Q2 2021 Westport Fuel Systems Inc Earnings Call
[music].
Thank you for standing by this is the conference operator, welcome to the Westport fuel systems second quarter 2021 results 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 1 on your telephone keypad should 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 second quarter, 2021 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 <unk>.
Johnson, and Chief Financial Officer, Richard or as Yeti, 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 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. So you are cautioned not to place undue reliance on these statements and information contained in this conference call is subject to and qualified in its entirety by information contained in the company's public filings.
I'll now turn the call over to you David.
Thanks, Christine good morning, everyone.
Thanks for joining us to review Westport fuel Systems' results for the second quarter 2021. This is David Johnson speaking Richard orders that he is also on the line with me today.
I'm speaking to you from our headquarters in Vancouver, British Columbia.
<unk>, which has experienced record setting temperatures this summer and ramp in forest fires that have claimed lives devastated homes and families.
Beautiful British Columbia isn't as beautiful as it's meant to be.
We aren't alone flooding and other extreme weather events in the affected people around the world.
In Europe, Brazil, India, and China, just to name a few.
The climate crisis has never been more evident and the need for action from every sector of society is increasingly urgent.
As a society, we really arent, having enough success from the face of the epic Environmental challenge.
Meanwhile, societies need for transportation continues to increase but the earth and humanity urgently be transportation would be much much cleaner that mean, each vehicle must be cleaner and we need to produce and sell and drive those cleaner vehicles, we must dramatically shift the mix of what we drive to clean transportation technologies.
Scale is critical to be crystal clear so called scale. We're talking about here is 100 million new cars and trucks that are produced and sold and put into use each year globally and it's also the 1.4 billion vehicles that are already on our roads today.
So to achieve scale on a global basis, we need clean transportation to also be affordable.
Governments can't incentivize us to scale.
California, and the United States have been trying for decades, Europe's trying now the U S. Federal E D incentives of $7500 per vehicle for the first 200000 units sold by each manufacturer, where a substantial incentive consider that just 3 major Oems, making and selling a combined 600000.
Federally subsidized battery electric vehicles cost U S taxpayers, 4 and a half a billion dollars.
And yet sales are still far from significant and global automotive terms.
Of those $1.4 billion vehicles on our roads today battery electric vehicles are not even 1%.
In the Netherlands, we have another recent example, teslas market share in the Netherlands was nearly 7% in 2019 so.
So far this year Tesla Dutch market share is less than 1% a precipitous fall incentives fell away and so did sales affordability doesn't just matter affordability as the key.
The key ingredient and the other kind of sustainability that is economic sustainability.
Slightly obscured by headlines in article after article about the future of the DS in fuel cells is the growing success of Westport fuel systems right now.
Our business is growing because our products are available now they're affordable now and they are effective at reducing C. O 2 emissions from now and.
And with the increasing availability of renewable fuels, including the potential of green hydrogen our path forward is clear, we're making a difference today and our future contributions will be critical to delivering the global response to our environmental challenges.
Our <unk> business continues to see strong growth in Europe today, Europe is our main market and be there we see the combined impact of growing infrastructure.
Fuel prices that supports increased use of clean fuel and are available now products.
In Europe today, low carbon gaseous fuels are less expense have been high carbon gasoline and diesel and these deals are readily available from a large and growing infrastructure.
In Europe today, there are more than 40000, LPG station more than 4000 C. N G spaces, and there's more than 400 LNG stations and the station counts are continuing to increase you can find great data at N GBA Europe's website as well as from other trustworthy sources.
Other markets on a similar path China's leading the way, India and Africa are following Europes in China's lead in North America holds great potential Westport fuel systems is well positioned our goals are significant and we're on track despite COVID-19.
We're seeing fleets adapting cleaner fuels and seeking a viable solutions that dramatically reduce carbon emissions.
We offer those solutions today and the market is increasingly recognizing our solutions deliver their clean they perform and they are affordable.
So while we're pleased with the recovery in our forward looking growth trajectory all of US are still learning to live with Covid and the COVID-19 induced supply chain disruptions, but continue to ripple through our industry and marketplace.
Semiconductor supply shortages remain a headwind for the automotive industry, including our business well.
Well, we anticipate that the microchip supply chain disruptions will persist into 2022, we do expect an improving trend in the second half of this year.
I'd like to draw your attention to a few highlights from the second quarter and provide a few market insight. The Richard will take you through a more detailed review of our Q2 financial performance.
We had record revenues in Q2 up 135% compared to the same period in 2020, and the recovery trend sequentially over several quarters is encouraging up 10% this quarter versus the first quarter of 2021 and up 56% in the first half of this year versus last year.
Revenue was $84.7 million in the first quarter compared to $36 million in Q2 of last year.
Net income was more than $17 million driven by sales growth combined with a tax recovery just shy of $9 million and a gain on acquisition of stucco nearly 6 million stock.
Stock go by the way has been immediately accretive to our Westport fuel Systems' Bottomline, we're thrilled to welcome our team members from Poland to Westport fuel systems.
In addition to strong revenues in our heavy duty OEM segment sales in our independent aftermarket and light duty OEM businesses recovered in Q2 from the impact of COVID-19, as compared to the same period last year when societies and our customers first experience COVID-19 related lockdowns.
