invested in the North American automotive market, increased activities in the APU markets, and as we have experienced growth in the OEM market and due to an acquisition at BRC.

Inventory management remains a key initiative for the management team as we strive to operate in an efficient manufacturing platform. Accounts receivable at September 30, 2012 was $72.7 million compared to $62.6 million at December 31, 2011. The increase in our accounts receivable is primarily attributable to increase volumes in our automotive business, particularly the growth in OEM and DOEM and compressor businesses.

As our business mix changed, our concentration changes and we have larger accounts receivable balances with longer payment terms with OEMs than we had with our after-market customers. Days sales outstanding were 74 compared to 67 at the 2011 year-end. We remain diligent in our collection activities and are certainly aware of its impact on our cash flow. Total assets as of September 30, 2012 were $439.2 million compared to $450 million at December 31, 2011.

Now on to our financial guidance. Company outlook a Fuel Systems has reduced its 2012 outlook which includes the following assumptions. Automotive division, based on the latest information available from OEM customers, revenue contribution are now expected to be delayed from programs planned in [Thailand] and certain Latin American automotive markets from 2012 and till 2013. Lower revenue from lower than previously expected growth in the European aftermarket products and the reduced revenue contribution from US Automotive, as the market continues to develop more slowly than the regionally anticipated.

Industrial division. Expected continued slowdown in stationary equipment, APUs and mobile industrial equipment markets. Based on the aforementioned factors, the company now expects full-year 2012 revenue to be between $380 million and $395 million and expects 2012 gross margin of 23% to 24% with 2012 operating margin of 1% to 3%.

This concludes our prepared remarks. Operator, now I would like to open the call for questions. Thank you.

Question-and-Answer Session

Operator

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

Unidentified Analyst

This is [Matt Lewis] in for Graham today. In general just from top level perspective, your market opportunity rhetoric seems very stable, yet that really hasn’t translated into the top line, doesn’t seem to mesh with your guidance. And I was just curious if you could offer some color on, just from a top level what the missing piece is to really bring this whole all together over the next year or so.

Pietro Bersani

Well, first of all my comment is that like we said, on an automotive perspective the business wasn’t changing in constant currency. Now what's going on is that some European countries are up like Italy, for example, and some other ones like Poland are down. North America is up and Latin America and Asia Pacific are basically down. Now if you look at a very short-term perspective, we have experienced delay in terms of shipping the units for US Automotive. So the big impact in terms of what changes between the guidance in the second quarter and the current guidance is the impact from US Automotive and industrial business especially in regions like North America and Europe.

We continue to consider extremely, a very good opportunity and as a matter of fact what happened that there were some timing issue in this respect and particularly in connection with the US Automotive business. So still we are interested in multiyear programs and we continue to believe that we are going to ship the units in within the last end of this year and of course having a ramp up of the volumes in the next year.

Unidentified Analyst

And could you offer some color on U.S. market. You mentioned that the demand is still there. Could you just address the underlying factors that are contributing to pushing that out into the future? And along those lines you know your relationship with U.S. automotive customers has generated some volatility in that outlook. Are you working to kind of improve your relationship there and increase your visibility on their demand at all?

Pietro Bersani

Definitely. This is something that we started to implement with the management reorganization and organization structure that we experienced in Q2 of this year. And the kind of matters that I was referring to, the kind of timing issues basically. So when it came to timing issue which in turn means that the right season for getting the budget for the fleet users. This is an important factor. For that we are waiting for the specific, waiting for the ship to commerce notification from GM. So nothing we are really concerned about. It’s just really a timing issue in that respect. And remember this is the period of the year where the significance of financial decision in terms of value that remains available. So this is a timing where, when the fleet users in the U.S. do get with a budget and as a result OEM and the other alternative fuel providers like we are can get a more better understanding in terms of the unit.

Unidentified Analyst

Great. That’s helpful. If I could slip in one more. You referenced slow down in APU activity but we saw some indications of stronger North American Class 8 order in October and I was curious if you are seeing any early indications of a positive near-term impact from that activity as well.

