Q2 2022 Westport Fuel Systems Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Westport fuel systems second quarter 2022 results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation there.
There will 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 and zero I would now like to turn the conference over to Ashley New well senior director of Investor Relations. Please go ahead.
Good morning, everyone welcome to Westport fuel systems second quarter, 2022 conference call, which is being held to coincide with the press release containing Westport fuel Systems' financial results that were distributed yesterday on today's call speaking on behalf of Westport fuel systems is chief Executive Officer, David <unk>.
Johnson, and Chief Financial Officer, Richard Orange County.
10 minutes on this call is open to the public questions will be restricted to the investment community. You are reminded that certain statements made in this conference call and our responses to various questions may constitute forward looking statements within the meaning of the U S and applicable Canadian securities laws and as such forward looking statements are made.
On our current expectations and involve certain risks and uncertainties.
With that I'll turn the call over to you David.
Thanks, Ashley good morning, everyone.
I'm pleased to be with you today to discuss our second quarter. Once again, our team delivered strong topline results, we continued to execute against our strategy amid a very challenging macro environment.
Today I'll be walking you through our HPA growth story, including the regulatory environment and total cost of ownership analysis, which demonstrates that HPT is most affordable way and the most available they reduce the O T E C O two standards.
I'll also discuss our LPG business for both our light duty OEM and independent aftermarket channels, but we're seeing improvements because of the increased price of images of LPG compared to petrol.
Finally, I'll walk you through our Indian business, where we're seeing growth today and expecting this growth to continue at C. N G fuel station build out continues towards 10000 stations.
Following that I'll pass it over to Richard to cover the financials.
Okay.
Results quarter over quarter, despite the ongoing challenges our industry is facing.
In the second quarter, we delivered revenue slightly up compared to Q2 last year and achievement, considering the combined impact of adverse foreign exchange rates and sanction stemming from the Russia, Ukraine conflict, which combined to negatively impact the quarter by $13 million.
Excluding these impacts revenue would have increased by 16%.
This is truly a testament to the strong results driven by our business units, while we saw increasing sales that is in India as well as in our hydrogen and electronics businesses plus. The addition of the field starch business. We acquired in late May 2021.
Although not a second quarter item I wanted to take a moment to highlight the significant new business, we announced last month to supply LPG fuel systems to a leading OEM.
This deal is forecast to generate 38 million euro in revenue through the end of 2025 with production expected to begin in Q4 next year.
Cost competitive alternative fuel solutions, such as LPG are a compelling option to reduce greenhouse gas emissions in markets like Europe , where refueling infrastructure is well established we're also developing fuel system to respond to future regulations, including the proposed euro seven standards and we look forward to updating the market on these developments.
This new business highlights our industry position as a leading tier one supplier of alternative fuel systems that respond to current and future emission standards and to customers for affordable transportation.
This new business, we secured is a key step in our plan to grow profitability.
In May at the Act Expo in long Beach, California, we unveiled our hydrogen H B I feel system for internal combustion engines for heavy duty applications and we did so in the form of a fully functioning heavy duty demonstration vehicles there.
There was dramatic interest from all the different players in our ecosystem.
We fuel providers and more.
The increasingly hydrogen is viewed as D zero carbon steel, we need for our industry and we're helping the industry to understand the IC engine with H B D. I will play a critical role in transforming from fossil fuels to clean renewable fuels, because H b D such as effective and affordable path to follow.
Fundamentally the outlook remains positive for our business as we continued to deliver solid results. Despite the various headwinds we and our industry are facing.
Yeah.
In our heavy duty OEM segment, despite a challenging LNG pricing environment, our European H began launch partner is continuing to gain market share over competitors that offer spark ignited natural gas engines were seeing the market appreciating and valuing H P. H superior performance and efficiency and as a result, we continue to.
The order flow for HVA systems, despite headwinds from higher LNG fuel prices relative to diesel.
H B O volumes will be a significant driver to bring the worst parts of profitability as increased volumes drive economies of scale.
And we're in a good position now for HVA growth with 20 to 25 European C. O. Two regulations will drive Oems to act to Decarbonize Euro.
European Oems need to meet regulations that require a 50% reduction in seat average C. O two with products that don't adversely impact the performance and reliability of their customers' demand.
H P D I as a solution.
A key reason HPT is gaining in the marketplace comes down to superior fuel efficiency.
Recently published road test H P. J I enabled fuel savings of more than 25% when compared to other natural gas engines, 25% is a massive number in this industry in the lifetime of a typical truck about $700000 worth of appeals consumed so a 25% savings is 175.
$1000 in lifetime savings, a very positive business case, and why HPA has continued to prove its economic and environmental benefits every day on the road in thousands of vehicles in Europe .
H B D I, especially when using biogas will be an important part of installation made even more compelling when the fuel price advantage of LNG versus diesel is reestablished.
Looking to the wider policy climate, we continue to see a positive trend that supports our heavy duty business outlook do.
The Ukraine crisis have spurred our commitment to reduce your reliance on Russian gas, resulting in additional biogas production plants in the U S, which is a huge positive for our sector. We're already seeing examples of this.
In June Scandinavian biogas announced a $269 million bio LNG delivery agreement.
And in Italy, Biomet announced receiving a $75 million investment to create Europe's largest plant for producing bio methane from waste.
While it's unlikely that any single low carbon energy source can replace Russian gas, especially as the EU seeks to reduce reliance on fossil fuels and imported energy.
Adoption of biogas and more investment at net zero Appeals creates further growth opportunities in new markets for our cleaner portable products.
