Q3 2020 Westport Fuel Systems Inc Earnings Call
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The conference operator.
Welcome to the Westport fuel systems third quarter 2000, She tried she results conference call.
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I'd now like to turn the conference over to Christine lives, what's parts <unk> Investor Relations Representative. Please go ahead mark.
Good morning, everyone welcome to Westport fuel systems third quarter conference call.
Which is being held to coincide with the press release containing Westport fuel systems financial result that was distributed yesterday.
On today's call speaking on behalf of Westport fuel systems, its Chief Executive Officer, David Johnson, and Chief Financial Officer, Richard or is he already attended.
Attendance at this call is open to the public and to media the questions will be restricted to the investment community. You are 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.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.
Actual results may differ materially from those projected in the forward looking statements.
You are cautioned not to place undue reliance on these statements and.
Information contained in this conference call is subject to an qualified in its entirety by information contained in the Companys public filings I'll now turn the call over to David David.
Thanks, Christine and good morning, everyone. Thanks for joining our conference call to review Westport fuel systems Q3, 2020 results. This is David Johnson speaking with me on the line today is Richard already [laughter], certainly hope that all of you your loved ones are healthy and well, let you stay healthy and well.
Last quarter, we talked about strong signals for a green recovery in multiple jurisdictions around the world and stimulus spending to build a better more resilient low carbon economy.
I'm pleased to say that momentum has continued despite the ongoing impacts of Cove at 19, and the challenges of second or even a third wave. We are encouraged by signs of recovery in our sales volumes and signals of normalization across key markets.
The pandemic, it's changed a lot of things, but the need for clean economical transportation solutions and urgent action on climate change has not gone away.
We've made meaningful progress in a number of our business objectives. This year, including engine certification in China growth in our Indian market and significant improvements to our balance sheet.
Although the global pandemic continued to have adverse impact on business in the third quarter, we saw recovery compared to the second quarter with sales spending significantly resulting in an 82% revenue increase relative to the second quarter of 2020 net income once again in positive territory.
Customer demand for aftermarket products and grow center H.B. I sales volumes were quite encouraging.
Two of our three Italian plants are at higher risk stones, which travel restrictions were imposed just last week. These restrictions are designed to limit people from traveling between regions. However residents could still go to work and are doing so our plants are operating at normal capacity at this time, we don't expect our factories to close.
We're closely monitoring guidance direction from public health officials I'm proud of our team's resilient hardworking commitment to operational excellence as we continue to maintain it safer work environment for our team members and first class service support for our customers.
We expect continued positive momentum in the fourth quarter, largely driven by H.B. I sales I sleep improve the sustainability of their operations with our market ready solution that delivers comparable from and it reduces total cost of ownership.
That said the extend duration and impact of COVID-19 is uncertain. Most of our production is from these three facilities look at normal in northern Italy, and one in the Netherlands sales.
Sales from these facilities are primarily Europe in areas that have been significantly impacted by the virus and continued to be challenged to contain the virus and keep you got to be operating.
We do expect to have any business to be less impacted than our aftermarket and light duty OEM business because of the ongoing need for delivery of freight worldwide.
We have implemented a number of austerity measures, which I outlined last quarter, we made excellent progress on shoring up our balance sheet and improving our cash interest during this quarter.
Including new loans with export development, Canada, Unicredit and Deutsche Bank, and the restructuring of our convertible notes, which Richard will walk through in detail later that's.
Let's turn to a few of the financial highlights.
Revenue was significantly impacted Q team and still in Q3 due to various shutdowns around the world.
But for the three months ended September Thirtyth of this year revenue decreased 13% to 65 million from 75 million compared to the same period in training team are.
Light duty OEM and donate OEM businesses are most acutely affected which directly reflects the reduced demand for light duty vehicles in the markets we serve.
Net income was Oh point Eightmillion compared to net income of 5 million for the same period last year.
Recorded positive net income in 2018 is that expected to improve upon this achievement 2020, However, as I said earlier the impact of Cook at 19 has had a significant impact on 2020 results.
That said net income for this quarter was positive net adjusted EBITDA was $4 million for the quarter.
