Q1 2022 Westport Fuel Systems Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Westport fuel systems first quarter 2022 results conference call.
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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 first quarter 2022 conference call.
It's being held following the press release Friday of Westport fuel Systems' financial results.
On today's call speaking on behalf of Westport fuel Systems', Chief Executive Officer, David Johnson, and Chief Financial Officer, Richard Aura study.
It's open to the public and the media, but questions will be restricted.
Bedroom community.
You are reminded that certain statements made in this conference call and responses to various questions may constitute forward looking statements within the meaning of the U S. It looks like well Canadian Securities laws such forward looking statements are made based on our current expectations and involve certain risks and uncertainties with that David ill turn the call over to you.
Thanks Christian good morning, everyone.
Thanks for joining us to review Westport fuel Systems' results for the first quarter 2022.
In Q1, we generated revenues of $76 million comparable to the same period of 2021.
Leading foreign exchange translation, our revenues increased by approximately 2% year over year.
As you know today's markets or anything but stable that's true for the broader market as well as our specific automotive markets.
Today's markets are volatile unpredictable and uncertain.
And then Q1 volatility increased now we have more inflation and we have the Russia, Ukraine War on top of the existing well known challenges chip shortages and there's still ongoing effects of COVID-19.
And there are myriad local market changes that matter like the collapse of the Turkish lira and the actions governments are taking to manage their economies and to help their citizens through these challenging times futile rebates for example.
So later this matching our year ago quarterly revenue in this most recent quarter. It looks to me like an accomplishment and as noted if we were to report in euro instead of U S dollars you'd be up roughly 6% compared to last year because foreign exchange rates are also on the business.
The reasons for this modestly robust quarterly result in these rather turbulent times are as follows.
First our core business is on the right path clean affordable transportation has been demand today, and then demand tomorrow and in fact demand is increasing.
Ultimately high energy prices in challenging economic times tend to be tailwind for our business.
<unk> is not a discretionary purchase transportation products that are both low cost to acquire and low cost to operate.
In times of financial constraints, our business can continue to grow.
Second Westport fuel systems has both product and market diversity we.
We served 70 markets and we provide fuel components and systems for the full range of low carbon cashless yields L. P. G. C N G LNG RMG bio methane and hydrogen.
All our fuel systems are applied to a wide variety of engines and the fuel cells in a broad spectrum of applications.
And we sell through diverse channels, both aftermarket and direct to Oems as well as to other tier one suppliers and we have a diversity of customers around the world.
Finally, and most importantly at Westport fuel systems, where on an important mission and our 1800 global team members and our partners around the world are each and are committed to our mission to deliver the products and services that enable clean affordable transportation.
We're determined and were resilient.
Looking into the quarter I'm pleased to report that our OEM business continues to grow up 21% over the year ago quarter, and including continued sales growth of our H B I systems up 60% to our lead European OEM customer.
And why does our HPA business continue to grow even in this challenging volatile times because.
It's H P. D. I is an excellent superior product and it's only available from Westport fuel systems.
H B D. I is surely familiar to you, but let me spend a little more time today reviewing the offer that H B O. It makes in the marketplace.
H B D. I enables a diesel engine to maintain all the diesel performance and efficiency that slipped and drivers have come to expect but using clean natural gas and importantly, biogas, otherwise known as R&D biomethane or bio LNG are.
A recent article in the French trade magazine Kratz routes explained and I quote thanks to Westport technology. The compression ratio is that of a diesel engine.
I point to this quote it may be only an engine geek like me could love because maintaining a high compression ratio and maintaining high boost pressure and maintaining high working pressure inside the engine are the key ingredients, enabling performance and efficiency.
H P D that makes that possible with clean low carbon natural gas deal.
France routes also documented a substantial efficiency difference fuel consumption of the HDI equipped trucks in their test was dramatically lower than that of a competitive truck using spark ignited natural gas fueled engines, 25% to 30% lower fuel consumption with HPE at.
That's a huge difference for most any application, but especially in trucking where competitive advantage and bragging rights are often measured in fractions of a percent.
And I just have to pile on the torque available using H P. D. I, it's 50% higher than those similarly sized engine without H b.
H P. D. I is the right way the best way to use clean gaseous fueled in internal combustion engines.
So where do we go from here.
We continue to grow to meet customer demand respond to regulatory requirements and realize economies of scale in our manufacturing and supply chain and improve our profitability.
As we've reviewed before the fleet average C O two standards in Europe require a 15% reduction by 2025, and a 30% reduction by 2030.
These requirements have not gone away due to Covid, nor do the war in Europe is working to make those requirements even more stringent.
Natural gas fuel provides an inherent 20% reduction in carbon compared to diesel fuel.
H B D. I gets the most performance for natural gas and so in combination our product responds directly and powerful to the regulations.
And H VDI is fully compatible with biogas, which continues to grow strongly in markets around the world, including the U S where the natural gas vehicle Association recently reported that R&D achieved a 64% mix in transportation last year and test it.
