Q4 2021 Westport Fuel Systems Inc Earnings Call

March 15, 2022

Thank you for standing by this is the conference operator, welcome to the Westport fuel Systems' fourth quarter and full year fiscal 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 one 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 Christian Tweedy West ports Investor Relations representative.

Please go ahead.

Good morning, everyone welcome to the Westport fuel Systems' fourth quarter and year end 2021 conference call, which is being held on that question just yesterday at Westport fuel Systems' financial results.

On today's call speaking on behalf of Westport fuel systems is Chief Executive Officer, David Johnson, and Chief Financial Officer, Richard or study. This call is open to the public and the media questions will be restricted to the investment community you are aligned to 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 made based on our current expectations and involve certain risks uncertainties with that David ill turn the call over to you.

Thanks Christian good morning, everyone. Thanks.

Thanks for joining us to review Westport fuel Systems' results for the fourth quarter and full year 2021.

2021 was a good year for Westport fuel systems, despite lingering COVID-19 restrictions supply chain challenges rising commodity prices, we continued our recovery from COVID-19.

We set a new annual revenue record of $312 million driven by the strength of our OEM business, which was up 31% you every year due to record H B D. I system sales combined with strong light duty OEM sales, especially in India.

Our profitability improved year over year, and we look forward to further improvement as our production increases and economies of scale and operating leverage are realized.

In addition to the positive financial results that demonstrate our resiliency in the face of global challenges during 'twenty 'twenty. One we also made significant progress developing and positioning our company for future success for an example, our purchase of stucco.

Completed in May of last year stock based on swaps, Poland is a world leader in LPG fuel storage systems their comprehensive product portfolio adds to and complement our existing product lines and manufacturing capabilities.

Stock, whose products serve the OEM and independent aftermarket as well as other markets like recreational vehicles and material handling applications.

And we recognized a $5 $9 million gain on the purchase in 2022 stack will contribute a full year of operating results to our P&L.

Another 2020 , one accomplishment was the strengthening of our balance sheet by way of an equity raised by restructuring our debt to lower costs and to a lot of your payment terms with our business plan.

And with a successfully negotiated exit from Cummins, Westport, which further strengthened our cash position.

Also in 2020 , one we had our initial demonstration of hydrogen H P. I. This technical success has led to new hydrogen H P. Diaz projects with Scania ABL on Tupi and as announced in February now also with Cummins.

In our view the demonstrated capability of H P. D. I is a hugely important development for Westport fuel systems, which dramatically improves the potential for our near term and long term success with H P. I.

And internally in 2020 , one we brought the company together into a single global organization. So that we're poised to bring all our capabilities to all our customers in markets around the world.

Patiency and effectiveness enabled by unlocking synergies throughout our global team.

Despite the various challenges you faced over the last two years and despite the challenges we face today and the new challenges that will come tomorrow fundamental market drivers continue to support a positive outlook for Westport fuel systems.

Climate crisis is still a priority clean air is still a priority.

Affordable transportation is still a priority.

Covid supply chain problems inflation, and even war none of these diminished the challenge we face to keep the world moving without fouling the air and endangering our lives our climate and our planet.

We owe this to society and to our children.

Global Transportation is responsible for roughly a quarter of greenhouse gas emissions. So we must continue to use all available options to clean the air to reduce C. O. Two emissions from transportation, we must do so quickly and effectively.

We can move quickly we need clean technology now to be effective we need scale to achieve scale, we need practical affordable solutions.

Westport fuel systems products are affordable effective practical and available now.

Our strategy stands on three pillars that enable progress towards our financial goals of $1 billion in revenue, 20% gross margin and 10% operating margin.

First among the principal growth.

Growth that's realized through a diverse portfolio of technologies products and services delivered by a team that's focused on doing the right thing in the right way and making a difference in our world.

We're focused on satisfying the demand for clean low emissions Transportation, Europe , India, North America, and China asked.

As we've done in the past will continue to complement our organic growth by adding products at scale through relevant M&A activities.

Second quality reliability are fundamental to our performance as a leading tier one supplier of clean and affordable fuel systems.

He must reliably deliver high quality products with high production efficiency to enable low cost and to achieve the scale necessary to make a difference in our world and for our stakeholders.

Third through innovation and technology, we deliver transportation solutions that power a cleaner future.

Advances in our H P I feel system technology, including H, PDI, three Plano and hydrogen H P. I will lead to growth and prosperity, including the ability to reuse our customers' capital investments in manufacturing supply chain infrastructure, while achieving their goals to satisfy their customers needs and government regulations, while reducing carbon emissions.

Ultimately the foundation for our strategic pillars is the continued strength of our organizational capability and a focus on operational excellence.

Our people are at the heart of what we do we are one company working together to deliver valuable impactful products and services to customers around the world, enabling an affordable transition to Decarbonize transportation sector.

In the marketplace around the world, we continue to see evidence that clean affordable gaseous fuels are growing part of the transportation marketplace.

