Q4 2020 Westport Fuel Systems Inc Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the Westport fuel Systems' fourth quarter and full year fiscal 2020 conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad share do you need assistance during the conference call you may signal, an operator by pressing star zero.
I would now like to turn the conference over to Christine marks Westport Investor Relations Representative. Please go ahead.
Thank you and good morning, everyone welcome to Westport fuel Systems' fourth quarter and year end of 'twenty 'twenty conference call, which is being held to coincide with the press release containing Westport fuel Systems' financial results that was distributed yesterday.
On today's call speaking on behalf of Westport fuel systems is Chief Executive Officer, David Johnson, and Chief Financial Officer, Richard or of Jackie.
This call is open to the public and from it yet the questions will be restricted to the investment community.
You are reminded that certain statements made a net conference call and our responses to various questions may constitute forward looking statements within the meaning of the U. S. Then the applicable Canadian securities laws and as such forward looking statements are made based on our current expectations and involve certain risks and on.
Certainties.
Actual results may differ materially from those projected in the forward looking statements. So you are cautioned not to place undue reliance on low statement information contained in this conference call of subject to and qualified at the entirety by information contained in the company's public filings.
I'll now turn the call over to David.
Good morning, everyone.
Thanks for joining our conference call to review Westport fuel systems 2020 results for the fourth quarter and the full year. This.
This is David Johnson of speaking with me on the line today is Richard or as Eddie.
Clearly 2020 was of years till the challenges the COVID-19 pandemic challenge the global economy and created headwinds for our business, but there were also unexpected opportunities and our global team demonstrated outstanding resilience you respond the both the challenges and the opportunities.
In spite of the unprecedented events of 2020, it's gratifying to see that the world's demand for clean low carbon cost effect of transportation hasn't wavered.
<unk> demand helped us to finish the year strength.
Looking back on the past year the impact of the pandemic was most severe in Q2, when we and our customers had to pause production due to the crisis Q.
Q3 saw some recovery and the strengthening continued in Q4 lifting us to a record quarterly revenue.
For the year revenue was down 17% from our record 2019 full year revenue.
Overall, nearly 90% of that decline was attributed to the COVID-19 related shutdowns in the second quarter.
However, our Q4, a record revenue as the 13% increase versus the same quarter in 2019, driven by a 32% increase in OEM revenue.
Looking forward, we're poised for continued positive momentum in 2021, albeit somewhat tempered in the near term debt.
The effects of the ongoing pandemic and by the global supply chain challenges the automotive industry is facing right now.
Aside from the COVID-19 challenges I'm pleased to report that we advanced each one of our 2020 business objectives, including especially sales growth in key market segments and geographies and overall, we strengthened the benefits with balance sheet improvements and cost reductions.
In November we announced the new product development work with our current OEM partner to apply H VDI to point out to an updated base engine platform designed to meet Euro six step deregulation that take effect in 2024, we read this as our launch customers confidence in our HBA systems, and the increasing demand of their fleet customers.
Who are realizing the benefits of our <unk> solutions.
Our targets for 2020 and for future growth include progress in China, where our joint venture with BHI power secured certification for the WP 12 natural gas engine powered by HP the Plano.
As one of the largest suppliers of natural gas engines in China are J D. Currently supplies spark ignited natural gas engines to leading Chinese commercial vehicle Oems and they in for sort of the largest natural gas trucking market in the world.
The WP 12, H B D. I engine certification sets us up to serve that large and growing market of vehicle Oems complete certification for their vehicle offerings with our engines.
We've also seen growth in India in 2020, we combined our business with our JV with Linda to better serve the market and to realize cost efficiencies. We can now offer a broader range of products to this growing CMG market.
And also in 2020, we commenced work on developing hydrogen with H PDI I'll cover that later in more detail.
As I said earlier Q4 sales volumes rebounded very strongly changing of the $84 million in particular, our heavy duty market segment saw very encouraging new sales growth as fleets and the European tracking the industry continued to gain confidence as they realized significant operational cost savings as well as carbon reduction benefits made possible.
The natural gas fueled HDI solutions.