To summarize our heavy duty business remains strong in the face industry wide headwinds there is growing recognition and appeal of our HVAC systems because of its low cost clear performance advantages of a spark ignited engines and carbon reductions that operators are looking for and which Oems require to respond to regulations.
Hydrogen H P. I is going to play a pivotal role in the future of Westport and we've demonstrated this through both Dallas and engine testing and now with our demonstration vehicles that H P. D. I works great with hydrogen.
Unsurprisingly, we saw considerable interest in our hydrogen H B O solutions at the Act Expo in May.
And our work with Scania continues this summer with their newest 30 meter state of the art engine test the Saudi in Vancouver.
Hi, Judy H P. I is compelling with near zero greenhouse gas emission lower vehicle costs, and low industrialization costs as compared to fuel cells or battery electric vehicles, particularly for heavy duty long haul trucking applications.
We've demonstrated the power torque and efficiency using hydrogen H b.
Definitely better than the same engine running a diesel fuel.
These demonstrations are changing the conversation right now.
To be clear Oems can now see that H b that has a long and bright future because its successful on natural gas and biogas today.
The most economic way to use hydrogen in the future.
Driving our conversations look Kurt if you surely and customers regarding our hydrogen H b gas solution has the potential to bring the product to market sooner the straightforward application existing H VDI componentry.
The opportunity to continue using Oems existing engine development capabilities and manufactured smelly, avoiding large investments required to develop an industrialized other technologies is very appealing.
It makes good economic sense, good business sense, and there's a real solution for the industry, combining better economics with better performance is driving significant interest in our unique product offering.
Hydrogen continues to gain significant traction and attention globally. The European Union has set a 20th fifties to achieve its goal of becoming carbon neutral and hydrants. Your heavy duty vehicle sector will play a substantial role in their decarbonization strategy.
Following our success at the Act Expo will introduce hydrogen H P. D. I technology for the first time in Europe at the I E. A transportation conference in Hanover, Germany in mid September .
We're thrilled to continue to demonstrate to the global industry that are H began technology works brilliantly zero carbon hydrogen and enables the most affordable weight use green hydrogen long haul heavy duty transportation applications and other important high load applications.
We're enabling HPT as used by OEM completes for long haul trucking with natural gas biogas and with a clear path to zero carbon hydrogen.
H B D I as a solution in the future that Oems can access today.
Just last week on August 4th we hit another milestone the west Port Hudson H B R truck pulling bally's Ozark trailer fueled with hydrogen for the first time in America at the West Sacramento station. The first hydrogen station in the world.
Turning our attention to China in light of LNG pricing that continues to negatively impact the market in China, which has continued to work with H B D. I that'd be poised to launch its market fundamentals return.
Discussions continue with potential Chinese partners, specifically around hydrogen HPA shine.
China is now ranked first in the world for the number of hydrogen refueling stations with more than 250.
Accounting for about 40% of the global total.
The China had been the lines forecasted demand, perhaps you will reach 35 million tons by 2030 with continued robust growth for decades to come.
Light duty vehicles fueled by LPG or growing market trends are positive impacts our business through both our aftermarket and OEM channels.
I feel cost create opportunities for our business as both industry operators and end customers look for lower cost options.
Lower cost to acquire and lower cost to operate alternative fuels are part of the answer what's happening currently with the price of LPG is a good example for LPG as a clear price advantage that it's growing part of our story.
Prices changed and customers react it's in these price advantage environments, where we gain market share and ultimately drive profitability.
In important markets like Turkey, Italy, and Poland LPG is available and the price advantage of petrol has recently been increasing.
In Italy for example, historically the price advantage of LPG was about 60, <unk> rising to over 80% more recently comparing petrol price per liter with LPG price perpetual leader equivalent.
Drivers, who drive and LPG are saving roughly 50 year or every time they refuel their car I'll say that again drivers who drive and LPG are saving roughly 50 Euro every time they refuel their car.
In addition to the pricing advantage LPG refueling infrastructure in Europe , it's widespread supporting further growth in the market itself.
Our business in India continues to grow has become a case study for the type of market, where we can be competitive and as a result gained market share with a clean and affordable solutions.
Our revenues in India continue to grow up more than 50% of $10 billion this quarter.
Market in India is transforming from a diesel petrol market to CMG, where we continued to see a price advantage natural gas fueled vehicles are taking the place of diesel in a real way and now represent more than 11% of sales for passenger cars and about 29% of commercial vehicles.
And we're seeing strong demand for our products from three over three wheelers and taxes as well as heavy duty trucks.
India aimed to have natural gas make up 19% of their overall energy mix in the coming years alongside plans to build 10000 natural gas refueling stations, which are expected to be installed by 2028.
India is poised to play a significant role in the growing hydrogen economy as well.
In June Adani, and new industries, one of India's largest energy companies announced that $50 billion investment belt green hydrogen ecosystem, representing India's largest commitment to green hydrogen from an individual company to date.
In summary industry represents a growth market price supported by strong fuel price advantage of supportive policy backdrop and a growing economy.
No question, we continue to face headwinds now, but we also had substantial tailwind.
Emissions regulations government action.
It'll demand economic and great products that respond to the called the action right now.
We remain well positioned as a company we have the right products for today and for the future.
China, the world's top LNG buyer last year is in the midst of a large step out the industry has ever witnessed.
10, new LNG import terminals or are slated to come online in 2023 alone and capacity of a level roughly double in the five years through 2025.
In Europe , with just two and a half years out from the 2025 regulation.
Penalties being implemented and I can tell you from discussions we're having with global Oems around H VDI that light bulbs are growing off of the cost significantly and overall capability and reliability concerns of the newer technologies are being laid bare.