Even in Auris, rather, especially in challenging economic times L. P. G. C N G LNG biomethane and soon if not already a hydrogen will add resiliency to our global transportation system and do so cleanly and affordably.

Global emissions regulations demand clean vehicles customers demand practical affordable vehicles, let me share a few examples.

Markets are responding right now by adding more refueling infrastructure like in Europe , where the number of LNG stations doubled in just the last two years today. There are 521 LNG stations Accordingly, N GBA Europe and a few of them. Those refueling stations is getting greener as biogas continues to grow more.

More than a quarter of the gas used in road transportation in Europe today is from renewable sources.

Likewise in India, We also see compelling growth for natural gas vehicles infrastructure. There has recently doubled to more than 3200 stations and the government continues to champion their plan to reach 10000 stations within this decade.

Oems in India are dropping diesel engines and moving to natural gas at a rapid pace Westport fuel systems is well placed with the right products to support the growing demand.

Another example, government support the European Union has just recently added natural gas that's part of its taxonomy a significant endorsement that can help make the eat more efficient in the use of energy and more resilient energy price spikes, while providing affordable and clean energy to end users.

Another form of government support incentives, we observed in Italy late last year that the Italian transport industry announced the decision to confirm increase and expand incentives for the purchase of LNG trucks.

The decree for a highly sustainable investments makes 50 million euro available to transport companies through 2026 exclusively for the purchase of new ecological alternative fuel vehicles, including LNG powered trucks.

Another one renewables, we have seen encouraging biogas developments in the past few months in Germany, Cheryl bio methane supplied at stations has already reached 80% moving towards 100% in 2022.

Swedish biogas, a leading provider of biofuel in Scandinavia saw increased sales to the haulage sector of 145% in 2021 compared to 2020, citing a $30 35 per cent price differential for heavy duty trucks, a significant cost reduction and that solution available here now for long distance heavy transport that wants to.

To switch the fossil fleet transportation.

And finally ultimately market share growth earlier this month the European automobile manufacturers Association that is C. Yet published vehicle registration statistics for 2021 alternative fuels, which include natural gas LPG Biofuels and ethanol accounted for the vast majority of the alternative the powered trucks sold across the EU in 'twenty two.

What was the total market share of three 6% up 40% from 3% in the prior year.

While at the same time, the registration of hybrid electric trucks was down 55% versus the prior year.

We're seeing a growing number of stories and advancements like this in our space, creating a very encouraging outlook for our product portfolio Oh.

Oh, yes without L. P. G C and D are LNG options today, alright at this advantage that our clean affordable product can help them to overcome.

As you know H P. D I have been and will be a critical part of our path to growth profitability, Let me point out some of the key developments.

First production and sales of H B D. I two point now continued to increase as evidenced by our top line growth and increasing weight of our OEM businesses, which reached 62% of our revenue in 2021 .

Second we're developing H b three played out for our customers. This next step for HPT I enables us with H B D. I with next generation engines that use higher working pressures to achieve even higher efficiency and higher performance.

Third we're developing H P. A with hydrogen this combination of our technology with Green hydrogen offers more power more torque and more efficiency than IC engine fuel with either natural gas or diesel we've.

We've demonstrated and documented this performance, including the economic advantage that Hudson H B O offers that's compared to fuel cell technologies and heavy duty long haul applications.

Hydrogen HPA lengthens and broadens the appeal of our proprietary <unk> technology, reaching all the way to zero carbon green hydrogen future that so many are pursuing today with massive financial commitments from both government and private sources.

We're pleased with the developments we've already concluded and knows who you are underway and look forward to sharing more data with you later this year.

In the meantime, I'd point, you to the White paper now since he recently posted on our web site, showing our expectation to achieve 52, 5% break thermal efficiency using hydrogen H PDI on our state of the art 13th in your truck engine.

This $52 five per cent BT EE figure corresponds to a 5% reduction in energy consumption relative to the same engine platform operating with diesel fuel. This is a big deal.

This will make IC engines with H B D. I, the best way to use green hydrogen to long haul heavy duty transportation applications.

I'd also like to provide an update on China, where H b dry powered vehicle models have been certified in field trials are ongoing with <unk>.

To work with our partner to launch our H B data to put in our product successfully with their OEM customers.

Multiple Oems are working to integrate H P. J I quipped engines into their trucks bring those trucks to market with.

Confident that H b I equipped trucks will enable substantial market growth in China, increasing the share of natural gas in Chinese striking market, yeah on todays already significant 10% market share.

Westport fuel systems looks forward to being part of that growth.

We are in parallel continuing our discussions with other potential partners in China as the interest in H P. D I, particularly hydrogen H b.

In China too.

Just recently, China National Petroleum Corp, launched a roadmap for the country's energy sector to meet goals of carbon, peaking by 2030 and carbon neutrality by 2060 <unk>.

They forecast the transportation of any mix, including hydrogen at 23, 7% and natural gas at 10, 7% a strong endorsement for these two fuels.