We finished the year with an H PDI sales rate almost double compared to 2019 and we're on pace for continued growth in 2021.
Net income grew to $4 1 million versus $3 4 million in the fourth quarter of 2019.
The work we did earlier in the year to shore up our balance sheet working with our lenders to secure lower cost of capital and access government subsidies positioned us well to navigate 2020, and we finished the quarter with $64 million in cash and cash equivalents.
Some growth trends in transportation underpin our confidence in the coming growth opportunities.
And perhaps the easiest to understand is the heavy duty trucking dishes, where investment decisions are pure business decisions that will fuel price differentials at the pump.
Driving sales and market share gains today.
For heavy duty long haul trucks weight is absolutely a constraint the other big constraint is cost both weight and cost are big disadvantages for the adoption of battery electric technology in heavy duty trucking.
Based on physics, and economics, it's perfectly clear that the lightest weight vehicles that go the fewest miles and returned the home have the potential of the transition to battery electric.
Italy as global infrastructure development improves.
In contrast, heavy the long haul trucks at the least likely or hardest of power with batteries.
In general about half of all trucks sold around the world are heavy duty long haul trucks as populations grow and economic developed continues we'll need to move more freight the number of trucks will grow and the performance and cost effectiveness, but lower carbon solutions will become increasingly critical.
In Europe, the market share of alternative fuel trucks increased nearly 40% in 2020, a stark contrast to the overall commercial vehicle market, which declined markedly due to COVID-19.
Governments have of critical role to respond to the challenges of climate change and urban air quality and at the same time seize the opportunity or the green path to reach their economic development goals, we already see strong regulatory support for transportation carbon reduction in Europe, India, China and in parts of the U S.
Governments that properly set the table with economic and regulatory structures focused on goal achievement kind of unleash the hardness market forces to lead our industry and our green path that can scale.
I believe the inability of electric technologies to deliver of affordable effective solutions for heavy duty long haul trucking in markets around the world combined with the urgent need to Decarbonize will drive the growth of <unk> systems <unk> is ready in.
In production for sale and proven right now no waiting.
The growth in our revenues demonstrates the word has gotten out of H VDI with natural gas and renewable natural gas works and it works well, it's available now and it's generating operating cost savings and I think fleets achieve their carbon reduction targets.
<unk> vote with their dollars take note of what's happening in Europe, right now with natural gas specifically HDI China is next.
Light duty OEM sales in our independent aftermarket revenue were slower to rebound with revenue for the independent aftermarket segment falling 15% relative to the same period last year.
In particular customer demand in Western Europe was impacted due to COVID-19.
At this time, we expect to return to 2019 levels with modest growth. Thanks for regulatory support from places like Egypt, and India, and other cost sensitive markets like Turkey, Russia and China.
I'll use India as an example, India's regulatory commitment to emissions reductions from transportation has not labor through the COVID-19 pandemic the.
The stringent brought stage six emission standards came into effect in April of 2020 during the lockdown at the same time. The government is committed to building a thousand LNG stations in the next three years and is doubling its commitment to natural gas that's part of the energy mix.
Our largest customer in India Maruti Suzuki responded by discontinuing the diesel product lines, which was 30% of their business a significant commitment to embrace alternative fuel specifically natural gas.
We've seen an uptick for natural gas products across the full suite of offerings in India from the ubiquitous three wheelers two after the heaviest commercial vehicles.
Combined with growth in infrastructure and highly cost conscious consumers, who can access of 30% to 50% price savings of the pump for natural gas versus petrol.
All of these are excellent market conditions for the success of our products.
And in heavy duty trucking fleets replace trucks every three to five years. There simply is no other viable cost competitive alternatives that can deliver all of the benefits that H B D. I does today.
Natural gas and renewable natural gas infrastructure continue to grow.
Also in Europe, now with nearly 400 LNG stations and 4000 <unk> stations and now we also see investments being made to create a hydrogen refueling infrastructure.
Hydrogen use with H PDI is extremely compelling with near zero greenhouse gas emissions and much lower cost fuel cell of our battery electric trucks, particularly in heavy duty applications.
This provides the pathway from fossil of LNG to bio LNG to green hydrogen so before I turn the call over to Richard to review financial results a few highlights of our progress with hydrogen.