We ended the quarter with $106 million in cash and cash equivalents, including the gross proceeds of $115 million from our publicly marketed equity offerings completed in June.
We've positioned the company for growth and we're investing in the development of our next generation products.
Overall, our business is growing from a solid foundation and our longer term outlook very positive.
We have a fabulous and committed team and excellent product portfolio growing sales to global customers across the full range of transportation applications through both aftermarket and OEM channel. It's the right recipe to achieve our mid decade goal of $1 billion to profitable sales.
Our joint venture with Cummins nearing the 20 year Mark together, we've enjoyed a very successful partnership and together, we've demonstrated natural gas engine deliberate and demanding trucking applications.
Our JV is scheduled to end this year and that leaves us with several potential pathways forward discussions are ongoing so theres no definitive conclusion to announce today.
The joint venture and we go our separate ways, both partners will maintain full and equal access to all of the Jb's intellectual property.
Meanwhile, you'll note that our current HDI customers are global Oems that can more easily launched existing product into a new geography. There are companies that don't yet have HDI products fully developed.
The opportunity in North America as significant an H videographers more performance more efficiency and the ability to use todays renewable natural gas resources and also future green hydrogen.
H B D as real world benefits, both environmental and economic are being demonstrated every day on European roads by thousands of commercial vehicles and generated rave reviews from drivers and fleet operators.
In the U S last week, the highly anticipated infrastructure Bill was released largely disappointing he be advocates that original funding target of $15 billion was cut in half the encouraging news is that low carbon and zero emission spending got a massive boost a 7 and a half billion with allocations specifically for hydrogen propane and NAV.
Gas stations.
Alternative in gaseous fuel infrastructure continues to be built out in the U S and around the world with more customers accessing natural gas and renewable natural gas.
People like Amazon and UBS arent waiting for technology breakthroughs, they're acting now to reduce carbon and our clean transportation solutions are saving the money.
This is just the beginning from North America, we believe the performance and the environmental and economic sustainability benefits of our products will help the market further develop and flourish.
The market in China is massive and promising for Westport fuel systems Ciao.
China is the global leader for natural gas trucking, the largest LNG refueling infrastructure in the world and the most natural gas fuel trucks on the road today.
That's 1 of the largest suppliers of natural gas engines in the world are waist-high Westport joint venture currently supplies, leading commercial vehicle Oems in China.
Last fall our joint venture with Great Chip power secured certification from the WP 12, natural gas engine equipped with HDI to Plano and we've recently seen notification that vehicle certification has also been secured.
In March of this year, we announced a co investment agreement to expand the HDI injector manufacturing footprint into China.
Also in March we announced the amended agreement terms.
I have at least 25000 HVA systems in China through 2020 for.
This represents a significant increase in the minimum volume compared to our 2018 agreement.
Last month, the Chinese government announced they will increase the use of natural gas from their overall energy mix from 8.7% last year to 12% by 2030, a 38% increase.
This is a strong endorsement for the continued usage and reliance on natural gas moving forward and the world's most developed natural gas fuel trucking market.
The foundations are in place multiple Oems are working to integrate HBA equipped engine into their trucks and bring those trucks to market, we're confident that H B D I could trucks.
Enable substantial market growth in China increasingly share of natural gas in the Chinese truck market beyond today's already significant 10% market share.
Westport fuel systems looks forward to being part of that growth.
Growth of H PDI today leads directly to the future of clean transportation Green hydrogen.
Today hydrogen components sales represent a small but critically important and growing part of our business.
Using hydrogen in an internal combustion engine is not a new idea.
Hydrogen in the spark ignited IC engine has been consistently disappointing with low power low efficiency and real world performance challenges.
In contrast high pressure direct injection of hydrogen enabled by our patented proprietary HDA system is a demonstrated solution. We demonstrated with our H began fuel system. Just this year hydrogen H PDI is a game changer.
Let me quickly review, our accomplishments with hydrogen H PDI already this year.
In January we announced a project with Scania to develop their engine with hydrogen H PDI in February we published with ABL, a paper detailing how IC engine using hydrogen with H B D. I offered some more affordable pack and fuel cells from long haul trucking applications in March we announced the successful demonstration of hydrogen with H PDI.
Which you can see today and here today on our Youtube channel.
In April we presented to the industry our results showing hydrogen H b.
Power density improved efficiency and its the most robust approach for using hydrogen and internal combustion engines for heavy duty applications.
And just last month in July we announced the collaboration with to be an ABL to develop a highly efficient hydrogen internal combustion engine for heavy goods transportation.
The collaboration aimed at combining advanced materials and cash flow technologies with our patented <unk> fuel system.
Hydrogen IC engine with H VDI offer not only high performance high efficiency and lower total cost of operations, but they also offer other critical advantages for Oems and suppliers.
Our solution enables the reuse of existing factory capacity for engine driveline and vehicles will use existing engineering knowhow and draw on existing supply chain and we will avoid creating new sustainability issues with respect to the supply and recycling of precious and rare Earth metals.
Therefore, we're confident that <unk> has a long runway from natural gas a day, 2 biogas today and not to green hydrogen tomorrow.
We believe hydrogen IC engines provide a compelling future for long haul transportation and others are starting to share our conviction I'll give you 2 recent examples.
