Westport Fuel Systems Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 11 speakers on the call.

Operator

You for standing by. This is the conference operator. Welcome to the Westport Fuel Systems First Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in listen only mode. The conference is being recorded.

Operator

After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Ashley Newell, Senior Director of Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone. Welcome to Westport Fuel Systems' Q1 2023 conference call, which is being held to coincide with the press release containing Westport's financial results distributed yesterday. On today's call, speaking on behalf of Westport is Chief Executive Officer, David Johnson and Chief Financial Bill Larkin. Attendance on this call is open to the public, but questions will be restricted to the investment community. You're reminded that certain statements made in this conference call and our responses to various questions may constitute forward looking statements within the meaning of the U.

Speaker 1

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

Speaker 2

Thank you, Ashley, and good morning, everyone. I'm pleased to be with you today to discuss our Q1 results. Today, in addition to reviewing our Q1 results, will be providing updates on our growing light duty LPG business and of course our heavy duty business where our patented HBDI products and technology are poised to play an important role in affordably decarbonizing heavy duty long haul trucking. Also, we'll share some observations and highlights from last week's ACT Expo in Anaheim, California and from the Animoto Symposium, which was held a week before last. Amid a macro environment that continues to be turbulent, we delivered year over year revenue growth of 7% to $82,200,000 primarily driven by increased sales volumes in many of our business lines, including delayed OEM, fuel storage, hydrogen and electronics, as well as increased sales volumes in our independent aftermarket segment.

Speaker 2

In the Q1, we also delivered gross margin improvement in both our OEM and IAM segments, driven by pricing and higher sales volumes and an improving sales mix in our OEM segment. Westport Fuel Systems is a leader in the light duty LPG space and demand for our clean, low cost LPG solutions continues to grow in Europe and other markets. Supported by the increasing price advantage for consumers who can run an LPG instead of petrol and can therefore save money every time they refuel at their local fuel station. The LPG price advantage is driving growth in key markets like Italy, Turkey, the Netherlands and also in North America. As the cost of new cars continues to escalate, consumers are looking for affordable alternatives, vehicles that are low cost to acquire and low cost to operate.

Speaker 2

VAS and LPG Advantage. Advantageous LPG pricing in major markets plays a key role in the decision to switch existing cars from petrol to LPG, and we have the products to enable this switch. Also, customers buying new cars are seeking affordable LPG equipped models. OEMs are taking notice of growing consumer demand, which is expected to persist globally for decades. OEMs are acting now to commit to the future of LPG, providing a significant runway for growth for Westport Fuel Systems.

Speaker 2

As we recently announced, we'll begin production and supply of the Euro 6 LPG systems to the leading European OEM in Q4 of this year. This new business materially adds to our revenue and market share. Our LPG market share in Europe is currently about 35% and with this newly announced OEM business, we expect to increase to above 50%. As a reminder, the Euro 6 LPG system production and sales that begins in the Q4 of this year will run for 2 years generating approximately €38,000,000 over the contract period. The follow on Euro 7 business we secured will double the scope generating approximately €40,000,000 per year.

Speaker 2

We continue to experience growth in our delayed OEM business and expect this growth to continue. As a reminder, our delayed OEM business is when we or our customers apply one of our LPG fuel systems to a new vehicle in advance of selling and delivering that vehicle to end use customers. More OEMs are taking advantage of our vehicle conversion capabilities. Volumes grew significantly this quarter compared to Q1 of last year due to strong demand from Doctor Motors, an Italian OEM that provides LPG fuel vehicles to the Italian and other markets in Southern Europe. Moving to our heavy duty business.

Speaker 2

In the Q1, we recorded a positive pricing adjustment for our HBI fuel systems sold to our European launch partner. Our existing contract with our European launch partner concludes in early 2024. As we move to the rest of the 2023, pricing is being negotiated. In the Q1, HPDI volume declined by 13% compared to a year ago quarter, primarily driven by unfavorable fuel price differential between LNG and diesel, which existed through all of 2022, causing fleets to reduce and or delay their purchases of LNG fueled vehicles. As we discussed last quarter, production volumes lag vehicle sales volumes and vehicle sales volumes lag fuel price changes.

Speaker 2

Now that LNG fuel prices have reestablished their advantage compared to diesel, we expect an improving vehicle sales outlook later this year and production sales of HBI Systems to follow that trend, again with some timing lag. Looking ahead, Westport Fuel Systems offers the solutions needed by heavy duty OEMs to meet future emissions reduction requirements, while delivering the performance, efficiency and affordability that their fleet customers demand. As LNG pricing reestablishes a persistent advantage versus diesel and as emissions regulations and associated penalties for OEMs loom, There is growing realization that affordable low carbon solutions like HPDI are required to meet OEM CO2 emissions requirements and fleet decarbonization goal. HPDI is already reducing real world emissions with thousands of vehicles on the road today. We're confident we'll continue to grow HPDI volumes through this decade and beyond.

