Q3 2022 Westport Fuel Systems Inc Earnings Call
Thank you for standing by.
Conference Operator, welcome to the Westport fuel Systems' third 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 will be an opportunity to ask question to.
To join the question accused in the press Star then one on your telephone keypad.
So do you need assistance during the conference call you May signal, an operator by pressing Star then zero.
I'd now like to turn the conference over to Ashlee <unk> Senior director of Investor Relations. Please go ahead.
Good morning, everyone welcome to Westport fuel Systems' third quarter 2022 conference call, which is being held to coincide with the press release containing Westport fuel Systems' financial results that was distributed yesterday.
On today's call speaking on behalf of Westport is Chief Executive Officer, David Johnson, and Chief Financial Officer, Richard already 30.
Speaking today for joining us on our call is still lacking our incoming CFO , who will assume the role following Richard's departure I'd note that matured yet.
Attendance on this call is open to the public the 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 based on our current.
<unk> and involve certain risks and uncertainties with that I'll turn the call over to you David.
Thank you Ashley and good morning, everyone.
I'm pleased to be with you today discussing our third quarter. Once again, our team delivered solid results as we continue to execute our strategy and showcase our pioneering hydrogen HPT I technology to a wide audience amid the ongoing challenging macro environment.
We continue to work through as the industry felt headwinds and feel both prepared and poised to grow into the future.
We believe that strong LPG price advantages continued expansion into new markets supported global emissions reduction requirements and further OEM conversations about Hudson H, B Guy will drive growth and profitability.
We remain committed to our announced $1 billion of revenue and profitability goals, but also recognize that due to the headwinds we faced so far this decade, and which which continuing to face for at least the near term future.
The environmental economic and regulatory requirements will not stop our weight and Westport is well positioned to respond.
Finally, I'll walk you through our independent aftermarket business, where we see recovery through this year, which is being bolstered by the continued price advantage of LPG in many markets.
In Q3, we delivered revenues of 71 million U S dollars slightly lower than Q3 last year.
As indicated in prior quarters, the Russian market has been historically important for Westport through both our aftermarket and OEM channels.
Now with the war in Ukraine sanctions on Russia, and in combination with the weakened euro and high natural gas prices in Europe , we've been heavily impacted.
If we're able to get the set these aside our business would have grown by 15% in the third quarter.
Changes in foreign exchange, our revenues grew by 10%.
We also continued to experience the impacts of rising inflation supply chain constraints higher utility costs and fuel price volatility that has weighed heavily on our industry.
As many of you know we are the only company with a technology use diesel combustion with LNG and bio methane and there are thousands of trucks on the road today using our technology.
Taking this a step further our fuel system technology paves, the path from natural gas and bio methane today to green hydrogen tomorrow.
We're thrilled to continue to inform both industry participants and policymakers about our unique capabilities and the advantages of hydrogen H PDI without class eight demonstrated vehicle at multiple industry events in Europe and North America.
It isn't a surprise then as populations grow and economic development continues we'll need to move more freight both the industry participants and the policymakers agree the numbers of trucks on the road will grow and the performance and cost effectiveness of lower carbon solutions will become increasingly critical.
We truly believe that at each PDI is the solution today and for the future.
Speaking more broadly about our business fundamentally the outlook remains strong demand trends for affordable mobility options that reduce emissions are encouraging.
But we're seeing regulatory and policy support for options that utilize zero carbon feels like hydrogen in biomethane.
We're capitalizing on this now with the advancements we've made with hydrogen H PDI and the further recognition of what H B O technology can achieve today with natural gas and liquid Biomethane. In addition to the work we're doing developing fuel system to respond to future regulations, including the pending euro standards.
I wanted to quickly take the time to reiterate our three pronged go forward strategy as a company and how we're positioning ourselves for the future.
We will drive sustainable growth in our existing markets through a diversified portfolio of technologies products and services. This will be seen across all our business units.