In a recently published paper the world's hydrogen council has shown that from a total cost of operations perspective.
Jim can become the most competitive low carbon solution and more than 20 applications by 2030, including long haul trucking.
Kenzie paper published in June confirms that hydrogen combustion will still fulfill an important role harnessing established technologies and supply chain.
As a leading expert in managing gaseous fuel and the inventor of H PDI Westport fuel systems is uniquely capable to lead the way with green hydrogen and transportation applications.
Westport fuel systems has been at the forefront of the shift to cleaner low carbon and cost competitive alternative fuels for transportation.
Continuing to remain devoted to the de carbonization of transportation sector and the critical need to deploy at scale carbon neutral solutions now over to Richard for more detail on our Q2 results.
Thank you David.
As David described earlier, we had another good sequential quarter of financial results with record revenues of approximately $85 million, which were 135% higher year over year, driven mainly by the ramp up of H PDI product sales and the continued recovery of sales volumes in our light duty OEM and independent aftermarket.
The <unk> acquisition also contributed $2.3 million in revenue since the close of the acquisition on May 30th 'twenty 'twenty 1.
The year over year comparisons to the second quarter of 2020 are somewhat overstated due to the severity of the pandemic impact on our operations and those of our customers that suffered through plant shutdowns and other social distancing measures last year.
Nevertheless, the results do reflect the positive recovery and demand for our products, especially a promising outlook for our <unk> technology.
Gross margin increased year over year to $15.7 million and our <unk>.
Gross margin percentage of 19%, mainly due to higher sales volumes, despite headwinds from the ongoing semiconductor shortages and supply chain issues.
Gross margin percentage improved due to the recovery and higher margin aftermarket sales volumes and also higher year over year of sales volumes to our initial <unk> launch partner, including some higher margin development work.
Another positive result for the quarter was the continued performance of the <unk> joint venture <unk>.
Income from CDW, I was $8 million, an increase of $4 million year over year, primarily due to the recovery in sales volumes from the impact of COVID-19, and also a $1 million tax recovery.
Net income for the quarter was $17.2 million compared to net income of $3 million for the same quarter last year.
A $14.2 million dollar increase in earnings reflect the positive traction in our sales volumes across the businesses in the current period and the increase in income from the <unk> joint venture.
Net income also benefited from some extraordinary items this quarter.
Recognize the bargain purchase gain of $5.9 million on the acquisition of Stockholm, We were able to acquire the business for less than its fair value due to the sellers interest in divesting their noncore LPG business.
On another positive development, we recognized an $8.9 million tax recovery related to an Italian government COVID-19 tax relief program that allowed us to step up the tax basis of some of our Italian assets to increase tax depreciation and thus lower taxes.
This quarter, our adjusted EBITDA was $6.2 million, which was comparable to the same periods. In 2020. However, as a reminder, adjusted EBITDA in the prior year second quarter included a $7.7 million insurance recovery related to a $10 million charge for a field service campaign for the replacement of our pressure released the bikes record.
In the first quarter of 2020.
Excluding the insurance recovery adjusted EBITDA increased by $7.7 million, mainly due to the better performance described before.
Now turning to the operational performance of our business segments. Our OEM revenue for the current quarter was $53.1 million compared to $19.1 million for the prior year quarter the significant improvement in revenues.
Driven by higher year over year, each PDI product sales to our initial OEM launch partner.
Quite challenges of the global semiconductor shortage production did ameliorate in the second quarter compared to the first quarter.
Further sales volumes of our light duty or yeah, or delayed OEM and electronics businesses are also recovering to pre COVID-19 levels.
The impact of COVID-19 was significant in the prior year period, which caused plant shutdowns combined with lower light duty OEM sales to German and Russian Oems.
Expect to see continued growth in our heavy duty business and improvements in the light duty OEM business in the second half of the year.
Clearly the higher sales volume drove an improvement in gross margin year over year in absolute dollars, excluding the 1 time $7.7 million insurance recovery.
Gross margin increased by $5.7 million year over year. This quarter, we generated a small operating loss of $3.4 million as we continued to invest in the development of our <unk> technology.
And our sales volumes are still relatively modest been growing.
Net sales volumes grow the profitability of H B D. I will improve through economies of scale on production through our supplier network.
Turning to our independent aftermarket revenue from the current quarter increased 87% to approximately $32 million compared to the prior year quarter, primarily due to the general general economic recovery from COVID-19, and the related shutdowns in April and May of 2020.
Gross margin increased by $5.5 million this quarter to $8.5 million for our gross margin percentage of 27%. This improvement in gross margin was driven by higher year over year sales volumes.
Though we were able to generate better sales volumes, increasing sales mix to lower margin emerging markets, which provide a significant opportunity for growth.
To Westport fuel systems, and the challenging recovery in Western Europe has challenged on margins.
We expect continued improvement in our aftermarket revenues in the second half of 2021, but temper expectation due to the ongoing global shortage of semiconductors, which could impact the independent aftermarket business.
Turning now to our liquidity.
Over the past year, we have made significant strides in improving the strength of our balance sheet and liquidity to fund our business plans are.