Speaker 2

Early this year, our HPEI launch partner announced new trucks that deliver more horsepower, increased efficiency, less emissions and an extended driving range using Bio LNG. As is typical with new product introductions, We expect this model change will result in lower volume near term and higher volumes later this year. In China, we continue to support Weichai as they work with their customers, the Chinese truck OEMs to bring HBDI equipped vehicles to their market. This includes demonstrations and field trials. We remain optimistic about the launch of production and sales, especially now that LNG prices in China have declined.

Speaker 2

China is the largest natural gas trucking market in the world by far and measured in terms of volume and market share and has just recently at a 21 month low, a significant drop from the elevated levels we saw last year. We're encouraged by the ongoing work we're supporting and the improving market conditions. Similar to the rest of the world, we're also building significant interest China for our hydrogen HPDI offering as an affordable path to using 0 carbon hydrogen in long haul heavy duty applications. Bottom line, our HPDI opportunity in China is significant using LNG and biomethane today and hydrogen in the future. Our business is on the right path.

Speaker 2

Clean affordable transportation is in demand today and we see that demand increasing into the future. High energy prices and challenging economic times tend to be tailwinds for our business. Transportation is not a discretionary purchase, especially for commercial vehicles. And we make clean transportation products that are low cost for OEMs to develop and industrialize and low cost for end customers to acquire and operate. Last week at the ACT Expo in Anaheim, California, We showcased 2 fully functioning heavy duty vehicles with our HPI fuel systems for internal combustion engines.

Speaker 2

1 truck fueled by low carbon methane, either fossil or biomethane, and the other truck fueled by 0 carbon hydrogen. We helped ACT Expo attendees understand how HPDI with natural gas and renewable natural gas enables all the performance, efficiency and durability of the diesel engines they're used to with very little change to engines or vehicles and yet all the global carbon and affordability benefits to enable a scalable solution. And with hydrogen and HBI, performance and efficiency improves quite significantly, enabling an IC engine technology path for decades to come. Given the growth we've seen and our recent expansion announcement in China, we also displayed at ACT Expo our 350 and 700 bar hydrogen components that supports both fuel cell and internal combustion engine applications. This follows fuel cell expos we joined in Germany and Japan already this year.

Speaker 2

We continue to generate significant interest from key constituents throughout our ecosystem, including OEMs, fleets, fuel providers and more. Importantly and increasingly, hydrogen is considered the 0 carbon fuel the industry needs. We're continuing to help the industry to understand that internal combustion engines with HPDI will play a critical role in transforming away from fossil fuels to clean and renewable fuels because HPDI is the most effective and affordable path. Two papers highlighting hydrogen HPDI were presented at the Vienna Motor Symposium, an industry event with the latest technological developments and product proof points are reviewed with our peers, engine and vehicle OEMs and Tier 1 suppliers. What makes this exciting for the Westport team is that these papers were each written based on engine dynamometer testing completed on 2 different engine platforms.

Speaker 2

Our work with Scania is well known and the paper we presented with Scania outlines our success in demonstrating brake thermal efficiency of 51.5%, while achieving a 97% reduction in tail pipe CO2 emissions. The second paper published by TNO is based on research conducted using another European OEM engine platform and was focused on outlining the differences in power density, efficiency and emissions between spark ignited combustion and HPDI enabled combustion of hydrogen fuel. TNO's testing analysis demonstrated that hydrogen HPDI clearly outperformed spark admitted hydrogen combustion with respect to power and efficiency. And doing so with HPDI requires minimal changes to today's diesel engines. This aligns well with our own results and with the superior performance achieved today in the marketplace using HPDI with methane as compared to spark ignited combustion of methane.

Speaker 2

The results are clear. Injecting hydrogen using HPDI on an internal combustion engine produces a highly efficient yet practical green solution for long haul heavy duty trucking. Overall, it was highlighted in Vienna can be challenging for technologies other than HPDI. For a certain segment of the transportation sector, near zero carbon internal combustion engines continue to be evaluated as a key cost effective solution and our HPDI fuel system is well suited to applications requiring high torque and high fuel efficiency. This not surprisingly has led to interest in HPDI and evaluation of HPDI by multiple OEMs.

Speaker 2

Affordable performance will drive adoption. The results announced at Vienna confirm that hydrogen HPI offers lower CO2 abatement costs along with the high performance demanded by customers. Our hydrogen HPDI demonstration trucks continue to provide high profile and valuable evidence of the feasibility of HPDI fuel system equipped engines fueled with hydrogen to deliver high performance, cost effective decarbonization of heavy duty vehicle applications. With that, I'll turn it over to Bill to walk through our financials.

Speaker 3

Good morning, and thank you, David. In the Q1 of 2023, we've generated revenues of $82,200,000 an increase of 7% compared to Q1 of 2022. In Q1 of 'twenty three, sales volumes increased in our delayed OEM, fuel storage, hydrogen components Electronics Products, along with increased sales volumes in our IAM segments, particularly in North America, Eastern Europe and South America. However, we did realize a slight reduction in light duty OEM sales volumes to our customers in India. No favorable price differential between LNG and diesel in Europe experienced in the first half of fiscal 'twenty two impacted HPDI volumes sold during the Q1 of 2023 to our European launch partner.