Second we aim to unlock new and emerging markets to the delivery of cleaner affordable transportation solutions.
Third we will continue as we've done in the past to drive operational excellence the mainline maintain our reputation as a tier one supplier with enhanced quality and reliability.
Historically when the word hydrogen that's been used in relation to on road transportation only fuel cells come to mind.
We're challenging this narrative the future requires many options include installations best fit for certain applications based on factors like distance payload durability and affordability.
Our technology is the solution for using zero carbon hydrogen effectively in many applications with the required performance at an affordable price.
We're having these conversations now including unveiling our hydrogen H P. I feel system equipped class eight demonstrated vehicle at IAA transportation 2022 in Hanover, Germany, one of the largest commercial vehicle conferences in the world.
Further differentiating <unk> from other technologies is the ability and opportunity to use existing manufacturing infrastructure a key factor in the near term adoption of sustainability solutions and a discussion point with all Oems at the Hanover show.
Minimizing investment both public and private on the path toward Decarbonization is a key component of our ability to achieve real change quickly.
They are taking notice we've demonstrated that our technology is better performance of diesel engines with near zero CEO to emissions, all while utilizing existing already paid for manufacturing infrastructure.
The interest in our solution continues to grow and I. It was a major stepping point in highlighting our technology to leading industry participants.
The recognition and momentum around the product or growing it so like many others our excitement is growing.
In our discussions with global Oems at IAA. It was clear they are beginning to understand that westwards hygiene HPT I feel system.
<unk> addresses the portion of the market not addressed by electrification and does so in a more affordable way and a fuel cell.
<unk> recognized that so electrification of all applications is not possible and utilizing internal combustion engine is a compelling option.
The tide is turning and the conversations are shifting the cost realities and engineering limits for electric solutions for heavy duty applications are thinking Oh, yes.
We remain committed to the idea that there'll be a full suite of options in the future, but it would be.
Coming strikingly clear that electric doesn't meet the needs of heavy duty long haul transport, while hygiene HPT I does.
Following I E. We spent time in Brussels in Washington D. C. We had policy makers and Oems looking more seriously at internal combustion engine and alternative fuels and recognizing these will play a larger role in the solution for lower emissions future.
In Brussels, we presented our hydrogen H b I feel system to keep policymakers highlighting its ability to substantially reduce C. O two emissions and a lot of the EU decarbonization goals.
Coming part of the conversation now is important as work is being done to shift sentiment given the internal combustion engine technologies work being recognized as part of the solution for our future.
It's our hope that the EU Commission member states prioritize the availability of green hydrogen from the transport sector in the coming years and support engine technology advances that will be key for the development of the whole hydrogen transportation sector.
Our message is clear the lowest cost C. O. Two abatement is using internal combustion engines fueled by H video technology, representing the most cost effective pathway deep decarbonization of long haul road freight.
In Washington D. C. We participated in the Hudson Americas summit exploring the topic of hydrogen mobility applications.
One of the focal point for the discussion was exploring opportunities for widespread mobility decarbonization through hydrogen combustion and area, which hydrogen H P. I can take the lead for heavy duty transport.
Every time, we get in front of industry participants and policymakers. It's a win as we advance our story and highlight our lower customer should be using advanced internal combustion engines with hydrogen to make a long term contribution towards decarbonization.
Engines equipped with our fuel system provide a superior combination of attributes as compared to fuel cell system diesel fueled engines and spark ignited IC engines.
Adding greater efficiency higher power density as well as lower total cost of operation T. C L.
We think we have the solution for hydrogen utilization have you transferred and remain committed to spreading our message and educating potential OEM customers on the unique and significant potential our technology brings.
That's our analysis has made clear and as industry observers have noted.
I see engine fuel, what's hydrogen or biomethane can achieve equal or greater C. O two reductions that's compared to fuel cells, while preserving manufacturing and capital investments.
Our hydrogen H P. I feel system offers more power more torque and more efficient use of hydrogen and therefore, the best opportunity for hydrogen IC engines real world usage.