The European Union has relaunched Repower EU in the face of its energy challenges Repower use plans call for rapidly increased imports of LNG, replacing imported pipeline gas from Russia.
Utilization of the significant untapped bio methane restarts in Europe , and also green hydrogen production all of which will require a significant prioritization and build out of infrastructure.
There's also been a quadrupling of the hydrant targets originally set out and the fit for 55 legislation. The ambition was 5 million tons and now with Repower or you plan to target 20 million tons by 2030. This represents significant growth opportunity for our company.
All of this indicates increased ownership interest in hydrogen H P. D I as a game changer for heavy duty transport.
With that I'd like to turn it over to Richard to go through our financials.
Good morning, and thank you David.
Revenue for the second quarter of 2022 of 80 million was slightly up from the prior year quarter, despite the challenging challenging headwinds from volatile fuel prices.
<unk> pressures and production input costs.
<unk> supply chain challenges plaguing, the automotive industry and the negative impact from the Russia, Ukraine conflict on our sales volumes to the Russian market.
Further the weakening of the euro against the U S. Dollar during the quarter has had a significant impact on the translation of our financial results due to a large euro exposure.
As David mentioned, the combined impact from the Russia, Ukraine conflict and the 13% decrease of the euro against the U S. Dollar negatively impacted revenue this quarter by about $13 million.
Despite what feels like a long list of headwinds we are proud of the work that our team accomplished this quarter and our business units.
Our OEM business continued to grow primarily driven by the addition of our fuel storage business acquired in June 2021.
But as well as modest growth in our hydrogen and electronics businesses and increased sales of our light duty OEM products in the Indian market.
Offsetting the growth in OEM revenue, our independent aftermarket revenue was lower year over year.
Due to reduced sales volumes, primarily a result of the impact of sanctions from the Russia, Ukraine conflict.
Net loss was $11 6 million for the second quarter of 2022 compared to a net income of $17 2 million for the same prior year period.
As a reminder, the second quarter 'twenty 'twenty. One included two significant onetime items at Boston earnings, namely the recognition of a $5 $9 million bargain purchase gain related to the acquisition of the fuel storage business and an $8 9 million tax recovery recognized for our COVID-19 tax relief ruling.
From the government of Italy.
Besides these nonrecurring items the decrease in earnings was driven by lower year over year gross margins of $5 $2 million and a loss of equity income from the termination and sale of the CW or joint venture.
Adjusted EBITDA was negative $4 $3 million compared to positive $6 $2 million in the same prior year period, the $10 $5 million decrease was mainly due to the loss of equity income from CW y and the lower gross margin, partially offset by decreased operating expenses.
We are experiencing gross margin pressure due to higher material costs from the global supply chain shortage general price inflation in our production input costs and lower sales volumes related to the Russia, Ukraine conflict.
And also we are seeing pressure from volatile C. N G in LNG prices, particularly in western Europe on our sales volumes.
Yeah.
Turning to our business segments OEM revenue for the second quarter of 2022 was $54 $3 million up 15% compared to the prior year quarter.
The operating loss from OEM was $5 6 million up from a loss of $3 $4 million for the prior year.
The increase in revenue was primarily driven by the additional revenues of $5 $1 million from our fuel storage business.
We also saw increased light duty OEM business sales volumes, specifically in India as well as increased sales volumes in our electronics and hydrogen businesses.
This was partially offset.
Due to lower sales volumes to our European OEM customers caused by higher she N G. Your prices.
Our hydrogen components business continues to grow with Europe , China, and North America being our primary markets, our existing <unk> branded hydrogen business supplying components of plug power Dollard and others have seen average annual revenue growth of 50% over the last three years.
In our electronics business, we are seeing volume growth from our key customer and supported by overall demand increase across the business units.
Turning to heavy duty Oems, our sales volume to our European OEM launch partner decreased slightly compared to the same prior period remains in line with year to date volumes from last year.
The decrease in the quarter was a direct result of the softness in demand caused by unfavorable fuel price differential between LNG and diesel in many western European markets.
Higher LNG prices are causing a significant challenge to the demand for LNG trucks, which is expected to temper our expected volume growth to our OEM launch partner through 2022 and until relative LNG prices return to a more favorable equilibrium.
Gross margin was $4.7 million or 9% of revenues for the quarter compared to $7 $2 million or 15% of revenues in the prior year we.
We saw a decrease in gross margin in our light duty OEM businesses due to lower sales volumes to our European OEM customers caused by the higher sea of jet fuel prices.
Which was partially offset by higher sales growth to emerging markets with lower gross margins.
Gross margin in our heavy duty OEM business decreased year over year due to lower comparative sales volumes.
Our contracted annual price discount to our OEM launch partner in the first quarter of 2022 and higher material and warranty costs.
Further we continued to incur higher production input costs from supply chain challenges and inflation in logistics and utilities and other costs, which we have only partially been able to pass on to our OEM customers.
Partially offsetting these pressures gross margin increased by one point and one for Mark your storage business.
R&D expenses for the second quarter were $4 1 million, which were lower year over year due to foreign exchange.
Our heavy duty OEM R&D activities continue to focus on the development of next generation HBV I fuel systems technology, and demonstrations with potential OEM customers on our <unk> fuel systems hydrogen and natural gas applications are.
Our light duty OEM research and development is focused on development of new LPG systems in line for installations for potential OEM customers.
Now turning to independent aftermarket our business continues to face significant challenges from reduced sales volumes in eastern Europe due to the ongoing Russia, Ukraine conflict and volatile fuel prices.
Revenue for the second quarter was $25 $7 million down 19% compared to the prior year period.
