Q3 2021 Westport Fuel Systems Inc Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the Westport fuel Systems' third quarter at 2021 results conference call.
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I would now like to turn the conference over to Christian Tweedy, Westport Investor Relations representative.
Please go ahead Mr Tweedy.
Good morning, everyone welcome to the Westport fuel Systems' third quarter 2021 conference call, which is being held to coincide with the press release containing Westport fuel Systems' financial results separate distribution yesterday.
On today's call is being up your house with Westport fuel systems.
The officer, David Johnson, and Chief Financial Officer, Richard <unk>.
You are reminded that certain statements made in this conference call and our responses to various questions may constitute forward looking statements within the meaning of the U S and applicable Canadian Securities laws.
And as such forward looking statements are made based on our current expectations and involve certain risks and uncertainties.
Actual results may differ materially from those projected in the forward looking statements. So you are cautioned not to place undue reliance on those statements.
Patients contained in this conference call is subject to qualified in its entirety by the information contained in the Companys public filings.
I'll turn the call over to you David.
Thanks Christian good morning, everyone.
Thank you for joining us to review Westport fuel Systems' results for the third quarter of 2021.
As world leaders meet in Glasgow with the <unk>.
21 U N climate change conference well known has kept 26, we know we're facing a pronounced climate crisis with an increasing need for each sector in a global economy take action now.
Globally transportation is responsible for nearly a quarter of greenhouse gas emissions. So we must continue to use all available options to reduce C. O two but we must do so quickly and effectively and affordably.
We need to dramatically shift the mix of what we drive to affordable clean transportation technologies that make an impact on our roads today and into the future.
At Westport fuel systems, our products are already playing an important role to do some carpet in transportation and helping to enable a clean and prosperous future for all.
We're confident that our products will continue to do so with increasing impact this decade and next additionally, our recent ESG report highlighting the operational improvements we've made to reduce our greenhouse gas emissions by 34% and our greenhouse gas intensity by 21% year over year. These.
These are good results and we look forward to continuing to do our part to lower our operational carbon footprint.
Furthermore, we know that the biggest contribution of Westport fuel systems can make to respond to this challenge is to increase the production sales and use of our products.
All right today, there are thousands of HB data powered trucks in operations in Europe fueled by low carbon LNG and bioenergy carbon neutral fuel. These trucks have avoided producing tons of Sidoti and will continue to avoid producing tons of C. O two emissions for years to come.
Without HDI. These trucks will be powered by diesel engines, and fueled with diesel fuel and would admit dramatically more C O two.
H B D. I is making a tangible impact on carbon reduction now with LNG and bioenergy and into the foreseeable future when green hydrogen infused with our H B D I technology.
I'd like to draw your attention to a few highlights from our third quarter share. Some market insights then Richard will take you through a more detailed review of our Q3 financial performance.
The third quarter was challenging for us as it was for Oems and other tier one suppliers in the automotive sector.
Global supply chain challenges for semiconductors, and other commodities are negatively affecting the entire industry.
Despite this we were able to post an improving trend in the company's performance, but not as strongly as we expected considering the strong end user demand for our products.
Our H P D I independent aftermarket and delayed OEM sales were constrained by lower than forecast production.
Despite these challenges we generated revenues of $74 million in Q3 up 14% compared to the same period in 2020.
However, lower than expected vehicle production and sales volumes due to the supply chain shortages combined with higher operating and R&D expenditures caused us to incur a net loss of $5 $8 million this quarter.
Our OEM segment rebounded from last year up 26% with revenues of $47 million in the third quarter compared to $37 million in Q3 of last year bolstered by higher light duty OEM sales by them and by our Q2 acquisition of stack up a leading manufacturer of the LPG fuel storage systems.
Despite ongoing headwinds from the global supply chain, we expect Q4 will contribute to and confirm our full year growth trend.
The European market continues to be a key driver for our business the refueling infrastructure in Europe for alternative fuels continues to grow.
N G V. A Europe reports, they're now 455, LNG stations and nearly 4100 C N G stations across Europe.