Bio methane and the growth we've seen this year and usage in heavy duty transport is an area. We're excited about as a.
100 per cent biomethane in HPT, I achieves 100% well to wheel C O two reductions.
Let me say that again, H B D. I with 100 per cent biomethane achieved 100% well to wheel C O two reductions.
As the share of bio LNG increases in the size of the deployed fleet increases the total C O two reductions well to wheel accumulate rapidly.
Continuing this momentum is key to mitigating the full effects of climate change and the speed of mitigation is paramount.
With the increasing substitution of renewable fuels like bio methane our products getting further decrease the greenhouse gas impact of transportation and they do so much more affordably than battery electric vehicles for example.
H B O with natural gas and renewable natural gas works and it works well, it's available now and could help lower operating cost well at least achieve their carbon reduction targets.
Take note of what's happening in Europe , right now support for renewables biomass continues to increase in the wake of the energy crisis.
The third quarter, the European Parliament voted to increase the use of renewable energy from 40% to 45% well Biobased joint undertaking is estimated to allocate $2.4 billion for private investment in biomass infrastructure by 2024.
Why all this talk about bio methane and you might ask because biomethane is today's hydrogen.
It's available.
Reduces greenhouse gases, it's affordable.
Scaling right now an H P D. I works today with bio methane and hydrogen tomorrow.
Development and testing of our hydrogen H P. I feel system solution is a key step to providing our customers with the pathway cause significant emissions reductions and we have projects underway now, but I wanted to provide an update on.
We recently announced impressive test results from our joint demonstration program, Wisconsin as.
As you know we applied our hydrogen HVAC fuel system to Sky News 13 liter CBE one platform Scania.
Next generation best in class engine intended for Euro seven on highway emission standards.
Test results using our hydrogen H b isolation, which requires a limited redesign to the cylinder head and no redesigning the pistons external gas exchange system, our crankcase ventilation system show performance with peak break thermal efficiency of 51, 5%.
This is complemented by 48, 7% break thermal efficiency at Rosemont conditions.
This is a significant achievement given that the 50 per cent break thermal efficiency Mark with diesel has been seen as the industry's lofty goal and we're able to eclipse. This number by one five percentage points truly validating our technology.
In addition, we demonstrated that hydrogen can be conducted at the same compression ratios at the diesel engine users without knock limitation that all I S. Hydrogen engines are striking.
The fact that we've achieved higher b T over and above best in class engine simply by changing the fuel system, while retaining the agent architecture and the on engine H B I feel system components.
Demonstrating the tremendous value and best in class performance that HPA offers.
What further excites us is the strong potential presented industrialization and a commercial product launch.
It isn't just a laboratory test hydro to the H B O I has all the ingredients to be turned into a product appreciate it by truck drivers and fleet owners.
The feedback from the announcement has been significant.
I'm, just I've been reaching out to us we remain very optimistic that the compelling benefits of hydrogen HPA will lead to commercial availability later in this deck.
Good.
We're proud to partner with Scania for this demonstration program and are looking forward to next steps.
In addition to our work with Scania you also have a program underway with to be maybe al aimed at combining advanced material and caching technologies with hydrogen H b.
We anticipate being able to detail the results of this collaboration in late in the first quarter of next year.
And just a reminder, hydrogen <unk> offers low tcl nearly 20% lower than a fuel cell vehicle just within five years and 580000 kilometers.
For the truck customer, it's a lower upfront acquisition cost with a proven design and durability for the OEM, it's a familiar product and the ability to reuse substantial investments that have already been made in powertrain manufacturing supply chain.
Nearly 20% reduction is a significant number and its styrene conversations with more potential OEM partners as is the opportunity to avoid new investments that fuel cells batteries motors and to reuse existing engine manufacturing assets.
The results from the work we continue to do and these projects are informing our current customers and other industry players and importantly are bringing us new potential OEM customers.