Relative to the third quarter. This year, we're expecting continued improvement in revenue and earnings in the fourth quarter 2020 and into 2021, but of course this will depend on the strength of the economic recovery and the uncertain, but continuing impact of code 90.
As we respond to rapid customer demand for our products. We remain focused on cost reduction disciplined cash management and supporting our global team and their communities as we navigate this recovery period.
I'll update you next on a few of our key markets, let's start with Europe Europe.
Europe remains our largest market, representing about 70 or 70% of ourselves.
Our strong sales of market growth and geographic expansion.
More and more fleets are pursing LNG fuel and heavy duty vehicles that a strong business case comparable decent performance and reduce greenhouse gas emissions H.B. I trucks are being deployed in high much applications and demanding duty cycles.
European Commission striving for climate neutrality by 2050.
To take action today fleet operators can choose from just for long haul trucks, it's one horsepower more that run on natural gas for biopsy.
The only H.B. I could imagine offers full torque driving ability and the efficiency of diesel engines that feeds demand.
We continue to see growth in LNG vehicle registrations, an increase of 175% and 29 to loan according to NPD a Europe.
There are currently 11000 LNG fuel trucks on the road in Europe.
We know that the build out of having a structure is critical in the adoption of any technology here too we see encouraging signals that places faster ramp market penetration for LNG for example, with the LNG recently network in Europe doubling since 2017.
There are now 331, LNG refueling stations across Europe spanning 21 countries like.
By contrast in the United States. We have just 70 stations is limited product choice and the fuel type price differential between natural gas and liquid fuels, it's not as compelling.
Purchase incentives a 20000 euros in key markets like Italy, and the extension of the road told Simpson, Germany for LNG trucks make already compelling fuel economics, even more attractive for operators.
Earlier this year the girl German government extended role toll exemptions have even natural gas trucks into 23 three.
This total exemption further strengthens the business case for each pediatrics and accelerate actions on the your opinions clinicals.
Recently, However, you commission is down that has never truth be told exemption for gas or electric hybrid trucks and does not intend to support it through 23.
Discussions between the commission and the German Ministry of Transport, who continue to support the exemption are ongoing.
We and others in the industry believe that any attempt to reverse the legislation exemption will be rightly challenge makes money transfer companies and fueling station operators, who have made significant investments in natural gas trucks and stations.
Well continue to monitor this closely.
Carbon neutrality will only be possible with policies that include the use of renewable and economic cashless major European companies and the retail detectors increasingly switching to biomethane fuel trucks as an affordable solution. That's available today give reduce carbon emissions to net zero.
Liquefied biomethane or bio LNG is now being produced in Sweden, Norway, and Netherlands, and France with projects underway in more countries right.
Well that shell's announcement to build 50, new LNG refueling stations in Germany and on the confession action plan, our significant investment <unk> de carbonized freight sector.
Supplying a blend of fossil and renewable natural gas and making their LNG supply carbon neutral.
LNG make trucks run cleaner and effectively accelerate de carbonization and our hardware is fully capable for bio and LNG applications.
Work is underway with the European Commission determined to determine and find the license here to baseline for commercial vehicle emissions can.
<unk> mission is expected to publish these baseline for each OEM manufacturer.
30 and 2021.
Raised but not to achieve target and avoid penalties, which come into effect 2025.
During the first just following once H.B. and Europe fleets placed orders for just a few trucks for evaluation purposes, then as evidenced in conference grew orders increased 10 at a time and Twentyth. This.
This year leaders have further increased into the hunger and despite cobot sales in each pediatric reached roughly 50% versus last year, which is a continuation of the growth rate you saw in 2018.
Leads for making the switch to natural gas and especially HP.
Our heavy duty products are not hester experimental phase their mainstream forced out of the news today around the world and we believe they are important part of an economic recovery in many markets.
A high proportion of C O two emissions come from long haul truck, which don't lend themselves to electrification H.B.D. eyes, the solution and with our even modest market share growth vehicles that use our technology, our revenues and profitability will keep growing.
In September we announced our we try Westport joint venture had received government certification of the Jvs H.B. I quipped engine.
The next important step in the commercialization process is vehicle certification, which is the responsibility of the JV is customers vehicle Oems.