Pietro Bersani

I think that you know, when it comes to APU it is true that there is kind of softening in market especially for the diesel and [rane] batteries. But like Tim said that we have an interesting program in that respect because we are pretty close to launch our new low cost battery product in early 2013 and so that our offering platform will be very interesting in that respect.

Operator

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

Steven Dyer - Craig-Hallum Capital

Just on the industrial weakness, wondering if you could elaborate on that a little bit more. And then just with respect to kind of timing of the weakness, it seems relatively sudden that’s also sort of meshing with what we are hearing elsewhere in the industry. Any color just sort of on the downturn here, maybe how long you anticipate it lasting?

Mariano Costamagna

Well, if you think about what is the current horizon, in other words we were performing pretty much well when it comes to industrial because of the recovery from the 2008 and 2009 decline. Now this is definitely more mature market which means that when you get out of the recovery phase you cannot expect for a significant ramping up and growth rate in perspective. So when it comes to stationary, when it comes to mobile, something which is very mature, we don’t feel that they may be experiencing in the near future, for an end-user ramping up in growth rate. It’s a little bit different situation when it comes to auxiliary power units just for the reason that they will try to draw to your attention.

Steven Dyer - Craig-Hallum Capital

Okay. And then the SG&A was meaningfully lower this quarter, was there anything sort of onetime in nature in that or is this a more sustainable level do you think?

Mariano Costamagna

No, I think this is a more sustainable level basically because of the one short impact of the 2011 events and circumstances, I mean year-on-year. So I will say that this is basically the range that we are dealing with. And it makes sense to consider that the region where we are working on.

Steven Dyer - Craig-Hallum Capital

Okay. And then tax rate going forward, it’s all over the place of course. I mean what's a decent normalized level to use looking out into ’13?

Pietro Bersani

First of all right now we are not yet in a position in terms of talking about 2013. As a matter of fact when it comes to task you probably know that we run our business in an international environment with significant operations in locations outside the U.S., which means a different statutory tax rate which are different from the U.S. tax laws of course. As a result the consolidated income tax rate is a composite rate that are reflecting the earnings in the various locations and applicable tax rates. The reason why we had such a change, I mean the effective tax rate is because of the result of the fluctuations of earnings in the various jurisdictions and losses incurred in the United States as well as in certain jurisdictions for which no tax benefit has been recorded.

So that means that when you are continuing to make profit in tax jurisdictions where we do pay tax and sometime you are not make profit where you have certain position in terms of the deferred tax assets, this is the reason we are experiencing this effective tax rate.

Steven Dyer - Craig-Hallum Capital

Okay. And then one last question. You had an inventory write-down in the quarter, do you anticipate there will be more to do there or is that it?

Mariano Costamagna

Well, when it comes to inventory, we also have to think about what is the impact of the revenue mix because there is a strong impact depending on aftermarket on the DOEM/OEM business. In addition to that, depending on the program we are talking about, there still maybe some impact in connection with the length of the programs and how we need to structure ourselves in order to build up our -- we continue to stay focused on the inventory. Also in connection with procurement function that we are working on, in connection with the company's organization and the new advisory committee working in order to increase synergies and efficiency not just under assisted marketing as well as an engineering standpoint, but also in connection with that procurement and supply.

So this is something that I can guarantee we have continued to work on in order to continue to operate in efficient manufacturing platform.

Steven Dyer - Craig-Hallum Capital

Okay. I guess if I could sneak one more in. The balance sheet is obviously quite strong in the stock, is at multiyear lows here. Is the stock buyback something that’s being considered on any kind of a regular basis here?

Mariano Costamagna

We like, I think that you know what is our approach. So we continue to be flexible. We do have certain options on our desk. We continue to gather the best and the most advantage as possible given the current situation. When it comes, for example, to cash and cash equivalents, that we do operate in a way that our excess cash equivalents are kept for safety rather than for earnings. Now in connection with the financial performance overall, the financial markets, thanks to our flexibility, thanks to our solid balance sheet and financial position, we may decision to repay back a certain term loan. So this is the way we are continuing to monitor the market. Be flexible, capture any opportunities, take advantage of the current situation in connection with our strong cash position in order to optimize our financial position.