Looking at Europe key market for our company and air transport sector generates 27% of the Eu's total C O two emissions and road transport alone generates almost 19%.
Being able to rapidly reach climate neutrality. This sector will require the combined efforts of all stakeholders.
Starting in 2025 Oems in Europe will face substantial financial penalties associated with missing the fleet average D&C requirements.
Next he moved from low carbon natural gas to net zero carbon biogas.
Two zero carbon hydrogen as we announced last week. This week, we're unveiling our high performance high efficiency Hudson H PDI demonstration vehicle at the Act Expo here in long Beach, California.
Our HDI technology works brilliantly with hydrogen as we've demonstrated in the laboratory with more power more torque and more efficiency in the original diesel fueled engine and with near zero carbon emissions.
H P. D. I was hydrogen is just what the world needs for heavy duty long haul trucking it economical high performance and clean.
Looking ahead, we're in progress with numerous hydrogen HVAC projects, including the announced work with Scania Avionic Tupi and comments.
We look forward to sharing more information at Act Expo late and later this year as we demonstrate archrock and develop the engine in our labs.
Hydrogen H P. D is a big deal this will make internal combustion engines with H b that the best way to use green hydrogen for long haul heavy duty transport applications, we have a disruptive technology and we're pleased to show it off and offered to our customers and the industry.
Next after that off road and high horsepower applications, we see a clear opportunity to decarbonize, its very hard to decarbonize sector, using Westport fuel systems' patented and proprietary <unk> fuel systems by applying our deep expertise in managing gaseous fuels.
Mining vehicles are a good example.
Today's mining truck fleets are typically diesel powered and mining vehicle emissions represent about a third of Myers greenhouse gas emissions.
Our low cost affordable and reliable solutions that are available now and play an important role in helping decarbonize mining, while maintaining reliability and dependability of their fleet by continuing to use the well developed internal combustion engines, but with H P. I feel system and clean low carbon gaseous fuels.
The ongoing Russia, Ukraine conflict will continue to have an adverse impact on part of our business.
As we highlighted during our Q4 call about 10% to 15% of our light duty OEM and aftermarket business has been sales to Russia to Oems and aftermarket customers.
This Russian business has been growing in an important market for gaseous fuel systems components because of the continuing conflict the future impact to our business on the commercial and economic consequences of the conflict.
Of course uncertainty yet.
For example, with respect to commodities in component material pricing, 40% of Europe's natural gas and 25% of your crude oil is provided by rush today. So pricing pressure is expected on components globally as energy costs for production and transport continue to rise as the conflict backs off.
We'll continue the minor tier developments as the situation is changing rapidly. Despite these pressures we remain confident that our products will continue to deliver and expand our market share in response to the persistent need for clean affordable transportation. We saw this through Covid and we expect to keep seeing it through the current challenges we are keeping our focus on the long term while we.
We work to mitigate the near term challenges, we have successfully done before.
You might not believe what's happening in India, but having just been there let me confirm that India is now the market with the highest penetration of natural gas used vehicles with market shares growing towards 40% in passenger vehicles and commercial vehicles and in India's unique three Wheeler segment.
It's impressive and exciting and Westport fuel systems is there supply all the various components and systems required to enable the transition underway in India.
Why.
First because regulations have driven a market change away from diesel and towards natural gas because of product affordability.
Because Indian customers demand affordable solutions and third because the Indian government has made clean natural gas for transportation, a foundational element of their strategy, while also improving air quality.
Natural gas fueling infrastructure continues to grow now approaching 3500 stations up dramatically in just the past years.
I'd like to quickly turn our attention to China and provide an update and outlook for our business, they're locked out of their back end effect across major metropolitan cities in China, and key important expert areas, which is having a reverberating effect on the global supply chain.
Meanwhile, natural gas prices, there continue to be elevated putting a damper on our JV is existing spark ignited natural gas engine business.
Work continues to bring H began to the marketplace, but with higher natural gas prices the government's increasingly focused on the potential for hydrogen.
China's hydrogen industry has undergone exponential growth in the recent years and local authorities and enterprises have shown strong enthusiasm for investing in this sector.
Ah study released by the Chinese Society for Finance and banking projects that China went back the equivalent of 74 trillion U S dollars and carbon neutrality financing over the next 30 years, representing five times its 2020 national output.
Westport has enough products to help China reached their stringent climate goals.
The way, we have ongoing discussions with potential Chinese partners for the usage of each be yet.
H P. I can play a large role in transportation decarbonization efforts and the country is embracing hydrogen and believe in its long term growth potential and use case as a future fuel.
We're excited about this opportunity ahead and look forward to updating the market on further developments.
Despite the pressure, we and our industry are facing in this moment the outlook for our company is favorable the world needs clean affordable transportation.
Westport fuel systems has the solutions and will grow to respond to increasingly urgent need market around the world.