Speaker 3

However, this quarter's volume decline was offset by an increase in the HPDI system pricing as well as higher engineering services revenue. Our gross margin increased to 16% in Q1 2023, compared to 13% in the prior year period. We reported a net loss of 10,600,000 Q1 of 2023 compared to net income of $7,700,000 for the prior year period. Prior year period included $19,100,000 gains from the sale of our interest in the CWI joint venture. In the Q1 of 'twenty three, we increased our research and development expenditures by $1,400,000 compared to the prior year period focusing on our HPDI technology and Hydrogen Components.

Speaker 3

Moving on to the next slide. In Q1 of 2023, We reported adjusted EBITDA loss of $4,500,000 compared to a loss of $6,100,000 in the same period last year. The The improvement in adjusted EBITDA loss was primarily due to the result of higher revenues and improvement in our margin. Gross margin increased year over year to $13,300,000 or 16% of revenue compared to $9,900,000 were 13% of revenue for the same period in 2022. This improvement was mainly due to higher sales volumes across multiple businesses and positive sales mix in our delayed OEM business segment.

Speaker 3

However, our manufacturing costs continue to be impacted by higher material, energy and labor costs as a result of widespread inflation and global supply chain challenges. These cost increases continue to weigh on our gross margin. Next slide. OEM revenue for the Q1 of 2023 was $56,300,000 compared to $51,800,000 in the same period in 2022. The 4th half nine or 9% increase was driven by significant increase in sales volumes in our delayed OEM business, as well as an increase in volumes in our fuel storage, hydrogen and electronics businesses.

Speaker 3

However, we did see year over year decreases in sales volumes of our light due to OEM products in India and Eastern Europe. Late last year, we've been talking more about our Hydro Shrimp Components business and the growth we are seeing, along with our expansion plans in China. We continue to see year over year revenue growth in the sale of hydrogen components of over 50% as compared to the same quarter in the previous year and expect our hydrogen components business revenues to continue to increase when we begin production in China in 2024. The unfavorable fuel price differential between LNG and diesel in Europe in fiscal 'twenty two negatively impacted our HPDI sales volumes to our European launch partner. In the Q1 of 2023, we saw a 13% decline in volumes, which was offset by an increase in the HPDI system pricing.

Speaker 3

More recently, we've seen a return to more normalized LNG pricing environment in Europe. We are encouraged by this recent trend in fuel prices, which we anticipate will be helpful in driving demand for trucks with our HCI systems. As a reminder, our European launch partner earlier this year announced the new HPDI equipped engine with higher horsepower and extended range. As is typical in the release of new products, we predicted seeing a decline in sales with the current offering as customers opt to wait for the updated more powerful option with extended range. This will have more of an effect on our top line given the current tight margins in our HPDI business and expect to see an increase in volumes in the second half of twenty twenty three with the launch of the newer product offering.

Speaker 3

Also in the Q1 of 2023, we saw significant improvements and reduction in our warranty claims and did not have an adjustment to our warranty provision outside of the normal warranty estimation process. Gross margin in the Q1 of 2023 was 8.19%, which was a 3.19% increase for the prior year period. The increased sales volumes in multiple OEM businesses, along with improved sales mix of delayed OEM volume in HPDI system pricing positively impacted our gross margins. This was partially offset by higher production input costs from inflation. Moving to the next slide.

Speaker 3

Our independent aftermarket revenue for the Q1 of 'twenty three was $25,900,000 compared with $24,700,000 for the same period in 'twenty 2. Gross margin was $5,200,000 compared to $4,900,000 in the Q1 of 'twenty 2. The increase in both revenue and gross margin was driven by higher sales volumes to North America. We also realized an increase in sales in Eastern Europe and Argentina markets, which were partially offset by lower sales volumes in the Middle East and Africa, along with higher production input cost. Looking ahead, supportive LPG pricing continues to create a positive demand trend in Europe and will be an important area of growth for our company and the years ahead.

Speaker 3

In the Q4 this year, we'll begin production for our previously announced business with a leading European OEM for the supply of LPG fuel systems for both Euro 6 and Euro 7 standards. This business will significantly increase our OEM revenue. As a reminder, the Euro 6 delivery begins in Q4 this year and runs for 2 years, generating approximately €38,000,000 in revenue over those 2 years. Motor 7 delivery approximately doubles the related revenues generating approximately €40,000,000 per year through 2,035 and beyond. Next slide, finally, I'd like to touch on liquidity.

Speaker 3

Our cash position decreased by $14,200,000 to $72,000,000 during the Q1 of 'twenty three. The increase was primarily due to net cash used in operating activities of $8,600,000 purchases of fixed assets of $3,000,000 and net debt payments of $3,500,000 Inventory levels slightly increased during the quarter following delay in the shipment of products related to our tender in Bolivia. With these products will be shipped during Q2 of this year. Despite the increase in inventory in the quarter, work is ongoing to reduce our inventory on hand to free up cash, This will be a net positive for our balance sheet moving forward. In the Q1 of 2023, net cash used in operating activities was 8,600,000 compared to $16,900,000 in the same period last year, an $8,300,000 decrease.