We expect this work to be completed in certification issue and Im actually that few weeks for the next few months and like you. We look forward to these announcements from the beach.
You have a great partner, a great technology in a large market to serve in China, and we're looking forward to ramping up sales. This important market in the coming years, the long term potential of H. media in China, the largest natural gas driven market in the world remains compelling.
We continue to work to serve the growth potential and that's got fuel vehicles in India, and our growing our business in India. In September we announced we are combining our operations of our role on DSD business their existing JV with them into a large well established tier one automotive supplier to serve both our aftermarket and OEM customers like.
Mississippi.
The combination provides synergies at sale manufacturing and operations.
The third quarter sales in India, a country covered from from run of Irish shutdowns and automotive sales were strong there.
Third quarter sales and the Indian JV, which we do not consolidate were about double that sales in Q3 2019.
There are a number of factors at play here some of the sales growth is due to pent up demand and reselling the inventory pipeline.
<unk> is also growing.
With the introduction of brought stage six emissions regulations. The cost of diesel powered vehicles has gone up and some customers simply find it too expensive to have these vehicles in their fleet.
CNG fuel price is 30% to 50% lower than diesel CNG vehicles are easier to operate the number of CNG fueling stations continues to increase.
It's too soon to predict how much of the Q3 sales increases from Corona Birch me, the pent up demand and how much is longer term shift from diesel to CNG it'll play out in coming quarters, but we're optimistic that the shift is happening.
We see similar positive momentum in Egypt, a growing market for our technology.
The gypsum President LCC announced in July that Egypt will not issue licenses to any new cars in less they run on natural gas the decision, which FCC announced during the opening of a number of National project is intended to preserve the environment and.
Natural University with the state and the lives of citizen.
The decisions will apply to any car, whether it's a minibus private car or a taxi.
In August Egypt Ministry of trade and industry and other details on initiatives aiming to replace obsolete vehicle didn't convert cars are run with natural gas during a meeting with the industry Committee how the representative.
As a result, we're fielding new increase and continue to be encouraged by the adoption rate of gaseous fuel vehicles in multiple geographies.
We've also seen interest around hydrogen vehicles continue to grow we already participate in hedging market across all transportation applications. Currently sell how did you think upon engineered in Canada and manufacturing facility in Italy to tier one suppliers.
Hydrogen faces many of the same challenge that natural gas they tend to 50 years ago sleep need product choices.
Our goal is to provide economically compelling traces that offer comparable efficiency to diesel and also deliver substantial sina to reductions.
H. VDI with renewable natural gas is the only commercially available solution that does that today.
Our specialty is working with gaseous fuel was robust patent portfolio and decades of engineering.
We continue to invest in research and development to power a cleaner tomorrow.
We're working to play H.B. I can deliver hydrogen for internal combustion engine applications.
Preliminary simulation modeling sales performance and product attributes comparable to our existing hps platform.
He is an internal combustion engine with our H.B. I fuel system. Good off for another cost competitive pathway to reduce cotwo emissions from transportation, if hydrogen becomes more affordable.
And the efficient use of that fuel and internal combustion engine as the H.B. I system is capable of delivering could provide for a competitive alternative fuel cells, while providing a similar greenhouse gas emissions reduction profile.
Well, it's early stages, we have a proven internal combustion engine platform that could be used either natural gas or hedging. It's certainly an exciting direction with optionality for the future. We're currently completing modeling and plan to begin testing in Q1.
We expect the better part of two decades successfully tackling similar heavy duty vehicle obstacles as what we see in hydrogen market lack of fueling infrastructure the challenge to efficiently produce hydrogen substantial incremental <unk> costs and scaling up vehicle production.
Irrespective of the technology direction that ultimately successful we're poised to take advantage of green hydrogen potential and that's an exciting place from my perspective.
Now, let me turn it over to Richard to review our financials.
Thank you David.
But as David highlighted consolidated revenues for the third quarter rebounded from 36 million in the second quarter to 65 million driven mainly by growing H.P.D.I. sales volumes and a steady recovery and independent aftermarket sales since the reopening of our factories in northern Italy.
