CDTI: Disappointing diesel retrofit sales pull down revenue and earnings.
By Ian Gilson, CFA
CDTi (CDTI) announced its third quarter results and held a conference call on November 13, 2012. The results were below our, and the company's, expectations. As we had discussed in prior reports there are a large number of trucks that are not in compliance with the CARB regulations for HD Diesel emissions, and there continues to be a lack of enforcement of the regulations. There are only 6 check points (presumably on I5, I8, I10, I15, I40 and I80) which we assume are at the ag inspection stations.
New Jersey sales increased but the UK LEZ program has ended. On the positive side 38% of HD Diesel revenue was from other sources than the retrofit market. The company is working on the OEM truck engine market and off-road and stationary diesel markets. It is estimated that over 100,000 trucks are still out of compliance, 66,000 have been updated and, out of the original market of 171,000 trucks 5,000 have been scrapped or moved out of California.
CDTi had hoped to have its new non-precious metal catalyst system (it uses copper) available for the retrofit market but this has still not been approved by CARB. This lower cost alternative to competitor's offerings would have added to third quarter revenue but CARB required further testing to ensure that no dioxins were produced and released into the atmosphere. The company has filed for a parts exemption based on its latest testing, which if approved would allow the system to be sold in the current quarter. If the parts exemption is not approved it would be early 2013 before the system could be sold. This new catalyst has been approved for a patent by the US Patent and Trademark Office.
The catalyst division revenue has been driven by Honda. Catalysts are now being fitted to V6 engines and CDTi is working on systems for hybrid and high performance vehicles. The 3Q12 results included $1 million from the completion of the TKK contract. Without this $1 million the catalyst division would have reported a loss similar to that reported for the second quarter. Catalyst operations are working at below 50% of the available capacity so there is significant leverage on earnings as the operating rate increases.
The 3Q12 had positive operating cash flow and the company continues to drive down costs. However, the HD Diesel continues to be weak in the 4Q12. Without the new catalysts, and the lack of regularity enforcement, CDTi's market share has declined and the market is smaller. Truck fleet operators are moving trucks not in compliance out of California and replacing them with new trucks. Although there are new regulations effective in December, 2013 the problems of no-compliance may continue.
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