Westport Fuel Systems Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 10 speakers on the call.

Operator

Good morning. My name is Sinto, and I will be your conference operator today. At this time, I would like to welcome everyone to the Westport Fuel Systems Q3 2023 Thank you. Ms. Ashley Knoll, you may begin your conference.

Speaker 1

Thank you. Good morning, everyone. Welcome to Westport Fuel Systems' 3rd quarter conference call for the 2023 fiscal year. This call is being held to coincide with the press release containing Westport's financial results that was issued yesterday. On today's call, speaking on behalf of Westport is Interim Chief Executive Officer and Director, Tony Guillemin and Chief Financial Officer, Bill Larkin.

Speaker 1

Attendance on this call is open to the public, but questions will be restricted to the investment community. You are reminded certain statements made on this call and our responses to certain questions may constitute forward looking statements within the meaning of the U. S. And applicable Canadian securities laws. And as such, forward looking statements are made based on our current expectations and involve certain risks and uncertainties.

Speaker 1

With that, I'll turn the call over to you, Tony.

Speaker 2

Great. Thanks, Ashley, and good day, everyone. I'm very pleased to join you on my first call as Interim CEO of Westport. Today, I'll provide an update on our strategic objectives Before I turn the call over to Bill to walk us through the Q3 results, we also intend to keep our prepared remarks today brief so we can get to the Q and A. I want to start off by hitting some of the key highlights and top line numbers for the quarter.

Speaker 2

Key to these is our excitement around our PDI joint venture with Volvo to accelerate the commercialization and adoption of Westport's HPDI fuel system technology for long haul and off road applications, which I'll provide an update on shortly. Touching briefly on our financials, Our 3rd quarter results saw improvements in many of our key metrics. Westport delivered revenue of $77,400,000 in the quarter, up over $6,000,000 from the same quarter last year. In addition, we continue to deliver improved gross margins both in dollar terms and as a percentage of revenue. We also improved our adjusted EBITDA to negative $3,000,000 for the quarter From negative $4,500,000 for the same period in 2022.

Speaker 2

I'll leave it there and let Bill elaborate in a moment on more detail on the financials. In terms of our strategic priorities, we remain heavily committed to these priorities, including driving sustainable growth in our existing markets, unlocking new and emerging markets, driving operational excellence and extracting efficiencies through proven capital management. Now near term, the immediate priority is to finalize the TDI joint venture with Volvo and to elevate the financial performance across all our businesses. I also want to walk you through a couple of other recent progresses against these priorities. First, we entered new markets with our H2 2 HPVI fuel system solution with a proof of concept project with a leading global provider of locomotives and related equipment for the freight and transit rail industries.

Speaker 2

Now this represents Westport's first application Of the H2 HPDI system for the locomotive sector. In our view, the hard to abate medium and heavy duty As well as high horsepower sectors are where HPDI creates significant value. We believe this is an affordable path to decarbonize the rail sector without compromising performance or efficiency. This 2 year project will begin immediately and is fully funded by the OEM. 2nd, consistent with our objective of improving profitability and strengthening our balance sheet, In September, we reorganized our business in India, including our partnership in India by reducing our stake in our joint venture, from 50% to 24%.

Speaker 2

We expect to close this transaction by the end of Q1 2024. In addition, we are amending our joint venture agreement to include hydrogen components in addition to CNG, LNG and LPG components and kits. Importantly though, the agreement will Including any HPDI opportunities. Now while this amended agreement will result in rationalization of local costs, We will maintain participation through the joint venture in a fast growing market in India And at the same time, provide access to low cost manufacturing footprint through the joint venture. Now Bill will provide Additional details on the financial impact of this transaction in a minute.

Speaker 2

Now moving on to an update on the progress on the joint venture with Volvo. Now I personally had the opportunity over the last month since stepping into this role to meet with Volvo and Westport teams I can tell you that we are in a great place to bring the transaction to successful conclusion. The teams Have made great progress on all items. And I can say now with confidence, we plan to have the definitive agreement signed by the end of January of 2024 and have the joint venture closed and operational in the Q2 of next year. Volvo and Westport have collaborated for over 15 years and shared the vision of creating sustainable transport solution.