Hydrogen is an important growth factor for Westport fuel systems H P. D. I enables the use of cleaner fuels and internal combustion engines long haul transportation.
Growth will enable of economies of scale that we can get to profitability, we're well positioned ready eager and determined with that I'll hand, it over to Richard to go over the financials.
Thank you David.
Revenue for the first quarter 2022 of $76 5 million was comparable to the prior year quarter. Despite the challenging headwinds from volatile fuel prices the impact of sanctions on a Russian sales volumes and continued inflationary pressure in supply chain challenges plaguing the automotive industry.
The continued to generate growth in our OEM revenues, primarily due to the addition of our fuel storage business and saw modest growth in light duty heavy duty OEM and electronics businesses.
Offsetting the growth in OEM revenue, our independent aftermarket revenue was significantly lower year over year due to the lower volumes caused primarily by the impact of sanctions, resulting from the Russia, Ukraine conflict.
Excluding foreign exchange translation revenue increased by approximately 6% year over year or.
Foreign exchange had a significant impact on revenues in U S. Dollar terms due to the 7% appreciation of the U S dollar relative to the Euro which is the currency would conduct a substantial portion of our business.
Net income was $7 7 million for the first quarter 2022, compared to a net loss of $3 1 million for the same prior year period.
The increase in net income was due to the gain of $19 1 million recognized on the sale of our interests in the CW <unk> joint venture and the monetization of the related intellectual property.
This was partially offset by lower gross margin from our independent aftermarket business inflationary pressure on cost of materials and manufacturing inputs and the loss of equity income from CW high.
Normalizing for the CW I gain we generated a negative $6 1 million in adjusted EBITDA for the quarter as compared to $2 $7 million for the three months ended.
March 31, 2020 one.
Turning to our business segments.
Revenue for the first quarter 2022 for OEM was $51 8 million up 21% compared to the prior year quarter. The operating loss from OEM was $6 $5 million, which was the same for the prior year.
The increase in revenue was driven by additional revenues of approximately $8 million from the acquisition of our fuel storage business in the second quarter last year. We also saw revenue growth in our light duty OEM business because it is the rapid growth in sales volumes through Oems in India, which was partially offset by a challenging market in western Europe .
During a volatile E N G prices and the impact of sanctions on a Russian sales volumes.
Despite the headwind of elevated LNG prices at the pump are heavy duty OEM sales volume to our OEM launch partner increased 16% year over year revenue.
Revenue growth was partially offset by the annual contractual price reductions to our OEM launch partner.
As a reminder, the first quarter of 2021 and the start of production challenges at our OEM launch partner from the shortage of semiconductor chips, which has improved since the fall of 2021.
I hire relative LNG prices are causing a significant challenge to the demand for LNG trucks, which is expected to temper our expected sales volume goes to our OEM launch partner through 2022 until relative LNG prices return to a more favorable equilibrium.
Gross margin was 5 million or 10% of revenues for the quarter compared to $4 9 million or 11% of revenues in the prior year of.
Gross margin increased by $1 3 million from our fuel storage business, which was offset by decreases in gross margin across all.
Other OEM businesses due to the increased sales mix to emerging markets with lower gross margins and increases in material costs from the global supply chain shortage and inflation.
Gross margin and gross margin percentage for Mark H B, a 2.0 fuel systems product will vary based on production and sales volumes levels of development work successful implementation of initiatives to reduce the cost input materials in foreign exchange rates margin pressure is expected to continue through 2022.
Those production costs and contracted price discounts with the existing OEM customers are only partially offset by cost reductions of materials until higher scale is achieved.
R&D expenses for the first quarter were $4 8 million, which were comparatively lower year over year, mainly due to foreign exchange benefit.
Our R&D activities and OEM continued to focus on the development of next generation H P. D. Our fuel systems technology and demonstrations with potential OEM customers on our H P. D I fuel systems hydrogen and natural gas applications.
Now turning to independent aftermarket.
Independent aftermarket business faced significant challenges in the first quarter from reduced sales volumes to our Russian customers caused by the sanctions and fuel price volatility.
Revenue for the first quarter of 2022 was $24 7 million down 27% compared to the prior year period.
Besides the impact of the Russian sanctions, we had lower comparative sales through our African customers as the first quarter of 'twenty 'twenty. One included the recognition of a large one time infrastructure project and then there was the aforementioned foreign exchange impact of the U S dollar appreciation.
Gross margin was $4 9 million or 20% of revenues for the quarter down $3 2 million as compared to the same prior year period. The decrease in gross margin and gross margin percentage was attributable to the lower sales volumes to Russia, and Western Europe increased sales to emerging markets with lower comparative gross margin at all.
Lesser extent higher manufacturing costs in the current quarter due to increased material costs.
Consequently, we recognize the small operating loss of 300000 compared to operating income of $1 $6 million in 2020 one.
On a positive note.
L. P G price differential to gasoline has improved favorably during the first quarter, which is providing some support to increase sales demand.