Operator

Thank you. Our next question comes from Chip Moore of Canaccord.

Chip Moore - Canaccord Genuity

Could you give us more of a general update on some of the American platforms? When you originally expect that GM notification to hit and then looking forward, how much does that ramp get pushed out in ’13?

Tim Standke

Well, how about if I address the first question. Are you referring to what other platforms we are looking at?

Chip Moore - Canaccord Genuity

Yeah, just a general update. Well, from an OEM standpoint, we have our GM contract that runs with two different vehicles. We have got the 610 Van and we have got the truck. In terms of releasing to production, we actually are manufacturing the vehicles now but we are waiting on GM for a ship to commerce. That ship to commerce waiting is literally any second, I was quite frankly hoping to see an email this morning that it was released. So it will happen almost anytime, pending GM’s review of any parameters that they are looking at.

In terms of ramp up, as soon as that’s released, my understanding is that our customers are very keen and they are very excited about the new program and the vehicle. It’s one of the things that all the main car maker customers in the market space were looking for. And this is something everybody has been waiting for, so to speak. So we are excited, and they are excited. I am trying to get there -- what was the last, can you repeat the last question?

Chip Moore - Canaccord Genuity

Yeah. So assuming that hits, there should be no material change in the ramp of ’13?

Tim Standke

No, not really. We are just waiting to uncork it.

Chip Moore - Canaccord Genuity

Perfect. And then it sounded like Venezuela was coming back, maybe you can just expand on that and then Thailand, maybe you can speak to that market a little bit too? Thanks.

Tim Standke

Sure. Well, with respect to Venezuela a lot of things on the governmental, how the government behaves. And the election actually cleared up a lot of questions and doubt. Not only just normally for ourselves and our forecasting but also for the entities like General Motors and Ford whom we do business with. So those programs, they will be moving along nicely. And as far as Thailand, are you....?

Mariano Costamagna

Yeah, as far as Thailand, you know during the first half of this year we have been unfortunately experiencing the impacts from the flood which means that our main OEM programs with Mitsubishi and Honda have been impacted. Now what's the difference? For Honda, we have been to definitely start a very excellent way, meaning that we are delivering that and we are very satisfied about the units that we are making with them. But when it comes with Mitsubishi, due to the flood they still had a significant inventory right before the flood and we have not been able to start again and to recover the shipment to Mitsubishi.

And by the way in connection with their mid-2013 program in terms of launch of new vehicle, that’s why we are not projecting any significant recovery for this year while there will be recovery next year, let's say around the middle of next year but in connection with the launch of the new vehicle. So it’s a different -- very different situation between Honda and Mitsubishi. But definitely the impact from Mitsubishi for this year is pretty much heavy in Thailand.

Operator

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

Matthew Blair - Macquarie

Regarding the light duty space, one of your competitors recently lowered pricing on their respective CNG pickup trucks. Could you talk about your competitive positioning in this market? How price sensitive are these customers and do you foresee having to drop your prices in order to compete?

Tim Standke

Are you referring to our aftermarket line or the OEM lines, the GM programs?

Matthew Blair - Macquarie

The OEM line with GM?

Tim Standke

Okay. With respect to the General Motors program, the pricing is not something that we necessarily control. We have to work with GM on the pricing. However, again, let's consider the market and the customers that are really looking at this product. As a general rule, we are not talking about small fleets and small organizations or the private owner. These are companies that have large fleets that do lots of miles and they go on to very difficult and hard conditions.

These companies have the advantage of the fuel pricing that’s usually a little bit better than even the common consumer. When you look at the payback period for them, it doesn’t become that significant. What's more significant to them is the fact that they have a pure OEM type of product. They get one spot where they can buy the vehicle, get the vehicle serviced, and it’s backed completely by the automaker. They are not looking so much for the small amount of difference I incremental pricing of the vehicle.