Italy, Spain, and the Netherlands continue to offer an important financial support for alternative fuels in alternative fuel vehicles, while Sweden recently reduced introduced long term support for biogas production to create a circular economy and to increase the use of sustainable energy in the transportation sector.
In Germany, the potential for bio LNG to reduce greenhouse gas emissions in trucking has recently been shown to be as much as 80% on a well the wheels basis yeah.
Europe remains supportive and we believe our products and global footprint will remain an advantage for our OEM customers as they adopt our clean transportation solutions.
There is today no other cost competitive alternative, but the benefits that H P. D edge delivers for long haul heavy duty transport.
And with the growth of renewable natural gas and green hydrogen H P. D. I will continue to do so for decades.
Tempur sitting heavy duty vehicles equipped with H, PDI and fueled by LNG and LNG for the lower total cost of operation comparable driving performance of diesel engines and a reduction in their overall covered footprint.
H B D. I powered trucks are being deployed in high mileage applications that have historically dependent on the diesel engine running in high carbon diesel fuel.
Our business in Europe is built and fully developed and fully validated products that use cleaner alternative fuels and respond economically to the environmental challenges we face sales.
Sales from our European launch partner have grown 43% year to date compared with 2020.
Customer and market feedback continues to be positive due to the <unk>.
Real world benefits HPT delivers.
Real World H Beady eye benefits include vehicle performance for the driver.
Lower cost your fleets and environmental benefits for our industry and the climate.
We expect a strong Q4 for HPT I see opportunities to grow markets around the world.
You may have noticed that markets are experiencing a surge in energy prices, both natural gas and crude oil prices have doubled over the last 12 months.
Instability in fuel prices creates challenges for our business as buyers make purchasing decisions on the total cost of ownership between vehicles fueled by petrol or diesel versus those steel by cleaner alternative fuels.
A meaningful price advantage for alternatives gaseous fuels versus traditional liquid fuels provides the economics that support purchasing vehicles with our products.
Higher fuel prices make an economic advantage of our lower cost gas as fuel even more desirable.
Due to the environmental benefits of cleaner burning lower carbon gaseous fuels, we expect any new normal will continue to offer economic advantages for alternative fuels and therefore support the long term growth potential of our business.
We anticipate these commodity price challenges to be transitory.
With a return to stable market conditions, the outlook for our business and our technologies will be strong.
Unstable energy markets and are also in China that have driven up LNG prices significantly in recent weeks and are creating headwinds for the natural gas truck market there.
Well these are not expected to endure their nevertheless impacting this segment today.
That said H B D. Our powered vehicle models have been certified and field trials are ongoing.
We're continuing to work with our partner way tied to them once the product successfully with their vehicle OEM customers.
Last week, we announced the award of a tender issued by Naphthyl a branch at the Algerian National oil and gas company to supply 60000, LPG system over the next 18 months with related spare parts for a total value of about 9 million Euro.
We have a continuing relationship with neft out having supply at over 120000 LPG kits in the last six years.
One can clearly see in these figures and acceleration of LPG fueled vehicles in this market.
There are in Algeria today more than 500000, LPG vehicles supported by a network of 680 fueling stations.
By 2024, LPG vehicles are projected to more than double to over 1 million vehicles or almost 20% of the vehicles on the road up from 10% today and this growth will be supported by an expanded network of 1600 filling stations.
Turning now to India I want to spend some time this morning, highlighting the Indian market, some wider trends occurring there and how we're working to boost our competitive position in that country.
At the recent U N General Assembly, India made commitments to increase their installed capacity for renewable energy to 450, Gigawatts by 2030 and to develop and implement a national hydrogen energy mission to scale up annual green hydrogen production to one Mega times by 2030.
The Indiana U K government, just recently announced a collaboration and clean energy, which will boost climate resilience and advance clean energy deployment.
Climate is one of the pillars of the India U K 2030 roadmap.
