Ian Gilson, CFA
Clean Diesel reports Second Quarter and encouraging news on California and the London LEZ.
On August 11, 2011 Clean Diesel (CDTI) announced its second quarter results. Revenue was $11.53 million, slightly below our estimate of $12 million. Gross profit margin of 29.75% was better than expected and above the 1Q12 level of 29.1% Operating expenses were higher than expected due to higher non-cash expenses, increases in personnel and higher R&D expenses as the company geared up for systems qualification for 2013 vehicles. Overall, management was disappointed with the bottom line.
The recent earthquake and tsunami had impacted Japanese parts production. Although Clean Diesel's business with the Japanese auto companies is with their US subsidiaries these plants had curtailed production due to a parts shortage from Japan. This had a significant impact on the Catalyst division revenue in the second quarter but revenue should increase over the rest of the year. One vehicle that was cut back is now increasing production, and revenue from an up-graded catalyst system for another automobile is now being realized. Clean Diesel has added Fisker Automotive, a manufacturer of an exotic automobile, as a customer and is now selling catalyst systems for Fisker's American sales.
The CARB early incentive program for diesel vehicle operators, for which the company had announced a $2 million order, is gaining traction. $1.3 million of the order has been shipped and we expect more orders to be announced in the next two quarters.
The London low emission zone initiative is now generating revenue. Management estimates that about 10% of the potential market has placed orders and the London LEZ will have a significant impact on the third and fourth quarters of 2011.
The HD diesel systems for both California and London use in-house catalyst systems. This generated significant intercompany revenue which will grow significantly over the next few years and result in improved gross margins.
We are encouraged by the prospects for the rest of the year and have increased our sales and gross margin estimates. Operating expenses should decline as a percentage of revenue during the second half of 2011 and through 2012 and 2013.
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