Speaker 2

Volvo Trucks have been on the road for over 5 years utilizing our LNG HPDI system and we look forward to a long and profitable future with the Volvo team. Now with that, I'll hand it over to Bill to walk you through our financial results.

Speaker 3

Good morning. Thank you, Tony. Just overview on our financial highlights for the Q3 and Q3 of 2023, we generated $77,400,000 in revenue. That's a 9% increase compared to $71,200,000 in the prior year period. This increase was primarily driven by our core business with increased sales volumes in our delayed OEM, electronics, fuel storage businesses And also increased revenues in the heavy duty OEM business, which were partially offset by lower customer sales in the aftermarket And light duty OEM Businesses.

Speaker 3

Gross margin increased to $13,200,000 or 17% of revenue in the quarter. This is up from $11,300,000 or 16 percent of revenue in the Q3 of 2022. This improvement was mainly due to higher sales volumes across multiple businesses and increased gross margin in our heavy duty OEM business driven by higher engineering services revenue. However, our gross margin was negatively impacted from higher production costs to continue to impact our business coming from global supply chain challenges, Inflation, specifically in logistics and labor costs. We're continuously working with our customers to pass through the impacts of cost increases where appropriate.

Speaker 3

On the next slide, in the Q3 of 2023, adjusted EBITDA was a loss of 3,000,000 This is an improvement compared to a loss of $4,500,000 in the Q3 of last year. The improvements in revenue And gross margin drove the positive improvements in adjusted EBITDA, which were partially offset by higher selling, general and administrative expenses from increased trade show Thank you. During which we highlighted our HPDI fuel system technology in North America and Asia, we recorded higher service costs And increased consulting and legal fees related to the ongoing projects, including finalizing our HPDI joint venture with Volvo. We expect to see the higher consulting and legal fees trend continue through the Q4 as we move forward with setting up the JV with Volvo. On the next slide, our OEM revenue for the 3rd quarter was up 20% to 52,900,000 As compared to $44,100,000 at prior year period.

Speaker 3

As a reminder, Q3 tends to be our seasonally slow quarter due to the annual summer production shutdown in Europe. However, despite the seasonally slow quarter and also as we expect and discussed last quarter, Our HPDI system volume in the 3rd quarter significantly increased compared to Q2 of 2023 and this was the result of Volvo's release of more powerful product offering with an extended range and we expect to see volumes continue to increase in the Q4. We also delivered higher sales volumes from blade OEM business, increased sales volumes in electronics and fuel storage businesses And higher engineering services revenue in the heavy duty OEM business. Offsetting these increases were lower sales to customers in India in the light duty OEM business. Gross margins in our OEM business expanded in the quarter increasing to 7,800,000 or 15% of revenue.

Speaker 3

This is an increase from $4,700,000 or 11% of revenue in the Q3 of last year. The gross margin increase was largely correlated with the revenue improvements but partially offset by higher production input costs. We expect to see gross margin improvement going forward as we achieve scale for our HPDI fuel system. As LNG fuel prices continue to trend positively against diesel and follows up the HPDI engine becomes more available, We expect volumes to continue to improve with Q4 being a full quarter with higher volumes. Moving to the LPG side of our business, our global OEM customer for Euro 6 and Euro 7 LPG systems has adjusted their start date For the Euro 6 program, just moving the initial delivery dates from November 23 to January 2024.

Speaker 3

As a reminder, this program includes both Euro 6 and Euro 7 deliveries and expected to generate approximately €255,000,000 in revenue through 2028. Affordability drives the buying decisions in the LPG market. Currently, on average, the cost of LPG in Europe is less than half The cost of petrol or diesel and our products enable customers to take advantage of these price differentials. The next slide, our independent aftermarket revenue for the 3rd quarter was $24,500,000 down $2,600,000 compared to 27.19 in the Q3 of last year. Lower sales volumes in African and European markets drove the decline, partially offset by higher sales volume in South America.