Before Richard takes us through the financials, let me address the proverbial elephant in the room, I'm talking about Russia, Ukraine and fuel prices.

You may have noticed in our press release that Russian market is relevant trusts, representing 10% to 15% of our light duty business through both our aftermarket and OEM channels.

We expect this will be directly affected by the conflict and Ive already seen the beginning of those effects, including reports of shortages affecting production and delayed processing of transactions through the financial system.

In addition, the conflict in Ukraine seems likely to further exacerbate the supply chain issues, we face as well as put pressure on fuel availability and pricing I want to call out three factors that don't all point in the same direction, making near term future rather unclear.

First higher fuel prices.

Commodity fuel prices are up dramatically, including crude oil and LNG higher fuel prices tend to be positive for our business as it intensifies the search for products and technologies that can reduce fuel expenses.

Cashes heels have often been the remedy for high diesel petrol prices.

Second, though fuel price differentials when gaseous fuel prices are lower than petrol and diesel than our markets strengthened gaseous fuel prices are higher than diesel and petrol and the headwind for us we're seeing both effects now in some markets for some fuels. We have an advantage on others. We haven't disadvantaged of course, what matters is what drivers see at the pump.

She has some relation to commodity prices.

Third volatility as prices change market participants can pause in decision, making waiting to see what the new normal will be this is categorically unhelpful to all of us.

Well, it's hard to predict the future, especially these days, we remain confident that our products will continue to deliver and expand our market share in response to persistent need for clean affordable transportation. We saw this through Covid and we expect to keep seeing it through the current challenges we're keeping our focus on the long term outlook, while we work to mitigate the near term challenges as we have successfully done before.

Sure.

So with that let me hand, it over to Richard.

Thanks, David.

In the fourth quarter, we generated revenues of $82 7 million, which decreased year over year by 1.4%.

The decrease was mainly attributable slightly lower heavy duty OEM sales volumes in our contractual price reductions to our initial OEM launch partner.

Lower heavy duty OEM revenue was partially offset by the addition of fuel storage revenues from the acquisition of stock all in the second quarter of this year.

The fourth quarter was challenging for gross margin as we generated $9 3 million.

Which was a decrease year over year of 28, 5%.

Besides the impact of lower heavy duty OEM sales volumes and the price reduction gross margin was pressured by lower sales volumes affected by the elevated and volatile fuel prices.

Lower margin sales mix to emerging markets and both light duty OEM and independent aftermarket and higher material costs, resulting from our global supply chain disruptions and inflation.

Net income was $5 4 million for the quarter, an improvement of $1 $3 million year over year. The CW I joint venture had a stronger than expected fourth quarter generating $15 million to our account, which primarily drove the increase in net income and was partially offset by the lower gross margin.

Revenues for the full year 2021 increased 24% to $312 million.

Due to the continued recovery of sales volumes in our OEM and independent aftermarket businesses and the addition of $13 8 million in revenue from our fuel storage business.

In 2020 , one we generated 21% higher sales volume store initial OEM launch partner and heavy duty OEM.

We saw rapid growth in our light duty OEM sales volumes in India and experienced a recovery in sales volumes and independent aftermarket notwithstanding the headwinds from the pandemic supply chain disruption and fuel price volatility.

Further we are seeing growth in our newer businesses and electronics and hydrogen.

Gross margin increased significantly year over year by 22% to $48 2 million, mainly due to higher sales volumes across all our businesses and the addition of the fuel storage business.

This was partially offset by the H P. I price reduction of lower margin sales mix, an independent aftermarket and higher material costs caused by the supply chain shortage, which we were not able to pass on effectively to our customers.

Fiscal year 'twenty 'twenty also included large COVID-19 related wage subsidies that were partially offset by a $2 4 million dollar field campaign charge.

We reported net income of $13 7 million for the full year 2021 compared to a net loss of $744 million for the prior year. The improvement in net income was driven by several factors primarily the increase in gross margin of $8 $7 million $9 7 million and higher income from.

See Wi and income tax recovery of $8 9 million related to an Italian government COVID-19 tax relief program and a bargain purchase gain of $5 9 million on the acquisition of Stockholm.

This was partially offset by $5 million less in government subsidies received compared to 2020.

Adjusting for nonrecurring items per our definition of adjusted EBITDA, We generated $17 5 million in adjusted EBITDA in 2020 , one compared to $14 7 million in the prior year.

Turning to our business segments.

Oh, Yeah, I'm revenue for the fourth quarter of $57 4 million was marginally lower and $58 8 million in 2020.

Revenue decreased by $1 4 million in the fourth quarter due to lower H PDI sales volumes to our initial OEM launch partner and the negative impact of the price reductions given at the beginning of the year.

Delayed OEM rubbing his were also worse year over year due to lower sales volumes caused by supply chain shortages of vehicles to convert from our OEM partners.

This was partially offset by additional revenue of $6 7 million from our fuel storage business.