Indy was also recently ranked third in the renewable energy country Attractiveness Index released by the professional services firm Ernst <unk> young.
Which ranks in the top 40 country markets and their handling of the renewable energy investment and deployment opportunities.
These government initiatives helped to support our position as a leading supplier of clean affordable solutions in the country you are taking the necessary aggressive steps to decarbonize.
The government of India is dramatically expanding the availability of natural gas fueling stations to 10000 by 2030, that's part of their strategy to focus on natural gas for clean cost effective transportation.
With the implementation of the brought standard six emissions requirements in April of 2020, the demand for our products has already increased significantly as diesel inches with the required after them and are now far more expensive and far less cost effective.
With our strong position in India today, and the significant growth opportunity, India represents to Westport fuel systems I'm pleased to announce that hit tender Mishra has recently joined Westport fuel systems as our managing director for India.
The tender joined Westport from Volvo Asia commercial vehicles, where he most recently served as senior Vice President and head of their components business I.
I couldnt be more excited to have a tender on board to lead us in what is an important growth market natural gas vehicles will have more to share on our plans for growth it's important market in the coming months.
Over the last nine months, we've made important progress working with hydrogen.
In January we announced our project with Scania to assess their engine running and hydrogen using our <unk> system.
Project is ongoing we look forward to the chance to share updates with you.
In February we jointly published a white paper with ABL detailing out internal combustion engines, using hydrogen and H B D. I offer a more affordable path in fuel cells for long haul trucking applications.
In March we announced the successful demonstration of hydrogen with HPT I more power more torque and higher efficiency compared with diesel and natural gas engine.
In April we presented the industry our results show a hydrogen H P. I offers the highest power density improved efficiency that most robust approach using hydrogen internal combustion engines for heavy duty applications.
And in July we announced a collaboration with to be a leading specialist of casting and machining of highly engineered structural components.
And with ADL to develop a highly efficient hydrogen internal combustion engine for heavy goods transportation.
The direct collaborations aimed at combining advanced material and casting technology with the latest hydrogen internal combustion engine technology, using our high pressure direct injection systems.
Interest in our hydrogen HPA solution is growing and I'm proud of our achievements in such a short amount of time and I'm bullish on the potential for growth in this important clean fuel area.
We believe we have a disruptive game changing technology using hygiene internal combustion engine and H B D I.
Being able to offer Oems diesel engine power torque durability of efficiency with near zero carbon emissions with a lower total cost of operation and fuel cells is a compelling solution for Oems and their customers.
Where Oems the ability to leverage preexisting manufacturing and engineering capabilities, it's vital from both a cost and sustainability perspective.
Particularly being able to avoid massive manufacturing capital investments and sourcing rare earth metals required for fuel cells and batteries.
We're seeing an increasing support globally for both the private and public sectors for the potential of hydrogen as an eventual zero emission fuel of choice.
Earlier this year, the European Commission announced the fit for 55 package proposing measures to reduce greenhouse gas emissions by 55% by 2030 from 1990 levels as well as outlining a framework for a carbon neutral Europe by 2050.
This package is important as it offers a significant boost to the European hydrogen industry through our 50% target on the share of renewable hydrogen consumption and an expansion of hydrogen refueling stations along with core networks.
As disclosed by the hydrogen council midyear update since February there's been a 60% increase in the announcements of large scale hydrogen projects, bringing the global total to 359.
The total investment into these projects along the value chain is approximately $500 billion through 2030 of which roughly a third of these investments are considered mature.
Zinc Council reported that the estimated investment hydrogen projects is increasing by $1 billion every week.
As you're all aware our Cummins Westport joint venture is scheduled to end December 31, 2021.
As per our agreement with Cummins and Westport fuel systems has equal rights to the joint ventures intellectual property. We continue to work with Cummins to wrap up the final terms related to the conclusion of the joint venture.
We expect engines with our <unk> technology will make an important contribution to the north American market much as they have in Europe and that they'll capture market share from ESI products as has been our experience in Europe.