Speaker 3

In line with the decrease in revenue, our gross margin declined to $5,400,000 or 22 percent of revenue In the Q3 as compared to $6,600,000 or 24% of revenue in the prior year period, margins were negatively impacted by change in sales mix Inflation in South America. Looking ahead, supportive LPG pricing continues to boost demand in Europe, It's an important area of growth for our company in the years ahead. On the next slide regarding liquidity, Our cash and cash equivalents decreased $8,300,000 during the quarter to $44,000,000 Cash used During the quarter, it's primarily related to debt servicing payments and purchases of equipment. In the Q3 of 2023, net cash provided by operating activities was 1.19. This is a significant improvement from net cash used of $8,600,000 in the Q3 of last year.

Speaker 3

The improvement in cash provided by operating activities was primarily driven by the change in working capital, specifically in inventory, Accounts receivable and prepaid expenses. As we previously discussed, we built up inventory to manage against supply chain risk, As well as shortages of raw materials and other components. We've had some success in reducing inventories during the quarter And we continue to take action to monetize and optimize inventory levels to further free up cash. This will be a net positive for our balance sheet going forward. Looking forward, we have multiple projects and initiatives Either announced or underway, they will have a positive impact on our liquidity.

Speaker 3

First, our HPDI JV with Volvo is a Flexing point for Westport financially and HPDI commercially. Global payments for their 45% share of the joint venture include the initial 28,000,000 And earn out of up to $45,000,000 which is a clear signal of their commitments to the future growth of HPDI. And that also helps shore up our balance sheet. The JV is focused on driving global adoption of HPDI in the long term, improving efficiencies at scale, while in the short term we have a partner to share in the required investments, including working capital and capital investments. Westport will be receiving the initial $28,000,000 following the closing of the JV.

Speaker 3

2nd, as Tony highlighted, we have reorganized our presence in India to streamline the business consistent with our objective improving profitability Thanks for taking our balance sheet. As part of the India transaction upon closing, we expect to receive approximately $3,000,000 from the sale. Also, we anticipate this reorganization of our presence in India will improve our cash flows going forward. Moving forward, we will continue to be prudent in our liquidity management and multiple steps are being taken to do so. Non dilutive financing alternatives remain an option As we look to solidify our balance sheet, we continue to do what is necessary to ensure we are adequately and fully capitalized.

Speaker 3

Based on the work we have done against some of the initiatives I've mentioned here, I expect our cash balance at the end of 2023 to be above 50,000,000 With that, thank you. I'll turn it back over to Tony.

Speaker 2

Great. Thanks, Bill. Just in closing, Dan, our products are making a material impact on the decarbonization of the transport industry And the magnitude of this impact will only grow as we get these products into the hands of more customers. Now while we've made significant progress Against our key strategic priorities in the quarter, we recognize that we do have more work ahead of us. Now before we open the call to Q and A, I just wanted to provide a brief update on our CEO search transition.

Speaker 2

Getting the right person for the role is obviously a priority for the Board, But this does take some time. The status is ongoing and we will have additional details for you as soon as we can. I want to stress though that through this transition as Interim CEO, I'm fully committed to executing against our outlined priorities. And with that, I'll turn the call over to the operator to open the call for your questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from the line of Chris Dendronis from RBC Capital Markets. Please go ahead. Your line is open.

Speaker 4

Yes, good morning. Thank you.

Speaker 2

Good morning.

Speaker 4

I guess, I wanted to begin with the locomotive opportunity, hopefully just get Some more color around the opportunity here. How long have you been working on this agreement with this company? What's been the messaging from the OEM on their thought process around hydrogen and HPDI? And then I kind of recognize that it's still very early in this process, but can you maybe discuss just any kind of unique design challenges that you might face with the adoption of HPDI for the locomotive setting. Thank you.

Speaker 2

Great, Chris. It's Tony here. Let me take a quick stab at The big picture and I'll let Bill jump in perhaps on some more details. Just from a high level point of view, I think what's very exciting For us, and it's actually part, I would say, of a broader theme over the last year or so, Which is the opportunity for hydrogen in HPDI as a way to decarbonize Without having to change the overall, shall we say, the layout of the engines and so forth. And that's an important point because for us this is really an opportunity to retrofit the existing locomotive fleets.