Aside from the impact of Russian sanctions sales volumes were lower the key markets of Turkey, and Argentina softness in the Argentine market, specifically due to higher CMG pricing, which has been a recent challenge for our <unk> products.
Due to the volatile fuel price further.
Further the aforementioned foreign exchange impact of the weakening Euro had a significant impact on the comparative performance.
Gross margin was $5 $8 million or 23% of revenues for the quarter down $2 7 million compared with the same prior year period.
The decrease in gross margin and gross margin percentage was attributable to lower sales volumes and increased material costs from the global supply chain shortages in inflation.
On a positive note the LPG price differential the gasoline is improving which is providing some support for increased sales demand, which we're seeing signals in some of our key markets like Argentina, Italy, Poland and Turkey.
With this positive tailwind and other countermeasures to mitigate the impact of inflation and improved productivity. We are taking the necessary steps now to improve profitability in our aftermarket business.
Finally, I'd like to touch on liquidity.
Our cash position decreased by $29 $4 million during the second quarter to $98 2 million.
Our net cash flows used in operating activities were $16 5 million and the <unk>.
Second quarter of 2022, an increase of $7 8 million compared to the same prior year period, primarily driven by an increase in operating working capital specifically, a buildup of accounts receivable and inventory.
We built up inventory to manage against supply chain risks, along with shortages of raw materials and components.
Further our inventory levels increased due to the lower than expected sales volumes from Russia, and other markets and our growing electronics business, which we are taking actions to monetize the existing inventory and optimize our inventory levels.
Our net cash used from investing activities in the quarter was $3 5 million, primarily driven by capital investments and H PDI.
Net cash flows used in financing activities were $8 filing for the second quarter of 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 beliefs.
We remain focused on our allocation of capital and resources in executing our strategic and operating plans.
And as such our focus on improving profitability and liquidity.
We have also seen continued pressure on gross margin a trend we are working to reverse currently we're working with our customers in both OEM and independent aftermarket businesses implement price increases and also taking productivity counter measures to manage our profitability going forward.
As the negative macroeconomic and uncertain geopolitical conditions continue to persist.
The duration and severity of the impact on future quarters is currently uncertain.
Having said that we do see positive signals in the growth of our OEM businesses and our path to profitability as sales volumes grow in our heavy duty and light duty OEM businesses. We're also optimistic about our return to improved profitability of our independent aftermarket business from the current tailwind of favorable LPG prices.
With that I would like to turn it back to leave it.
Thank you Richard.
Before we open up the call for questions I want to close on a few key points.
Westport fuel systems' delivers market ready transportation solutions that reduce emissions and save money.
Cost to Oems to bring to market and lower cost vehicles for feedstock right.
We remain encouraged by the outlet for our business and here just three reasons why our H PDI story performance efficiency low cost and even better with hydrogen.
Second the growth of our LPG business and third the growth, we're seeing and we expect to see in our business in India.
As a supplier of advanced fuel delivery components and systems for clean low carbon fuels I'm confident in our ability to capture the additional market opportunities we have in front of us.
All these factors give us optimism in our ability to meet the needs of our customers and advance towards our financial objectives.
And with that I'll turn it over the operator to open the call for questions.
Thank you we will now begin the question and answer session analysts who we.
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The first question is from Colin Rusch with Oppenheimer. Please go ahead.
Thanks, So much guys now could you talk about what you're seeing right now in terms of the ecosystem develop into support the ramp of hydrogen with H b.
There's a lot of action now, particularly in the U S, but certainly in Europe as well.
Around sort of a feeling that supply channel and I'm, saying they are required to support that ramp.
Yeah. Good morning, Colin good question on hydrogen.
I would say, it's a very exciting time in the history and developments around the world.
Primarily driven by a combination of government and industry action.
We are taking different approaches.
Details of course, but fundamentally what we see and I think the Russia, Ukraine crisis has really crystallize. This in Europe is that there's like kind of a.
A renewed energy or an increased energy around.
Taking those actions and making those investments so there's investments in building out the capability to produce and make available green hydrogen.
Or incentives in the marketplace too for all elements of the ecosystem I think this is a really important development. What we saw at act Expo in May.
You know, there's a preponderance of Oh.
Or even a majority of the offerings out there are fuel cell based and ourselves in Cummins now were at the show with internal combustion alternatives and this I think is is really what's new.
<unk> is a kind of a recognition by the existing and mature industry that hydrogen is coming as a fuel that it's going to be the fuel of the future and it will have a place in the industry and therefore, we need to get ready and now searching for what are those best ideas, our best technologies, most practical and <unk>.
Alistair to respond to the availability of hydrogen fuel in the future and the need to use that to Decarbonize transportation. So I really see this as kind of as a really a formative time in our industry and the actors like the hydrogen council.
Collaboration of industry and government all of the different players in ecosystem really having an important effect on catalyzing towards action of both generation of hydrogen distribution of hydrogen and use most of hydrogen and where we see H VDI playing is is being very practical and affordable way to use hydrogen various.
Secondly for long haul heavy duty transportation. So in addition to showing our demonstration vehicle as we did at Act Expo in long Beach in May and then just last week in Sacramento and then in September at the IAA in Hanover.
We're demonstrating this capability and Dino cells with customer engine and that there's I would say a tremendous amount of increasing momentum to accept and understand its potential to use the existing internal combustion engine infrastructure, you know existing plants existing vehicles all all the exist.
Infrastructure can be reused with HPT I until it broke very effective product.
The use of green hydrogen in the future and therefore has a huge impact on compensation in a very affordable way. So we think this is a really important for Westport fuel systems and really promising for our industry.