North American long haul heavy duty market for natural gas biogas and hydrogen combustion engine products is modest in size today, but there are lots of reasons to be bullish on the opportunities in this part of the world.
Our fleets are large vehicles, we're looking for immediate and significant carbon reduction solutions alternative fuels like natural gas and biogas and eventually green hydrogen can play an important part in this de carbonization effort.
The growing supply and availability of LNG fuel produced from capturing naturally occurring methane and using it as a transportation fuel is compelling already today.
We believe this compelling story for fleet operators needing to Decarbonize. Its working today will drive continued growth. This two pronged approach fossil LNG and LNG is a reason why major fleets are recognizing that it's the easiest quickest and most cost effective way to meet their sustainability goals.
However to Richard for more detail on our third quarter results.
Thank you David.
David described earlier, we had a challenging quarter financially in operation due to the impact of supply chain challenges from the shortage of semiconductors and other materials.
Our revenues of approximately $74 million were 14% higher year over a year.
Mainly by continued recovery of sales volumes in our light duty OEM businesses.
And also the addition of $7 1 million from our recently acquired fuel storage business.
This was partially offset by the decrease in revenues in our independent aftermarket business.
Revenue was lower sequentially due to the continued supply chain challenges, which was a drag on the growth rate of our each PDI product sales to our initial OEM launch partner and also on the production and sale to our independent aftermarket and delayed OEM customers.
Gross margin was comparable year over year, but decreased sequentially to $10 million or a gross margin percentage of 14%.
This was mainly due to lower sales volumes and a higher sales mix, the lower margin customers, particularly to India, and Russia, and OEM customers in our light duty OEM business or.
Our equity income from C. Wi decreased by $1 1 million to 3.8 million year over year, primarily due to higher extended warranty coverage recorded during the current quarter.
Net loss for the quarter was $5 8 million compared to net income of point 8 million for the same quarter last year.
The $6 6 million dollar decrease in earnings was primarily the result of increased spending in research and development expenditures for heavy duty OEM lower foreign exchange gain and an increase in income tax expense compared to the prior year quarter.
The prior year financials also benefited from $1 $1 million in government sponsored wage subsidies compared to <unk> 2 million this quarter.
This quarter, our adjusted EBITDA was negative $1 4 million a decrease of $5 4 million compared to the same period in 2020, mainly due to lower gross margin and higher expenses as described before.
Now turning to our operational performance of our business segments.
Our revenue for the current quarter was 48 million compared to $37 4 million for the prior year quarter. The improvement in revenues was driven by higher year over year sales volumes in the light duty OEM businesses, the Indian and Russian OEM customers and was partially offset by pressure on sales to our western European based OEM customers.
Further we had $7 $1 million in revenues from our fuel storage business.
Heavy duty OEM revenue on sales volumes were comparable year over year and reflect the negative impact to the growth trajectory for manufacturing delays caused by the shortage of semiconductors on our initial OEM launch partner.
Despite the headwinds from supply chain issues and increases in LNG prices, we expect to see continued growth in heavy duty OEM sales through the remainder of this year as production recovers.
<unk> margin increased by <unk> 5 million year over year, mainly due to the addition of the fuel storage business, partially offset by margin pressure from delayed OEM heavy duty O M and light duty OEM, which contributed to the decrease in gross margin percentage.
The operating loss of $7 4 million reflects our investment in the development of our HDI technology and lower gross margin as mentioned as.
As our sales volumes grow the profitability of heavy duty OEM will improve through economies of scale in production through our supplier network.
Now turning to the independent aftermarket.
Revenue for the third quarter decreased by 6% to $26 3 million compared to the prior year quarter, primarily due to lower sales caused by the disruption in global supply chain, including semiconductor chip shortages and the continued pressure in the traditional important western European markets.
Gross margin decreased by <unk> 4 million this quarter to 7 million for a gross margin percentage of 27%. The decrease in gross margin was due to lower year over year sales volumes, resulting from the shortage in the supply of semiconductor chips and the increase in sales mix to lower margin emerging markets. We expect to see continued improvement in revenues from the.