Speaker 3

This is probably driven by changes in working capital, specifically in inventory, accounts payable and accrued liabilities and accounts receivable. We'll continue to be prudent in how we manage our liquidity. As a reminder, we have outlined a prudent capital program for 2023 with about $12,000,000 to 15,000,000 focused on advancing our work with hydrogen and adding test cell capacity. Again, we invested about $3,000,000 in CapEx during the Q1 of 'twenty three. I'd like to take a moment to provide an update on a few items that occurred in April.

Speaker 3

On April 1, we entered into an agreement with Cartesian to This included the release of the security interest in our HPDI 2.0 fuel system intellectual property. We paid 8,700,000 which results in elimination of the minimum future royalty payments totaling $7,900,000 On April 26, we announced that our Board approved a share consolidation on a 10 to 1 basis, which is expected to be effective in early June. With that, I will turn it back to David.

Speaker 2

Thank you, Bill. Westport Fuel Systems products are critical to decarbonize transportation. And because our products are affordable, they can and will scale. As the world gets more serious about decarbonizing transportation, Westport is ready. 2023 is an important year for us as we focus on enhancing our financial performance, driving margin expansion, revenue growth and technology development.

Speaker 2

While we're pleased with the progress we demonstrated in Q1 of this year, we recognize that we still have substantial work in front of us. We know we need to deliver both financially and operationally. Capturing efficiency, delivering revenue growth, increasing margin and developing great products and technology are our priorities. Our recently announced Chief Technology Officer, Sabian Radhan, will lead our team to develop and deliver clean alternative fuel system products from concept to customer to the global transportation and off road markets. And with that, I'll turn it over to the operator to open the call for your questions.

Operator

Thank you. We will now begin the question and answer session. You will hear a tone acknowledging your request. To withdraw your question. The first question comes from Colin Rusch with Oppenheimer.

Operator

Please go ahead.

Speaker 4

Thanks so much guys.

Speaker 3

Could you talk a little bit

Speaker 4

about the competitive landscape for hydrogen with internal combustion engines? We've Seeing some announcements around Spark Ignited Solutions. Just want to get your sense of the maturity and relative performance that you're seeing

Speaker 2

Good morning, Colin. Glad to talk on that topic. Thanks for the question. So interestingly, I think Everyone in the world sees the hydrogen opportunity, right? As we think about how do we get to a 0 carbon fuel, that's basically the only one for the long haul heavy duty application.

Speaker 2

And I think everybody is realizing the challenges that remain with fuel cells. They'll have a place, But that leaves the door open for the internal combustion engine, which has a tremendously well established reputation and installed base around the world. But the vast majority are headed down the path of spark ignited engines, I'll say, as their first attempt. And what they're finding is that this is challenging. So we commented a little bit about Vienna Motor Symposium.

Speaker 2

There were quite a few papers about spark ignited into a combustion engine. But what this requires and what results from Changing an engine into a Sparklinget engine is really tremendous in terms of the effort required and rather poor in terms of the performance of that results. So basically, with our HPDI product, we eliminate those challenges. So I think people are literally agog When they understand that we can apply HPDI to a diesel engine, change Almost nothing, right? Not change the piston, no change to the air handling system, no changes to the combustion formula, the peak cylinder pressures or any of the Fundamentals of the engine, hardware of the engines, just adapt our fuel system, run that engine on a diesel cycle and have performance that's better than the base diesel engine by 20% on power, about 15% on torque, 10% on efficiency.

Speaker 2

And that sets us apart from Lewis Park Admitted Engines by a wide margin, which really is consistent with what we have today with HPDI and Natural Gas, where leading market magazines and journals have demonstrated that the products that use HPI have a significant fuel efficiency and performance advantage in the marketplace today with natural gas and that advantage is accentuated as we go to hydrogen because of all the changes that are required if you choose a Spark Ignited approach. And so while people are trying Spark United because it's, I would say, relatively obvious to try, the results are less than compelling in terms of the performance of the engine, the fuel efficiency of the engine and the offer to the marketplace in terms of how much you have to invest to create such a different engine in order to work with hydrogen and yet how simple it is with HPA. So I think we're well differentiated. And at AX Expo and at handover last year, we were able to have these conversations and help people understand and then again at the Animoto Symposium And so we'll continue to do that. So we had team members at an important conference in Sweden, just last week and we'll continue to help Our customers understand the opportunity that HPDI presents and that manifests itself when those customers bring their engines to us and say, show us on our engine.

Speaker 2

And so we've talked about the projects we have going already and we think it's a really exciting time for us to demonstrate that differential that we offer with HPDI that can't be repurchased with somebody else's system.

Speaker 5

All right. Perfect.

Speaker 4

Thanks so much. And then just a quick follow-up on supply chain. Thanks. Are you seeing a real easing to the point where you might feel to print down inventories

Speaker 2

Two stories. One story is electronics and that story is somewhat improving, but not to the point that it's going to allow us to dramatically change our inventory situation. Suppliers are still allocating products. We're still having to put out long orders, orders with long lead time used to be you could get chips in a matter of a few months and now it's 18 months. So This is really constraining our supply chain management and causing us to have to have that extra stock on hand and we don't see that abating significantly with respect to electronics.