We have a done a very very extensive amount of market research with the automakers to set the price and establish what can work in the market space and we are very comfortable with that pricing.

Matthew Blair - Macquarie

And then also just on Latin American revenues, it seems like a big drop-off sequentially. Are all the currency issues cleared up there in Venezuela with the election over?

Pietro Bersani

Yes, they are in Venezuela. But even if Venezuela is one of the -- maybe it’s the most important market so that we have experience in, and we are going to experience some impact also from the Argentina situation. What does it mean? It means that in Argentina there was a strong/significant increase in fuel price, around 300%. So actually this is the reason why Argentina and Venezuela are down. And that’s why we are seeing the Latin America is in this kind of situation because Venezuela, they were waiting for the presidential election and now they just got out of the foreign money shortage issue. We believe with those factors already behind of us that we will be in a position to recover.

But at the same time we have the situation with the Argentina market. And we have minor good news, minor in terms of size, but still good news in terms of how we are executing the pay rule in Chile. So it continued to be a very strong and important geography for us. And by the way, we are working on a interesting program around the next year spring with an important OEM maker over there. So very important region.

Mariano Costamagna

Just to underline what Pietro said, in Venezuela BRC and TA are jointly the brand leader, more than 50% of the market. Our main competitor is [Landi]. In Argentina TA is historical leader on the local market with probably more than 50% of the market share and BRC also has a marginal presence. Main competitor locally is an [Argentina] brand. Brazil, we are three trademarks, BRC, TA and (inaudible). And we are sold to the local subsidiaries. Lovato and Landi are the probably the market leader. But anyway FSS brand have an important market share.

Peru, talking about Latin America the whole core brand, we are present with BRC [GFI] TA and (inaudible) are in the market. Jointly we are probably the largest market share. And main competitor is really the same, Lovato, and there are some Polish brands. Chile, BRC is the market leader with more than 50% of the market. And also Colombia, we are present in Colombia, but Lovato is the market leader. And then we are on other important market -- also other important markets there. This is roughly what's happening in Latin America compared to our competitor.

Matthew Blair - Macquarie

And then just one more question here. There is lot of talk about the currency impact on your revenues. Can you just remind us, I think you do not hedge these revenues because of your cost are also in the same currency. Is that correct, okay. So I mean really what we should be looking at here is the margin impact quarter-over-quarter then?

Pietro Bersani

Yeah, I mean you are, Matt. When it comes to FX impact in terms of translation, every time you get a negative impact on revenues that there is of course a positive impact on that cost endpoint. Now as a result the FX impact on operating income is definitely not material. We are talking about 0.5 million over the third quarter. So the right way to look at that is to making distinction between the translation of FX impact from the, compared to the transactional FX impact. So we do run our foreign operations in local currency. So not just revenues also the cost incurred locally and that’s why we do have these limited impact on the FX endpoint on our income statement. In particular at the operating income level.

Operator

Our next question comes from Shawn Severson of JMP.

Shawn Severson - JMP Securities

Tim, if you could talk a little bit about the R&D and the technology road map you guys are working on. I mean I there is some changes in the industry and just kind of get an idea of where you are going both in light-duty and any opportunity in medium-duty as well over the next couple of years?

Tim Standke

Well, that’s an excellent question to ask. I appreciate that Shawn. When we look at the future and we start talking about different technologies, I can't really tell you what they are going to be. But I can tell you and frame what environment we are looking at and what the drives are that make that happen. Basically when you look at the mix of things in the future, you are talking natural gas vehicles, propane vehicles, electric vehicle, hybrid, hydrogen, even the diesel and gasoline vehicles. It’s not going to be an environment in the future where you have just one or two big players. It’s going to be a much bigger mix.

Because of that we are looking at our research and development and manufacturing prowess, is what we want to leverage to find out what those enabling technologies are. And we are feverishly working at identifying those technologies and developing them so that the IP and the ability to manufacture in mass volume on these niche markets is something that we will be very, very strong at. We have the manufacturing capabilities. We have got a brand new research and development division. A center facility in Carasco, Italy that is very very capable of doing all kind of different developments in each and every one of these regions, areas of markets.