Although it is rather modest today in the scope of our total revenue our existing GSI branded hydrogen business supplying components to plug power Ballard and others grew by 75% in 2020.
According to the hydrogen council the total addressable market for hydrogen is about $150 million, while cost of producing green hydrogen of falling 50 per cent between 2015 and 2020.
So far hydrogen produced close to where it's used and there is limited dedicated transportation infrastructure. Today. There are only about 5000 kilometers of the hydrogen pipelines around the world in 2016, compared this over 3 million kilometers for natural gas.
In 2020 worldwide. They were less than 500 hydrogen refueling stations are good start compare this with existing and growth plans for natural gas infrastructure in Europe, India, and China as I mentioned earlier, there's work to be done with hydrogen.
But support for hydrogen infrastructure development is growing with commitments of announced in China, Japan and Germany.
Hydrogen appears to be well suited for heavy duty trucking applications for our ranges over a 400 kilometers or comment at fast filling is important for the operator of <unk>.
Few weeks ago, the published a white paper with ABL sharing our initial modeling for thermal efficiency and total cost of ownership.
We are confident that the high efficiency hydrogen internal combustion engines have the potential to financially outperform fuel cell evs in terms of total cost of ownership and also lowers the cost of C. O two of weighted which is especially relevant in jurisdictions with carbon taxes and other penalties for high emissions.
Earlier, we announced successful first trials of of hydrogen fueled internal combustion engine with H PDI.
Our test cell in Vancouver ran an engine of peak torque and rate of power combustion was stable and controllable.
Initial test results are highly encouraging and confirm that HPA, Eric hydrogen in internal combustion engine is comparable inefficiency the fuel cells in heavy duty applications.
With this early success of fueling our enthusiasm will continue to collect more data.
The results with shared the reviewed by independent experts at the upcoming the animals Symposium late next month.
We also announced the project the scan yet to comments development work on their internal combustion engine fueled by hydrogen.
We are designing and preparing for that testing program, which we expect to commence in the fourth quarter.
According to a recent research report by Morgan Stanley If hydrogen truck sales account for just 10 per cent of global sales by 2030 that would equate to per annum growth of 30 per cent and the next five years alone and provide a significant runway of growth over the next decade.
Capturing just a fraction of this growth is meaningful for Westport fuel systems.
The potential for Oems and others to avoid new and significant investments required to develop the manufactured fuel cells electric motors and batteries is incredibly exciting and compelling.
Other high load applications like mining Green rail have come to rely on the efficiency power of durability and reliability of diesel engines and there's no. Other alternative that offers the same potential to leverage the established supply chain manufacturing investment and infrastructure and the economies of scale.
Now, let me turn it over to Richard to review a few of our financial results.
Thank you David.
As David mentioned, our record revenues were higher of 13% year over year.
We had a strong sales volumes from HDI systems kind of 7% increase in the euro to U S dollar exchange rate.
We also saw a strong recovery in our light duty OEM revenues during the quarter, an increase of 44% over the third quarter 2020, due to sales in India and Russia the.
Strength in sales activity in the quarter was partially offset by a large onetime contractual price reductions in our contract with our initial launch partner in the fourth quarter of 2019 and lower year over year independent aftermarket revenues were still recovering from the impact of COVID-19 on sales volumes.
Gross margin decreased mainly due to lower margins realized year over year on H P. D. I systems, lower <unk> engineering services, and lower independent aftermarket sales, partially offset by the large increase in HDI sales volumes.
Net income benefited from $2 7 million and higher income from a strong quarter in our CW I joint venture due to lower operating expenses.
And also a five point of $3 million unrealized foreign exchange gain compared to $2.6 million in the prior of year.
We generated higher year over year, adjusted EBITDA of $8 1 million bolstered by strong quarterly performance for the CW eye and lower operating expenses.
Our adjusted operating cash flow, which includes the dividends received from CW I decreased year over year due to increased working capital, resulting from a buildup of receivables on higher sales volumes and inventory for our heavy duty OEM business.