Speaker 2

Some of the numbers we've seen, there's probably about over 100,000 installed base locomotives, about over 30,000 of those in North America. And there's only a few OEMs that do this. So what's unique here is And what this OEM is looking at is effectively retrofitting an existing locomotive, which is Which will have some challenges and fundamentally that's really what the project's about over the next couple of years is to it's just to go through that process. So It's a very exciting opportunity as part of the transition to cleaner energy, which the locomotives, these are very Long life assets, not dissimilar to some of the on highway truck markets. And this is where the hydrogen Element of HPDI, I think, can be quite a unique proposition.

Speaker 2

So we're quite excited about the big picture opportunity. But it is this is A 2 year program and we'll both learn a lot about this going forward. So that's kind of the big picture. I don't know, Bill, if you wanted to Add any color on the specifics around how long this has been going on with the customer, just to answer some of Chris's other questions. But I'll leave it there at the high level, Chris.

Speaker 3

We've been looking at the automotive market for many, many years and Wabtec, we're I'd like to partner with them on this process. We've had typically these are fairly lengthy conversations before getting to this point. And we're excited about the opportunity. Just to add a little bit more, Tony mentioned, this isn't going to be a new build. This will be what I expect to be a retrofit.

Speaker 3

And typically, these engines, they get overhauled about every 14000 to 15000 hours, so that's about every 7 ish years. And so that's the opportune time to retrofit And integrate our technology on the engine platform. So there's a natural cycle there to do the installations. Actually, it's from a technical standpoint, we're just dealing with bigger injectors, more fuel flow. So the packaging is not going to be that challenging.

Speaker 3

As a matter of fact, it should be a little bit easier because we're going to have a larger packaging To put our technology in and then of course, ultimately you're going to store the fuel probably in a tender car behind the locomotive. So from a new standpoint, I think it's less of a challenge. So we're as mentioned, this could be a 2 year projects and It could turn into a significant opportunity.

Speaker 4

Great. Yes, thank you for all that color. I guess my as my follow-up and sticking with the HPDI here, you mentioned Volumes with Volvo were maybe picking up some. I know previously there were some dynamics around the changeover to a new model With that Volvo truck and that was kind of weighing on things maybe a little bit near term. Can you maybe just provide a bit more color on sort of What the messaging from Volvo has been as of late and sort of expectations going forward if there's been any kind of Changes in the past couple of months.

Speaker 4

Thanks.

Speaker 3

I can look, I think Volvo is committed to HPDI. They're very excited about Yes, in fact, there was a podcast, one of their technical leaders did. And again, they mentioned HPDI In their technical podcast, we're really excited and believe in the HPDI technology. One of the biggest takeaways is just having that vote of confidence in our technology and the right solution As we mentioned, as we get kind of the switchover, we did expect a lower decline in our unit volumes in the second quarter. We started seeing the ramp up in the 3rd quarter, still kind of a partial quarter because of the summer shutdown.

Speaker 3

And so we expect that to continue to increase in the Q4 even with probably the slower holidays, slower sales during the last couple of weeks Got it. We're really excited and motivated To continue to increase and drive demand for this product.

Speaker 4

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from Colin Rusch from Oppenheimer. Please go ahead. Your line is open.

Speaker 5

Thanks so much guys. Can you give us an update on where things are with Weichai and the HPDI deliveries that you've had in queue here for a little while and how the Volvo relationship may change dynamics with those guys?

Speaker 3

First of all, I'll tackle the segment. I don't the dynamics is incorrect. I don't think it's going to change. That activity won't go into JV, and I'll be part of the JV. So the overall relationship won't change.

Speaker 3

Regarding Weichai, they continue You'll move forward with their development activities around integrating PDI on certain engine platforms as well as certain TAPI applications. As of right now, we continue to support these initiatives and we're of course providing Pricing information, but as of right now, I don't have any we don't have anything else to add other than where we continue to support their initiatives and where their support we try and Apply the HPDI systems and phones when they're ready to launch.