Our cash position increased by approximately $96 million since the beginning of the year to 161 million the increase during the past quarter was primarily the result from the market marketed equity offering completed in June partially offset by a $7.5 million payment of the royalty payable to the Cartesian group and other debt.
Service.
The marketed equity offering in June successfully raised $150 million and approximately 108 million net of transaction costs.
The offering generated a lot of interest and it was oversubscribed by numerous institutional investors in North America, and Europe and retail investors.
The board the executive management, and our largest shareholder all participated in the offering.
The funds raised from the offering were a major step to support our growth of Westport fuel systems to invest in capex to expand production capacity and research and development for H PDI technology acquired bolt on businesses like Stockholm, with complementary capabilities or technologies to existing businesses.
And also to further strengthen our balance sheet.
We also continued to manage our debt profile and to align the cash flows from our businesses to our investment plans.
During the quarter, we refinanced a $7.5 million Euro zone or the unit credit in the second quarter under the crypto liquidity program maturing in 2027 that we announced earlier this year.
We're also negotiating with our partner export development, Canada to refinance our term loan and COVID-19 bridge loan into a long term credit facility to support funding of our H PDI technology commercialization and research and development.
We received waivers from E D C. The deferred principal payments on the term loan and COVID-19 bridge loan due in June and July of this year, respectively to September of 2021 in anticipation of renegotiating the new agreement.
We're very appreciate of the support and relationship with EDC and this refinancing would be another significant step to bolstering our liquidity to fund our growth.
Uh huh.
I would like to turn it back to you David.
Thanks Richard.
Looking forward not only very optimistic, but we're committed to deliver we expect.
Continued post COVID-19 recoveries in markets around the world and continuously increasing demand for transportation. We also see continued regulatory and societal pressure for clean transportation and the persistence of the economic fundamentals that mean only affordable solutions can scale in a way that is meaningful in both automotive and environmental terms.
<unk>.
For Westport fuel systems, we are well positioned and expect growth in all of our businesses, but especially growth of <unk> in existing markets launch of HPA in new markets and the development of H B diaper hydrogen with existing and new partners I'm proud of our team and of all of their efforts remain focused on our objectives and the challenging conditions, we faced during the last year and a half.
Well positioned to continue leading the market in gaseous fuels and believe we have the best team technology and partners to secure the sizable opportunities ahead.
With that I'd like to turn it back to the operator for your questions.
Thank you.
We'll now begin the question and answer session analysts to wish to join the question queue May Press Star then 1 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 2.
Pause for a moment as callers join the queue.
Our first question comes from Eric Stine of Craig Hallum. Please go ahead.
Hi, David Hi, Richard.
Good morning.
Eric.
Good morning, Good morning, So maybe just starting on H P I.
And I just wanted to clarify so did you say that second quarter volumes did improve sequentially.
And then also would just love your thoughts on some expectations, obviously very bullish.
But some expectations for the second half of 'twenty, 1 maybe versus what the run rate you had in 2020.
Yeah. Thanks for the question Eric.
As you mentioned, we had some sequential growth already this year quarter over quarter.
Obviously, that's a GAAP year over year growth from Q1 with year over year growth from Q2, which of course it looks the COVID-19 time, but also.
New growth so fundamentally you know.
This is a this is a product launch that started a few years ago and continues the goals for the industry in the world really drive our business. So in Europe. For example in 2025, because it remains a strength.
15% reduction C O 2 and as that that goal comes closer and closer we expect the volume to continue to ramp in response to trying to meet that goal.
By our lead customer, but also by other persons yourself.
We're on a very good path and we do expect that continued growth through this year and into the coming years.
Got it yeah, and then maybe just transitioning to China.
<unk> been waiting on vehicle certification for quite some time.
I mean anything you can discuss in terms of when you actually might start to see volumes given that when you do I would think that the ramp.
Maybe it's gradual for a couple of quarters, but then can be pretty significant.
Yeah, I think you've characterized it correctly are we expect to see a launch and we expect to see volumes grow and the market in China is a huge market as ive pointed out are regularly.
We're already in China, having a 10% market share of natural gas vehicles next with spark ignited engine. So it's like a 10 X kind of performance with gaseous fuel vehicles in China versus what we have in North America, So and the market is a 3 or 4 times larger than North America. So we're really well positioned.
<unk>.
Power is a great partner of ours, our joint venture is doing excellent in the market today with spark ignited product and when we're able to add and bring the HPT out to that marketplace. We expect a really strong response, because it offers that improved performance improved efficiency and really nothing to be taken away from them from the fleet driver in the truck driver on that.
Really reflects back on what we see in the market day in Europe, where basically H PDI is winning versus spark ignited product because of its superior performance and so we expect a really important development for ourselves and for our partners in the Chinese market as these PDI lunches.
Got it maybe last 1 from me just on hydrogen anything you can discuss about the pipeline now that you've got Scania.
At least for a development agreement.
You've had a number of data points and progress.
Here anything you can share on the pipeline.
Yeah from our perspective, we've shared what we can in terms of actual names results and outlook, but fundamentally I think the important a big.
Big picture is that we.
We've already demonstrated a very clearly and brought the day to day marketplace showing that hydrogen with HDR is super effect. It's a great solution. It's a great way to use hydrogen it's a great way to use <unk>. So the combination is a is really fantastic and we expect that really to accelerate.