For the full year OEM revenue of $195 5 million increased by $45 9 million or 31% over the prior year.

The increase was mainly due to the aforementioned higher sales volumes in our heavy duty and light duty OEM businesses $13 8 million in fuel storage and increased sales growth in our electronics business.

The impact of COVID-19 was significant in the prior year period.

Which was impacted by plant shutdowns combined with lower light duty OEM sales to German and Russian Oems.

Although heavy duty OEM revenue was higher year over year from better sales volumes.

Positive momentum on customer demand was impacted by manufacturing delays caused by the shortage of semiconductors on our initial OEM launch partner.

Although the long term outlook for H P. D high sales volumes is positive. There's also near term pressure on sales volumes caused by the rapid increase in volatility and LNG prices.

For the fourth quarter of 2021 gross margin decrease year over year by $1 5 million to $5 1 million.

Four 9% of revenue compared to $6 6 million or 11% of revenue for the same prior year period.

The decrease in gross margin and gross margin percentage was mainly due to an increase in material costs stemming from the global supply chain disruption across all business segments, increasing sales mix of light duty OEM sales to India, and the aforementioned H P D I price reduction.

This was partially offset by the additional gross margin from the pure storage business.

As India will play an important role in our light duty OEM growth strategy, we are evaluating opportunities to localize production and other value creation initiatives to improve our margins.

Turning to the independent aftermarket.

Revenue for the fourth quarter and full year, 'twenty, 'twenty, one or $25 3 million and $116 9 million, respectively, compared to $25 1 million and $102 9 million for the same prior year periods.

Revenue growth in 2020 , one was primarily due to higher sales to African and South American markets offset by softness in demand from Russia and in Turkish market due to the rapid increase in LPG prices.

We expect to see continued improvement in revenues from the independent aftermarket business segment for the full year of 2020 to temper expectations in the near term due to volatile LPG prices in our key markets and disruption from the Russia, Ukraine conflict.

Gross margin decreased significantly year over year by $2 2 million to $4 2 million or 17% of revenue.

<unk> fourth quarter compared to $6 4 million or 25% of revenue for the same prior year period.

The decrease in gross margin and gross margin percentage was due to the evolving change in sales mix toward lower margin African and other emerging markets slower than expected recovery of sales volumes in western Europe , and higher material costs due to the global supply chain disruption.

The prior year also benefited from government subsidies, which resulted in a higher gross margin percentage.

To counter this margin pressure, we are actively pursuing cost rationalization manufacturing productivity enhancements and sales volume growth.

Turning to liquidity as we have discussed over the quarters, we have made great strides to strengthen our balance sheet and liquidity to fund the growth in our heavy duty OEM and other businesses to raising equity in refinancing our debt to better match expected organic cash flow profile to the debt repayment.

Is that year end, our cash position was $124 $9 million and our debt was $79 million.

During the fourth quarter, we closed the refinancing of our loans with our banking partner export development, Canada into $120 million term loan repayable over five years, we are very appreciative of the support and relationship E. D. C has and continues to provide Westport fuel systems and.

Another significant boost to our near term liquidity was derived from the termination of the CW I joint venture.

On February seven 2022, we agreed to sell 100% of our shares and CW I to companies for proceeds of approximately $22 2 million.

Along with our interest in the joint ventures intellectual property for an additional $20 million. We received proceeds of $31 4 million net of a $10 8 million dollar hold back after the closing date.

Moving away from financing activities net cash used in operating activities was $43 8 million in 2021. The use of cash is driven by operating losses of heavy duty OEM business due to the lack of scale and a large increase in working capital specifically inventory caused by a buildup.

Heavy duty OEM inventory for customer growth supply chain disruption and inflation.

We are proactively managing our working capital to monetize the inventory and optimizing purchasing levels and the evolving supply chain landscape.

Risks from the Russia, Ukraine conflict and volatile fuel prices will also cause near term pressure on revenues and margins. Although the headwinds in 2022 are very challenging we believe in the long term fundamentals of our products will deliver affordable clean transportation solutions will prevail.

With that I would like to turn it back to David.

Thank you Richard.

To recap I'm proud of our team we made important progress in our strategic positioning for the long term and we recover from the pandemic and supply chain challenges in the last two years.

Despite the new challenges facing us in 2022, we see the need for our product and the need to Decarbonize transportation will persist.

In the coming months, you'll find us participating at various investment conferences, including but not limited to the car Mart inflection conference Oppenheimer's annual emerging growth conference and the RBC capital markets Automotive conference well be participating at the Act Expo in long Beach, California, and Bay, which is north America's largest clean transportation technology and clean fleet.

Advent, where we'll be providing an update on our latest development with hydrogen and H P. D I.

With that I'd like to turn it back to the operator for your questions.

Thank you we will now begin the question and answer session analysts who wish to join the question queue May Press Star then one on your <unk>.

Telephone keypad, you will hear a tone acknowledging your request if you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw. Your question. Please press Star then two we will pause for a moment as callers join the queue.