What I mean is, we can do natural gas vehicles, we can do propane, we can do diesel, we can do gasoline. We even have the capacity to do electric vehicles and hybrid vehicles, and range extension. There is lots of different markets that we believe the space we will be in. The key for us is to develop those enabling technologies and we are feverishly working on that.

Shawn Severson - JMP Securities

Great. And that’s the kind of the crux of my question. Absolutely. And that’s certainly part of a bigger change in technology for transportation applications. And you guys from an overhead strategy standpoint clearly face that. The company is capable of operating in multiple classes, correct?

Tim Standke

That’s correct. And we are looking always at different directions. It’s a delicate balance between targeting what we need to do and doing everything. If you do everything, you are going to spread yourself way to thin and it won't work. But if you target in the right areas and develop those areas, then you will come up with the answers. All of a sudden, out of the blue it will seem from everybody.

Shawn Severson - JMP Securities

And going back to the balance sheet, obviously you do have a strong cash position. I am trying to understand the buy versus make and development internally. And now obviously there has been some tremendous damage across the clean tech markets, and I assume that there are some interesting technologies floating around out there that are at fairly attractive prices. And is this something we would expect to see you making some acquisitions in over the next couple of years or do you think that you are going to run through the process driven, mostly by internal factors?

Tim Standke

That’s a real tricky one. I can't really give you a good answer on that just because I can't tell you what our internal drivers are. But suffice to say that we have executive directive committee that meet, and we talk about the different directions we want to go and we focus the company on the important aspects of where we want to go. Quite literally, what do we want to be when we grow up. And when we make those decisions, we will make that buy versus make decision internally and pursue what we think is the most effective way of reaching our goals. Does that help?

Shawn Severson - JMP Securities

Yeah, it does. But to be clear. I mean acquisitions are perfectly viable and we need to accomplish that in your model, if it’s appropriate, right?

Tim Standke

Yeah. Definitely one of the cards we look at playing.

Shawn Severson - JMP Securities

Great.

Mariano Costamagna

We not only have shown that we want to continue to be flexible, I think that we are flexible on the balance sheet stand point. We are in a good position in order to capture all the opportunities and this is the way we are looking at our cash. So it does mean that we are keeping well open, I would say, to monitor that.

Operator

Our next question comes from Rob Brown of Lake Street Capital Markets.

Rob Brown - Lake Street Capital Markets

Just wanted to loop back again at the U.S. GM business. I know a lot obviously is pushing in the next year. But can you give us a sense of kind of how next year could be? Are there customers lined up and waiting that you are confident in or is this short of hits the market and you see how it goes. And then maybe you can give us a sense, is it hundreds of units or thousands of units? Sort of maybe, scope out what 2013 could be once you could actually ship product?

Mariano Costamagna

Well, Rob, when it comes to US Automotive, we are still talking about you know a few numbers especially if you compare it with the number of vehicles that the OEM are making. In this respect, as you know they are making million vehicles. Now we are talking about a few thousand of vehicles which means peanuts for them, right. So you need to be patient in terms of waiting for the definitive ramping up of the automotive business. Nothing happens all of a sudden. You need to be patient in terms of experiencing growing up in that respect.

Of course, we do have a portfolio of customers ranging from two very important big OEM program which you know, and then we have minor programs in order to address and to increase as much as possible, our revenue base. But the real good point for us is that we have the right capability in order to cover and to address the different possible application for the U.S. automotive. That means OEM/DOEM, (inaudible) aftermarket, etcetera. That’s why as a matter of fact we are, in the U.S., the number one in terms of kit installed. I am not talking about the converted engines, no, just kit installed. Which makes a huge difference.

So this is where we are and this is or offering capability which puts Fuel Systems really in a very nice position in order to gather the opportunity when they would be ready and coming up from the ramp up of the unit.