That's super helpful. And then just on a more practical way and given what we've seen in terms of raw material movement.
So rolling over some of the metals baskets and other elements recently I'm just curious how quickly that might start flowing through with some of your cost structure and what you're doing to kind of a tender that start working down some of the component costs.
Yeah, So I think as a general premise in our industry right now not.
Typically the H P I, but just thinking about the industry, we have in place in the world and we have this huge inflationary pressure around the world and so we're seeing that are that you know that the key aspect for us is to manage our pricing in.
In real time with the cost increases this is super challenging in the OEM business for example are basically.
You're the our customers are let's say open be grudgingly of course to our price increases to reflect the inflationary cost pressures that we're seeing and they're seeing but it's a process whereby the cost go up and then you asked for the price increase in and we're successful in getting those price increases, but it's after the fact not before the fact that it's different from our.
Business, where basically the price goes on to a consumer and the consumers aren't going to pay that price if they can make it back up with the fuel price savings and this is where we're very pleased about the move that we've seen in the price advantage of LPG versus gasoline and diesel because that allows customers to pay back the car.
Cost of acquiring the hardware to put on their vehicles and allows us therefore to to recover the cost increases we're seeing in our aftermarket products with increased product pricing there.
Yeah in general that that the key element is a is being able to pass those cost increases that we're seeing on to our customers and then fundamentally with our <unk> business.
Probably the more important aspect is getting the volume up so we can access economies of scale, bringing the costs down and increasing our margins and that is a oh.
A path, we're on but not yet got to the point, where we can we can declare that we've got to those appropriate margins for that product.
It's still at relatively low volumes in total and it needs more growth before we can get to a profitable standpoint.
Perfect. Thanks, so much guys.
Thank you Colin.
The next question is from Eric Stine with Craig Hallum Capital markets. Please go ahead.
Hi, David Hi, Richard.
Yeah.
Hey, So you you just mentioned some of the market developments.
As we think about hydrogen H P D I b.
I know we've got the the introduction of the demo unit in Europe here in mid September , but as you think about the next I guess.
For the remainder of 2022 and into 2020 three.
Without naming specifics I know you can't do that but just maybe some signposts that we should look for or expectations that you would have to say that you are on the right right track here, you know and in a timely fashion.
I think there can be any number of developments that could get announced in the future, Eric but obviously I can't.
Forecast those are promised those but fundamentally the business with respect to hydrogen is one that we've found so far people are willing to talk about a bit more than perhaps our natural gas developments as an example.
I could expect that and we're looking forward to the chance to show that.
For US right now what's our what's wonderful is its demonstration truck that we do have because basically you can hand, the keys to customers and government officials and other people that they need to understand what the potential is of hydrogen H B D. I think we can do that.
By showing the capability of the truck to pull a load to drive just like trucks that they're used to and in all of my experience.
In the industry through the years and there's nothing better than handing someone the keys to a vehicle and thing try this out and see what you think and so that's what we're doing now so we did this past week in Sacramento I think it really makes a big difference in the psychology of approaching what is essentially a new technology, new technology of the industry to think hey, we can run.
Hydrogen through the internal combustion engine and have a not just a viable product with a great product, we're demonstrating more power more torque and more efficiency with hydrogen H PDI than you get with the base diesel engine that we apply to it. So it's really a great great offering and we're looking forward to the chance that one by one will be able to make more.
More announcements that would help the.
The Investor community understand the progress we're making.
Right no absolutely need maybe a follow up on that I mean, do you feel like a acknowledging this is the OEM world. It still takes quite a bit of time, but if you compare this to LNG I mean, the fact that you now have Volvo.
In Europe it.
<unk> got trucks in the market the market knows H P. D. I mean, do you think that that potentially hydrogen moves faster and its development or do you expect kind of a similar.
You know how it plays out similar to LNG.
Well first of all for sure I expect that from our side is that the fuel system provider or we can move faster with hydrogen.
Then, let's say the history of HPT I with natural gas just because we're taking existing components and system knowhow and applying it to just basically connecting and using hydrogen from natural gas so that development path looks quicker to us. It certainly looked quicker to US then you know the full industrialization.
Fuel cell path for example.
Were you know they've got to go build plants.
The the componentry, we're using comes off and stay in line.
As the componentry for our natural gas solutions, and so that seems faster I would say also that you know fundamentally the economics are in the favor of H B D. I with respect to the efficiency of the engine delivers and the cost of the componentry versus the change that has to be made in the vehicle to adopt other technologies. So I think yeah that can move.
Faster, but perhaps most importantly.
This view that we're helping our OEM customers and prospects understand at H P. D. I is a long term solution.
Two achieving low carbon long haul heavy transport.
Because hydrogen as a long term solution with <unk> and you can use natural gas and biogas today. There's a path forward that says you can act today with natural gas and access to the hundreds of stations in Europe . There are thousands of stations in China that the thousand plus almost 2000 stations in the U S. This is the ability to use H.
Today and have a path forward with hydrogen and that adds to the potential for an accelerant of our business pulled by hydrogen in the future, but grounded in natural gas and biogas today.
Yep understood.
Maybe last one for me just on wage Jay Thanks for the update there in China, and I know, you've got to take or pay but but likely just given the macro and you're not going to hit those timing targets is that something that you know.
Potentially it could be renegotiated to in some way include hydrogen a mix of hydrogen in LNG or how should we think about that.
Yeah as you have seen before you know we we struck the agreement with HIV back in 2018, and then we had a renegotiation of the terms and the volumes are just last year. So everything is up for negotiation I would say nonetheless, we do have some commitment and it always should be an improvement on what we have today, but nonetheless.
