CDTI: Fourth quarter results disappointing but outlook improving

CDTI: Fourth quarter results disappointing but outlook improving.

By Ian Gilson, CFA

On March 15, 2013 Clean Diesel (Nasdaq-small:CDTI) announced its fourth quarter and full year 2012 results. Although we had forecast a decline from year ago levels due to the end of the London Emission Zone initiative the rest of the diesel business was a disappointment. New Jersey was down and California flat at best. Since the Diesel market uses catalysts made internally this had an impact on the catalyst division. Lack of enforcement of the existing regulations by CARB is still having an impact, although citations are increasing. Some of the operators may opt to buy new vehicles (making that a OEM sale) and others may scrap the older vehicles.

CDTI has about 17% of the diesel pollution retrofit market in California, as compared to about 34% in the other contiguous states. One of its largest competitors (Cleaire Advanced Emissions Control) has gone out of business, leaving about 40% of the California market up for grabs. This includes a significant portion of the school bus fleets state wide. However, there is a major program to retrofit school buses with alternative fuel engines and a large number of school buses run on natural gas. We estimate that, over time, CDTI could move its market share up to 30% and possibly higher.

The catalyst division was impacted by two major factors. The decline in revenue from the diesel division reduced revenue from $1.8 million in 2012 fourth quarter to $1.1 million in 4Q13 (the eliminations line on the reported income statement is all internal catalyst sales). The rest of the catalyst revenue was unchanged. The second problem was that both rare earth and Platinum Metal Group (PMG) metal prices were very volatile and not all of cost were covered under the Honda contract. Honda is a significant customer for catalytic convertors on both the 6 and 4 cylinder Accords.

The Honda contract has been renegotiated to address the metal pricing problem. This will impact both revenue and costs since the active metal prices are a component of the selling prices as well as part of the cost structure. This should have an immediate positive impact although there may be a lag as inventory pricing moves through the system.

The company also discussed several strategic initiatives. The Pirelli initiative mentioned below may be followed by other agreements that would provide Clean Diesel with a stronger position in the OEM market. The company's low PMG catalyst systems may have applications for fuel cell cost reductions and Clean Diesel has a significant patent portfolio that has not, so far, been licensed to third parties.

We have adjusted our estimates using the 4Q12 as a base and there is the possibility of significant upside if the California market improves.

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