And aftermarket business segment in the fourth quarter of this year, but we temper expectation due to the ongoing shortage of semiconductors and the recent spike in LPG prices, which could continue to impact the independent aftermarket business.
Finally, I want to speak to you about liquidity.
As we discussed in the past quarter, we have significantly strengthened our balance sheet and liquidity to fund the growth of our heavy duty OEM business and our other business plans, our cash position was $142 million and our debt was $64 million at the end of the third quarter since.
Since the successful marketed equity offering in June we've begun our investment in expanding production capacity of H P. D I products and increased our spending in R&D in our H PDI technology for next generation performance and emission standards, including the application of hydrogen.
We're continuing to progress our efforts to align our debt to our growth profile and a sustainable profile.
During the quarter, we exercised our option to convert the final principal balance and remaining interests of the Cartesian convertible debt into common shares.
Verbal note of $10 million has now been fully repaid and converted into common shares.
We are also in the final stages of refinancing our term loan and COVID-19 bridge loan with our banking partner export development, Canada into our long term credit facility to support funding of our HDI technology commercialization and R&D.
We received further waivers from EDC for the principal payments on the loan to the 15th of December 2021 in anticipation of the completion of the new agreement in the fourth quarter of this year.
As I've said previously we're very appreciative of the support and relationship with export development, Canada bolstering our liquidity to fund our growth of H D D I and all of our products and services.
With that I would like to turn it back to David.
Thanks Richard.
To recap we've made substantial progress on our business plans. This year. Despite the challenges of COVID-19 World, We live in and the ongoing supply chain issues, we are facing.
Main focus on our key priorities for the last months of the year I'm confident in our team and we're committed to delivering 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. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging that request.
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 as callers join the queue.
The first question comes from Eric Stine with Craig Hallum.
Go ahead.
Hi, David Hi, Richard.
Good morning, Eric.
Good morning, So as we think about CW I and obviously.
Youre working towards wrapping that up and looking at options. There just curious it was a subtle change in your commentary in the release.
Sure.
When you were talking about your presence expected in North America.
Obviously HPV high but in the past you have mentioned spark ignited is there anything we should necessarily read into that or anything you're able to share.
Related to CW IP on the release.
Yeah glad to touch on that Eric you know I think fundamentally the the thing to be quote unquote read into that is is the fact that H P. D. I is the superior product and we see this playing out as we mentioned in the opening comments in Europe.
Where there is vehicles that are on offer that spark ignited engines and there's vehicles on offer with HPT I attentions and DH PDI equipped engines are preferred by drivers they're preferred by fleets and they are taking market share from spark ignited engines and.
So from that perspective, we feel quite confident.
Is there a technological product position, having said that you know spark ignited is is also a good technology you don't want to just dismiss it can entirely or we sell a lot of spark ignited product around the world are weighted to sell their products in North America has been through CW why historically, but.
But there could be a new path in the future So watch the space.
Got it and then just kind of.
Taking that another step in terms of when you think about.
I mean, what would be your ideal path.
Or maybe some ideal ways to think about getting into North America, whether it's.
Your current partner in Europe coming to North America.
Potentially multiple Oems do you think it's with one or with multiple or how do you how do you kind of envision that.
Well my my preferred path to market is with a strong partner or partners are quickly and successfully so you know getting the product right and having having a partner that supports it and promotes it as it's important for us.
But fundamentally when I look at in the long run I expect there'll be a lot of companies around the world offering H P. D I because of what it offers two drivers in the environment in combination and so I think you'll see that also play out in North America as well as in Europe and in China.
Okay.
Stay tuned on that maybe the last one.
Just as we think about the overall business light duty included.
Electrification gets a huge amount of focus.
Just talk about your OEM.
Electrification.
As part of their past, but they also have gaseous fuels so maybe.
Just kind of your thoughts on on on how that is playing out.
In the general press it might seem that it's all electric.