The progress of bringing H began in the marketplace for natural gas for biogas from for hydrogen as a function of time as those sales become increasingly available. So that we think it's a really important part of our portfolio and our technical capability to respond to that the future green hydrogen fuel you are getting.
Capability.
Okay. Thanks, a lot.
Thanks, Eric.
Our next question comes from Rob Brown of Lake Street Capital markets. Please go ahead.
Good morning.
Good morning, Rob.
Oh, just just sort of following up on the on the European H P. I growth. If you you expect I think you said expected improvement in the back half are you are you seeing pent up demand maybe from supply chain issues that are going on.
To alleviate or are you where are you seeing the demand growth in the back half of the year.
First half.
Yeah. So so general trend, which has played out since we launched it's been.
A nice growth trend with volume growing quarter after quarter.
1 thing Thats very frustrating for all of our shareholders and the Investor community is not being able to see that in detail. We look forward to breaking that out in some detail in the future. When we have more customer volume to aggregate and and show, but fundamentally there have been some constraints in the marketplace from the first half of the year.
Despite those we've still grown.
And those constraints related to all the supply chain shortages, which includes microprocessors, we've mentioned as well as other materials.
A pent up demand and a residual COVID-19 effect in the marketplace globally and certainly still in Europe. So all those factors we think have been.
Headwind for ourselves and our customers. Nonetheless, our results are up and we expect that as those headwinds each whether it's COVID-19 or or a supply that.
The market will continue to grow and that's just on the on the foundation of the fact that it's a better product and it response to both the customer.
Customer demand and regulatory requirements and as I mentioned in the comments earlier, you know the key ingredient for all of the things that we bring to the marketplace to help clean up transportation is their affordability and but you can read a customer testimonial after customer testimonials from Europe, saying that the the trucks perform really well and the trucks.
Save fleets money and that combination is the perfect perfect pivotal readouts for success.
Yeah.
Okay. Good. Thank you and then in the North American market, you talked sort of alluded to do some activity there.
How do you see that developing what's your approach to enter the north American market with HBO.
No I think something that's.
Truly important in this equation is the fact that the world of commercial trucking heavy duty interest for commercial trucking is supplied by just a handful of companies around the world that make and sell the vast majority of the products and all of these companies basically are global so our current partners our global Oems.
They have brought and are bringing H P D add to the marketplace from their home market and I think having done that then that offers the opportunity to expand to markets around the world and that includes North America clearly the North American market has historically been a little bit slower to develop with natural gas in markets around the world in places like China and Europe.
For example, and that's primarily due to the fuel price dynamics in North America, where that that fuel price differential isn't as significant and its net persistent historically as it has been in other markets. So I think that's an important part of the equation. So we're really excited about the opportunity North America based on the need from an environmental perspective.
And the effectiveness of our price or respond to that.
Sector. So we see companies that have made the analysis of natural gas from trucking in North America leaning forward and buying more and more and shifting their fleets, but we're expecting that will increase in the future as ESG requirements and societal demands and regulations and fuel price dynamics.
Modify over time, we'll get more and more European and Chinese like in the North American market.
Okay, great. Thank you for the color I'll turn it over.
Thanks, Rob.
Our next question comes from Colin Rusch of Oppenheimer. Please go ahead.
Thanks, So much guys could you give us an.
An update on where you're at now with the HP for hydrogen testing in Wisconsin.
Have you begun those tests fall and are you still doing preparation work what's the latest.
Right.
Yeah. So our projects are proceeding so we have our engines from the test cells. They work and as we develop results that we're able to share and as our customers allow us to share we've been sharing that with the marketplace. So we did a presentation of our own results in Indiana in April that you referred to.
Earlier, and we have an upcoming presentation in Linz, Austria in early September and so we'll continue to bring that news to the marketplace as it becomes available for us development.
Hydrogen H P. I is an ongoing effort on our own R&D dollar as well as with our customers our projects announcements Scania and <unk>. These are really are I would say meaningful developments important developments and in the press very exciting because it's moving on to this next fuel of the future of clean fuel for transportation.
And our results already are very exciting so.
Yeah, as we have more to share we will certainly be share you could countless zone.
Thanks, So much and then with the potential for adding in new rich media and customers on the natural gas side because of the runway that you provided the hydrogen can you talk about the benchmarks that that those customers are looking for before they would go forward with you guys on the network outside from the hydrogen testing.
Well I think the real question Colin is when do our customers make announcements right.
The business of developing engines and bring them into production.
And for any technology, including ours is a multiyear activity.
Where we engage with customers as we did with our lead customer in Europe and in our customer in China. Many years ago, and we do develop from the test cell and the need to develop and vehicles and so this is a multi year activity and.
In many cases as was the case with our lead European customer there yeah.
Any announcements don't come in direct alignment with what's actually happening so.
I apologize for that is just the way it works from our industry and we're looking forward to being.
Are you seeing any announcements from our customers as they were already.
Yes.
That's the profile thanks, so much.
Our pleasure.
Okay.
Our next question comes from Amit Dayal of H C. Wainwright. Please go ahead.
Thank you Joe good morning, everyone.
Good morning.
Hi, David.
Has the COVID-19 sort of impact in the recovery process.