Speaker 2

With respect to the rest of the supply chain, I would tell you the only battle is inflation, the inflation on material costs. And so we see inventories going up just because material costs more. But in terms of having to hold more inventory because of supply chain problems, We don't see so much of that other than electronics.

Operator

The next question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Speaker 3

Good morning.

Speaker 2

Good morning.

Speaker 3

Just wondering

Speaker 6

if you could give some further color on the price adjustment of the OEM launch part Was that for the old system or is that applied to the sort of next generation system? And really what was the I guess the sense of scale on what that price adjustment was.

Speaker 2

Yes. Thanks, Rob. These are obviously you You want to take that, Phil? Go ahead.

Speaker 3

No, you go ahead. I was just going to yes, we've been as we talked about, We've been dealing with inflationary pressures on our system pricings and we've been in discussions with our partner on for HPDI Systems and came to an agreement on incremental pricing to cover offset some of those increases as a result of kind of the inflationary pressures that we're seeing. So that definitely helped Both the top line and the bottom line kind of mitigate some of those pricing increases that we're seeing.

Speaker 6

Okay. Great to see. And then, I guess, sort of the environment is stabilizing in terms of LNG pricing, but you said There would be some timing differences in terms of demand response, I guess. What's your latest view and when that price improvement has sort of translates into demand improvement.

Speaker 2

Yes. So I think the market behavior we see, obviously, every customer does their own thing. But fundamentally, when you aggregate all that, people are quick to stop purchasing and slow to restart purchasing. So because they really when you buy an asset like a truck, you want to know that it's going to be a fruitful asset to your fleet operations over 3 to 5 years and then have a good resale value at the end. So when there is a price shock like we endured in 2022, There is hesitancy throughout the industry about getting back into LNG trucks.

Speaker 2

Nonetheless, they can't stare at that fuel savings and operating cost savings in the face for too long without taking action. So We're confident the market will come back, the kind of aberration of the market behavior we had in 2022, primarily due to the war in Ukraine and the disruption of LNG supplies from or natural gas supplies from Russia really impacted the market heavily. And now we have a normalized situation again. This applies around the world. We're also seeing that in China, and so that's really important for our business.

Speaker 2

And we already see customer interest coming back. We think this too shall pass, but it does take some time. Hence the comments about the lags in the marketplace we see. When customers Do place an order for a truck, then that truck gets scheduled and then the truck gets built and then the truck gets delivered and that takes some time. So we do see the kind of the return being more robust in the 3rd and 4th quarters of this year than in the second quarter.

Speaker 4

Okay, great.

Operator

The next question comes from Chris Dendronos RBC Capital Markets. Please go ahead.

Speaker 5

Hi, good morning and thanks for taking the questions. I guess I just wanted to go back to that last question and maybe ask it a little bit differently. I guess I understand that you can't really provide Too much detail on price renegotiations with the OEM customer, but maybe just thinking about the impact Holistically on the on that segment, on the OEM segment, how should we think about contribution margins on the HPDI sales kind of going forward? Does this really put you in a place where that at current volumes it's kind of contributing more meaningfully or are you still kind of in a situation where volumes really need to come up a lot more before, I guess, margins can really be accretive?

Speaker 2

So, Chris, thanks for the question. Fundamentally, I think it's important to say every system we sell is accretive to the bottom line today, elevate PDI. But fundamentally, what we do want to see is kind of a bit of a chicken and egg problem. We want the volumes to be high so that we can get the economy to scale and get the cost down so that our customer can sell those high volumes and we can offer them a price that's is attractive in the marketplace and we can have a margin that is beneficial to our shareholders and the bottom line of our company. So that's the generic textbook, let's say, playbook for our business.

Speaker 2

And what we're coming out of right now with the low volumes due to the higher LNG the product at an attractive price. In the meantime, we'll work with our lead customer to make sure that we work through this and do so in a way that's Good for both parties.

Speaker 5

Got it. Okay. I guess maybe just shifting gears a little bit to the IAM business. You have some, I guess, a good growth potential here in the back half of the year and kind of thinking about that, that a win for that, I think, Euro 6 business. How should we think about the margins of that new win In relation to where you're at kind of today at around 20% margins, is that business sort of in line with where you're at today?

Speaker 2

So for that business, we're really excited about The launch in Q4 and really not just the launch, but the fact that we've won also the follow on business to keep going and grow that business as a function of time and it's new for us customer. So that's a very important business. In terms of margins, we do see it, I would say, more in the kind of standard range than something that's Exceptionally high or low. So I think it's fair to say that.

Speaker 5

Got it. Thank you.

Operator

The next question comes from Amit Dayal with H. C. Wainwright. Please go ahead.

Speaker 7

Thank you. Good morning, everyone. Just quickly on sort of the hydrogen components pipeline, David, This was around $100,000,000 when you in the last conference call. Has any of this started converting into orders yet?