Revenues were lower year over year due to the pandemic impact on independent aftermarket light duty OEM and delayed OEM since the pandemic outbreak. This was partially offset by strong sales growth from the second half of 2020, and our heavy duty OEM business unit selling the H P. D I system.
The two our initial launch partner. This is net of price concessions and lower engineering services work, which all had a direct impact on gross margins.
Further impact the gross margins of a $3 $2 million charge taken on two pressure release device field service actions as well.
Equity income from <unk> decreased slightly in 2020, mainly due to the impact of COVID-19, and the related OEM shutdowns in the first half of the year.
Despite a challenging year of net loss of seven 4 million was mitigated from government subsidies of <unk>.
$6 1 million cost reductions from austerity measures and of four $3 million unrealized foreign exchange gain.
Net income in 2019 included a $3 $3 million of onetime gain and a $2.5 million of unrealized foreign exchange gain.
Operating cash flow and adjusted operating cash flow were significantly below 2019 year over year due to the impact of COVID-19.
The multiple financing efforts government support of austerity measures mitigated this impact of secured the liquidity of Westport fuel systems.
Overall EBITDA continues to be positive notwithstanding the many challenges we faced from the first half of 2020, the positive trend in our EBITDA and adjusted EBITDA reflects the commitment of management of the deliver sustainable growth.
Our product portfolio and the performance of our team continues to strengthen and I'm encouraged by our progress on the pathway to sustainable profitability.
Now turning to our business segments.
OEM revenue for the three months and year ended December 31, 2020 was $58 8 million and $149 6 million compared to $44 7 million and of $164 7 million or the same periods in 2019.
Revenue growth in the current quarter largely reflected an increase in sales volume in the heavy duty OEM business from our initial launch partner combined with a 7% increase in the euro to the U S. Dollar exchange rate that I mentioned.
This was partially offset by the price reductions of our H PDI product.
The year over year decrease in OEM revenue for the full year 2020 is mainly due to the impact of the plant shutdowns in response to the COVID-19 pandemic in the first half of the year combined with lower light duty OEM sales to our German and Russian OEM partners.
OEM gross margin increased by $1 3 million to $6 6 million or 11% of revenue for the fourth quarter, 2020, which compared to $5 3 million or 12% of revenue for the fourth quarter 2019 the.
The current quarter benefited from volume discounts from HB I component suppliers achieved at the end of the year and recognized during the quarter.
Turning to our independent aftermarket business.
Independent aftermarket revenue for the fourth quarter, 2020 was $25 1 million and of $102 9 million for the full year 2020, compared with $29 6 million and $140 6 million for the same prior year periods.
The year over year declines in revenue for the Iam business segment.
Our primarily due to the continuing impact of COVID-19 on customer demand in Western Europe, and the related shutdowns in the second quarter of 2020, partially offset by the stronger Euro to U S dollar exchange rate.
Independent aftermarket gross margin decreased by $2 1 million to $6 4 million or 25% of revenue for the <unk>.
Current quarter compared to $8 $5 million of 29% of revenue for the same period in 2019. The decrease in gross margin and gross margin percentage was due to lower sales caused by the impact of COVID-19 on customer demand and the higher margin markets of Western Europe.
Now turning to our <unk> joint venture.
Revenue from our CW <unk> joint venture.
For the fourth quarter decreased by $6 5 million to $96 million or 6% versus the same period last year due to lower engine sales during the quarter.
Unit sales were lower for full year 2020, compared to the prior year, reflecting the impact of OEM factory shutdowns in April and May in response of the COVID-19 pandemic the spa.
The lower revenues gross margin for the fourth quarter 2020 was slightly higher year over year at $28 5 million or <unk> 30 per cent of revenue the.
The increase in gross margin and gross margin percentage resulted primarily from product mix, which more than offset lower revenues in the current year quarter.
Net income for the fourth quarter 2020 increased by $5 3 million, the $18 8 million or 39% higher over the same period last year, primarily reflecting lower operating expenses combined with the increase in gross margin.
Westport fuel systems' share of <unk> net income for the fourth quarter 2020 increased to $9 4 million from $6 7 million in the same period.
The year.
Now turning to our balance sheet and liquidity.