Year over year consolidated revenue was 13% lower compared to 75 million in the third quarter 2019, mainly due to lower independent aftermarket sales as customer demand continues to recover.
The ramp in H. BTI revenue continues to grow through higher sales volumes for our initial launch partner, partially offset by lower average selling price of each PD I components due to contractual price reductions and lower engineering service revenues compared to the prior year quarter.
Gross margin in the third quarter.
Decreased significantly by 7.9 million to 10 million, mainly due to lower independent aftermarket and light duty OEM sales volumes lower H. VDI engineering services and a one time charge for.
Approximately $1 million for a field service campaign.
The decrease in margin was partially offset by a significant increase in each VDI sales volumes from the growing demand for clean transportation and long haul trucking in Europe.
Consolidated operating expenses of 13.2 million for the current quarter were $6 million lower than the third quarter and 2019, mainly due to the continuing austerity measures and government COVID-19 relief wage subsidies.
1.2 million.
In addition, we had an unrealized foreign exchange gain of $2.3 million due to the appreciation of the Canadian dollar.
Net income was point 8 million for the third quarter 2020, compared to 5 million for the same period in 2019. In addition to the impact of COVID-19, the third quarter 2019 results benefited from better margins, including a.
About $1 million in higher earnings from the CW I joint venture.
Prior year earnings were also boosted by a one time 3.3 million dollar gain on the forgiveness of government that for the development of <unk> technology.
EBITDA was $4.9 million for the third quarter compared to 11.7 million after adjusting for non cash and nonrecurring items, such as the foreign exchange gain and the onetime gain on that that settlement and better reflect the change in performance.
Adjusted EBITDA was $4 million compared to 9.4 million for the same period last year.
Turning to our business segment performance OEM revenue was 37.4 million during the current quarter, which increased modestly by 3.3% year over year, mainly due to the growth in H.P.T.I. sales volumes, partially offset by lower average selling price of the H.P.D.I. components and lower engineering.
Service revenues that I spoke about previously we expect to see continued growth in our <unk> sales volumes in the fourth quarter.
Although light duty OEM continues to recover since the reopening of our factories in the second quarter revenues were approximately 35% lower year over year.
Consequently, our OEM business generated an operating loss of 4.8 million compared to a loss of 8.9 million in the prior year.
Included in net operating loss is the onetime charge for the field service campaign.
Independent aftermarket revenue was 28 million for the third quarter 2020, a decrease of $11.2 million or 29% year over year, mainly due to lower sales volumes caused by the impact of COVID-19 on customer demand.
Customer demand has been recovering steadily as quarter over quarter revenues improved by 66% over the second quarter.
The resurgence of the pandemic in Europe could potentially dampened the recovery during the fourth quarter as new social distancing measures get implemented.
Due to austerity measures and government wage subsidies independent aftermarket generated an operating income of $1.7 million.
She W.I.s operating income of 6.2 million was comparable to the prior year gross margins were 16% lower year over year due to higher sales mix of lower margin engine sales versus parts revenue.
Margin pressure was mostly offset by lower operating expenses.
Equity income for the quarter from the joint venture was 4.9 million, which was down approximately half a million or 9% from the prior year.
Turning to liquidity.
Quite a challenging business environment, we generated adjusted operational cash flows.
<unk> point Threemillion compared to 1.2 million in the same period.
Right in the prior year.
The impact to adjusted operating cash flow from the loss of gross margins was partially offset by wage sub because he was up 1.2 million.
The austerity measures, we took to whether the immediate impact of the pandemic.
We also had a build up of receivables from increasing H.P.D.I. sales volumes and a general recovery in sales in our other businesses.
During the quarter, we ought to net cash inflow of 717.4 million, bringing our cash on hand at the end of the period to $46 million, mainly due to the numerous financing activities undertaken in the second and third quarters to secure our short term liquidity and offset the impact of over 90.
As part of our plans to ensure we have sufficient liquidity. During these uncertain times, we have launched <unk>.
At the market program yesterday to prudently issue shares to raise capital from time to time if needed.
We have also expanded our credit facility with one of our lenders to help us manage working capital pressure from our growing H.P.D. I demand.