Now switching focus to the left to the LPG market. Despite the headwinds, which I discussed earlier, we're seeing strong demand and higher sales in key markets like Poland, Algeria and Peru.
The large and increasing price advantage of LPG compared to petrol is driving our results also in the Netherlands, Italy and Turkey.
We're implementing price increases to mitigate the effect of inflation to date, we've achieved some success as margins grew slightly in the quarter.
Surely we have more work ahead of us since there's no sign that inflation is going away.
Fuel and geographic diversity is our important core aspects of our overall offering.
We can pick up market share in areas, where the spread between petrol and alternative fuels is favorable this.
Includes growth in new markets, like Thailand, Peru, and Bolivia.
All emerging markets with regulations, emphasizing the need for cleaner transportation.
In Peru for example, we're seeing a growth trend emerge.
The LPG compared to gasoline as nearly 70 cents a leader cheaper.
This is a significant spread and a cost sensitive market.
In India. Despite the recent spread narrowing between CMG and petrol the overall trend continues to be positive.
Currently in the Indian market the average running cost of at CMG fueled vehicle has jumped from one point to rupees per kilometer and now $2 six per kilometers, but the running cost of gasoline fueled vehicles is nearly double that at 551 rupees per kilometer.
This favorable operating cost advantage of seat for C. N. G supports our positive outlook for our business in India in fact, and I a have you met with several of Indian Oems who've expressed interest in many of our solutions, including H PDI with methane and hydrogen.
C N G selling network in India is expanding correctly with the government committed to have a number of things station increased by 10000 by the end of the decade.
Westport is poised to benefit from the impact of products. We offer are used in all Oems.
In summary, despite the macro headwinds, we face high fuel costs and continued focus on carbon emissions create opportunities for our business as well as industry operators and then customers look for lower cost options.
What we're seeing in key markets with LPG is a clear example of that.
With that I'd.
I'd like to turn it over to Richie to go through our financials.
Good morning, and thank you David.
Despite a challenging macroeconomic and geopolitical environment.
I want to start by highlighting that fundamentally Westport delivered better performance year over year in the third quarter of 2022.
Oliver this is not readily apparent due to the negative impact of foreign currency translation from the weakening of the euro against the U S dollar.
Total revenues for the third quarter, 2022 decreased 4% to $71 2 million compared to $74 3 million in the same prior year period.
Merely driven by the weakening euro.
Excluding the impact of foreign currency translation total revenues increased by 10% mainly due to a rebound in the performance of our independent aftermarket business and the resilience and growth in the portfolio of OEM businesses like delayed OEM electronics and hydrogen.
This is a remarkable achievement given the significant challenges presented by the impact on sales volumes from volatile LNG and PNG fuel prices sanctions on Russia, and customers' deflationary pressures on production.
And continued supply chain disruption.
Loss from operations of $10 9 million.
And a net loss of $11 $9 million for the third quarter of 2022 compared to a net operating loss of $8 $6 million and a net loss of $5 8 million for the same prior year period the.
The increase in operating loss was driven mainly by a $2 $6 million unrealized foreign exchange loss caused by the depreciation of the Canadian dollar and euro to the U S dollar.
In our adjusted OIBDA calculation, we exclude unrealized foreign exchange gains and losses to better reflect the underlying performance of our business.
For the quarter adjusted EBITDA was negative $4 $5 million compared to negative $1 4 million in the same prior year period adjusting.
Adjusting for the unrealized FX loss in the prior year period, the operating loss decreased by $1 $2 million year over year due to higher gross margins generated in 2022, driven primarily through increased sales in multiple OEM businesses in a more normalized sales mix of heavy duty OEM systems parts.
However, this better performance was offset by the loss of equity income from the termination and sale of the Cummins Westport joint venture.
Imperative result in 2021 included $3.8 million in equity income from the joint venture.
Turning to our business segments OEM revenue for the third quarter of 2022 was $44 $1 million down 8% compared to the prior year quarter. The 16% decrease in the average euro rate versus the U S. Dollar for the third quarter was the main driver for the decrease in revenue. However, this was partially offset by.