With this positive tailwind and other countermeasures to mitigate the impact of inflation and improve productivity, we anticipate a return to profitability of our aftermarket business soon.
Finally, I'd like to touch on liquidity.
Our cash position increased by $2 7 million during the first three months of the year to $127 6 million from about 125 million at year end.
The increase was primarily from the $31 $4 million in proceeds received from the sale of our interest in KWE Y and the monetization of the related intellectual property offset by cash outflows and net working capital investments in capital assets and repayment of our short and long term debt.
Our net cash flows used in operating activities were $16 9 million in the first quarter of 2022, an increase of $14 3 million of cash you compared to the same prior year period.
The increase in cash used was primarily due to the net change in working capital from a buildup of inventory and the decrease in gross margin.
Our net cash from investing activities of $29 2 million consisted primarily of cash acquired through the sale of our investment and see Wi partially offset by capital expenditures of $2 8 million.
Net cash flows used in financing activities were $7 9 million for the first quarter 2022, primarily due to a net repayment of debt as we begin paying down our debt on a quarterly basis. After a period of deferral from COVID-19 relief.
As discussed COVID-19, the impact of the Russia, Ukraine conflict uncertainty and volatility in our fuel prices, especially in Europe had a negative impact on customer demand in the quarter.
Further supply chain disruption and high inflation continues to challenge the automotive industry with the rising manufacturing cost pressuring gross margin in the near term as we respond with pricing and productivity counter measures to manage our profitability.
As the conditions continue to persist the duration and severity of the impact on future quarters is currently uncertain.
Being said that we do see positive signals in the growth of our OEM businesses and our path to profitability as sales volumes grow and our heavy duty and light duty OEM businesses, our balance sheet and liquidity to fund. The growth is currently in good shape and we will remain prudent in our allocation of capital and resources in executing our strategic.
And operating partners.
With that I would like to turn it back to David.
Thanks Richard.
The current global factors are causing headwinds and market fundamentals regulatory environment and the overall global trends remain the same the world needs clean affordable transportation, we're excited to bring our hydrogen H B IQ assistant technology to the forefront and we'll be sharing more of our technical and commercial results with you through the year.
Our team will continue to work hard to meet the needs of our customers and the industry with a focus on executing our long term strategy growth in new markets, new product development and a commitment to quality reliability Westport fuel systems is driving affordable de carbonization of transportation globally.
Thanks for your time today looking forward to your questions.
Thank you you will now begin the question and answer session analysts who wish to join the question queue May Press Star then one on the telephone keypad, you'll hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys.
To withdraw your question. Please press Star then two little 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, Eric.
So maybe just to start with your heavy duty OEM are with Volvo in Europe .
Maybe this is tough to answer but do you know.
For obvious reasons, you know kind of a tempered outlook for the end of 2022 I'm. Just curious anything you can share relative to maybe the shortfall versus your expectations.
You don't potentially versus volvos expectations, just anything to add some details and then also would just love your thoughts on.
Kind of the linearity of revenues throughout 'twenty, two 2022 at least how things stand today.
Yeah, so glad to talk a little bit about the business in Europe with H P D I with our launch partner.
Fundamentally you know a key ingredient in that is the.
Fuel price and fuel prices are a bit elevated these days, it's been getting the LNG price relative to diesel so that is for sure a headwind nonetheless.
Looking at our results in Q1, and what we shipped to our customer fundamentally were up 16% year over year.
And so and I know what also point to in general our our Q1s have been kind of the soft quarters, and then Q4 tends to be a stronger quarter. So we're hopeful for a repeat of that and an increase through the year as we go forward. Nonetheless, we did have this headwind of.
Fuel prices, but we still have you know the the mouth tax abatement of about 10000 year old per truck and other purchase incentives. So as the market has many factors and I think you know one of the things that we can have some significant competence on is the fact that it is the superior product in the marketplace and so our customer is taking share.
From other natural gas and other alternatives in the marketplace and so we feel good about the business in the long run and we see this up quarter and kind of forecast that we will have a relatively good year.
Although this fuel prices are forever a challenge, but then there are elevated out there right now.
Right got it.
Well, then maybe turning to China, you mentioned that with elevated fuel prices and Covid lockdowns everything going on there that the government is starting.
You're starting to change or or look more at hydrogen you know just curious so you've got the take or pay with weight shy. I mean is there a mechanism is a mechanism in there where that can be shifted or a portion of that can shift to hydrogen or when you're talking about elevated interest or are you talking about.
Potentially other parties as well.
Yeah, I think it's a it's both so basically what we see in China today relative to hygiene is a lot of pushing the government a lot of funding available and basically all the Oems have a varying degrees of interest in <unk> and how to approach the market with hydrogen and frankly, we have work to do to make sure. They understand like we do.
Like we're doing this we could act expo to help the world to understand what's possible with hydrogen and H P. D. I because this really is quite novel compared to the other alternative of a spark ignited a hydrogen engine and so this is our our work to help them understand the potential of H began with hydrogen.