Our first question comes from Eric Stine of Craig Hallum. Please go ahead.

Hi, David Hi, Richard.

Good morning.

Good morning, So maybe just to start with H P. D I three.

Point, Oh, you know if you could give a few more details there I know you mentioned performance benefits curious if those are each PDI related or because it's on the as you said the nextgen engine platforms out there and then just wondering you know what your activity level is with this technology to date, whether you've.

Got current development programs going on right now.

Yeah excuse me great question, so glad to talk about H B at three point out I think the context to just paint the picture of that needs to be real clear.

And the market and immediate today, many people think the internal combustion engine is going away.

But yet we see with our partners around the world that people are continuing to invest in advancing internal combustion engine.

And the development of internal combustion engines is far from complete and there's always more improvement that could be me.

Fundamentally in this day and age that means lower emissions from the base engine more performance more efficiencies from the base engine.

For us as a fuel system supplier that means that we need to upgrade our fuel systems to match the engine improvements that are being name.

So very specifically basically to make a cleaner more efficient engines you diesel engines you up the working pressure are in.

In the combustion chamber and so as the working pressures go up the pressures for our fuel system need to go up to match and and keep pace.

And so that's what we're doing that work to basically increase the capability of our systems to match and complement the upgrades in the base engine and we see this across the industry.

In the work, we're doing with our various customers for applying our technology, whether it's with hydrogen or or natural gas.

Okay. That's helpful. Maybe just turn into hydrogen a little bit here and I know H P. D. I along with the rest of your business near term, it's a little tough to call given a lot of crosscurrents, but did you think about hydrogen in the H P. D. I version just curious.

That might be helping that the LNG, each PDI version or discussions with Oems given that.

You know maybe they they don't hesitate to go H P. D I with LNG, if they have the potential to migrate to something down the road and obviously everyone's got to be looking at hydrogen.

Yeah, so the the.

The process, our customers and Oems around the world are going through evaluating different technologies and trying to choose the path forward.

If they could put all eggs in one basket because they were sure of what the future lies ahead. This this is a ongoing evolving process as they learn about different technologies and when I talk to different technologies that liquidity into the full the full list of electrification and fuel cell and even autonomy all of those things.

The that you read about and hear about in the industry today, and so with respect to our hydrogen developments, we see this as a helping our customers to understand the potential for a green hydrogen future in long haul trucking and what that economic and technical equation looks like and as part of the paper.

We published last year with the.

The combination of your partnership with a B L.

We see our H P D I with hydrogen as a very economic and really an easy path forward to use green hydrogen very effectively because we have this significant efficiency improvement versus diesel and natural gas on an internal combustion engine using hydrogen H VDI, but also offers more performance more power more torque.

Better efficiency more power and more torque gives it an advantage that's even extended its lead over our other technologies from a technical standpoint, and also a commercial standpoint, where it's very affordable to to adopt H P. D. I onto an internal combustion engine as compared to the alternative of.

Creating a fuel cell vehicle. So this really is an education process that as we generate more data and demonstrate to customers like the partnership and project that we're doing with Scania. This then factors into their work and their decision, making on where to place their bets and what a what a what priority is to make them.

Turning me for future technology.

And I'll say seeing that H P. D. I can take an OEM all the way to zero carbon hydrogen with more power more torque and more efficiencies than they have today on their engine is a really compelling vision that allows them to think about okay, let's consider HDD I, even sooner and we could use it say with fossil natural gas.

<unk> and that's a trend I mentioned, a few moments ago about the biogas, increasing as a share of that.

Fuel supply to the marketplace is really important.

For everybody's mission to try and clean up transportation reusing natural gas or methane that would otherwise go into the environment is truly beautiful environmental reuse a scenario that the H P. D I enables.

Okay, great. Thanks on that maybe last one for me just just some thoughts on unplanned in North America I know, it's a you know it's only been one a month and a half since or a couple of months here since the end to see Wi, but just maybe what your current thought process is on North America.

Yeah, the North American business case for natural gas is a is also improving right now I mentioned in my comments that are you know these fuel price differentials are really the driver of our business and we see a widening gap or basically are in North America diesel prices are going up more than natural gas prices.

So the advantage for natural gas is growing in this moment. So that's a positive sign. Additionally, as mentioned in my comments will be go into the Act Expo. This year, we really look forward to joining that let's say on our own as Westport fuel systems. This year and are ensuring the trucking industry. What we have to offer with H B D. I for natural gas H, B, a biogas and <unk>.

Yeah with hydrogen are these are really great combinations of fuels and our technology that could be an important part of what trucking does in North America. So we're we're eager and excited we recognized at the same time are there steps that need to be taken some of our customers around the world of course are already present in North America.

We're hopeful that that could accelerate the path towards commercialization in near future.

Okay. Thanks, David.

Thank you Eric.

Our next question comes from Rob Brown of Lake Street Capital markets. Please go ahead.

Hi, good morning, Thanks for taking my call.

<unk>.