Made any difference in the historical seasonality you know, we typically see the fourth quarters.
Strongest true varies.
Because of what has transpired over the last 12 months should we anticipate any change from some of that.
And James Zone.
Hum.
Uh huh.
Yeah, I think I understand your question about how does COVID-19 and seasonality fit together to me, it's a simple superposition.
So we just add the 2 effects together I don't think there's any fundamental change the seasonality of our business and a clear example that we control is in the month of August coming up. The next couple of weeks, we have a our.
Typical Italian holiday period until we close the factories for a couple of weeks and of course, we'll continue to do business, but there is this is a drop in supply in the month of August it always happens for us and the second quarter tends to be a strong quarter in fourth quarter tends to taper off a little bit.
Some of these trends and our seasonality are changing as the mix of our business changes from heavily reliant on aftermarket to more of a mix of OEM and aftermarket, we've talked and and put up the results. So you can see it is the mix between OEM and aftermarket brake.
Break that out from a financing is also you can see what that mix looks like and as we increasingly become an OEM business and in a tier 1 supplier to those Oems.
Seasonality will change more to an automotive as opposed to consider product moving.
Well with respect to Covid.
That has been effective in the marketplace I would say not so much on the on the heavy truck side, although there have been other supply side challenges that have been induced by Covid I believe and other factors of course, so to me you kind of do a little math and kind of make the forecast and what do you think the COVID-19 effects are what the seasonality is and how it changes between aftermarket and OEM.
To try and get an idea of how all those effects are are coming out in our in our results.
Fundamentally.
The backdrop of ball that wouldn't be the foundation of all of that.
The fundamentals of our business clean affordable technology and the need for those in the marketplace. So we do see this growing a growing business and that's why we're excited to have another quarter of a record quarter and we'd have to look to more of those in the future.
Thank you for them to do it and just 1 more from me.
With this Cummins 1 drug from doing them.
In terms of the December you know were up for renewal I guess.
Or the.
Potential strategy to food GAAP from doors contributions as the relationship does not continue.
Yeah. So we have quite a few different alternatives and of course, our business is is global its not just a north American business. Our business is varied in terms of market segments, we address and so frankly, we see growth across all of our different geographies and product segments.
Of course, HPA is an important part of that and we think HP as an important role to play in North America as a as the market continues to develop.
So yes, there's lots of different opportunities to backfill in the case that our joint venture wind up subs is currently contracted to do but we're also continuing to have discussions with our partner around other all true and what might happen in the future. So.
Yeah stay tuned.
Have some news will share it with you.
Got it and maybe.
And 1 last 1 sorry.
How many customers for HBO now do we have good news from them.
Yeah. So I think the way I count is that we have the cash.
Customer that's in production in Europe, we have a customer that had the production in China and then we have the 2 customers that we've announced that are developing in hygiene H P. Bad with that and so 1 is I would say not a typical OEM customer our partnership with <unk> to be maybe L. But.
Certainly, we think and they think it leads to customers that are bringing hydrogen H b and in the marketplace. So those are the kind of the 4 announced I don't have any more announcements in that but you can imagine that we have other projects that aren't in that so that's just the way the business works.
Okay. Thank you.
Thank you.
Our next question comes from Jeff Osborne of Cowen and company. Please go ahead.
Yes.
My questions have been answered a couple of clarifications just on China I thought the.
You in your prepared remarks, he said they had certification, but then to Eric's question you didn't I thought they received <unk> 344 certification in mid June.
Yeah. So we found a you know are in.
In the public domain from announcements of vehicle certification. So we know those steps have been completed and we.
You can reference them in a public way and so that's what has happened.
We mentioned it in my earlier remarks.
Got it.
So once you have that certification you then need to get designed into a truck OEM.
Any sense in working with them that it is actually being marketed or sold.
Yeah. So these are the announcements Jeff that we have to leave to our customers, but basically the certification that's been achieved in both the engine certain who did our joint venture did last year and then our customers are doing the vehicle search and you've seen those published in China. So we know those have been achieved.
So with that basically then.
Next steps are basically onto the marketplace, but again. These are the announcements that will come from RJ. These customers that is the truck OEM not from us.
Got it and then how is the expansion in China.
With your manufacturing partner, there or is that up and running do you have the capacity to meet the agreement that you have extended through 2024 can you remind us.
Yeah, Thanks for asking it.
We are really important that we have made these investments and are putting the equipment into place. That's a this year activity and that will support the ramp that we forecast in the Chinese market.
We have a long standing partnership.
On our fuel injector with Borgwarner and we're excited about this development and making the investments necessary to support the marketplace. So it's happening now and the capacity will be available to support the lunch script that we expect that's a business we put the capacity in place. So we can support the ramps that we even forecast, we expect them and understand from our customers.
Got it.
A question on the hydrogen side, you mentioned the performance of H P. D. Iva spark ignited and you saw similar trends with Nat gas with torque and whatnot, but my understanding is I thought hydrogen with engines as you indicated in your prepared remarks has been tried for years 1 of the challenges I thought was embrittlement of the hydrogen molecule into the meta.
<unk> itself or it sort.
Defuses into the metal.
Is there anything unique about <unk> that would avoid that problem or can you talk about.
Embrittlement trends have been in terms of performance.
