ATF.V
stockhouse.ca
Alternate Fuel Systems has recently announced a new partnership with California-based Clean Air
Partners as well as new market opportunities with Cummins Engine. With projections of
skyrocketing gross margins and $20 share price, ATF has launched a new front as they compete with
Westport Innovations in the war of the alternate fuel sector.
Toronto, ONT, May 12 /SHfn/ -- It's been nearly nine months since John Anderson joined Calgary-based Alternate Fuel
Systems Inc. [V.ATF] as the company's new President and CEO. Since that time, ATF has made a number of high profile
executive appointments as well as building up its technology division with several new scientific officers. Having closed one
recent financing for $5.7 million and cancelling another for $8 million, ATF will soon be returning to the Street for more
capital as they look to finance a massive expansion strategy. With a fresh alliance with Clean Air Partners that will open the American market, as well as new deals in Iran,
the UK and opportunities in the US with Cummins Engine, ATF has set it's sights on winning the battle of the alternate fuel players.
On April 6, ATF announced the appointment of Walter Brooks to its Board of Directors. Brooks has been with General Motors Canada
[T.GM] for 37 years and according to Anderson, will become key as ATF pushes its duel fuel technology in the North American market.
Brooks has been intimately involved with introducing the Isuzu [ISUZF] Duramax 6600 V-8 engine into that market. Anderson sees the
Duramax engine as the future of duel fuel system engines, "I would project that the Duramax is going to gain about 4 or 5% market share
(North America) and will take the world by storm." Anderson ads, "That engine has Ford terrified and rightfully so."
Vancouver, BC-based Westport Innovations [T.WPT] is largely considered the closest competitor to ATF in terms of alternate fuel injection technology. Westport
currently has a working alliance with Ford [F] to develop the enabling technologies for a natural gas- fuelled diesel engine for light-duty vehicles. To date, Westport and ATF
haven't had the chance to go head to head in the marketplace with their technology as WPT has yet to bring a product to market. If Westport is able to develop a system
for the Ford diesel engine, they may get their chance, competing directly with the Isuzu engine.
It is expected GM will debut the all-new direct-injection diesel engine in the 2001 Chevrolet Silverado and GMC Sierra heavy-duty full-size pickup trucks. ATF currently has
its Eagle diesel dual fuel system running in an Isuzu 7.5 tonne truck in the UK, done in conjunction with Isuzu Truck (UK) Limited. Depending on the overall success of that
program, Isuzu UK will consider rolling out the Eagle/Isuzu truck throughout the country. Anderson foresees tremendous benefit to the company as the newly equipped
Isuzu tours the UK. "I'm expecting an order for about 75 systems for Britain," which could merely be a stepping stone for Isuzu North America where Brooks has
considerable influence.
ATF is currently in negotiations with Cummins Engine [CUM], the world's largest producer of diesel engines above 200Hp, in an effort to
build on a relationship that has already been well established between the two companies' in the UK market. Ernestine Chan, an analyst
with Vancouver-based Golden Capital sees great potential in the Cummins alliance, "They will be able to use their experience through
international contracts to expand into the US market." Two years ago, ATF put its Eagle system in a Cummins engine and today have 40
trucks in the UK running on a Cummins B-1 engine using ATF technology. That relationship has now been focused on the US, where ATF is
in talks with suppliers to develop an OEM relationship for Cummins. Westport has also been working with Cummins but as far as any
perceived exclusivity with Cummins, Anderson dispels that belief; "We talk to people in Cummins and they tell us this is strictly a research
project with Westport." Anderson says Cummins has assured ATF, "We're not going into production with this (Westport) thing." As the battle over actual contracts with
Cummins develops, ATF is building on their existing relationship with the diesel engine giant that could push them into the US market.
California-based Clean Air Partners have had a long standing relationship with ATF that dates back to 1993 when they signed a joint product development and distribution
agreement. That agreement was not so much of an agreement as an understanding, essentially stipulating the two would agree to stay out of each other's markets. Clean
Air had an existing relationship with Caterpillar [CAT] as its sole client in the US, and ATF was left with the rest of the globe to market its injector technology. On March
27, the two companies rescinded that agreement which now opens the door to a cooperative agreement for the US market. Anderson has even spoken of the two entities
merging at some point in the future. One area that has been identified as the largest single area of untapped growth for ATF is the stationary power generation market. Both
Clean Air and ATF plan on tackling this opportunity having identified a market of over 37,000 sites such as hospitals and institutions that use diesel generators.