Tim Standke

And to help frame a little bit better, maybe if I can address what we can do for GM line if we needed to. The line is capable of running anything from a few hundred vehicles a year to 5,000 to 10,000 vehicles a year if we had to. So from a capacity standpoint, we are able to meet it where its needs are. The considerations would be infrastructure and the overall incentive programs of different states will institute as well as where there customers have their needs.

Operator

(Operator Instructions) Our next question comes from Jeff Osborne of Stifel Nicolaus.

Jeff Osborne - Stifel Nicolaus

Most of my questions have been answered but I was just wondering if you could give us an update on AT&T. You mentioned some softness there and what your outlook is for the fourth quarter and 2013?

Pietro Bersani

When it comes to AT&T, just a kind of timing issue. We are in a very good position. Like Tim said, we got the certification. Everything is fine under EPA and the CARB certification standpoints. We were just waiting for the final numbers in terms of units from AT&T. Because like I said, this is budget season so this is the reason why we made reference to the timing issue. This is an important program, like you know. We are very satisfied in terms of what the units will be. No doubt about the fact that once again there will be a shifting from 2012 to 2013, but nothing changes in terms of potentiality of such program.

Jeff Osborne - Stifel Nicolaus

Great. And just the last question from me is, just as you look out into Europe for 2013, can you just talk about which markets you are optimistic on and the most cautious on?

Pietro Bersani

Well, definitely, when under global standpoint if we focus on certain geographies like Asia, that would be a very interesting region. Why? Because Thailand, which together with China and India, a very important market for us, finally it will be experiencing a full year of no external factors impacting the development. So we continue to be executing very well as well as with the Mitsubishi in connection with the new 2013 vehicles.

We have a number or programs also in India and China. You already know that we have a pretty nice base in terms of our programs with Volkswagen in China as well as the other Indian programs, OEM programs. So that will be an interesting region. When it comes to Latin America, in 2013 the good news is that, that we will have the full potential from the Venezuela country to be -- develop it to be benefited by our company in connection with the comments for the region that we just said. It can be a little bit more tricky in terms of Argentina in connection with the significant fuel price increase and also in connection with the very difficult economic situation. This is definitely true. But in connection with the potential from other countries in that geography, in particular Peru, Chile, like Mariano mentioned, we feel very positive.

And of course, when it come to North America, 2013, in terms of unit, in terms of developing the potential of the two important OEM programs that we have, that could be very interesting as well.

Jeff Osborne - Stifel Nicolaus

Got you. And then in terms Europe, are you still optimistic about Italy and a little bit cautious on the rest of the markets there?

Pietro Bersani

Yes, we are, because even if there is a tough economic situation that each of us is well aware about, the price differential is still playing a key role in that respect. It will be not correct to say that it’s the same situation for all the European countries. No, that’s not correct. I mean Italy is doing very well. Especially because this is a country with probably the highest price differential between alternative fuels and traditional fuels. But at the same time there are some European countries where we are suffering a little bit in terms of local strong competition, which as a matter of fact, is making pressure on our profits, on our margins.

But overall we are satisfied because we are executing very well. We predict to continue to execute very well in countries like Italy, like Germany, also Turkey, which is an important market, is still good. And this is the reason. So when you talk about Europe, think about the potential from the price differential, the fact that in connection with economic crisis people are even more paying attention to cost savings. And there is a third factor, which is not so good of course but we need to take care, is the pressure on our margins in connection with the local competitors that we are envisioning, we are experiencing.

Mariano Costamagna

For example, just to finish what Pietro started to say, for example the price of gasoline is $4 per gallon and you save $2 per gallon, I think is not so bad. But if you consider the price, the European price average is $11 per gallon, you save $5, $6 per gallon. And this is the real market driver for us. And that continues to be forecasted in 2010-2014.

Operator

I will now turn the call back to Mr. Bersani for closing remarks.

Pietro Bersani

Thank you for your participation and we’ll speak with you next quarter. Thank you.

Mariano Costamagna

Thank you.

Operator

Thank you. This concludes today's conference call. Participants you many now disconnect.

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