<unk> Nox and Sox.
With the various different tests that you've done with Scania.
Yes so.
Glad to talk about that so so we are in this space and you can tell from our announcements with flow Scania ADL and to feed that we need to go do some work and actually develop the product all the way to production from the initial demonstrations that we've done that show the clear promise and potential of the fundamentals of the combustion system.
But as you know well and everybody on the call it's really understand.
The world of commercial trucking. The first priority of every trucker is to make sure that their truck always runs and had this long durability of thousands hundreds of thousands of kilometers or miles. So that long term durability is something that we need to develop and demonstrate and quote unquote. The hydrogen embrittlement challenge, which is a no real material.
The science type challenged is its still to be let's say fully addressed I don't anticipate any problems would do that but yet we have to go do it and so that some of the work that is ahead of us still.
Can't say, it's fully solved but at the same time I can also say that so far in our testing we had no real issues identified.
It's a real thing and we need to work on it and that the engineering work that would be done.
So just to follow up on that.
Hopefully a non technical question, but the intent is to allow the installed base.
To use this so there's no augmentation of the metals within the engine block.
Versus you could avoid embrittlement by using different materials, but.
Is that is that correct view.
Yeah.
The idea would be to upgrade existing net gas engines to something greener.
Yeah, I really don't expect this to be a retrofit activity in other words, we're not going to pull a truck into the shop and change injectors and fuel systems and the hydrogen just like we don't take a diesel trucks, a day and put it into a shop and turn it into an H pediatrics.
The business of making engines.
Engines for long haul trucking is an OEM business and I expect it to remain an ODM business and so we will develop the hardware that is the fuel injection system as well as the engine hardware and make whatever necessary changes are required in order to produce product.
Customers can count on and that delivers the benefits that we've already demonstrated with hydrogen from gas.
Perfect. Thanks for the clarification I appreciate it.
My pleasure, Jeff good to hear you.
Once again, if you have a question. Please press Star then 1.
Our next question comes from Mac whale of Cormack Securities. Please go ahead.
Hey, good morning, gentlemen.
Just a question on you know.
Long term goals, David you mentioned profitable sales target mid mid decade, what in broad strokes like what would the segmentation in gross margin look like under that scenario like what what is it just.
That you're aiming to achieve I think you can achieve on that on that profitable sales target.
Yeah. Thanks for asking so this this goal that we've set for mid decade to have $1 billion. In revenue is not just a revenue goal, but also includes a 20% gross margin on our business in total.
And then in terms of you know how does that business develops we see growth across all our segments are Richard mentioned earlier some of the developments, we're seeing of our aftermarket business and developed in markets around the world in places like Algeria, and Egypt, and India are and so as we look at our full suite of business really.
We will hit on all cylinders, so to speak to to build a $1 billion book of business with the profitability that we can be proud of and so that's the plan and the outlook for for our growth of our company of course, a key ingredient in that is the growth of <unk> from a 1 product in 1 market with 1 customer.
<unk> 2 a productive selling broadly around the world China being next North America after that and then more and more Oems the hydrogen future starts to hit the road with our with our technology.
Okay.
And then.
Following up on that or maybe linked to that on the hydrogen side. So I suppose the hydrogen portion of that.
Sizable because you get investment.
On infrastructure and development along the cost declines for hydrogen, let's just suppose all that happened.
Do.
What level of spend.
Do you perceive sort of on an annual basis is this like a is it a 10 million dollar a year.
Our task is at 25 is it like can you just give.
And the idea of what the next sort of 4 or 5 years will require in terms of spend on getting that commercial.
Yeah. So I think the key ingredient here actually in terms of spending going forward I would say, it's not so much on the R&D side of course, there is some spending will continue to invest in new products and that's part of our roadmap and business plan, but.
But I would say tell you that the bigger spend is putting the capacity in place.
To grow and support our customers as as more and more HDI customers adopt the technology and then followed their own launch and growth curves and so that that would be the bigger part of the spend and.
Yeah.
Yeah don't have figures to share with you, but fundamentally we see a relatively.
Modest curve of spending going forward not some huge capital need that.
I needed to bake into our model.
Okay.
And then just lastly on on the on the future of the JV is there and perhaps if it's available online just point me to that but is there details on how the rollout would occur like in terms of like is there a stipulation that 1 partner buys they'll be out there or that you have to.
Share and what cost or anything of that nature that's available.
Yeah, So a decade ago, when we signed the current JV agreement.
We didn't we didn't post that is 1 of our material agreements and file that with some reductions, but basically but the fundamental structure of that is all laid out in the agreement.
The question that everybody is asking that we don't have an answer for today, but we don't have it in for the future. It will there be any changes that I would just follow that formula. So yes. We can point you to that documents that you can you can come up to speed on what that is.
The current agreement says.
Okay, great. Thanks, guys.
Thank you.
Our next question comes from Eduardo D, Jim Barry Dare now.
From the webcast. His question is any sale of H P. D I in South Africa, or Australia, and what about H P D I and off road applications any update.
Eduardo good good to hear you. Thanks for your question so generally.
Generally speaking we have a our business with our lead European customer and they are a global OEM as you well know and consider markets around the world as potential markets for H P. B I.