Fundamentally you're going back to the contract you know anything is possible, but at this point in time do you have a contract in place and we have a customer and they continue to do the work to bring H began the marketplace and our pivot to either add or move towards hydrogen I would say it would be beyond the time frame of that contract rate that we're talking about with the wood.
Right.
Got it okay.
Okay. Thanks for that and then just maybe one quick one bookkeeping.
Bookkeeping here for Richard just on the debt repayment can you just maybe give some color.
Into debt repayment expected for the remainder of the year.
And then I guess, maybe in 2023 as well as you start paying things that were deferred.
Yeah, No that's outlined in the notes to the financial statements you can see it's going to be roughly about $10 million to $12 million on our debt and then there's like a usually got $5 million bullet.
For the car T and.
Royalty.
Got it thanks a lot.
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 I, just wanted to follow up on the China comments.
Are you implying that that may be the H P. I product is not launching into the market right now in terms of the natural gas side or is that still moving forward and and I guess.
No just relative to your comments on the hydrogen that what does that mean for net natural gas product at the moment.
Yeah. So so first of all the project with respect to our natural gas H P. D. I had with our partner and with their customers. The truck Oems. This continues to move right in terms of the work that's happening on our customer side and on our customer side to get.
Get the validation done and be ready to launch the comment that neighborhoods in the context of every OEM looks for that launch window. When it would be the best kind of into the marketplace and launch the product. This is not the truck OEM side and so you know with elevated in LNG prices right. Now are it's easy to see it maybe not the best time right now so we're hopeful for a realignment in the <unk>.
Place, but then creates a window for a properly launching the product commercially in the marketplace, but we wait for our customers to take those decisions.
With respect to hydrogen you know I think we have the same I'll call. It dynamic sales dynamic with hydrogen H P. D. I in China that we do with having an H P. D I in Europe and in North America and that is a.
The technology, we have at Westport fuel systems of H P. D. I, we're demonstrating now with her vehicle at act textile Kinda results, we presented in Vienna, a few weeks ago and in previously.
Press release to the various results. These are this offer of more power more torque more efficiency using hydrogen niche VDI in combination.
It gives all Oems that are considering how to respond to the marketplace and demands for lower Cotwo clean transportation. It gives all Oems, it's a basic vision and potential that they can adopt H PDI today with natural gas use HBA today with biogas and use it in the future with headroom.
And as that.
Increasingly available in the marketplace. So this really provides us longevity of a technology roadmap ahead for it for decades to come that makes then the decision to adopt H P. D. I sooner more tenable and more interesting for our OEM customers and I think that is the key dynamic we see in all markets around the world.
Including China.
Okay, great. Thank you that's helpful and just on the pricing environment, maybe between differentiate between OEM and independent aftermarket, how how much pricing kind of.
Ability do you have in each of those markets and how quickly can you change prices as your cost structure changes.
Yeah, Great question and I think it's a.
It's a different time in the marketplace that we've seen for some decades, frankly with respect to inflation being relatively low and stable for many many years and now we have this high and unstable Hyatt and growing in many markets around the world you're right, our aftermarket business and the ability to price and that is different than our OEM business typically OEM business of care.
Victor is by a long term supply agreements that have some clauses that allow you to go back and renegotiate and pass on costs and so each one of those contracts with Oems is different and requires going back and talking to the Oems and negotiating discussing and so it takes some time at some work and we've been doing that and we've had numerous successes.
There's more to be done because of course, the trochowski going up.
Stationary environment.
On the aftermarket side frankly, we can raise prices I would say more easily recognize.
Recognize that in the aftermarket side not too dissimilar from the OEM side, but it's a different different equation you know customers are buying those products to save money on fuel and so the the the key ingredient to pay attention to is the fuel price differentials in the various markets and then the cost of the product and so you know while we can price a if the truck.
Cause that it makes the attractiveness of the product less and in all cases. So that's that's our challenge and so as we see oil prices going up as gasoline petrol and diesel prices going up as Richard mentioned, you know relative to a L. P. G. Today that price differential is actually working in our favor also in general.
Higher fuel prices are just in general make people more sensitive and look for ways to too to save money on fuel and LPG kits. As an example, our I would say increasingly in favor and this model because of this rising fuel prices rising fuel price differential and so individual private we can price, but we have to do it market by <unk>.
That'd be talk about do we have 70 markets around the world and they're all different and not all of them are LPG markets by the way and so that that's a more challenging when you're talking about natural gas markets for example.
Okay, great. Thanks for the color I'll turn it over.
Thanks, Rob.
Our next question comes from Colin Rusch of Oppenheimer. Please go ahead.
Thanks, so much faster.
You've got a certain amount of engineering work do you have to do to get the H P. D. I should point out for hydrogen to market can you just give us an update on where some of the balances system engineering their preparation that's at this point.