Speaker 5

Super helpful. Thanks. And The rail application is a nice win. And I'm just curious about the maturity of any other customer conversations around stationary or marine applications. Obviously, There's going to be a role for hydrogen in a variety of areas of the economy.

Speaker 5

I just want to get a sense of how robust the various applications Can be for the technology?

Speaker 3

I know there is For the larger applications, this HPDI is ideal for those larger applications. We have had some conversations, but nothing substantive that leads to some sort of Proving concept type work typically just even get to the start line, they are very long Years conversations with the engine manufacturers, the end users, There's a lot of education that goes into it in terms of the overall Sysmarkitecture technology and also benefits. Regulation also helps as well, kind of drive interest for in HPDI technology as these Larger engine applications, displacements, there's a huge push to decarbonize, especially in In the Marine, there's been a big push, especially in the ports and minimize or essentially eliminate the use bunker fuel just because of how the pollution related to that. So there's always conversations going on. There's a lot of interest, but these are very, very long conversations.

Speaker 2

Yes. If I could jump in, it's Tony here. Bill is calling. Just a quick Two seconds on the marine market because it's a really interesting market. And Bill touched on, obviously, they're one of the biggest polluters out there, Particularly in the ocean going and bunker fuel.

Speaker 2

What's interesting, of course, in the marine markets, there are sectors within so many subsectors. And as you kind of start at the I'll say the smaller to midsize, there's a lot of the suffice it to say some of the engine manufacturers in marine Are some names that also were engine manufacturers in some of the heavy duty Application, so meaning there's a fair there starts to be some overlap at the smaller end Of the space, so where HPDI can make a fairly significant difference. So Bill is absolutely correct, Early stage, but I think there's some interesting opportunities where there's potentially some OEMs who we know already or get to know particularly on the We on the not so much on the ocean going side at this point, but perhaps on the smaller end of the marine scale. So I think some very interesting opportunities there, but early days.

Operator

Question comes from Eric Stine from Craig Hallum. Please go ahead. Your line is open.

Speaker 6

Good morning, everyone.

Speaker 2

Good morning, Yaron. Good

Speaker 6

morning. Hey, so I'm just curious, so this process with Volvo and working towards finalization of the joint venture, I guess part 1 of the question is anything you can share how the view of the opportunity has changed as you've gone through the process? And then really interested in how it accelerates the business beyond Volvo. I know that It's become more commonplace for OEMs to collaborate together. And so just curious Your thoughts on what this means more broadly for HPDI adoption?

Speaker 2

Eric, it's Tony here. I'll let Bill go first and then I'll pile on. So sorry, Bill, go ahead.

Speaker 3

Yes. I think, Chris, I would mention it is, this is about Getting up to scale and scaling the technology and pulling out of costs out of the complete Supply chain to make this technology even more and more affordable and attract compared To alternative for computing technologies like fuel cells or electrification, that's where the huge benefit is. And because when you look at the end users, the operators, They know their cost per mile. They're very economic driven. So they're looking at what is the upfront cost, What's the fuel price differential then ultimately what's the payback period for converting or buying a Truck with HPDI system on.

Speaker 3

And so it behooves us to scale, Reduce costs, which ultimately reduce the end cost of the customer, which will make it more attractive for them. I think that's

Speaker 2

Yes. Bill Stone here. I was going to pile on. That's absolutely spot on. I mean, the volume is what's going to drive this.

Speaker 2

The other part the other Dimension to this, if I may just jump in, it was the beyond Volvo, we had the opportunity this summer as we were I say we, the Board and management, had an opportunity to spend some time with Volvo back at one of our meetings in Europe. And I'm just speaking from a personal point of view here as a I was actually very impressed with Volvo's vision for this. To your point about there's a changing dynamic and how OEMs are working with each other. And Volvo has a number of other partnerships. There in Europe, there's many of these where, shall we say, parties that you wouldn't normally expect to be doing business together are.