I mentioned earlier, we have made significant strides the secured the liquidity of Westport fuel systems through the cost of the year, which included the restructuring of our convertible debt held by the Cartesian group.
One of the significant appreciation of Westport fuel systems' share price. The Cartesian group converted seven 5 million of the $10 million in debt outstanding of $5 million in the fourth quarter of 2020 and $2.5 million in the first quarter of 2021.
As part of our efforts to improve our liquidity and funding. We are also actively managing our debt profile to align that to our long term capital investment needs and discussing with our lenders about modifying.
Renewing some of our term loans, the extend terms and improved borrowing rates based on our improving credit profile.
Under GAAP.
At the market program that was launched after we released the third quarter results last year, we issued 5 million share at an average price of $5 48.
For net proceeds of $27 million net equity from the period of November 2020 to January 2021 the.
This equity raise of significantly ameliorated the liquidity of the company to operate as a going concern in the near term and provides a buffer against the continuing challenges of a co.
All of them at 19.
Recently, we have issued preliminary base shelf perspectives. The issue shares from time to time during the 25 month period that this perspective is effect of up to $400 million.
Due to the outlook of significant growth of our H P. The high sales volumes with our initial launch partner and with way each eye there will be of need for investment to augment production capacity as well as continued investment in the evolution of our technology and potential expansion of the application of the technology and other industry verticals beyond <unk>.
The road transportation.
We are also excited about the potential industrial and clean energy benefits from applying our HP. The AI technology in an internal combustion engine using hydrogen based.
On our current and long term prospects, we anticipate additional investments in these opportunities that potentially can create shareholder value and benefits for our current and potential customers.
With that I'll turn it back to you David.
Thank you Richard.
To recap I'm immensely proud of our team and the substantial progress we have made on our business plan throughout 2020. Despite COVID-19 in 2021, our focus will be on continued growth at scale in key markets for <unk> that means Europe, China, and the North America and for our light duty business profitable growth.
Through the aftermarket and OEM channels and markets like Turkey, Russia, Egypt, India, and other cost sensitive markets, where our products resonate strongly with the need to deliver affordable transportation and reduce emissions.
The market fundamentals are in place societal expectations and regulatory requirements demand. The response to the need for clean cost effective carbon reducing transportation and our products provide that response of developed validated in production of for sale and in use today and they meet customers' demands.
Operational excellence and exceptional customer service will continue to guide our efforts as well as innovation at the forefront of the clean transportation solutions as the.
Richard said, we think it's a good indicator that at the current rate of growth for <unk> in the heavier the OEM business will need to expand production capacity and also fund the growth potential of emerging technologies, such as hydrogen H PDI.
I am confident in our team and we're committed to delivering value for our customers the shareholders.
With that I'd like to turn it back to the operator for your questions.
Thank you we will now begin the question and answer session analysts who wish to join the question queue May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys.
To withdraw your question. Please press Star then two we will pause for a moment of callers join the queue.
Our first question comes from Eric Stine of Craig Hallum. Please go ahead.
Hi, everyone.
Good morning, Eric.
Good morning.
So just wondering if you can start on on hydrogen and you've had a pretty busy start to the year I mean clearly this the started.
In 2020, but in terms of what you've shared publicly in the scan. Your announcement just curious what that has meant for your development pipeline.
I know you've got a number of of potential partners looking in LNG, but giving them. The additional path. The hydrogen just curious what that's meant.
Yeah. Thanks for the question, Eric I think it's a really important dynamic for us because in.
In the marketplace.
There are customers there are Oems out there who thought.
Let's skip it and go straight to the hydrogen and are I think are now seeing that actually HDI with headwind is not only are good the solution, but perhaps a far better solution. One that enables them to reuse all of their industrial complex. That's already built all of the engine plants all of the transmission plants.
All of that capability and know how they have with respect to internal combustion engines can now be used with hydrogen based on our initial test results of course, there is work for us to do but I think.
Companies in the Oems that we work with are technically focused and engineering driven in terms of products and the test results are very very strong I expect a further bounce when we get through deal all of the test results at the end of Motor Symposium. The late next month. So it's a very important dynamic for us and the changes change.