There are some practicalities and today, we see this adverse price condition in in China with respect to natural gas that is really weighing on the marketplace and specifically the launch of our product the way China. So.
As that is remedied that is fixed in the marketplace through market mechanisms and perhaps government action.
Then we would look forward to some some action and that could include some some change in our contract, but who knows that's all in the future.
Okay. Thank you.
Thank you Eric.
The next question is from Rob Brown with Lake Street Capital markets. Please go ahead.
Good morning. My first question is on the European H PDI product.
I think I think it was a slight growth this year or this quarter.
How do you see the order rates sort of in real time here are they continuing to slow down with the with the price spread or do they are they sustaining sort of flat or just sort of directionally. How is how is the order flow.
Price situations.
Yeah. So it's a very interesting thing.
Historically, we've talked about our product H B D I N or other gaseous fuel products being able to offer in a lock and give customers access to an economic advantage because of the price advantage.
Natural gas and LPG typically offer versus gasoline and diesel.
And right now in Europe , and China are we kind of have this parity or in some cases at the pump.
M G tends to be a bit more expensive than diesel and so we have this adverse condition right now, which we don't expect to persist but that is that is really flattening. The curve. If you will in some fashion.
Near term as we as we looked at this year at our kind of volumes are flattish side with respect to <unk> as opposed to growth. Nonetheless, you know we're really happy.
Happy and and and we see that the C. O. Two standards are on the horizon, and so our OEM customers and prospective customers face. This regulatory requirement. It's starting in 2025 with substantial penalties if they don't meet it and so we think that becomes more of a driving force that the drive Unfortunately.
And the marketplace is actually the Oems requirement to reduce C O two and our solution being one of the most effective ways to do that I mentioned earlier in the call that a we've got this report a road test report showing 25% better fuel economy or fuel economy.
So she didn't being H PDI versus a spark ignited engine and so this really crystallizes an end and makes it glaring example of how H P. D I really benefit and so when you say, hey, I've got to get to a lower carbon fuel now what's the most effective one it's H P. D I and so those are kind of the two forces in the marketplace that we've got higher.
Benji prices, we've got this big economic benefit and the need to Decarbonize and that's kind of flattening our growth curve in this moment.
But we don't expect that to.
Persist and certainly as 2025 is on the horizon, we expect an acceleration of that volume is because.
Because the HDI is that very cost effective way to respond by regulation.
Okay. Thank you and then.
LPG contract you announced within OEM is that a is that a new contract or a new OEM or just some color on what market. It.
As an extension or as a new contract. Thank you.
Yeah sure. This is a really important step for us it is new business for us. So we're really excited to have this new customer and have this new business. Obviously, it's a meaningful number for us in terms of our our revenue outlook over the contract period at 38 million Euro.
A big deal for Us and you know fundamentally our our path to profitability as a company is through growth.
In a way we can secure good business like this based on the technologies and the products that we offer and the services that Westport fuel system offers to our OEM customers. It's a big deal and we're really excited about it and we hope to add more to that of course will continue the growth trajectory for us as we look at LPG are the benefit of LPG is growing.
The economic benefit the environmental benefit.
Huge installed infrastructure of refueling stations, they were taking tens of thousands of stations across Europe , where LPG a it's a very common feel they're the most common in the world for transportation right now and so that's a great development pressure excited about it and we think it really demonstrates that.
That's our Westport fuel systems is a leading OEM for supplying these kinds of assistance to the OEM industry in total.
Okay. Thank you I'll turn it over.
Thanks, Rob.
The next question is from Amit Dayal with each C. Wainright. Please go ahead.
Thank you and good morning, everyone. Most of my questions have been asked David.
With respect to sort of the.
This will be a mood point to our sales environment.
I know there are some near term headwinds et cetera, but have you seen any deals fall school or are customers, the slowing down or adoption in this environment like how should we think about.
No that's garnered over the next few quarters sales for that product.
Yeah, I think Oh, good to speak with you on that I think generally most of our activities are now with customers are now considering a debt opportunity that HPA offers with both hydrogen and natural gas and so this is really what's catalyzing our discussions with customers is.
The opportunity for H B O to do both and to have that path zero carbon hydrogen and future and so that's making the opportunities for H b die with natural gas and biogas, a more accessible more interesting for.
For our customers and so that I would tell you that's probably the main ingredient that's really driving the discussions and we see this around the world right. So as an example.
We've spent a lot of time talking about our business with late Jai and looking to get that launched with natural gas, but there is a tremendous amount of opportunity for H B O with hydrogen in China, we're carrying on conversations with.
Many Oems there around that opportunity and they are building out housing infrastructure structure. So we talked about Europe , because it's very accessible to us, but in China, there and the lead like they are with natural gas in terms of refueling infrastructure and so we see a big opportunity there and that to me is really the catalyst for the discussions on H B I in general.
Cross markets around the world, it's moved to a hydrogen into future natural gas and biogas now.
Understood.
So just sort of bridge that you know some of it was almost like group you have to come out with a new offering that has that can support both diesel and you know capability.
The hydrogen capability.
All right.
What would be the timeline to introduce a product like this.
Are you sort of working on developing it out of an accelerated pace and any color on sort of the real towards strategically on how are you.
You know I've been to this opportunity.
Yeah, So I should clarify that.
Abundant mentos ever HDI system.
From a the injector and the system architecture, and the componentry and so forth are very very similar so basically today in our demonstration vehicle or using the same hardware, we do expect and are working on the various.