Speaker 2

Yes. So thanks for the question, Amit. Good to hear you this morning. Our hydrogen business is really a great growth story for the company, But I would say we're still in the early stages. So when I talked about previously the $100,000,000 of new business that we secure, This is really all, I would say, in our future still.

Speaker 2

So the growth we're having today is sales of our current 350 Bar Systems and Components in North America and China primarily. Meanwhile, Because of the push around the world on hydrogen, we're just fielding a tremendous amount of Pam, really around the world, everyone recognizes that hydrogen is an important fuel for the future. For many modes of transportation, FuelCell will be a part of the solution and we have a great product that are recognized around the world, also in China. So we see really big opportunities, but the $100,000,000 hasn't started to hit the income statement at this point in time.

Speaker 7

Thank you. And then for the Euro 6 and Euro 7, the additional revenues coming through those contracts, Is that a base case scenario, David, or is there upside to those numbers?

Speaker 2

Yes, it's a good question. So this is How our customers seeing the market developing. There is a ramp that has been going on for years With respect to LPG products in the marketplace being more and more meaningful, we see this in our delayed OEM business as an example, a different business than the one we're Same phenomena where basically customers are able to are interested in asking for LPG products and OEMs responding, some by having a delayed OEM product, others by having a direct OEM supplier, they're installing our parts in their factories. So Looking forward, I think it's a lot of crystal ball gazing as we try to understand where the market will be 2, 3, 4 years out. But what's very compelling to us is that our customer is committed to high volume production and next generation emission standards and the continuation of this product and has chosen us as their supplier.

Speaker 7

Thank you, David. That's all I have.

Speaker 2

Thanks Amit.

Operator

The next question comes from Bill Peterson with JPMorgan. Please go ahead.

Speaker 8

Hi, this is Mahima Kakanya on for Bill Peterson and thanks so much for taking our questions. Maybe touching on the LPG contract as well, How should we really think about the cadence of revenue generation beginning in 2023 onwards? And is there any additional spend kind of required to help ramp up that production as well?

Speaker 2

Yes, great question. So good to speak to you this morning. Thanks for your question. The spending required actually this is largely the case where There's minimal spend requirement. There's a bit of development and validation that we do.

Speaker 2

There's a bit of augmenting our capacity as the ramp occurs, so more in the out years, not in 'twenty three or 'twenty four. But basically, our customers Come to us with a number of models and as they increasingly as they change those models and change the sourcing and select us As the provider and tier 1 supplier for them, the volume grows for us. And so you kind of see that in the revenue figures we provided, dollars 38,000,000 over the next 2 years and then $40,000,000 annually going forward that volume progresses over time for us. And then you have the market dynamics. And so when we get into the out years, there is some capacity we need to put in place in the 2025, 2026 timeframe to support that ramp with the Euro 7 product, but nothing in the near term.

Speaker 8

That's really helpful. Thank you. And then how should we think about gross margin trajectory as we move through the year? And what are some of the puts and takes that could really drive it up or maybe potentially be a little bit weaker?

Speaker 3

Yes. I think from a gross margin perspective, we're really excited about what we generated during the quarter. And there's still work to do on improving our gross margins. A lot of it is, hopefully, we're starting to see somewhat of a stabilization In our supply chain and continue passing on those incremental costs to our customers Just trying to preserve that margin, but we got to be very careful in terms on how much we pass on, Now price ourselves out of markets. Another important factor that improves our gross margin and this is This new LPG business that's coming on later on this year will help our margins as well because it drives throughput within our existing capacity.

Speaker 3

And so we will expect more of that profit to drop to the bottom line We really don't have to make significant investments for this additional capacity in terms of CapEx. There will be a little bit from working capital, mostly inventory to start prepping for that. So we still have work to go on our margins. And you eventually, we do expect hopefully to see some improvement as hopefully, as inflationary pressures come down, we start Increasing, picking up the capacity that we have from a production standpoint, But we still have work to do.

Speaker 8

Okay. Thank you so much.

Operator

The next question comes from Eric Stine with Craig Hallum. Please go ahead.

Speaker 9

Good morning, everyone.

Speaker 2

Good morning.

Speaker 9

Hey, I know you touched on it a lot here, but I just want to go back to The situation with the contract with Volvo. I mean, should we think about the so the price adjustment in the Q1, I mean, is this something that we should kind of view as more of an interim agreement while you work towards potentially a new one? Or is this one where there may be some quarter to quarter variability where it's kind of on an ongoing negotiation basis?

Speaker 2

Yes, go for the 2nd category, Eric. So we have ongoing negotiations. So and as mentioned in prior calls, We do have a contract that's expiring early next year and we'll be are in the process of negotiating What will be the next turn of that contract in the future? So it's a work in process. We feel good about the results that we achieved So far this year, but as the market moves and as material costs rise and As the business unfolds, we have to continue to work with customers to do that.

Speaker 2

But we see a productive environment with our customer to do that.