Higher sales and delayed OEM youll storage hydrogen in electronics.
Impact of Russian sanctions were significant to our light duty OEM business as we generated approximately $3 million less than the prior year quarter.
The impact from the Russia, Ukraine War on C. N G prices also negatively impacted our sales volumes to the European market.
On a positive note we saw an increase of light duty OEM sales to our Indian OEM customers for the period.
In our heavy duty OEM business, our sales volume to our initial OEM launch partner decreased 16% as compared to the same prior year period.
It remains comparable on a year to date basis.
This is a direct result of the unfavorable pricing differential between LNG and diesel in Europe .
Higher LNG prices continued to cause a significant challenge to the man for LNG trucks, which is expected to temper our expected volume growth to our OEM launch partner until relative LNG prices return to a more favorable equilibrium.
The operating loss of $7 $3 million for this segment was comparable to the prior year due to better gross margin gross margin improved to $4 7 million or 11% of revenues for the third quarter compared to $3 1 million.
Four 6% of revenues in the prior year.
We saw a strong increase in gross margin driven by increased sales in multiple OEM businesses as discussed before in a more normal mix of each PDI systems components, along with higher engineering services revenue.
In the third quarter of 2021, we had a higher sales mix of spare parts in our heavy duty OEM business for warranty purposes that had lower margins.
Improvement in gross margin was partially offset by the annual contractual price reduction to our OEM launch partner and.
Decrease in margin in our light duty OEM businesses due to a higher mix of sales to emerging markets that generate lower margins.
Further we continued to experience higher production input costs from supply chain challenges and there's inflation in logistics energy and other costs, which we have only partially been able to pass through to our OEM customers.
R&D expenses for the third quarter were $6 5 million slightly higher year over year, our heavy duty OEM R&D continues to focus on the development of demonstrations with potential OEM customers of next generation.
Asian, each PDI fuel systems, particularly with the use of hydrogen.
Our light duty.
R&D is focused on the development of new LPG fuel systems to meet upcoming Euro seven standards.
Now turning to independent aftermarket our business continues to be resilient in the face of macroeconomic challenges with some positive positive emerging trends.
Revenue for the quarter increased by 3% to $27 $1 million compared to the prior year period.
Despite the significant impact of foreign exchange translation discussed previously higher sales in eastern Europe as well in Algeria in Peru generated higher revenues year over year, our focus on entering new markets and better competing in the markets. We're currently in has enabled us to offset some of the loss of revenue to the Russian market.
Actions as a result of the Russia, Ukraine conflict.
An impact of approximately $4 million for the nine months to date in 2022.
Gross margin was $6 $6 million or 24% of revenues for the quarter down slightly compared with the same prior year period.
The decrease in gross margin and gross margin percentage was mainly the result of higher production input costs occurring in material transportation and energy costs.
Looking ahead supportive LPG pricing is creating a promising demand trend for our business as Westport continues to address and serve markets for customers looking to save money on fuel costs.
Finally, I'd like to touch on liquidity.
Our cash position decreased by $11.7 million during the quarter.
So $86 $5 million. The decrease was primarily from net cash used in operating activities modest capital expenditures and repayment of $3 $6 million of debt.
The decrease in cash used was driven by net changes in working capital specifically in inventory.
Our inventory levels have remained consistent since the second quarter of this year due to lower than expected sales volumes in Russia, and the timing of delivery of some tenders in the independent aftermarket we anticipated in the third quarter that have been pushed to the fourth quarter, resulting in less of an inventory reduction than expected.
Before we close let me touch on the written notice we received from NASDAQ last week regarding the company and not being compliant with the minimum bid price requirement.
Low and zero emission transportation is our future and H VDI is our story performance efficiency and even better with hydrogen provides an affordable solution to the market.
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 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.
With that I'll turn it over the operator to open the call for questions.
Thank you well now begin the question and answer session.