Details of tuning that hardware and and and modifying it to make it fully validated and are available for hydrogen. So I do expect in the long run that the the actual hardware will be different right. It won't be exactly the same components for hydrogen and natural gas Nonetheless, the fundamental technology and for example, how it.
Fifth on the vehicle how it fits in the engine is is the same and so this is what really opens the door for those developments that are future hydrogen natural gas now and.
Biogas too and so that is the that is the path that we see in the past that we're working with our customers on many fronts for many markets like China, Europe and North America.
Yes, sorry, I think I did see some of that at the Act Expo you you showed me some of the models Oh alongside our own Dismissively. It's.
With respect to the LPG system, David I think you mentioned production could begin in the fourth quarter next year I don't know if I got that correct.
No no that's exactly correct fourth quarter of next year is it start up production for that project and then over the two year period that unfolds after that.
38 million euro of revenue expectations.
Okay understood.
So it's a near term sort of margin outlook should we from a just a conservative standpoint, even though the macro environment could be improving do you feel what we're doing in which almost.
Bludgeon perspective et cetera.
As you know similar levels or Muslims Hum.
Thank you and booking.
So generally I would expect in the near term you know as Ive mentioned about the <unk>.
Big levers going on with respect to pricing and margins are three factors cost pressure from inflation pricing activity that we take on and I would expect the H P. I read the volume curve to actually achieve the economies of scale and improve our margins. There. So so I would expect not a big movement in the margin in the near term as we work to pass along.
Long costs that we're seeing to our customers in terms of pricing and then looking for that improvement in the economic conditions of LNG in the market place to drive the REIT.
Recovery and then the resumption of growth in our volumes of H B.
Okay got it. Thank you that's all I have for now it takes a lot of questions offline.
Thanks, Amit.
The next question is from Chop off spring with Cowen. Please go ahead.
Yeah.
Hi, This is Jeff Rossetti on for Jeff Osborne, Thanks for taking our questions.
I just wanted to see if I could ask on the O&M.
Volume OEM volume side.
How to think about the headwinds on the LNG side for heavy duty with respect to the the tailwind you're seeing for LPG.
LPG for for light duty I know you called out to him.
Given the LNG prices may see them.
Some slowdown with your.
H D D C P R two point or.
OEM launch partner.
Yeah. So our outlook right now is I would say for H B I S is flattish with some with some upside potential and certainly we've seen in global markets. Some moderation of the of the LNG prices.
Condition in Europe is really quite challenging with respect to trying to forecast fuel prices with the ongoing Russia, Ukraine War I think you know someone who's got a crystal ball on that should be super valuable at this juncture, but.
Fundamentally in the long run I do believe that the LNG flows around the world natural gas ability ability will continue to grow and certainly with high LNG prices, we have more and more biogas coming online and that will help so fundamentally until there is.
And let's say reestablishment of an LNG price advantage versus diesel.
And then the implications associated with the C O two standards in Europe , I would expect you know.
So flattish modestly upward trend and some luck.
And then when the price is reestablished and C. O two staters come in place, we expect a big change big growth potential as a H PDI continues demonstrate that it is the most cost effective way for Oems to respond to the regulations and for customers to access clean your transportation.
Got it okay.
That's very the another one that's probably difficult to sort of.
Possibly going on but one large tier one provider it talks about potential gas supply.
Disruptions in the back half of the year and in Europe , and I was just thinking if you would.
Cause if you contemplated any scenarios around that or any thoughts around that potential.
Yeah, No I think as a general premise.
It's we don't have we don't have a an oar in the water with respect to controlling our availability of prices of fuels, So where it's an external factor that we respond to one of the things that I think is very positive for our company in this let's say dynamic market or a volatile market are unknowable market in the future is.
But we do have a diversity of markets and a diversity of products and a diversity of fuels that we support so as an example, you know we're seeing growth in our hydrogen business right now are in our in our markets in North America and in China, and we're seeing growth in our electronics business, our LPG business sees growth.
And then we're you know we're working in markets around the world. So it's not all about Europe , LNG and an H B I. There are other elements of our business, which are our having those those tailwind supporting us and so that's where I think you know fundamentally looking at our results just this past quarter coming off flat in the context of.
You know really constraining the business in Russia that was important to our P&L.
Historically and hopefully in the future will be important again, but right now it is a super impacted by the conflicts and then the foreign exchange. So you have to think that we would have been up.
More than 10% had we not had those factors I think is indicative of where where the company is going in the long run.
Okay.
Okay. Thanks for that and just one last one for me because I think Richard you talked about the working capital build I just wanted to see if there was any.
Thoughts on that if there was going to be any kind of relief.
Near term on the working capital side.
Thanks.
Yeah for sure you know we did build up some some sort of inventories specifically with respect to the electronics business I think everybody around the world understands the challenges this business has faced.
We are we didn't have much choice in the matter. So basically suppliers of chips in the marketplace said, if you ever want to get chips again, you better place orders and so in this context, we didn't have a lot of flexibility and so we have a built up those inventories and certainly we expect to get those inventories down as a function of.
Time, as we use them up and perhaps that hopefully the the market's four four from our suppliers, specifically become more stable and predictable and the ones that we can return to normal normal terms and normal order cycle as opposed to having to hold inventory to protect our our sales.
Thank you.
Thanks, Jeff.
The next question is from Mac whale with <unk> Securities. Please go ahead.
Hi, good morning in terms of.
When does that truck sales downturn, we usually see fleets drive the their vehicles longer and that builds up some pent up demand. So when you finally do launch or when your partner is actually ramping up do you have any insight from say, new OEM projections about whether that will play a role in and the ramp up phase.
Yeah. Good morning, Matt So the the view I have in this regard is that you know our business right now is still sub <unk>.