Currently ATF has two patents covering both its flagship product Eagle, as well as the Condor. The Eagle system is in operation in the field with busses in Thailand and
Australia as well as the recent Isuzu partnership in the UK. The Eagle system is a hybrid fuel system designed to allow diesel engines to operate using natural gas while
maintaining the power and performance of a full diesel engine. The Condor Reverse Flow Catalytic Converter is described by Anderson as, "the best after treatment,
methane- destroying catalytic technology in the world." Currently being tested in Germany in a Volkswagen engine, ATF expects to get the results of that trial later this
month. As well, Anderson hinted the US military has expressed an interest in the Condor for field operations. ATF also has the Sparrow that is a single fuel compressed
natural gas system.
On April 10, ATF announced an alliance with IDEM (Iranian Diesel Manufacturing Company), which is 30% owned by DaimlerChrysler
[DCX]. The alliance represents the first OEM (Original Equipment Manufacturer) contract for ATF and calls for the partners to work together
to design modifications for a Mercedes diesel engine, dedicated to operate on 100% natural gas. The agreement includes a purchase
schedule for 2000 Sparrow units to be delivered before year end 2001. The company currently has ATF personnel on the IDEM assembly
line installing the units. Asked if ATF would have problems meeting its contractual obligations, Anderson indicated that it would be a
challenge for the relatively small staff, which he counts at less than 20, to deliver the product on time but is actively in the process of
ramping up staff. By the end of the year, Anderson expects that in addition to moving into a new manufacturing facility it is expected his
staff will double as well.
Part of the problems facing ATF today, and Anderson is the first to admit it, is that in the past, former CEO and company founder, Gerhard Klopp, regularly issued press
releases announcing massive deals that often failed to materialize. "There was a lot of exaggeration in those announcements and that's what we're paying for today
because the company has lost a lot of credibility," says Anderson with a refreshingly matter-of-fact tone. Asked about one specific deal announced by Klopp back in March
1998, regarding a Mexican contract for a reported 10,000 ATF conversion systems which would reportedly bring ATF $200 million in revenues, Anderson sighs and says,
"The company could never have followed through delivering 10,000 of anything back then." ATF has installed to date about 300 of the 1000 units that were actually sold for
that Mexican contract. Klopp, who was asked to leave his post as CEO, is currently listed on the company's site as a Director, yet Anderson indicated his direct
involvement is limited and that the company is currently in negotiations as to Klopp's future relationship with the company. With new management and a fresh focus,
Anderson is determined to turn things around for the company.
As far as the obvious competitive comparisons between ATF and Westport, Anderson sees a market that places great value in Westport
stock (currently trading just over $12, well off its high in February of $26.40) "[Westport] is like a race horse that's come out of the gate in
the right direction, never stumbled, raised money consistently," but as Anderson can't help to point out, "never sold anything." The irony
definitely isn't lost on Anderson whose own share price languishes at $1.25, off its February high of $4.70.
However, Anderson optimistically boasts, like a man who knows the outcome of the final act, "But that's all ok, because we're going to prove
that the little company is going to be the winner." Ernestine Chan, an analyst with Vancouver-based Golden Capital follows ATF and sees
great potential in the stock moving forward, "ATF is relatively undervalued with products that have been on the market for a few years." Chan
believes the stock should be trading in the $3 to $4 range based on 1999 revenues of $3.5 million. Anderson is projecting 2000 revenues of
$6 million.
On January 24, 2000, ATF announced a proposed $5 million financing to be underwritten by Calgary's Acumen Capital. At the time of the announcement, Laurel de
Yturralde, who followed ATF for the Bidding On Bay Street newsletter, announced she was dropping coverage of ATF. In her mind, the financing was a bad deal for
shareholders, as the placement would swell the float by over 7 million shares. (Currently there are about 36 million shares outstanding) What was particularly interesting
from a competitive perspective is what Yturralde wrote in her last report to subscribers, "With Westport trading at $5 and nowhere near ATF in terms of product
development, principals at Acumen must know full well this financing is undervalued." That financing closed on March 29 for gross proceeds of $5.8 million.