Yeah, Great question and I'm happy to talk on that type of get linked it probably could go on for way too long, Eric but just briefly.
In the world of transportation today, we havent diversity of solutions in terms of fuels and technologies and when I look to the future whether it's a year from now or or 50 years from now I expect a diversity in solutions to persist because they're a diversity of applications. So what you need for a small car or what you need.
For a large car what you need for a dump truck, which need for train would you need for boat, they're all different and what those differences drive differences in technologies and fuels and we have a an economy in the world that is demanding for transportation solutions. So I.
This diversity of institutions and so while our electrification seems to be the only thing that anyone can talk about in the media in public domain and everything else, we're quietly continuing to grow our market share of gaseous fueled vehicles in some cases in many cases way out in front of electrification. So.
You heard today, and then last week about our announcement with mapped out there are places in the world that can't afford electrification.
And I would say there are more places that can't afford it then can afford it and so on that basis, we see the need and the opportunity to provide our solutions, especially in those markets.
Not exclusively in those markets and we'll continue to do that and we think frankly, you know and we see evidence that our OEM customers see it the same way. So some of the largest makers of electric vehicles in the marketplace today have their foot also in the gaseous fuel world and find that to be a very important and compelling part of their business and their offerings to their.
Customers.
Okay. Thanks, David.
Thank you.
The next question comes from Colin Rusch with Oppenheimer.
Please go ahead.
Good morning. This is Christian on for Colin Thank you for taking my question.
I actually would like to start with a follow up to that good morning, let's start with a follow up to that to the prior question just on the diversity of fields and as Youre thinking about the overall hydrogen opportunity and is there an opportunity for you to transition some of that technology into light duty vehicle.
Yeah. So you know hydrogen today is actually had gotten its start in in fuel cell applications in passenger vehicles. So as a general picture for hydrogen is there opportunity to vehicles I think there's many people who think yes. There is and so I think youll see that alongside what we've analyzed and and demonstrated in the work.
<unk> done just this year is that hydrogen in an internal combustion engine has an advantage with respect to fuel cells that is quite substantial and it has to do with the load factor of long haul heavy duty trucking, where we when you load a propulsion system, whether it's an internal combustion engine or a fuel cell.
You get a different efficiency level, then if it's unloaded and so that to us really speaks strongly because basically the efficiency of an internal combustion engine goes up with load, whereas the efficiency of our fuel cell goes down with mode and that that basic physics of the two different devices internal combustion engine to fuel cells.
Thickly points to fuel cells being an absolutely Sydney internal question ends up being an absolutely fabulous application, where heavy duty long haul trucking because they can address the cost issues, it's far more practical and so this is where we're headed I will there also be hydrogen and light duty vehicles for sure there will be and that could also include in combustion engines, but now we've got a lot.
Tradeoffs to play with respect to our efficiency and cost and investments and so it'll be interesting to see what the future looks like but certainly hydrogen in Westport fuel systems will be important parts of that future.
Yeah.
I appreciate that detail David My next question is really just at that he and the rates high ramp.
Just on that briefly from I'm wondering if you can provide a little bit more in detail on the progress of that ramp and and as a related question, how youre feeling about supply chain readiness to launch that product. Thank you very much.
Yeah. So let me answer the first one the second one first and that is supply chain readiness, where we're ready. So from my perspective are the investments we've made to have the capacity available to support the launch in China are in place and so really what were waiting for is as our customers customer to take the action.
A marketplace to launch the product and make it available.
We mentioned that field trials are ongoing and that's that's the fact certifications have been achieved that's fact, and so where we're really at that that pivot point and really waiting in anticipation as I know our investors are too. So we're hopeful to have some some further news to share but at this point in time.
Status related in her opening comments is what we have to share today.
Fundamentally our the market in China is a big one as you know and where we're eager to have our marquee product launch there.
The next question comes from Robert Brown with Lake Street capital markets.
Please go ahead.
Hi, good morning.
Good morning, Robert.
Just following up on the H P I.