Due to the continued growth of rich VDI sales volumes the need for investment in production capacity and R&D for developing new technology for solutions like hydrogen we continue to evaluate our financing needs to ensure alignment to the long term growth plans of our business.
With that I turn it back to you David.
Thanks Richard.
To recap we've made substantial progress on our business plan. Despite COVID-19, and we remain focused on a few key priorities for the last month of the year.
The successful launch of H. VDI in China.
Continued cost reduction new light and heavy duty business says in key market geography, and the profitable growth of our likely do business with the aftermarket and OEM channels I'm confident our team and we are committed to delivering.
With that I'd like to turn it back to the operator for your questions.
We will now begin the question and answer session.
Analysts who wish to court to join the question queue. You May Press Star then one on your telephone keypad. Your what was your tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing the keys to.
To withdraw your question. Please press Star then two well.
Well, we'll pause for a moment as callers join the queue.
The first question comes from Eric Stine with Craig Hallum Capital. Please go ahead.
[laughter] and even <unk>.
Good morning.
Good morning, I'm I guess when my questions I'll stick with the H.P.D. I you know just one thing I did want to confirm from your your remark. So did you say pediatric volume's up 50% and if so is that.
Third quarter year over year or is that year to date.
Yeah. That's it that's a annual figure just a rough number to give you an idea of the growth we're seeing from that business in Europe. So it's quite exciting to US you know considering the kobin crisis that we all face the shutdowns both ourselves and our customer.
But to see the market come back at with that strong return. After you know a very good year last year.
And our first full year in 2019, so we're encouraged by that it's really been a assigning star for us as we look at the outlook for our business going forward and the 21.
Yeah, I know I mean.
I guess that implies given that Q2 is pretty much nonexistent that implies.
A growth rate, even higher than that for the third quarter just curious.
When you think about that number how do you kind of break that down I mean, clearly you've got fleets that are as you said going from the tens and twentys to looking at orders of 100, plus you've also got that the baseline was finalized in the first quarter its been finalized.
And Im curious if that means you know you're seeing more of a push from Volvo a in the market, maybe just how that breaks down in your view.
Yeah, I guess, you know as I tried to.
Pulled back from the day to day and look at the broad picture of what's going on and a and then I try and if I had to say, okay, and if Kobe Didnt happened, what we where we'd be right now because the <unk> externality of course that we all have to get through but that doesn't have any do with H.B.D. I or trucks or freight.
So you know when I looked at that a you know we are launching a product that's a new technology for the marketplace.
We are a standout products patent protected nobody else has that it competes with us and I think what we're seeing Eric more than anything else is this adoption cycle that I can remember talking about it my first days with the company, which was you know when a new technology, it's introduced especially a powertrain technology in the trucking industry in any market.
Around the world there's.
There is a significant adoption cycle, where basically these are large capital purchases for fleet and they're going to buy a one or two inside out perhaps for an extended period before they buy more and so I'm really encouraged by these you know 100, <unk> hundred unit orders and and kind of the little signs that we see in the marketplace because we don't get.
Such rich data from our customer in terms of what they're doing and how they.
Run their business its really their business of course, but the signs we do see and the volumes, we do see in the growth coming back after the shutdown in Q2 are really compelling to us and again I just point to the fact that they really have one customer in one market and this is a technology that can is delivering already.
And it has that potential when the wind is littered with the right biomethane fuel to be a net carbon and net zero carbon solution, that's affordable and realistic and deliver for customers. So to me. The signs are very compelling and we're looking forward to getting beyond covidien getting into 21.
Continuing that well launch a curve and growth of this important product.
Got it and then maybe last one for me just turn into China, I mean, I know you're waiting on now the vehicle certification that's out of your hands, but confident that that's either weeks or months. You know just curious from what you see what type of.
Actions have been taken well certainly by you, but by wage Guy and also by some of the truck Oems I mean is this something once that certification is is it you said that you expected volumes could start pretty soon thereafter, or how do you see that playing out.
Yeah of course vehicles their dedication as important a step in the process, but then no those vehicle Oems will have to sell products and take orders from their customers needs in China and I do expect there's a an adoption curve there that perhaps could be a little bit more aggressive than what we have seen so far.