Speaker 9

Yes, I mean, it would seem to be a good at least a good indicator in advance of that. Okay. Maybe just turning to, again, sticking with HPDI and LNG, the launch of the new longer range, higher powered truck offering. I can understand a pause or a little bit Softer in advance of that, but maybe thoughts on maybe over the next couple of quarters or maybe even into the first half of twenty twenty four, What that potentially looks like when you kind of balance that pause and then what potentially is Pretty nice demand there with what we also have talked about for quite some time. It's the impact that lingering impact of the price, The 2022 higher LNG prices.

Speaker 2

Yes. So I think you understand it well in terms of model change and what that means is Now the announcement is out there. Customers are saying that's the product they want. I think 500 horsepower is a really important figure in trucking around the world. Of course, everyone can drive the 460 horsepower product or the 420 horsepower product, but fleets really like to have that added capability of 500 So it is some kind of magic number that's really important in the marketplace and customers are wanting that.

Speaker 2

Moreover, in long haul trucking, People want to go as far as they can go in truck and so the extended range that is offered through the efficiency that was unlocked in the product and the range that was unlocked by a larger tank also very appealing. So We have this phenomenon that's kind of the opposite of a pre buy instead of buying in advance of the emissions change, they're waiting and buy later when the new product is available. So and I would say importantly in the marketplace, I think our product is generated and our customers' product generated A very strong reputation, there's a lot of pull for it. And through all the difficulties that we've had over the last few years in Europe with COVID and Ukraine war and inflation and chip supply, all these challenges, we see that trucking and the emissions push around the world Cleanup trucking has persisted and even accelerated. So when we think about 2,030 with a 45% reduction in CO2 now being proposed as a requirement in terms of reduction of CO2, 90% by 2,040.

Speaker 2

This is really pushing the direction and fleets understand and OEMs understand That they need to move in the direction of cleaner trucking and then they see how our offering of HPDI, first with LNG, then with Bio LNG then with hydrogen is a really excellent path to follow very affordable, very practical, delivers for the trucker And that doesn't require a lot of investment. So we see that all the indicators are pointing in the right direction. So we have to get through this year, challenging transformational year for us and but we see a very bright future already and hopefully in the Q4 and then into 2024.

Speaker 9

Yes, understood. Thanks. Last one for me, maybe for Bill. Just I know that Potentially securing more debt just to feel more comfortable on the balance sheet has been a priority. And I know that That's often centered in Italy where a lot of the operations are in the light duty business.

Speaker 9

So maybe just a status update on that.

Speaker 3

Yes. No, we are continuing to pursue options around debt financing. It was just over in only a few weeks ago, Meeting with our local banks and talking about what options we do have available. It is attractive. There are still tie in government programs available, which essentially they guarantee the debt, Which in turns drives a substantially low interest rate on those loans.

Speaker 3

So we're going to go we're in discussions with the banks and pursuing those, as well as we're evaluating other options here at the corporate level in terms of debt financing.

Speaker 5

Okay. Thank you.

Operator

The next question comes from Jeff Osborne with TD Cowen. Please go ahead.

Speaker 4

Hey, good morning. Just a couple of questions on my side. A lot's been already addressed. Bill, how should we think about linearity through the year? I know you don't give quarterly guidance.

Speaker 4

Should we think about 2Q being similar to Q1 and then a ramp up in the second half?

Speaker 3

Well, as We do have seasonality in our revenues and typically our second quarter It's kind of the highest quarter in terms of rest during the year. However, As David mentioned, we expect we're seeing a little bit of a pause in the heavy duty business until the Higher horsepower extended range comes online. And then, of course, in the 3rd quarter, we start seeing the dip because of the holidays and then we see the ramp up back in the Q4. So that's how We're looking at the rest of the year.

Speaker 4

Got it. And then on the are Are you seeing any impact on the delayed OEM side or straight OEM side in 2Q, just given where fuel mix prices are?

Speaker 3

I think David, you can elaborate on this. I think that's one of our bright spots in the delayed OEM business. We've seen a significant increase with Doctor. And that's been really one of the bright spots in our business and we continue to see year over year growth in our delayed OEM business.

Speaker 2

I think the element there that's hard for us to really Put our hands around and be confident on is how many vehicles are the OEMs able to produce and ship. Like us, they're facing ship crises too. And so far that hasn't adversely impacted our customer Doctor, but our Korean customers have been affected as Well, it's our Japanese customer. So it depends customer to customer, but I definitely see an opportunity in the near term still for the mid OEM. These LPG price spreads are really a serious driver of our business right now, where frankly, they have never been as large as they are right now with People are able to save €50, €60 every time they fill up if they run an LPG.

Speaker 2

And frankly, a lot of jurisdictions around the world have backed off on incentives for battery electric and hybrid vehicles and some of those vehicles that looked attractive because the incentives don't look so attractive and people are looking for lower cost opportunities and that points straight away to LPG, lower cost to buy and lower cost to operate.