Is the the positioning of our product as of long term viable zero carbon product for transportation of long haul statistically.
Got it and then maybe just sticking with H P D I and in the current offering with your current partner.
Well I guess number one I know you don't give out units, but anything you can share I mean, it seemed if I'm trying to back into some kind of a number it seems like it was you did see sequential growth in the corner. So maybe if you could confirm that and then maybe just talk about the.
But the baseline being set.
Last July 1st I mean, how much has that been of part of the growth. In addition to obviously fleets just starting to roll out more units.
Yes, I think theres, a whole bunch of dynamics that play out there are of playing out we'll continue to play out and one of the Miss the regulation. Another one is the I would say normal fleet adoption cycle with respect to new technology like <unk> is for commercial trucking.
What we saw you know clearly we shut down and our customers shut down in Q2.
And that included our lead the HVA customer in Europe and.
Of that was it was the very slow and difficult time for us, but when the Q3 started up the factories restarted.
I think there's a clear picture of recognizing that 13% lower revenues in Q3 versus 2019, and 13% higher revenues in Q4 versus 2019. So I think this kind of trend of 13% lower and higher gives you a flavor for what was happening and as he meant.
And in our in our discussion that.
For that call or that the number was really driven by a buyer OEM business. So with that I think you can kind of as you say back into some analysis, but as you say, we don't talk about the the details of our our volume of unfortunately.
Okay got it fair enough.
Maybe last one for me you know you have talked about the investment.
And it sounds like it's both some internal but also of.
Doing some or some steps within the supply chain I mean is that should we take that as is securing more capacity for injectors is it is it more on the tank side I mean, maybe just dig into the into kind of all of the things that you're referencing there if you could.
Yeah of course, we sell a complete system from the tank to the injector and some of electronics along a lot of the line we have.
Capacity challenges in various parts of the system injector is the big part of it for sure.
<unk> six and there'll be engine of course so.
That is Oh, we're excited about this challenge to our business to say, Hey, do you need to grow your capacity to respond to demand and thinking that at this point in time, we're servicing one customer in one market of the world and the potential for growth with respect to the Chinese market is really tremendous.
<unk> talked about that the this is already in the world the largest natural gas trucking market and the infrastructure. There is built out we are through our JV, the leading manufacturer of natural gas engines for commercial vehicles and those are the spark ignited engines and so when you bring the superior product of PDI, which improves the economics.
Thanks for the operator reduce the carbon footprint and you've already developed and validated in the European market. So.
We're looking forward to that launch and the volume curve that comes along with that so we will be.
The investing we are investing in expanding that capacity and we think that something that we've been looking to forward to for some time and are glad of the time that's kind of.
Okay. Thanks, a lot.
Thank you Eric.
Our next question comes from Colin Rusch of Oppenheimer <unk> Company. Please go ahead.
Thanks, So much guys in China can you just speak to the the expected cadence of the ramp and what's that Mike.
Due to the gross margins as you guys scale up from a reasonably low volumes.
Yeah. They are I think the the speculating in forecasting the ramp is very challenging but I.
I do expect that we'll be able to witness that this year and hopefully soon.
<unk>, we have this opportunity with our JV to supply all of the Oems in China, we have a unique product that the should be appealing to many Oems in China that differs from our European market.
Where we have just the one OEM and it's the vehicle Oems.
That dynamic is different and then it's less of the largest market. So I do think and we were we're going into it with the product that's had multiple years of experience in Europe. So there's more confidence globally and our interest me around industry around the product. So I think we can expect a steeper curve.
But yet at the same time, it's still lunch curve. So.
Not a lot of specificity there for you, but I think it's important for us and it is factoring into our equations with respect to our growing our capacity to support that expected demand.
In terms of margins.
I won't make any specific comments at this point in time, but the key ingredient for us is to grow the volume to get the economies of scale that would improve our margins and launching in China is the very important part of that equation for us.
Okay. Thanks, so much guys and then can you just give us the state of the state on how Youre thinking about the medium duty market certainly.
There's a lot going on all across the different class of vehicles, but as you have.