Far in Europe, because the market is already well familiar with natural gas trucking in China or.
Nearly a 100000 trucks per year being sold these days with.
With our joint ventures spark ignited technology. Nonetheless, this is a new technology and so there will be a ramp curve and some concern.
Conservatism, even in China about taking on new technology, improving now people buy no tens or even hundreds of vehicles at the same time. Another another key factor in that as we do expect multiple Oems to come out multiple truck Oems to buy engines from our JV <unk> technology, so that could make the ramp a bit more.
Aggressive so that's those are the factors in terms of the actual plans and Gatland time, they really are dependent on our customers take those actions, but that you know there there also global players and they see what's happening in Europe and that they're familiar with our products and there is going to happen.
Yep, Okay very helpful. Thanks.
Thank you Eric good to hear you.
The next question comes from Rob Brown with Lake Street Capital markets. Please go ahead.
Good morning.
Hey, Rob sticking with A.H.T.I. in China, how many vehicles are being us in the process of getting certification at this point.
Yeah. Unfortunately, I can't go into the numbers of our customer our jbs customer and so unfortunately don't have a number to share with you, but it's not a it's not a one at a time activity I can confirm that.
Okay. Okay.
Helpful. And then and then on the margins they were pretty low in the quarter. There were some one time stuff, but how I guess how much of this margin compression is sort of quickly.
Quickly.
Turning around and how much is a result of the ASP decline and and takes time for volume to ramp and I guess, where do you sort of see gross margins settling down overtime.
If that change Oh, hi, Rob its Richard it's a changing things. So they we had significant margin reduction cost too close to call it 30%.
Over a six or nine month period.
And and the idea always with those margins were going to be offset by.
Cost reductions that we're gonna that work contractual in terms of increasing volume and scale. So in terms of settling I mean, you know we'd like to be north of 20%.
Right now we're not there volumes are growing very quickly so in our European partner is doing well with the product so.
We're getting good line of sight, China is critical to this process I just want to reiterate we have a relationship with wage I Oh, that's very important for us with regard to the <unk>.
Being able to.
Generate the sales volumes there to help us reduces the cost of our cost of producing.
Producing our components.
Okay. Okay. Good thank you very much.
Welcome.
The next question comes from Colin Rusch with Oppenheimer. Please go ahead.
Thanks, So much guys just continuing on this gross margin question and the cadence for it obviously, you're not providing forward guidance, but how should we think about the volume well as they need to get here before we start seeing some of that gross margin expansion.
A follow up around the supply chain.
Oh, Yeah, let me.
Yeah, once you're a little bit better, but I do know that number [laughter] what's their confidence.
[laughter].
Yeah I know.
No. We're in we're in a growth phase and and yeah, we have a number but we won't be selling it today you know fundamentally we need we need a a second customer who need our volume inside of that come along to help us get the economies of scale to get the cost down to get the margins up it's a I would say a pretty straightforward relationship it's easy to understand.
But no we'd love to see these things happen faster, but there's work to be done in terms of getting the product to the marketplace and get the volumes on the cost out and so that's a an important part of our business plan or activities right now as we continue to work with all our suppliers and also work with our customers to get the the volume's up and so we can achieve those economies of scale.
Margins that we target.
Okay actually I'll take the splashing question offline.
But just in terms of the customer interest around hydrogen and that science you know I I. You identified are you talking about the fact that you are selling into a certain so you know certain programs around.
How to best Nichols, but can you talk about the customer activity in the space you know.
The design activity and how active you are in terms of building a pipeline of business in that area.
Yeah. It's a great question. Thanks for asking so the the hydrogen market in various parts of the world Europe being amongst them, but not that not lost on the Asia region North America that matter is a very mistakes I think it's interesting there's lots of people doing works in labs on a developing product.
And getting ready for the the availability of a hydrogen refueling and certainly the advent of green hydrogen at scale. So there's lots of things to be done, but we are working today with leading Oems as well as their supply base. So in some cases were tier two to tier one and are providing them.
With the prototypes in developing big hardware for them.