It's really around the questions around the EU market and what are you seeing in terms of visibility now in HPA heavy duty market in terms of demand with with pricing is it is it how much are you seeing it decline if it hasn't happened yet or are you just sort of getting cautious on it.

Some color about how that market is trending now.

What's the pricing.

Yeah. Good morning, Rob. Thanks for your question. So in the EU market right now we are facing higher LNG prices that we have historically and that is for sure some headwind for business. Additionally, the Russia, Ukraine conflict and the you know the shut off of where the not realization of Nord stream two all these things.

On the on the marketplace relative to our products. So we have seen some some moderation of demand let's say.

But we're hopeful that that's a temporary thing in the end I can remember two years ago. When Covid was being at least we saw a moderating until that demand and then as we work through kind of what's the new normal gonna be what's what's what's required in the future and so my expectation is that this is temporary.

And I'm very comfortable with the fact that we need to move goods and we need to do it cleanly and on our systems enable that are in an economic way on an ongoing basis, so our licensee where all shakes out but for the near term some moderation hopefully recovery in the.

In the coming quarters.

It could and then and I think Richard said that you expect the independent aftermarket to grow in 'twenty. Two despite these headwinds I just wanted to clarify that what's your sort of view on growth and independent aftermarket.

The current environment.

Yeah, I would tell you that the independent aftermarket.

<unk> is already a sizable business around the world for US are on the order of a third of our revenues and so we're not expecting you know super strong doubling or tripling type growth, but nonetheless, we do see opportunities in various markets around the world that are really are are opening up and becoming new markets for us. So we've mentioned.

And in prior discussions our Egypt, Algeria, India we've.

We are currently in the last Ah period seen some softening in places like Turkey and Poland.

But now with the outbreak of the conflict you know what I think a L. P. G becomes increasingly something that are let's say local governments have and can make available and so we have some of the budget price differentials today between our petrol and LPG in various markets in Europe , and we do expect that to to potentially.

Persist and to drive our growth in those markets. So we're hopeful and our outlook is positive with respect to the aftermarket business continuing to be an important part and a growing part of our business.

Okay, great. Thank you I'll turn it over.

Thank you Robyn.

Our next question comes from Amit Dayal of H C. Wainwright. Please go ahead.

Thank you and good morning, everyone.

So David just with respect to you know the macro developments in Russia, you et cetera.

Are there any.

Receivables of funds to those markets that may be introduced.

And so we're monitoring this very carefully and you can imagine with respect to our our business in Russia that are with all the sanctions being put in place. There's a high degree of anxiety and let's say additional friction in the system. So that's a I mentioned in my comments you know some some slower payments and I think that's just the.

Banks being careful to make sure that they follow all the sanctions precisely we're not doing business today with any government entities in Russia, and but yet we have you have customers in Russia, we're seeking clean transportation of affordable transportation. We aim to continue to to help with those customers to access those but it sure is getting more and more.

Or challenges challenging as the days, there's conflict roll on and so are our outlook on that business is quite guarded that oh, we could see it actually come all the way to zero in the future depending on what happens, but frankly, we don't know.

Nonetheless, we are being very let's say cautious about what we do and changing our our terms to our customers. So they get paid in advance and things like that so we don't see any significant risk from that perspective, just something to be managed.

Understood.

You know and sort of the gaps from that market.

Towards revenues and margins et cetera are there other avenues for you to maybe make up some of those or do you just have to get through this and you know that's attrition master normalize before you can.

I'll make some recoveries you know from those markets.

It is truly hard to say what would I what I think in general is that Oh, we should expect that our ourselves in Russia will decline.

And so that's that's a pressure on us Nonetheless, one of the advantages we have in the company that we are present 70 markets around the world are Russia, and Ukraine are just two of those markets. So we have lots of opportunities in other places and as mentioned earlier. This the price differential between petrol and LPG for example, and a number of markets is widening as opposed to shrinking.

And so we do see some bright spots in the business around the world and we're hopeful those will offset or more than offset any decline that we have in Russia that would be a challenge for us, but that's certainly our goal.

Understood. That's all afternoon, David I'm, taking my questions offline. Thank you.

Got it.

Okay.

Our next question comes from Colin Rusch of Oppenheimer. Please go ahead.

Thanks, So much guys can you talk a little bit about you know the.

The Cummins testing process and the duration, how long, it's going to check before you're able to get some sort of results you can speak about.

Yeah. So this for US is typically a two.

2020.

Sorry, Yeah, just specifically around hydrogen sorry, sorry to clarify that.

Yeah, no problem yeah. The work the work, we're doing with the with come into us as announced on hydrogen. So we are getting that started now and I expect that to be completed within the year. The actual pace isn't something we can control because it's you know we do it with our partner in others.

As you saw with our work with Scania ER last year, there can be some big delays, we don't expect the kind of big demand that we have gotten you to a to be the case with Cummins, but it's it's to beat to be demonstrated as opposed to a known in advance, but I think I can say confidently we will have some progress within this year.