The potential to address for natural gas and hydrogen it seems there's probably opportunity from here the creep into some different vehicle designs as you go for it so I'm, just wondering where you're at with the without all of the journey.
Yeah. The medium duty market is I'll say, two things are more fragmented and the I'll say more economically challenged in terms of.
In order for the economics to work for our any fetal of based a product like ours, where we're saving money every mile you drive the more you drive the more mass you carry the quicker you get your payback, so that's where.
With the medium duty market is more challenging theres more diversity of applications, which drug library of fire at all of the sandwich.
The approach kind of I don't know half the distance of long haul so quite a significant reduction.
Absolute use the vehicles longer tend to have longer cycles for their for their turning over the fleet. So I do think there are opportunities. There clearly are that's on our radar, but I think actually with H PDI, we could see the opportunity to move in the other direction towards mining.
In rail and other applications that are kind of bigger engines and really see excellent economics there.
With the H PDI.
That's super helpful. Thanks, So much guys.
Thank you Kevin.
Our next question comes from Rob Brown of Lake Street Capital markets. Please go ahead.
Hi, good morning.
Good morning Tahira.
Just just following up on the European market, maybe you can give some more color in terms of the demand drivers. There are you seeing this any R&D activity in that market or is this a sort of of cost savings driven market, maybe some sense of what the demand drivers are in the market.
Yeah I think.
For sure. Okay. So we have just be real clear right, it's still trucking.
So the economics are the Supreme.
The ingredient I'll say after your confidence in the technology and the product to deliver the reliability durability of that the truck fleets expect if you can't deliver the freight that doesn't matter how efficient is or how clean the data. So that's number one number two is the economics and then I would say in Europe, especially there is a tremendous.
Sigh at all.
The pressure and momentum with respect to the Greening transportation and this works for US both on the front of our current product with LNG as well as the potential for that product to respond to a zero carbon hydrogen green hydrogen in the future. So I think those dynamics are very much in our favor were real.
Happy to be with our partner in Europe and to have launched when we did and be able to ride. This this pressure in the marketplace and to do it on the basis of a great product.
That delivers for the fleets and saves the money.
Okay. Good.
Thank you and then on the on the capacity additions you're thinking about could.
Could you give us the sense of the scaling there is it the doubling tripling kind of multiple of current capacity or how do you sort of see that overall, our capacity addition of playing out for the next year or so.
Yeah, it's the it's a.
The really important parameter to manage for any supplier is to match your capacity with your demand as closely as possible. We don't want to be running any part of our manufacturing system of our suppliers' manufacturing system at 10% of capacity and we also don't want to run into a bottleneck of we can't supply the.
Demand that occurs so that's.
That's the general equation as we look at it we are expecting multiples of of growth because right now we're moving from one customer or one market to two customers or maybe even three or four when you think about the vehicle Oems in China that will be able to serve.
And so we were making those plans carefully but there's also some challenge. So I think you can imagine that we'll be leaning forward a bit on capacity. So that we can sort of every unit of demand, but the eventually does come to us in the near term.
Okay.
Okay. Thank you I'll turn it over.
Thanks, Rob.
Our next question comes from Amit Dayal of H C. Wainwright. Please go ahead.
Thank you morning, David how are you doing.
Good morning expect too.
<unk> of revenues in 2021, how should we think about the quarterly revenue.
May play out.
Given that you are seeing recovery in your segments. You know HPV area is getting traction but of the same thing. The there are some supply chain challenges that the mostly in the market right now so any color on how do we model for.
The next four quarters would be helpful. Thank you.
Yeah.
Lee glad to kind of try.
Tried to paint the picture of a little bit of of what we expect first of all we are still dealing with.
With the Covid situations around the world.
We're fully recognizing how wonderful the vaccines are and we expect those to have an effect, but in the meantime, our factories in Italy for example, at our customers around the factories and so forth on our distributors there in the orange and red zones, and so that that the COVID-19 impact is still with us and we see that affecting <unk>.
Our our light duty in the aftermarket business.
On the heavy duty side are we.
We are we've seen a bit more stabilization than you can see that the growth is coming through in kind of the fourth quarter and we expect a good of gear for <unk> going forward.