In Europe that you've talked about I think you mentioned Q4 should start to get better what's sort of the picture in terms of pent up demand and how quickly can that supply chain loosen up and how do you see that trajectory playing out at this point.
Yeah.
Yeah. Thanks for the question, Rob fundamentally that we we do see a strong demand and we're getting very positive feedback from our customers that have taken product not just this year, but in prior years. The reputation is really building strongly and people recognize it as as the the gaseous fuels a long haul truck that you want in the marketplace. So I think that.
Bodes well for the mid and long term future for for our relationship with our OEM partner in Europe.
In terms of ability to support that ramp we're very we're in a very good position to do that as mentioned just a moment ago to.
Christina we are we have the capacity necessary to respond to the marketplace and so we're eager for that that growth and as.
As we look through the year in terms of supply chain challenges I should say your question.
These are really on our customers' side and so it's difficult for us to see and because each one has its own little story going through the supply chain and we face some of those ourselves an administrator easier to talk about but as it pertains to our customer and it is difficult for us to see but we do expect these to be resolved step by step one by one.
In time, and therefore that the demand will come through in terms of from the customer to our customer and then to R. R. A R E D I in our delivery to our customers.
Okay, great. Thank you and then on the light duty side, you talked about some of the commodity fuel price dynamics going on has that resolved yet in Q4 are you seeing that business come back in Q4 or is it still too early to tell and I guess following that how do you you know what what's sort of the the ins and outs.
And how next year develops dependent on fuel prices stabilizing or or or do you have visibility on next year yet.
Yeah. Thanks for the question I think it is a really important dynamic that is still playing out in the marketplace. It hasn't been settled and we Havent reached stabilized I mentioned in my opening comments that the commodity prices on our gas and kept petroleum are doubled over the just just last year and so you know we're now get.
Back into the territory kind of expensive for the energy, let you buy and so how that plays out at the pumps in different countries and what the differentials and prices are between petrol and natural gas or petrol and L. P G or diesel or natural gas market by market does matter and frankly more than anything.
Els the changing crisis.
Causes people to pause a little bit in their purchase decisions and we're hearing some of that and we're seeing some of that in our forward looking order books and so forth. So that that is a concern to us and we'd like to see the prices stabilized. We're happy if it stabilizes at a high level because I think that of course, it's all to conserve energy and but.
We need this the price differential between gaseous fuels and liquid fuels that has persisted for a long period of time, and we expect that to persist for a long period of time going forward in markets like Europe, India and China.
Okay. Thank you I'll turn it over.
Thanks, Rob.
The next question comes from Bill Peterson with Jpmorgan.
Please go ahead.
Yeah.
Hi, good morning, and thanks for taking my questions first of all I'm coming back to the hydrogen application.
You mentioned, a little bit, but what additional areas do you think are remaining to be solved and I guess can you give us a better feel for what additional type of customers maybe beyond the ones you've been working with are interested in technology, and I guess conceptually what could be the timing of commercialization.
Yeah. So let me great question, Great to hear you. This morning, Bill Let me, let me dialed back to the beginning of this year.
When I would argue that almost no one was talking about hydrogen internal combustion engines. So it's not like the fuel cell. That's been invented 1966, who had been talking about it. Since this is actually is something new and I think the new thing really is us as Westport fuel systems with the demonstration of how he is.
<unk> H P D I S.
For hydrogen in an internal combustion engine I'll tell you in my experience my career basically hydrogen internal combustion engines has always been dismissed.
Because it's always been tried as a spark ignited a spark ignited engine basically gasoline or petrol engine and the spark plug in a throttle and this is a very poor way to use hydrogen internal combustion engine and we've demonstrated this this year.
So as we I tell that kind of setup because fundamentally as we go and work with customers each and every one of them has to be educated and informed about what we've done with H P. D I and hydrogen in an internal combustion engine because it is counter to their experience with spark plugs throttle valves.
And in internal combustion engines in S. I answer your question. So we have to educate and we've been doing that and and I'll tell you that the data is so compelling that it isn't a long journey to do but.