A subsequent ATF press release on March 30 announced the cancellation of a second planned financing through Acumen and Octagon Capital for what was supposed to
be an $8 million round. In the release, Anderson stated, "We believe the actual value of the company is much higher than what the market is currently reflecting in share
price, and as such a financing at this time, is not in the best interests of shareholders". What had happened at the time, as Anderson explained to StockHouse, was that
with the March market downturn, Acumen would no longer give ATF the original $3 per special warrant as set out in the March 6 press release and were instead offering
$2 which Anderson rejected as unacceptable. Anderson now admits he'll have to return to the Street for a new round of financing within 10 months. With $3 million in the
bank, Anderson sees that cash as enough to get them through the year.
For the next round, ATF isn't likely to go with Acumen Capital again. Anderson was pushing for institutional investors throughout the first
financing, while Acumen was filling its own retail orders and the placement ended up being nearly 50% retail. "What [Acumen] tried to do is
get their clients into cheap deals, I mean that's what they do so we don't want to do that again," said Anderson looking ahead to the next
round. ATF is currently looking at Octagon, as well as Golden Capital playing a more central role in the next financing.
Westport and ATF operate in the same alternate fuel sector, yet ATF's rich cousin, in the eyes of the investing public, has yet to prove itself
in the one area that truly matters; product in the field. However, to the investing public, Anderson understands that perception is a large part
of the game; "You've got to remember that our closest competitor is sitting with 100 people, $40 million, 60,000 square feet and not a sale in
sight." Whereas with ATF, Anderson is supporting technology in eight countries with a stock under $2 and less than 25 staff, "It's the
complete antithesis of Westport," says Anderson. When the CEO took over the helm at ATF back in August, the company was literally
insolvent and Anderson ran it for the first 8 months, until the financing in March, on sales alone. At the time, Anderson doubled the price of ATF products reflecting huge
increases in margins. As a result, Anderson predicts, "You're going to see our gross margins skyrocket this year." Without giving a specific timeline, Anderson tells
StockHouse he sees ATF as a $20 stock.
Anderson sees the ATF dual-fuel injection system as really the only choice for the diesel engine manufacturers. In referring to the Westport High Pressure Direct Injection
(HPDI) technology, which is still a dual-fuel system but administered through a single injection unit incorporating both diesel and natural gas, Anderson sees the system as
wrought with complications and maintenance requirements once in actual use in the field. He views the two injection systems, which are similar in design, as completely
different in functionality. Both systems inject diesel and natural gas into the diesel engine; the difference lies in how the injection is delivered and regulated. The ATF
system injects the gas and diesel into the cylinder head separately and then gas is injected into the manifold, which Anderson insists is much easier to control. With the
Westport system, the gas and diesel are injected nearly simultaneously through the injector port, which Anderson says is both difficult to regulate and in actual application
won't function nearly as well.
For the Westport technology, Anderson questions the reliability once in the field, "In a single injection system, you have to control the
injection of the diesel and the gas to less than a millisecond and if you get it wrong, you flame out the gas ignition." Anderson doesn't see
the Westport single injector as the way of the future, "It's not an easy thing to do through a single injector and frankly it's not one that
Caterpillar, Mitsubishi [MSBHY] Isuzu or anyone else in the world is doing and certainly not the way the diesel engine is going, which is
more the way of the Duramax." Anderson and ATF are hopeful the partnership with Isuzu and the Duramax engine proves to be a fruitful one
in the diesel engine market. Speculating on the potential for future market acceptance of the Westport injectors, Anderson remains
skeptical; "Once their super-duper fuel injector is finished, it's going to have to be made for $20 and you're going to be making about $2 on it because that's how Ford or
any of them work." As Anderson sees it, "You can't make money on a spark plug."
Anderson is convinced that with the right partners such as Clean Air and Cummins, together with a ramping up of staff and production facilities, the new ATF will be seen
as a real player with real product in the alternate fuel sector. Anderson speculates as to ATF's future, "I'm going to build the company in value and two things will happen.
Either we'll be bought out, which is probably what will happen, or we'll just keep in and finally be profitable." Investors are hoping profitability comes sooner than later. |