Speaker 2

And Volvo at the most senior levels indicated to us that unequivocally their objective is to make this joint venture a Successful business, which would by definition, they're looking at the opportunity well beyond their own needs for their internal products. So I can say with great confidence that all those on the same page here want to make this a global make this This joint venture, a global leader in HPDI, both so there'll be other OEMs, obviously, that we intend to take it to. And There's a number of them that we're talking to already who looked at this product. So no hesitation in saying this is It's going to be a well beyond just Volvo. But as Bill says, it's really at the end of the day, the more product that we can move, the better pricing that all of the OEMs in Volvo in particular can enjoy.

Speaker 2

So spot on, this is a different model, but one that we're well aligned with Volvo on. Okay.

Speaker 6

Got it. That's helpful. And then maybe just specific to Volvo, I mean, good to hear the color and thanks for it The fact that you really just got a partial impact on the volume side from this new engine launch with HPDI And growth going forward, I mean, obviously, with the joint venture, you're now going to have a much more motivated partner. Can you update on maybe Volvo's geographic expansion plans? I know Canada was a spot that Potentially might be a little easier to get into, just from a regulatory perspective, but maybe how Volvo is thinking about that as well?

Speaker 3

I can tackle that. I know there are as we go through and we're working on the business plan For the JV, and this is not this is a long term business plan. And in there, we're looking at What are the opportunities? What are the various markets? Yes, we're predominantly in Europe today.

Speaker 3

There's been a few trucks that have been imported into Canada that are running around. But we are continuing to evaluate all the markets globally and where is the opportunity. And together with our partner, we will bake those into our business plan. So yes, we are looking at every opportunity in making that assessment. Clearly, there are going to be Tuning to North America, but that's we're going to have to make an investment in the technology To bring that vehicle to bring a application to North America and that's something that we'll have to work together with our partner And ultimately allocate capital for the business.

Speaker 3

And that's one. There's a lot of other opportunities out there that We will continue to evaluate with our partner. But again, as you mentioned, Eric, is we've got a motivated partner now Make this as successful as possible.

Speaker 6

Okay, that's great. I'll take the rest offline. Thanks.

Speaker 2

Thank you. Thank you.

Operator

Thank you. Our next question comes from Sameer Joshi from H. S. Wainwright. Please go ahead.

Operator

Your line is open.

Speaker 7

Yes. Good morning, Tony, Bill. Yes, sir. In terms of Improving margins on the OEM business. Can you give a little bit more insight into how the discussions on price increases are going?

Speaker 7

And also, what if prices are increased, when should we see the impact of that on the gross margins going forward?

Speaker 3

Okay. It was a little bit hard to hear, but so improving margins in the OEM business, Big chunk of that is mix of where our revenues are generated. That's one. As I mentioned with the heavy duty OEM, we did have quite a bit of Engineering services revenue, which helps improve margin. We are looking through our supply chain To 1, try to reduce costs and try to mitigate any potential future cost increases.

Speaker 3

We're also having conversations with our customers About price increases. So mix does have a big impact on that. Also, Organizationally and operationally, we're looking internally at our operations and we are taking steps To reduce our cost structure, primarily in Europe where a lot of our manufacturing activities are. And we're also looking at where our essentially our manufacturing footprint and we've done some Consolidation of smaller operations into our existing facility. So we're tackling it from multiple angles from the supply chain to Internal production in delivering the product and then also pricing.

Speaker 3

So that's an ongoing effort.

Speaker 2

Yes. Thanks, Bill. It's Tony and Samira. I just want to I'll just add a little color to it. I certainly over the last 12, 18 months.

Speaker 2

We have supply chain has been an issue, cost pressure has been an issue. Some of those supply chain pressures, some of them continue to exist, but that's starting to alleviate somewhat. I think to the other point that I'd want to make and I It kind of commented in my highlights. The 2 big priorities for the company in the near term, one of course is the Volvo, Getting the Volvo JV closed, as I mentioned. And the other one is improving the financial performance and margins.