On the fuel system side, basically getting a fuel from a tank to a fuel cell or perhaps also to engines. In some cases, there are already some evaluations going on around the potential use hydrogen internal combustion engines as I mentioned earlier in the call, we see an opportunity to leverage our H.P.I. techniques.
Oh Gee with respect to hydrogen and really have very compelling product our modeling looks very very good to us like we should have something to offer the market that that could have some significant legs and really offer some choice to the marketplace in terms of what kind of technology choices, including the potential of course to re.
We use existing engine architectures and get developed a a a green hydrogen internal combustion engine that could have really excellent economics. So we look forward to sharing with the market more news on that as it develops and we have the data to share with you.
Okay. Thanks, so much guys.
Thank you.
The next question comes from some of your Josh you with H.C. Wainwright. Please go ahead.
Hey, guys. Thanks for taking my question can you elaborate a little bit on the India up opportunity or the consolidation that you had done there and like what level. So for whatever news on contribution as a percentage of total revenues.
Expect from India and over the next few years.
Sure glad to talk about this is for phone from our perspective very important development.
Let me just talk to the kind of the general seen and what we're doing in strategy and our operations, there and I'll, let Richard comment a bit on on the numbers that we don't consolidate so they end up kind of off the off the off the income statement or in terms of any detail, but in terms of our strategy. So first of all in the market in India.
The natural gas market for quite some time and they've been in developing the infrastructure. So you're probably aware there was on the order of almost approaching 2000 CNG stations across the country and there I have a build out plan for that which is a national plan 10000 stations in there and they're proceeding along.
That plan.
Natural gas vehicles, both light duty and heavy duty are already in the market place and we're supporting all the different customers that make those today and we see a tremendous opportunity to grow and the impetus for that growth is not missed the infrastructure for the infrastructure coupled with the economics are.
That are now fully in place because of the advent of the brought standards six emission standards. So that's the standard that's like Euro six and what it causes is a I would say the dominant engine and fuel in India. Today is diesel fuel, but when you go from zero six are brought into euros four to your sales.
Are brought to four tier abrupt sales six significant cost increase in terms of after treatment that really erodes. The competitiveness of the diesel engine and therefore puts a spotlight on natural gas fueled engines.
So we.
We have been in the market for a long time, then deal with the division and they roll on Steve. It started out of the joint venture, but then became a wholly owned subsidiary of ours and what we've done is we've rolled that into another entity that we have in partnership with them into no men does more than a billion dollar a tier one supplier to the automotive industry.
Number of areas certain number of sex, there's no the sectors.
With that we work on natural gas products and support customers like 30, Suzuki and so we've rolled in our capability from our Standalone sub into our JV with the Melinda and that we think that positions us quite well to serve the market even better than we could do on our own and so it's a bit of a consolidation right.
The time in the markets starting to pop and frankly, where a truly pleased with the results. We saw in Q3 with the growth in that market.
Progress there frankly faster than I thought it would come following cove and in India. Because you know, it's not actually over in India and it isn't over anywhere else in the world and so that's an ongoing pressure, but nonetheless the numbers were.
Quite positive and we're pleased about that we think we're strategically positioned well and have a great partner and we have a market. That's a really expanding right now as a result, the new emission regulations that came into effect just this year.
Understood.
Richard where are you going to talk about the revenue contribution.
Yeah, why don't we do that on our call separately, though.
Okay.
And then during the last quarter, you mentioned that your heated cooled than they usually do has there been any can you give us an update on that and a good investor interest or activity on that front.
Sorry, I missed the first part of your question could you say it again Oh the <unk>.
He is he initiated.
Just an update on that.
Yes. So you know we consider ourselves a born and raised as an E.S.G. company. The nature of what we do is trying to clean up transportation around the world.
And so.
Having a report to then chronicle the work that we've been doing over the past decades and show our progress on various metrics. It's something we're proud to have them and we're pleased to release that report earlier. This year. So we're committed to continuing to do that and to continue to build our ER, our positioning as a and I'll say, that's just positioning that actually.
Having people know through through the best basins of by recording a about R.E.S.G. credentials, it's still in the marketplace. So that that's an important part of what we're doing as a company.
Hi, Justin I will take my questions offline. Thanks.
Once again, if you have a question. Please press Star then one.