And then maybe the other thing Thats important to mention is that as you've heard from in the media. There are supply side challenges that are all of the Oems are facing and that includes us and we're managing that in the on a daily basis to try and make sure that we can meet our customers demand.
I think there is risk that that could impact us and constraints.
Some days some weeks hopefully not any months from achieving everything one achieved in 2021.
We arent back to full normal and so kind of the normal.
The seasonality you might see and expect it will be still perturbed by cope with this year.
And I think those are kind of the factors at least that are on my mind with respect to the market outlook for 2021.
But that sounds from thanks, so much.
And then.
Richard talked about some concessions on the margin front the.
Have been provided in the fourth quarter.
On the behind the company and do we see gross margins bouncing back.
The 'twenty, one relative to the fourth quarter.
Yeah. The the price reductions were made in the fourth quarter of 2019, and they were significant and we saw it.
Sort of muted the sort of of the growth the.
That we had especially in the second half going into the new year. There was that was the question with the wage I. We can't go into specific contracts, but there is we will call that a little bit of near term gross margin pressure that then yields to the better economics.
As more volume starts ramping up in the numbers are getting.
Significant debt, we have contractual price savings with our our supplier base.
Okay.
Just wanted the national and I guess, then with respect to the China milestones for 2021 can.
Can you share any of them key highlights that we should be moving from.
Yeah in China, I think we've we've made good progress of course, we had substantial delays through 2020 with Covid and the other other challenges with the the certifications, but we expect to see the certification of the vehicle side shortly.
The and then thereafter, so true this year start the project the process of launching production in sales. So we're looking forward to that but I don't we don't have any more specifics for you than that today.
Okay understood. Thank you David that's all of that.
Thanks, Amit.
Our next question comes from Thomas Boyes of Cowen <unk> Company. Please go ahead.
Hi, Thanks for taking my questions. Most have been asked but I wanted to so maybe just follow up on the line.
My question about China, just because obviously you got the certification through the way stretch the ether was accomplished of the Oh.
Level of how long do those tests, usually take on their side is it different for everyone who is testing the engine or is most of them completed in say a quarter or something like that.
Yeah. So I think the processes is not a short process.
But we are aware of that the there are cases with the specific Oems where the testing is complete. So then it's just a matter of let's say getting the the paperwork through the officials and having them bless it and the issues of certification and I can't comment on those timelines.
It's the it's challenging for for us to see and it's also the challenging for the for our JV and the Oems the C into that process.
The the testing is done.
At least in one case.
Perfect and then.
Let's see I think of as Amazon had ordered of around 700 vehicles through the JV with Cummings I'm. Just wondering if you could talk maybe half of that business the secured U.
The potential discussions with other customers just obviously given the rise of e-commerce from the pandemic out.
The buckets.
Yeah, I think it was a real promising report from right is for about.
Of that that order.
Because I think what it says is that the fleets large fleets in North America.
Consider and in accordance to the reporting of our purchasing natural gas product to.
The green their fleet the economics in North America, because of our fuel price of the relatively low in the fuel price differential is not so great. The economics are more challenging and not as compelling. Nonetheless, you have a big fleets, whether it's U P. S.
The air announcement of previously and now this report from the writers are about what Amazon.
It's doing.
These are really good signs that the fleets are taking their responsibility with respect to carbon emission of very seriously and taking action and recognizing that natural gas is an important part and important step and it works for them in their fleet operations, where again EBIT for <unk>.
Amazon EPS or any other fleet in North America than the one thing is get the freight they're on schedule and the don't don't pass up the capability and reliability to.
To try and get the low cost or green and so I'm real compelled the real excited about the opportunities in North America, and we look forward to the.
The chance to bring HPT out of North America and go a step further than you can with the spark ignited natural gas engines.
I appreciate it thank you.
Thanks Thomas.
This concludes the question and answer session I would like to turn the conference back over to Christine marks for any closing remarks.
Thank you operator, and thank you everyone for joining US today. If you do have any follow up questions. Please feel free to reach out to the Westport Investor Relations Kim hotline and thanks again, so much for your actual total Westport fuel system.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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