Speaker 4

Got it. My last question, David, is just at the Act Show, one of your competitors on the Spark Ignited presented sort of A vague timeline as to when they thought their solution would commercialize. And I think they talked about field trials, field testing in the second half of 'twenty five and through 'twenty six and then volume production for revenue in 'twenty seven. Is there any rough timelines that you can put out there for your HPDI hydrogen solution and when do you think you'll start actually having field trials as opposed to testing that's presented at shows like Vienna and others?

Speaker 2

Yes. So I think what I would call is we'll have maybe in the more near term than you were just talking about demos of vehicles. So we're talking with a number of different parties now about where we can demonstrate our technology in a larger way, 5, 10, 15 trucks, something like that. In terms of and so maybe we call those field trials too, we'll see about the words, Fundamentally, that is in the near future. In terms of production, I think this really depends more than anything else on availability of fuel in the marketplace.

Speaker 2

Frankly, we need green hydrogen. If it's gray hydrogen, this might be good for a transitionary period. But frankly, we're making hydrogen from natural gas. We shouldn't bother. We should just make natural gas into LNG and use it in trucks that Very efficiently used in with our fuel system.

Speaker 2

So that's my view. Really the timing of production and volume is more driven by the availability of green hydrogen, affordable green hydrogen in the marketplace. We're ready.

Speaker 4

Got it. That's all I had. Thank you.

Speaker 2

Thanks, Jeff.

Operator

The next question comes from Mac Whale with Cormark Securities. Please go ahead.

Speaker 10

Hi. Just a follow-up on the Euro 7 LPG business you talked about in 2025. I'm just wondering if you can give us The basic underlying assumptions on that forecast and how do they compare to today? I'm assuming you have things in there like truck sales cost, LPG diesel spread, that I just want to understand what you've put into your model in that timeframe.

Speaker 2

Yes. So maybe it's a 2 part question, Max. So with respect to the Euro 7 that we've been talking about primarily, which is on the Life Duty side and this is a new customer for us. And what we see with the Euro 7 is that we've been awarded more of the total models that this OEM makes. And so therefore, our volume will grow.

Speaker 2

What exactly the market is in 2025, 2026, 2027 timeframe as Euro 7 comes into play and how that how the business looks at that point in time is maybe anyone's guess, but definitely Our customer says it's up and to the right, the market is growing. People are asking for and demanding these low cost to acquire, low This is really as a barrier to further growth of clean fuels in trucking, whether that's natural gas or hydrogen. So responding to the regulations is no problem. And again, the driver in the second half of this decade are the CO2 standards starting in 2025 and then going on 2030, 200040. And that applies also to cars as well as trucks.

Speaker 2

It's Really driving customers to look for cleaner fuels that they can use with our technology.

Speaker 10

So is the projection then one based on your view of a certain number of vehicles have to be cleaner of a certain amount, so it's top down on an emissions basis rather than a bottom up looking at particular customers And sort of a production schedule, is that how you're doing that? I'm just trying to figure out €40,000,000 is a pretty precise number. I'm just wondering what goes into that?

Speaker 2

I see. Okay. So basically, this is the calculation based on a combination of units and selling price and is an expectation put on us by our customer. So there's always a chance to exceed that. There's always a chance to fall short, But that seems to be an appropriate number for us.

Speaker 2

It's very meaningful obviously for our P and L and of course our top line. And so we're Yes, it's a combination of factors in the end, Mac. We look at all the factors in the marketplace. We listen to our customer. We make our own judgment.

Speaker 2

And then we do some rounding, so it sounds good and easy to remember.

Speaker 10

Okay. But it is based on reaching certain points like cost points. I'm trying to figure out like we have our own forecast and I'm trying to figure out whether your 40,000,000 euro forecast is consistent with assumptions that I'm using. So maybe it is, maybe it isn't. So I'm just trying to figure out how much Of that do I incorporate into a model, because it's a good number to have that you've put out there.

Speaker 10

I just want to make sure It's based on things that I'm thinking are aligned with my own thoughts.

Speaker 2

Yes. I'm not sure how to advise you and how to do your model in this regard, but I can say that this is our calculations based on Our read of the marketplace and our work with our customers. So I think it's a good number.

Speaker 10

Okay, great. Thanks. That's all I have.

Speaker 2

Thanks, Matt.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Mr. David Johnson for any closing remarks.

Speaker 2

Thank you very much. Thanks everyone for your time today. Really appreciate you joining and the Q and A. Clearly, as we look at this quarter, we're quite Satisfied that it's an improvement over prior year. Nonetheless, this for us, the 2023 is quite a transformational year As we put the past behind us and set our sights on the future, we have really important business coming as the heavy duty LNG market recovers and as we launch for our new customers later this year.

Speaker 2

And so Looking forward to continue the conversation. We have a number of opportunities yet this month. We're at the Oppenheimer Emerging Growth Conference this Thursday next week with RBC at their Automotive and Industrials Conference. Then we'll be with investors in London with TD Cowen. And we'll end the month at Craig Hallum Conference in Minneapolis and be glad to be back there in person with our fabulous team.

Speaker 2

So thanks Thank you again for your time and have a good rest of your day and see you soon.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a

Powered by Quartr
Earnings Conference Call
Westport Fuel Systems Q1 2023
00:00 / 00:00