Speaker 2

There is a discipline Needed. While we're certainly seeing good revenue growth, we're not going to be we're not and never were chasing revenue at the Expensive margin, but Bill, I got to say Bill and his team have done a great job of instilling and Changing a bit the discipline around pricing in terms of ensuring that we're working with our customers, But ensuring that we can push through as much of the price pressure we've seen. And that really frankly has had as much as the biggest impact including mix, But also the biggest impact in the last year has been on having some hard conversations with customers. And I can say that we're starting to see the benefit and we'll continue to do so. But having said that, there has been a bit of an alleviation on the supply chain.

Speaker 2

And as Bill said, we're taking some CAD taken steps and we'll take steps to further Improve our manufacturing footprint and efficiency, which will help gross margin as well.

Speaker 7

Thanks for that color, Tony. Just staying on the cost front, I think maybe I missed it, but Was there anything more details given on what level of savings to expect from the India JV Sort of reduced responsibilities in terms of dollars and when should we see that impact Like 2Q of next year, 3Q of next year impact or benefit I should say?

Speaker 3

I'll take that and I can Chime in, Tony, is we haven't we didn't put out specific dollar amounts. We've had a long relationship with our partner and looking at the Indian market is a very attractive market. We've got a great partner there. And we looked at how do we address the smart market to take advantage of the growth opportunity. And hence, we did the restructuring and our relationship with Minda To take advantage of that and the leverage which will help improve our cash flows and that's essentially going to be I think we'll start seeing some benefit in Q4, but We will that will we'll start seeing the true benefits next year In that new relationship.

Speaker 7

Got it. And just one last one maybe. I know the delay from November to January 24 is not a significant delay, but is there any reason for that? And What is the level of confidence that in January, the LPG systems were Euro 6 will be will start production?

Speaker 3

Yes. It's this it doesn't surprise me. It happens all the time and it is a 2 month delay. It's just trying to get productions up and running, trying to do all the validation. It just takes time to get through that process.

Speaker 3

So I don't have any concerns here with the short delay and have a lot of confidence that we'll start Delivering the components to our OEM partner early next year.

Speaker 7

Got it. Thanks. Thanks, Bill. That's all from me. Good luck.

Speaker 3

Thanks, Ritu.

Operator

Thank you. Our next question comes from Rob Brown from Lake Street Capital Markets. Please go ahead. Your line is open.

Speaker 8

Good morning. Good morning, Rob.

Speaker 3

Good morning.

Speaker 8

Again on the heavy duty OEM business, You've got the model changeover, you've got kind of the improved fueling price spread environment. Just want to get a sense of how you see that And maybe in terms of market share gains or penetration gains into next year, how do you see that kind of turning around? Any sense on the direction there?

Speaker 3

I think there's a Couple of the market drivers, one we've talked about the economics, but also the other side of the equation is regulation. And trying to get to kind of a net zero carbon, we're seeing broader use of biogas And in addition to just LNG, and I think that will drive a lot of adoption. It's getting more and more broader market share, adoption of HPDI and getting the trucks into more markets in And having Volvo as a partner leveraging their marketing and sales machine will help You drive that, but also regulation is our friend as well in today's environment in driving that adoption. And From our side, from a cost perspective, it's in our best interest to continue to pull costs out of the system To make the overall upfront investments more attractive for these owners and operators. So it's going to be really from a couple of different angles that will have a really a positive benefit On HPDI adoption.

Speaker 8

Okay, great. Thank you. And just back to the Volvo kind of JV closing and timing, just I want to clarify, as that comes through, you get the cash from them and then additional cash through earn out activity. And are there cash contributions that you need to make ultimately to that JV or will this be a kind of a net cash positive to Westport?

Speaker 3

So you're right. So we'll get the upfront $28,000,000 upon closing and when we launch the JV and then The earn out of $45,000,000 will be based on achieving certain milestones. And We're actually going through that process right now and standing up the JV. We're working with our partner on the business plan. I've been doing a really detailed roll up budget for 2024 and beyond.

Speaker 3

And that business plan will determine How much cash will be needed in the JV? And the partners will contribute their portion on a pro rata basis. So we're going through that process right now. So I would expect there would be some level of cash contribution From both us and Volvo to make sure the JV is fully funded.