Yeah, Thanks for asking Colin good to speak to you. This morning. So fundamentally you know the applications that we've done so far of our H P. D. I system to existing engines have been to apply of the product that we use today for natural gas with no modifications, we expect that there will be some.
And that has to be developed and optimized the system production, but we're in this phase basically and demonstrating the capability, which has been really a I would say frankly exciting right for us and for our customers to see the potential to apply our fuel system off the shelf. If you will and already achieved this on the order of 15 to 20 per cent improve.
In power and torque compared to diesel or natural gas, which in general are parity right. When we talked about H began with natural gas can be at parity with the diesel engine power and torque, whereas with a hydrogen H b, we can actually increase by 15% to 20%. Similarly with efficiency. We see this five percentage points four to five percentage point improve.
Break thermal efficiency, which turns into about a 10% improvement in in engine efficiency and the kind of miles per gallon or liters per 100 kilometers kind of pieces. So vehicle type of efficiency. So these are really big benefits that we're demonstrating lab and now we're looking for demonstrating I'm on the road and basically handing people that Keith.
But fundamentally the product development to support that so far is a relatively straightforward from our perspective, but.
But we have we have work to do no no no no OEM is going to take it if the HPA system bolted onto their engine and start being in hydrogen and selling to customers without the validation steps. So I think these are programs that are multi year programs to bring hydrogen bracket, but frankly, so that'll be a plenty fast enough relative to the infrastructure developed in detail.
Building affordable hydrogen.
That's super helpful. And then could you just.
A sense of where things are from a labor perspective on.
On the manufacturing side, certainly labor spending issue all over.
Many geographies, but just wanted to see where you guys are at in terms of labor.
Labor inefficiency or concerns.
How it gets or some nice ups ups and downs in the market.
Yeah, I would say that you know in general we don't see ourselves, having let's say a labor problem of any kind, but we were able to access the quantity. We need of course, there is inflationary pressure people want to let's say a two or two to raise there there are no salaries and they're paying in order to respond to that the costs, we're seeing in the marketplace.
Manage that of course, but it's just another element of our cost structure, but in terms of labor in total we don't have an access to labor problem or a quantity of neighbor problems.
And I would say the one thing that we are seeing is still some trailing effects of absenteeism due to you know people are getting.
Secondly, bringing its COVID-19 or having it actually because it's that still is a challenge for us, but I would say what we've been managing now for two years and not a not one that really affects our operations. It's just have to manage.
Perfect. Thanks, so much.
Yeah.
Our next question comes from our.
Our next question comes from Amit Dayal of H C. Wainwright. Please go ahead.
Thank you good morning, David Good morning, Richard.
On the pricing question earlier have you started implementing some of these price increases.
And by the time, maybe you get through some of it in or is it like a 'twenty 'twenty. Two time period, you know whether you can achieve most of these are you know price increases and any color on how that is being executed would be helpful. Thank you.
Yeah, No great question, I think as mentioned earlier kind of a new regime or in the inflationary times. So we did a bit of this last year, specifically related to the the chip shortage and the extra costs, we were paying to find and access the materials, we needed in the marketplace and so we did make pricing changes.
I'll say historically during 2021 on some of our aftermarket products.
To mitigate those those added costs.
And we're doing that now as costs continue to rise across all sorts of commodities raw materials as well as some labor cost increases and from the Collins question. So all of these costs and even right now in Europe , we see it with the Russia, Ukraine, where our energy costs have almost doubled so that's kind of a structural cost change on our on the opex side.
So fundamentally we're seeing these cost increases were able to pass them onto our customers, but with the OEM business. It takes I would say more time, we can't be as quick to implement because it means going back and say with a customer to to negotiate the passing on of those costs. In most cases that means we have to I would say, it's a typical thing for a tier one supplier to the citizens in front of their costs.
And say here are cost increases that we've had to be passed on to you and everyone. I would say, it's very understanding of that of course, they don't want the car seat there nobody wants a price increase but at the end of the day, we're able to justify those that does take some time before theres a lag there's a lag between costs going up and prices going up and that does put pressure on margins in near term.
And you can imagine two thirds of pricing over time that pricing cost and how we might happen on the backside of that hopefully when prices stabilize some some benefits to the to our margins.
Understood. Thanks for that David and then with respect to the independent aftermarket business.
Primarily coming from Russia, I mean is there what are the other sort of drivers that could help you recover.
In this segment.
Well, so you know relative to our Q1 results, we saw a direct impact of.
The sanctions are and therefore the tapering.
The reductions in our Russian business in the aftermarket, which is good business for us typically a profitable business for us. So so that was.
A consequence of the war started by Russia. So this is this is the situation we faced with respect to the aftermarket in the Russia, Ukraine conflict that as far as we can tell it looks like it's going to persist and we don't know when it might happen. So that's just a special special case with respect to the rest of the markets around the world are the the operating.
Characteristics of the marketplace really our fuel price differentials and so I'll give him a very specific example, so we had have had for some time a relatively depressed.