I can't go into any geographic details that's that's their business not ours, but we're certainly pleased to support them as they investigate the aperture for each brand in the market.
Terms of off road markets, we certainly see an opportunity. There. This has been something that the Westport fuel systems from the Westport innovations days has proceeded and investigated and certainly there are opportunities as a general premise I see those to be kind of <unk>.
In this timeframe kind of as a follow on activity to on road. So in my experience industry No on road trucks lead the technologies in off road comes as a follow on so we certainly see that as an opportunity and we recognize.
In industries like mining for example, there is a big push to clean up.
Let's say industrial side than the internal combustion engine side of their business to move towards cleaner and lower carbon technologies like ours.
Our next question from the webcast comes from David Douglas.
What is the true state of play with we try and Cummins if not yet when will we know date certain if neither is likely to come to fruition what is the plan going forward.
Yeah. So I think we've covered this quite well, David and well I appreciate the question.
We're offering in this call are the state of play in that is we have a joint venture with Cummins is scheduled to end at the end of this year and we're in discussions with that with our partner on on alternatives to that ending and if theres. Some change we'll certainly announce it in when we have that are that a conclusion. The same is true.
With our partner weight, China, we've been very transparent about what's happening to the best of our ability and we have some more news will share that so you might recall that we signed a new agreement with weight chart earlier. This year are committing to the business and an increased volume of now 25000 systems as a minimum through 2024.
And Meanwhile, the market in China, and our partner are poised to bring HB day to that market. So we are yeah. We're we're excited about the future and anxious and eager anymore.
Our next question from the webcast comes from Charles or N Ski Your European is your European partner also stressing is future of electric trucks, how long is that away and it seems they are not interested in hydrogen any comments are greatly appreciated.
Yeah. So I can read what you can read in terms of what our partner is doing in Europe.
And then in addition, I have kind of insights into how we see the HPA growth curve, but that partner in Europe, and I think broadly speaking across the industry, including our lead partner in Europe.
He is kind of placing their bets and not putting all their eggs in 1 basket right. So I would tell you from kind of just observing the industry. As you can also that people are making bets on fuel cell people, making bets on battery electric and I guess you know the big picture from my perspective is that you know recognizing these truck manufacturers Oh.
All of them make a.
Our full breadth of offerings to the marketplace from transit vehicles for inner city that carry relatively light loads and doing a lot of stop and go to long haul trucking and in some cases, they're also offerings off road equipment. So it's the full range of applications.
So what I would point you to.
Is that over a long period of time and I'm talking a full sensory or the development of the internal combustion engine and our industries for automotive and off road into propulsion system that there's always been a diversity of solutions that applies in the marketplace. It's never been 1 thing that solves all needs from a motorcycle to a long haul.
Truck to and Earth moving equipment in our mind in a in any geographic geography around the world and so these diversities of solutions have evolved over time as technology has evolved over time and as the requirements of the marketplace has evolved over time. So you know just to put a pointed at a real clear example is basically before World War 2.
To all engines for almost everything where spark ignited gasoline petrol engines post World War, 2 we saw the real development and proliferation of the diesel engine and trucking and now basically all trucks are diesel engines quote unquote, all you don't like 98% and all cars quote unquote in roughly speaking almost.
All of them are gasoline interest. So you have this split of the market and as we go forward Oh, Yes, we're investing in a suite of technologies and Theres going to be a mix of those technologies going forward. What I can clearly point to is that the mix of natural gas from trucking has grown very strongly in very specific segments and its continued growth in Europe.
And better technologies like ours that are affordable will win at the end of the day and so that to me is that the overall picture that I can quickly.
Our next question is from the webcast from James Warner.
Are there penalties if a flashy does not meet the H P. H D. P. I purchase school of 25000 units by the end of 'twenty 'twenty 4.
And not so much penalties, James but actually there the contract size is very similar in form of the contract. We signed back in 2018 and that is they're committed to buy a minimum of 25000 and so it's just kind of they're committed to make these purchases at a certain price and.
The only question is what does the curve of those purchases that ends up to 25000 systems purchased by 2024.
Our next question from the webcast comes from Peter Wong will H P. D. I 2 in North America require LNG infrastructure first.
Yeah.
And so there is some question Peter Thanks for asking basically at the engine are the fuel that were injecting into the engine with our HVAC system is basically.
I'd say mid pressure.
It's not liquefied gas.
So we can run the H P D I with a gaseous fuel system in CMT fuel system, we don't need an LNG fuel system. Both options are possible for us today in the marketplace from both Europe, and China were bringing to market and LNG system and the reason is bringing LNG system is that LNG is that much more dense form a batch.
For gas and therefore, you get better range. So it's really about the application. So so if you want to apply <unk> in an application that doesn't have as long a range.
You can see in G or you can use more tanks of PNG and in the North American market. As you know, it's very possible to put it back to Capex has been on have plenty of CMT.
We definitely see that as an option for H P. I N North America, CMG H D apps.
This concludes the question and answer session I would like to turn the conference back over to Christine <unk> for any closing remarks.
Thank you and thank you everyone for joining us today. If you do have any follow up questions. Please feel free to reach out twice a day Westport fuel systems Investor Relations team. Thank you again for your interest in Westport fuel systems and have a wonderful day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Yeah.
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