Speaker 2

Yes. Rob, it's Tony. Yes, I'll just pile on to say absolutely. I appreciate a bit Certainly, we talked about getting through the signing and definitive agreements and closing. And Bill, spot on, one of The mutual deliverables is a detailed business plan, which we presented a first draft.

Speaker 2

So we'll have more I think, well, safe to say, we'll have a bit more color At year end and going into early next year on the business plan, maybe a bit more color on the burn. But Yes, there will be some mutual investment as we stand this up and get it up and running, but it is expected and we'll assume Based on the business plan, it won't be a protracted cash investment in terms of the timing. We expect this thing to Quickly move to cash flow breakeven, but we'll have more color on that in the New Year.

Speaker 8

Okay. Thank you. I'll turn it over.

Operator

Thank you. The last question comes from Bill Peterson from JPMorgan. Please go ahead. Your line is open.

Speaker 9

Yes. Hi, good morning and thanks for taking the questions. You discussed the cash, I guess, I was in the year about $50,000,000 I guess within that, how should we think about the drivers, especially including working capital here into the Q4? And I guess, You mentioned some of the cash things in the prior question. How should we think about working capital or use of cash at least at the start of the year before the JV is consummated?

Speaker 3

Yes. I can't comment right now on next year's, but I can talk about through the end of the year and mention this, we do We have multiple initiatives in place to try to enhance convert our working capital into cash and so continue To bring down our inventory levels, we are seeing some easing in the supply chain and taking a looking at our purchasing And trying to bring down the inventory levels and convert that to cash, same thing with receivables. We're trying to shorten the cash conversion on that and drive down our receivables and drive down our DSOs. We look at that very closely. Also, as I mentioned, we do are looking at some debt financing opportunities over in Europe.

Speaker 3

And we have a couple of term sheets, actually multiple term sheets in the hand that we are working through that process That will provide additional debt funding to support the operations.

Speaker 9

Okay. Thanks for that. And I guess just coming back to the JV. So I was wondering if you can provide more information, I guess, as what remains to be ironed out here in the next few months. And I presume these are straightforward based on your commentary and confidence that it's going to be signed early next year.

Speaker 9

But I guess, how should we think about a plan B if for whatever reason this doesn't work out? And along those lines, like what would then be the best means to commercialize and scale HPDI. I mean, are there other OEMs that can that may be interested in stepping in, maybe even similar to what, I guess, this rail OEM did in terms of funding the efforts?

Speaker 2

So it's Tony here. I'm not going to take the bait on what happens if it doesn't close, but Per se, but I just I will say that and I say it's with confidence. I don't think there's any concern that we're not going to get to closing The signing of definitive agreements, which is really we'll call it a signing and closing is really a 2 step. The definitive agreements are very close on. Yes, there's not a lot there's a couple of issues we need to work through, but I would expect we're very close on those.

Speaker 2

The reason why for the delay in closing is not nothing to do with any additional Negotiation to be done. It's just going to be literally working through the carve out of the business out of Westport, including Our large engineering team that would be moving over, setting up the legal entities, getting the assets transferred in. So the delay I'll say the delay, the timeframe between today and closing in Q2 next year is frankly just the time it's going to take to execute on it. Now I said I wouldn't take the bait on it. We have all the confidence that we're going Close with Volvo.

Speaker 2

But theoretically, sure, there's lots of other OEMs who were interested to see what we've done and I'm That wouldn't be a concern. We would continue to execute and grow this business with or without. But I just want to say unequivocally we have confidence we're going to get there.

Speaker 9

Okay. Thanks for sharing the insights.

Speaker 2

Thank you.

Operator

Thank you. There appear to be no further questions. I'll return the conference back to the speakers for closing comments.

Speaker 2

Well, great. Thank you, operator. And it's Tony here again. I want to thank you all for joining us today. As you gathered, we're Very excited about not just the future business, but we're seeing improvements in our current business and we are executing.

Speaker 2

We intend to against our key strategies and we look forward to providing you further updates over the course of the next few months. And beyond that, we'll look forward Speaking to you again at our year end in the New Year. So thank you very much for joining us.

Operator

Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your line.

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Earnings Conference Call
Westport Fuel Systems Q3 2023
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