A depressed market in Italy, where basically our business. The aftermarket historically has been strongest in Italy and during the Covid period with Lockdowns and everything it was hard pressed to decide you know or understand exactly how much does the COVID-19 effect that people not buying vehicles or not converting vehicles and so forth and how much was due to the market dynamics are actually alternate.
It fuels, what we saw in March actually was a steep uptick in our business. It should be with the outbreak of war in Russia, Ukraine fuel prices really went up dramatically and the price differential between petrol and L. P. G got a much larger so there was this huge benefit moving to LPG and we saw big.
Uptick in our sales and deliveries in the month of March Unfortunately.
Unfortunately, I would tell you the government came in in the month of April and offered some incentive some you know free free gas cards or I'm not sure what the mechanism they weren't used exactly what's in Italy, but we've been doing this around the world, we're helping helping the population by giving money back from the government to ease the pain at the pump and when they did this it has a differential effect more more.
Giving us more a more help with respect to petrol prices then LPG prices. So we've seen some some tapering down of that that good demand Spike we saw in March. So this is just an example, and it really depends market a market around the world.
And where we're managing all of those and doing the best you can in these turbulent times.
No understandable David.
With respect to China could you give us any sense of sort of what are your overheads are in terms of just you know maintaining studer school at this point for that effort.
Yeah. This isn't a lot of effort on our part basically we support our customers through regular dialog and answering questions as they come up but frankly, it's not so much work on our part we're not spending a lot of money on it I would say the biggest impact to our business is the absence of the volume that which we.
Plant on right. So we expected volume from the heart of our business in China are now already of course like like you did like we've been discussing for some years and the absence of this volume means that we're not able to access the economies of scale that we wanted to have therefore, our profitability is still challenged. So this this is I would say that the big effect of.
Our business in China being in the state. It is right now, but in terms of actual day to day work and spending in R&D and cost there's very very little.
Okay. Okay, Alright, that's all I have David My other questions were already discussed thanks, so much.
Perfect. Thanks, Amit.
Our next question comes from Mac whale with <unk> Securities. Please go ahead.
Hi, David I think I just missed the answer to one of the earlier questions about about expectations for volume sales in of OEM heavy duty H P. D. I had with Volvo in Europe did you say, 16% was the year over year increase in volume.
Yeah. It was 16% in Q1 2022 versus 2021 'twenty one.
And.
What would've been like entering into the quarter, what was sort of the expectation of growth.
Well, we've seen over a long period of time since we launched in 2018, a nearly a doubling kind of year over year of the volume. So it's it's been in some cases larger than that in some cases more than that but kind of a year over year over a long period of time kind of a doubling so.
Our expectations are very Uh huh.
We have big expectations for this product in Europe , we think it's really important in the marketplace. We think it's very well received and we can see the testimonials from customers and frankly, it's hard to.
Understand exactly how the higher LNG prices in this moment are affecting sales because sometimes sales are booked and then the trucks come later and stuff.
It's tough to tell at this moment, what the rest of the year will be and of course, if LNG prices decline or diesel keeps going up and the price differential gets reestablished in a favorable way that will propel sales in C. O. Two regulations that come into play in 2020 five that Oems need to meet and then 2030, so there's really a lot going on and it's hard to.
Even for us and our customer insights to figure out all the factors and forecast we're at scale. So hence no forecast for four out of the market sorry for that.
So, let's suppose that the various regulations. They don't move is there as the shipments are low how do you expect the next few years to play out in terms of catching up to where they need to be like can you is there enough slack capacity, where you would see a much greater than doubling.
Or is it in order to catch up by sort of mid decade, but how would it play out do you think.
Yeah. The way I view. It is that are we have a really good future.
In Europe , particularly with our launch partner and and we expect to other companies and customers to come along and enjoying a joined him because the C. O. Two standards have not moved through all of Covid through two chip supply is true now war. None of these things are deteriorating the European Union to from.
Their goals with respect to Decarbonising transports because the heavy transport.
And we see our product in the marketplace proving itself is very effective at decarbonising and providing all of the fundamental transportation capability that our fleet or a truck driver expects from their truck.
And so so in terms of scale and where it could go we have the capacity installed and we're ready to scale up significantly and so does our customer because basically for them. All it means is instead of grabbing a diesel tank and putting it on the truck the grabbing LNG tank and put it on the truck and same thing with the injectors instead of instead of six diesel injectors. They can kind of set at six <unk>.
And so for them, it's just kind of normal production. They have their full production capacity available there might be some constraints along the way as they break bottlenecks to actually change. The next but these are relatively easy for them to overcome so the capacity is there and that you know the requirement fundamentally doesn't come into play play until 2025, that's when ow.
And if they don't meet the 50% reduction requirement from the baseline established two and a half years ago. That's when you'll have to start paying penalties at which point in time, they will make the decision about whether they're they prefer to pay penalties or would they prefer to incentivize and otherwise helped the sales of the product that reduces C. O two like H B I D.
