New Honda Accord contracts and strong off-road business:
(CDTI) The catalyst Division has been awarded the supply contract for US built next generation four and six cylinder Honda Accords.
OEM, off-highway and stationary sources are now nearly 40% of HD Diesel Division revenue and this is non-retrofit revenue that should continue to grow nationwide and outside of the vehicle mandates
Second quarter results: The results were disappointing. Although some sales into the London Low Emission Zone carried over into the second quarter it appears that truckers in California are waiting until the last possible moment to comply with the emission requirements that come into force at year end. Unless CARB starts a major compliance enforcement initiative revenue from California may continue to be below expectations. On the positive side, OEM, off-highway and stationary sources are now nearly 40% of HD Diesel Division revenue and this is non-retrofit revenue that should continue to grow nationwide and outside of the vehicle mandates.
Both Heavy Duty Diesel and catalyst revenue increased year/year. HD Diesel Systems revenue was impacted by the end of London LEZ program, although there was about $1 million from the LEZ in the second quarter. California based revenue was $2.5 million; $1 million in New Jersey and $0.8 million in Texas.
On a geographic basis the US nearly doubled year/year, Canada increased slightly and Sweden was down slightly and the major gain occurred in the UK. With the LEZ initiative ending the business in the rest of 2012 will be biased towards California, New Jersey and Texas. We expect gross margins to improve from the second quarter level.
Catalyst revenue was driven by two major factors. Last year operations were impacted by the aftermath of the earthquakes in Japan and the subsequent tsunami. Japanese auto parts production has recovered and sales of the Japanese auto companies to US customers are well above year ago levels. Rare Earth metals, that are used in making auto emission catalysts, have increased in price. Although Clean Diesel is protected from these price (cost pass through) increases the profit is not increased, with subsequent margin compression.
Now that the London LEZ business is over the S.G.& A. expenses associated with London will also end. This will have a positive impact on operating margins in the rest of the year and into next year.
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