The next question comes from Jeff Osborne with Cowen and company. Please go ahead.
Hey, good morning, guys. A couple of questions on my end I was wondering if you could just touch on the the CW margins. It's been a lot of discussion about H.B.D. I, but can you just touch on what the moving pieces were sequentially on Cws.
Yeah. The major difference just with the <unk> there was a greater proportion of the sales next per engine sales versus parts and not that drives you know most of the margin difference. The you know the joint venture try to offset that with we'll call just 90.
And their operating costs were expecting that trend to reverse a little bit in the fourth quarter.
Get back to more so than normal margin you would've seen the first off there.
That's helpful.
And then can you just talk about the the linearity within the quarter and the reason I ask is in a normal year day sales outstanding or less than 90 days, obviously last quarter was a bit of a challenge and I would assume it was it back end loaded quarter.
But can you just touch on you know this quarter the receivables seem to be a bit bloated.
Relative to normal time, so it was that the stimulus on the pass car side kicking in or was H.P.D. I back end loaded can you just touch on what what drove.
The higher receivable accounting terms as measured by day sales outstanding.
For sure the the so the dsos, increasing specifically because of the the European launch partners. There is a.
Our traditional annual 90 day and it depends on when a sale falls in that that creates a little bit of low working capital pressure.
You would have heard me mention actually have that we increased the we have a credit facility, we don't factor our receivables, but we actually borrow against them and then and then B you know when we collect money from some of the customer cannot <unk>, we paid down the.
Phil Eddie So, it's it's fairly cheap financing, but we increased by $10 million.
Because of the sales are starting to increase and we're paying our we're paying our vendors 45 days. So there. We unfortunately I went to a symmetry with regards to one we received money versus one we're paying on it so we're trying to address them.
With the customer got it.
Then I think you alluded to in a prior question that pricing as you have greater volume pricing goes down based on pre determined contracts in China to kick in.
A two part question is with the down 30% <unk> I thought I heard that number.
With part one of the question and part two is there subsequent breakpoints like hypothetically if volume doubles or Quadruples here does it go down another 30% I'm just trying to understand what the trajectory is especially if China is slow to ramp up for whatever reason.
There are there contractual their time based so they're not volume base with the customer and that's the way they were negotiated back in the day to to attract a customer I guess there was a a view no risk that was taken.
So there is there is no. There is there are some future ones that are small the.
The biggest ones have been taken to right with a particular contract.
Which will be so with regards to that I think we're okay for the time being so now the question is how much volume, we will get with a European customer and then obviously wage I switch.
Which.
Things are progressing along the.
We we have this 18 $18000 take take NK agreement that were currently negotiating with them to figure out what's the sort of the right cadence of what we will sell them to the JV.
Got it and the last question I had was just can you touch on you you alluded to in your prepared remarks stimulus can you touch on what you saw in the past car side [noise].
As it relates to you know, either Germany, or France, or any individual countries that might have been bright spots in the third quarter.
The bright spots for us definitely it ought to be as high end market is a big one for us which is roughly 20%. So that's where we're definitely seeing the recovery we've got a great.
Distribution network in a sales team that sells into that and we saw that recovery it was quite significant.
From the second quarter, the effective where Europe was on almost comatose for for quite a bit of it in the second quarter that is coming back in and look good they actually had to even a strong October.
Which is <unk>, which was promising but the reason why we provided some caution in our.
Our statements is because of the sort of resurgence of Oh COVID-19, you would have seen in you know throughout Europe as well.
Well call. It a people are taking a pause again.
The viruses propagation. So that's just that's the our biggest concern right now so it it is doing well, Turkey for us is doing well, Russia, Russia as well as the market improved signal.
Significantly, but it's a lot it's very dependent more so right now and people ability to go out and feel comfortable and go to their local shop by one of our systems with regard to the independent aftermarket.
Got it. Thank you that's all I had.
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This concludes the question and answer session I would like to turn the conference back over to Christine Mark for any closing remarks.
Thank you everyone for joining us today, if you do that.
Any follow up questions. Please feel free to reach out to me.
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Investor Relations team. Thanks, again for your interest [laughter].
Have a great day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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