Are the secondary factor that will matter to you, calling the market places okay. When we finish that work what is Cummins are they allow us to say it in the marketplace. So our customers have that are important right to decide but what we say as a supplier and so we have that is our highest priority and our to do list. If you will.

Sounds good.

And then just around the supply chain you know obviously you guys saw some of the stuffs come in early or are you know back in.

2020 are uncovered.

One thing to that.

Inventory on hand, so I get that you know with some of them. So we're seeing right now in China.

And you know a potential for some other disruptions given the conflicts in Europe can you talk about you know.

On a full points in your supply chain now and how you're managing that.

Yeah, I would tell you that we haven't had any severe problems at this point in time, but we're absolutely on top of it with respect to trying to manage the supply chain.

You know these sanctions that come into place.

Or are you now.

Something that.

Cannot be ignored and have to be abided by so that that's what we do and at the same time, we're not sourcing any materials from Russia, and you don't have really a big exposure to Ukraine, I'd say the one commodity that is challenging for us is steel for our planted at soco. So this is a this is kind of what.

Ample nonetheless, there are other sources and so far we haven't been able to Uh huh, we haven't had any trouble that you haven't been able to mitigate.

But I would tell you it's a yeah, there's some anxiety associated with it because we don't know what tomorrow holds and we're working very hard to do that without having to increase our inventories the way we did through the Covid period. So hopefully we're in a good place and we'll manage it day by day.

Great. Thank you so much.

Thanks Colin.

Our next question comes from Bill Peterson of J P. Morgan. Please go ahead.

Yeah, Hi, good morning, and thanks for taking my questions. I know you I know you've kind of a frame or wanted to refrain from providing forward guidance, but you know the Russia, Ukraine kind of started towards the end of February can you comment just on the demand trends with the OEM and I am at least heading into that are at least if not quantitatively at least qualitatively.

Yeah sure Bill good to hear you this morning so.

As a general premise are you know we had a a good fourth quarter and we've seen a little bit of softness in the first quarter, so far but generally we.

We have demand and order books that are.

Yeah or are not as exciting as we'd like to see but are there. Okay. So far we have not seen a tail off in demand in fact, we've seen some uptick in demand in certain markets around the world.

As people recognize these big price differentials and customers.

Our interest in our products. So on one hand, and so so he knows <expletive> super ambiguous answer I apologize because what we are seeing basically is we're seeing kind of a continuation of recovery trend coming out of Covid that we saw in 'twenty one.

Coming into 'twenty two at the same time that we're seeing this this anxiety driven and volatility driven by price fuel price volatility driven anybody that kind of tempers some market. So hence.

Hence no guidance for today, because it's it's really challenging to see.

How this will all play out near term and through the through the later parts of this year, how long of a conflict last for example in and what will all be actions being taken around the around the world.

Nonetheless, I guess you know my overriding principle here and thought is that are you know.

In tough times people go looking for.

Less expensive ways to move and access to lower cost steel and so I think that price differential is really the key driver of markets around the world for US has been always and I expect it always will be going forward.

No. That's that's that's that's.

Helpful. Thanks for that I guess, maybe just speaking on the cost side and somebody can also use some of your cash outlays and so forth.

Again, I understand you may not want to provide kind of clock quantitative, but I guess, how should we think about your opex opex trajectory as well as Capex should given I guess some of the pauses or near term dynamics and how should we think about that trending through the year for.

For 2022.

I'm wondering on.

Not one built like in terms of Capex, where in the range of $15 million to $20 million.

Spending on our programs I mean, we're we're obviously trying to rationalize our capex and it would be a little bit prudent during this period of time.

The H P. I itself there is as David mentioned earlier at the outset of the call like the H PDI 3.0, there's sort of longer term programs.

It'd be foolish for us not to continue we're on a time line with her with our launch partner. So those things will have to continue.

But you know 15 million or so would be a you know a good number in terms of capex.

In terms of Opex trend.

You know we.

Material costs and inflation are showing up and we sort of provided that guidance in there.

Having said that we're you know obviously, we're taking actions to do to offset those through or just some other productivity initiatives that we had ongoing there.

For the time being I would say you know whether they are relatively stable in terms of percentages, we're spending more on R&D, you'll see that sort of show up in our P&L. The G&A should be more or less the same as you see their margins are the ones that are coming a little bit more under pressure than that and unfortunately, its a little bit hard.

To model just given how many markets were in.

The fourth quarter was particularly bad will say compared to where we our expectations are.

So you obviously were working to improve those margins to get we'll call it more of our targeted rates there.

No. That's good color and maybe just kind of a big picture question and again, recognizing it's hard to call. Some of the power of some of these geopolitical things turn out but but.

But if we were a recompete a year from now like what are the key milestones we should be looking out for like what would you have accomplished during this year that we can look back on it and call. It a success.

Yeah. So.

Let me just look back on 2021, I think really important in 2021 where the developments that we started with customers you know what.