But we've been doing with customers around the world and the reception is quite strong as you can see from the already announced projects that we have with Scania ABL Tupi et cetera. So from my perspective. This is going well what remains to be done is I'll call. The normal development work of developing an engine for our unique fuel that hasn't been done before.
Sure.
Our technology and H P. D. I is ready, but the system needs to be developed in that a lot of work. Meanwhile of course I'll tell you that.
The companies that make the vehicles, let's say arent in a big hurry because there isn't the infrastructure. So we have to do this we've seen this play out before with natural gas as an example, you need some market coordination if you will between the buildout of the infrastructure and the build out of the of the the products themselves and so we are doing these projects are.
The technology has already demonstrated its value and its potential and so now we need to do the development production development validation and bring it to market, but as you noticed I havent had any announcements yet of a customer, saying, we're bringing <unk> to the market with hydrogen, but I do expect us will come.
Okay.
Yeah. Thanks for the color there I guess coming back to the can.
Essentially PDI and in particular, China simply waiting on your customers' customers is this.
I mean this is related to for example, I think there was even kind of built a build up of trucks.
Or is this this is more of a backlog issue or.
What else was waiting or is there more let's say commercial negotiations going on at your side, just trying to get a better feel for at least one was frankly to correct I realize you're not willing to you know kind of goes precise timing on when those get out them, but just what needs to get cleared before before the ramp up.
It can happen.
Yeah, I think fundamentally it's a for the our customers' customers. So the vehicle Oems in China.
To choose their timing for when they want to launch with perhaps other things they've got going on that we have.
Mentioned in her opening comments that you know right now like it is in the rest of the world. We have some rising prices of natural gas and so you can imagine that makes a bit of a headwind for launching a new product that runs on natural gas so where.
We're we're still convinced that there's a long term and an important place for HPT eye in the market in China that we have the right partner.
Partner in which a power that they have the right customers and the Oems that they're working with but the.
In terms of an actual launch date, yet we wait for our customers' customers to pick that date and make announcements.
Okay. Thanks for the clarification.
Thanks Bill.
Once again, any analyst, which who wishes to ask a question you May Press Star then one.
The next question comes from Amit Dayal with H C Wainwright.
Please go ahead.
Thank you good morning, everyone.
Richard You mentioned our capacity expansion for each would you potentially taking place can you give us some color on you know what levels, we're going to and where we are right now.
In terms of capacity for each media production.
Hi, I'm, an yeah no. It is a it depends on the component somewhere going into set of 20 to 50000.
So it's a we're trying to build it up according to our demand forecast, sometimes you know these thresholds.
Or kind of all or nothing, whereas if you buy a machine and you have a lot of capacity but.
We're working between 52 to <unk>.
It's 30 to 50, and then looking beyond at 100000 systems per year.
It's kind of a first step in an initial program.
Okay. Thank you for that and then just one more from me.
Grace potentially doing any price increases with mature in this environment.
Yeah great.
Go ahead, Dave.
Yes, alright, thanks, Richard So you know what we are live I I've told my team that it feels to me like it's really clear we're living in an inflationary times and so part of that is cost go up and part of it is prices have to go up and so this is a let's say daily work of our team to work with our customers to find the right.
The right time, and the right amount to change prices as necessary and to pass those on to the end customers. So I do think we're seeing that throughout the world and in all markets and we have to do our part of that just to keep up with the commodity price increases that we've seen whether it's steel or energy or other commodities copper for example, all of them do affect.
And of course microchips are in there too. So all of these cost increases are needed to be borne by the market in place.
And to the equation and so that's part of our daily activities.
Thank you David that's all I have I appreciate it.
Thanks, Amit.
This concludes our question and answer session.
I'd like to turn the conference back over to David Johnson for any closing remarks.
Thank you very much and thanks, everyone for joining our call today.
Look forward to providing you a further updates in the future and certainly to seeing those of you who tend to Craig Hallum Conference. Thank you very much have a good day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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