5% of that marketplace right. It's a very small fraction of the total market. So if the market declines by 10 15, 20%. The reality is that Ah I expect that we've seen this historically in the markets moved around and we've been growing through the years as we've after the.
Lunch in 2018.
The ups and downs in the marketplace, because with a small percentage of it and the focus of our customers the Oems and their customers. The fleet is in accessing lower carbon fuels for their trucks and being able to offer a lower carbon solutions to the marketplace. So I don't think that affects us so much of course it can.
Be viewed as positive that the volume goes down and it can be viewed as positive as the as the volume of the market was up in total, but I would say the impact is not nearly not.
Not nearly as important as the impact of the growth of market share of our products. So historically just a couple of years ago, you know gaseous fueled products in the European truck market, where sub 1% and now they're on the order of 3%. So it's tripled right. So we've seen that in our volume, which has gone up dramatically during this time, but still at it.
Still relatively low buying even though the growth has been good.
So yeah overall I don't see the market.
Volume in total is having such a big impact, but rather the growth trajectory of our product and that's driven by the economics that we've talked about in the regulation that you talked about.
So just so I understand that like.
So you have the Mark you have a market share, but you also have the market rebounding like there's normally a big pent up demand. So are you, saying that the adoption will be the adoption for natural gas.
God bless and so your market share growth might actually slow because the adoption will just be based on this sort of niche or are you, saying the opposite saying no the market will grow and it'll it'll raise all boats.
Plot, including alternative fuels, so your growth rate would actually be faster.
I'm not quite sure I understood your answer.
And so I think theres two percentages right. So there's what's the percentage growth of the marketplace is it going from so if you think about Europe as it goes from 300000 trucks, a year to 400000 trucks, a year of $3 $53 50 down to $2 50, or what what does that movement and then theres the market share of our product in the market and that that to me is the more important growth.
And so as we as L. A N G. So whats primary secondary and for US. What's primary is a is that movement of our market share in the markets. So if you compare it if you will to like diesels right now are 97% of the market 98% of the market. So so if if the market goes down by 10% diesel.
And goes down for 10% of that.
In our case it doesn't it doesn't move that way because we were expecting and we've seen that our market share is growing dramatically and so that's the more important effect.
Okay.
Okay, I've I've, a bunch of other questions, but we will take it offline. This afternoon I have a call. It 11 I have to jump on so I'm sorry, I was late in the Q, but I will talk later, okay sounds good Matt. Thanks, so much.
The next question is from Bill Peterson with Jpmorgan. Please go ahead.
Yeah, Hi, Thanks for taking my questions wanted to come back to hydrogen.
You know you've done some work with to be an ABL I believe Collins was supposed to happen. This year I just want to get an update on that one in particular do you still expect that and I believe you talked about the potential fourth partner just trying to understand how the interest in hydrogen should play out.
Specific partners.
Yeah. Good morning, Bill. Thanks for your question. So it's right. We have these projects we have a project with Scania that you mentioned earlier.
This call Oh, we have a project with ABL and to be also working at that that activity is actually taking place.
ABL in Graz, Austria.
We have work going on with comments that was announced as part of our our announcement earlier this year on the on the share sale that we did so so these projects are all running and we'll look forward to sharing some information about them win when our partners agree that's okay to do when we hit certain milestones and so forth and we do expect to have a new.
Customers added to the queue as we work with customers around the world, including China, Europe , and North America.
To demonstrate as we were doing with our demo vehicle. So so all of those are progressing and we look forward to sharing updates when they're available and approved by our customers.
Okay. Thanks for that and then secondly on the cost side, specifically for Opex I guess, how should we think about the opex trajectory for the remainder of the year presumably.
Probably belt tightening, but also you might get some.
Who knows what's going to have an exchange rates, but just try to help us understand.
You know what youre doing on the cost side.
Bill.
Yeah I'm here.
Uh huh.
I think we the you you'd estimate that we're gonna be comparable going towards the back end there in terms of Opex.
The R&D our program is expected to spend approximately $30 million this year.
And G&A.
Is it might be a little bit lighter, we're investing more money for sure within business development or sales and marketing is something that.
As we're getting the hydrogen truck on the road and and more activity in terms of development in North America.
These are just small numbers.
The bigger issue.
Bill was actually within our gross margins and that's something that.
You know, there's a we'll call it a mix change that's happening I mean, we can talk about on the call a little bit later, but.
We're looking for upside in our independent aftermarket so we should see margins improve there our OEM business.
As we've talked about in her notes has been challenged by the higher <unk> prices and so theres a little bit of a mix change, where we're seeing really great growth in India that has a slightly lower margin.
But you know very promising.
Hmm.
With regards to or with regards to our heavy duty business. You know, we're going to we'll see sort of flattish year over year growth, that's kind of where we're sort of estimating right now and so.
You know I would say that margins.
We will be more or less kind of what you saw in in the second quarter, they might improve a little bit with regards to you know we had some additional warranty costs that were.
A little bit higher than normal, but that are that are being that are being sort of the metal by our engineering.
Department.
Great. Thank you good luck you're welcome.
This concludes the question and answer session I would like to turn the conference back over to Mr. David Johnson for any closing remarks.
Yeah. Thanks, everyone for your time and attention. This morning and are in the Grand scheme of things that I appreciate the chance to review our results with you.
Feel guardedly optimistic.
It's really challenging time that we continue to deliver the products that the marketplace needs to both economically and environmentally improved transportation Ah.
There's work to be done ahead, and we look forward to review with you in upcoming Investor conferences. Thanks for again for your time.
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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