Well given given that the customers are so focused on total cost of ownership and that the pricing for that.
Fuel is volatile and you have this additional costs coming onto regulation is there any exploration of different pricing regimes, where say for instance, you capture.
Some of the potential given the fact that your technology is helping them to do to be very efficient with beating the lower carbon so in other words as pricing differentials increase that you could over time capture some of that so that the save like it because the customer really only cares about T C L.
And.
And you're giving them some stability in your sort of taking a little bit of you have to wait so to speak to get paid but you don't have to really give up the price of your product is there any ability to do that to think of new ways or better or.
Some of that that volatility.
Or is it impossible I think.
No no I don't think it's impossible, but I do think it's challenging I would say, especially for us perhaps easier for Oems to make this kind of a transaction. If you will with their customers. So if you look at for example, what Nicholas I suppose you could do with their trucks, where they're saying hey, we're going to put the fueling infrastructure in place and here's these trucks and and while our <unk>.
You have a business model in which we can we can share and the fuel efficiency benefits or some savings I think the same thing could be constructed on the OEM side for H pediatrics, but really it's on the OEM side, it's not something that we're not off Westport fuel systems selling to fleets a product we sell our product to our Oems, who then sell trucks to fleets.
But the basic idea that you raised is very interesting.
Okay. That's all my questions. Thanks, guys.
Thanks, Matt.
Once again, if you have a question. Please press Star then one.
Our next question comes from Jeff Osborne of Cowen and co. Please go ahead.
Hey, good morning out quite a bit it's been discussed already been a couple of housekeeping questions and clarifications. One Richard I was wondering can you just maybe for all of last year.
What percent of revenue is euro denominated just as we think about FX changes and the impact to you folks.
I want to say, it's close to like 85%.
A significant portion of it.
Got it that's helpful and then.
Wanted to dig into the L. P. G comments, you talked a lot about in the Q&A on the LNG side, but I thought you had said that the differential between gasoline and LPG is improving in some markets. So I just wanted to clarify if that's right and then B. If you could talk about which countries that is not maybe as a second derivative what the impact of those differentials Archie.
Your tank business, which was give or take 10% of revenue this quarter.
Yeah. Thanks for the question Geoff So so fundamentally it is different market by market and I don't have a long list in front of me, but as an example in Italy. We saw that these price differentials are very favorably moving fate in the favorable direction in the Netherlands, and Germany, Poland and Turkey, So kind of I would say our typical market.
In Europe , where we saw it moving in the right direction as basically a gasoline and diesel prices went up quite significantly and LPG prices didn't move up so significantly that did go up some but not nearly as much as as LPG excuse me as a petrol and diesel. So this is a where we've seen that's been.
But it's it's a it's a modest benefits in the right direction helps us, but it doesn't overcoming some of the challenges we see with respect to C and D. As an example.
Prices are some of the highest fuel prices are in.
In Europe , right now and so on the passenger vehicle side, we've seen a significant pullback in our CMG business in various markets.
Got it that's helpful. David and then maybe just the last one for me is you touched on the demand side in China Central shipped a hydrogen I was curious on the supply side or are you, having an issue any issues with your.
Manufacturing partners on availability of fuel injector technology or any other.
Adjacent equipment, you need or produce yourselves or through third parties.
No I would say no specific issues are I would tell you in general that are you.
So we're kind of like.
Bracing is the wrong word, but where we're we have a big anxiety around okay. So what is the COVID-19 lockdown in Shanghai and Beijing actually go to affect US Tomorrow and the next day and so we're doing what we can working with suppliers to try and make sure that our supply chain is continuing to move them, but fundamentally we haven't I don't have a specific issued a call out.
It says this hurt us by X and in Q1 or is about to hurt us in Q2.
Got it that's helpful. That's all I have look forward to seeing you later this week at the show.
It sounds great. Thanks, Jeff.
This concludes the question and answer session I would like to turn the conference back over to Mr. Johnson for any closing remarks.
Yeah. Thanks, everyone. Thanks for your time today I appreciate your questions and tuning it for the call. We are a it's a challenging time for sure in the marketplace, but I think fundamentally you know we have a great product we have a great presence around the world I think the diversity of our markets that we serve so the fact that CMG markets.
<unk> are down, but LPG markets are up hopefully, Russia is down but also it could be up in other markets and fundamentally the key ingredient here is that we continue to build with respect to H B O and I can't the let's say clear enough about how we see the H P. A hydrogen opportunity affecting our business in the mid to long term.
As we unveil this technology and demonstrating around North America later this year in Europe . So that's a really exciting part of our business and we're looking forward to the chance to speak with you more about that in the coming days and you have some investor conferences coming up.
The RPC Auto conference in Toronto, with H C. Wainwright conference in Miami, and looking forward to seeing you there and speaking more about the business then thanks for your time and have a good day.
Yeah.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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