One of the key markers that I think about is when we're installing our HPT I feel system on a new engine.

Almost doesn't matter what fuel we're going to use that's a really important step towards are starting a program that will lead to production for me, we can't get to that to the finish line unless we get to the start line and and get started so you know the work we're doing with Scania. The work that we announced with Cummins. The project, we have an ABL in tupi.

I expect all of these will have a really important milestones through this year and some of those milestones will be announced hopefully and will show progress towards our commercial further commercialization of <unk>.

We're still pursuing our business interest in India, and in China, and see a really great opportunities there and so I look forward to having more to talk about that through this year for both of those markets also.

So yeah, I I think there'll be some really important.

Business progress that we can share with the market through this year and you should definitely look for that.

Thank you.

Our next question comes from Mac whale of <unk> Securities. Please go ahead.

Hi, Good morning, I was just wondering I'm, just a little bit of detail on the effect that a narrowing in the spread between gaseous fuels in diesel and gasoline have in terms of.

Liking.

How long does it take for that to recover or to or to kick in when you see that swing from one direction to another.

Yeah. It's a it's a really good question. It doesn't have a closed form answer because frankly it depends on the products in the market from the channels. So oh okay.

So we sell right we sell products for three wheelers in India that are Super inexpensive we sell high end H P di systems in the European market for Big trucks and everything in between and so every market is a little different and so we sell directly to Oems as they get the channels, where the Oems were there also.

We have dealers and inventory and so I would tell you. There's all these lags in the system that really make it hard.

Two two are categorized as we see it within three weeks, we see it within three months.

But in general the other thing I would point to is that most of the markets around the world to have some kind of what they considered normal right that are you know this is kind of a 30% discount on a gaseous fuel versus petrol or or 35% discount to diesel between LNG and so when that moves.

If it was a couple of percentage points. Yeah. This is kind of normal we're all used to this the pump prices move, but when you start to notice it like hey, wait those prices are close to the same than they used to be different are that does affect the consumer behavior. In this league behavior and this comes back to the system to us, but at the time constants are tough to call in and tough to categorize it as just one.

John .

Okay and does that would you say that that's basically a loss sale like is that a situation, where you where say a fleet manager is looking at replacing a vehicle and it's like okay. We're replacing that one this quarter or this period of time, and so you're not going to see that until.

<unk> replaced in the next cycle or is it a delay and then it pent up demand.

Yeah, I think it's more of the latter I think its more of a delay so, especially with respect to volatility. So when fuel prices are volatile than it's kind of like what I was planning on buying 20 trucks every quarter or 10 trucks every month or whatever the sequences that normal fleets are going through depending on their fleet size their buying behaviors and patterns and are they just say well.

Wait and see before I place that order and so I I tend to believe in most cases, it's more today than it did.

The dropping of that debt.

That order and so it does come back.

Mark we are assuming assuming the conditions come back right away, but yeah.

Yeah Yeah.

That makes sense.

Whether you're gonna, whether you're going to downsize our upsize your fleet.

More about that suites outlook on their business as opposed to yes, that's right.

Yeah, Yeah, that's right. So basically fleets are buying some mix of natural gas vehicles different technologies, and so forth and it's really that decision on the mix and what theyre going to buy them that that and then when when economic times are challenging they they spend.

Times to lay there instead of buying 10, only about five or change their their order timing. So all those things are the behaviors of fleets that are pretty consistent around the world in terms of how they behave based on macroeconomics and fuel prices.

Yeah Okay.

And then Richard I think you already answered a question on the R&D and thinking about the Opex.

What percentage of that span of the Opex in general or maybe you want to talk about R&D is would you say is stuff that you're going to spend regardless of your revenues and margin is is it like how do you budget.

Like what level of I guess, what I'm trying to fish for the question what level of Opex.

Opex spending is sort of not negotiable, because you're you're looking at certain programs that just arent going to be impacted by you know a quarters are a revenue or margin. Just say you know what we're doing this this year and so we're going to spend X millions on this I'm wondering what how big that is.

Yeah, I would say on the R&D, probably you know I would say 90%.

Yeah to 100 like were pushing that I mean, we raised the money specifically because the company itself was starving itself.

Over a period of time there.

Say between the period of 2016.

Even up to 2020, obviously going into Covid and so now we're trying to accelerate especially on the heavy duty side, there were certain things that I need it now needs to get done so that's why I'm more.

More towards the 100% on R&D, where triangle, where you optimize the spend of where we do work, where you would actually see required austerity measures.

We're going to go through this year I mean, obviously, the Russian crisis causes problems. It's just a bunch of headwinds Unfortunately, but of all showed up at the same time.

Obviously, G&A and Opex are the ones, where we will look at the discretionary spend there.

Right.

And then is that when you look at the trends obviously, you have more cash in the balance sheet. It kind of went up in 'twenty. One by you know single digit millions like.

Four 5 million or so.

Do you then does that incrementally incrementally go higher from there again or is it more of a.

More flatline.

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