Analysts who wish to join the question can you May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request.
If youre using a speakerphone please pick up your handset before pressing issues.
To withdraw your question. Please press Star then two.
Our first question is from Eric Stine with Craig Hallum. Please go ahead.
Good morning, everyone.
Good morning, Eric.
Hey, So you mentioned obviously.
Obviously some interaction.
Coming out of a number of the demonstration.
The demonstrations you've done conferences.
With some Indian Oems on HPV I am wondering if you can provide a little more detail.
Outside of India.
I don't know whether it's buying.
By number of Oems Excel.
Accelerated talks with Oems anything just providing more details.
And also you know how how the greater break thermal efficiency plays and through those discussions.
Yeah.
Gladly here I think we had the chance as you know to bring our truck to the long Beach show back in May.
Act Expo and then we had our truck at the Hanover show in September and the combination of this event was really fantastic for us and frankly, what we've been doing with the truck. The roadshow. We referenced just a moment ago has been very effective in terms of getting the truck in the hands of of key individuals at <unk>.
<unk> around the world. So as an example, a hangover Ah I spent time with nine different Oems.
At the senior executive level, sometimes CEO , sometimes see T O N.
And sometimes head of purchasing so really really great audience and many times a large contingent would come from an OEM to our stand to to talk to US to review our technology and every time. These were super useful conversations because I think in the Grand scheme of things our technology is not as well known.
As it needs to be and having the truck can go into the shows as really changing things for us as a as we sell and offer this important technology to the industry. So those are discussions we mentioned, India Indian Oems, but also Chinese Oems European Oems North American OEM, So we really cover all of them.
<unk> made markets in the World I also had the chance to spend a week in Japan recently meeting with Oems. There. So frankly, I think we're covering the base as well and really getting a fantastic response.
And then we pile on I would say with our latest results with our project demonstration with the Scania engine and this is just a fantastic result, I can remember in my career.
Many years that the U S Department of energy had hundreds of millions of dollars of funding available for companies to try and show a pathway to get to 50% breaks thermal efficiency.
So just to kind of put things in perspective, most of the engines on the road today in all markets or are on the range of 43 to 45 or 46% maybe break thermal efficiency and these are an improvement over where we were in prior decades.
The goal that the Doa has held for a long time and it's been 50 per cent breakthrough, especially from a diesel engine and now companies like Scania are achieving that kind of really record performance for a diesel engine.
So then for us to put our their engine in the test cell apply our H P. D. A hydrogen HPA system feed the engine with hydrogen and achieved 51.5% break thermal efficiency. It is really a tremendous accomplishment and just kind of sets the stage for what we'll achieve next in terms of the full map in the full capability of the engine as.
We continue those development projects with customers.
So for US this is a really really important and exciting time.
Been in production with H P. D I using methane has or let's say is our molecule for a long time. These trucks are are really well received in the marketplace, but then to show that pathway.
That goes from fossil natural gas to bio methane and then hydrogen in the future is really compelling for Oems around the world.
Yeah.
No that's great and good segue I mean, I guess my next question was just going to be how.
How the data points, which clearly I mean, other Oems are watching closely how that.
Against others beyond your launch partner today to look at LNG as that interim solution young people, who maybe were saying look I'm not going to move that.
Each PDI utilizing LNG.
Going to have to go to hydrogen.
Five plus years I mean are you seeing that movement or is that something that you expect to see going forward.
We're seeing it and we're expecting to see more of it is the short answer, but let me let me just expand a bit you know fund.
Fundamentally I'll tell you in the marketplace. There has been so much pressure from various constituencies around the world getting.
Basically every every segment the media investors Oems fleets, all focused just on zero and this idea of electrification being the shiny object, we all should pursue in and fuel cells of the technology that our that we all need to move to and this idea even that hydrogen.
Equal fuel cells has pervaded the industry and in every market around the world and so when we show up with hydrogen H P. D. I N hand people the keys to a truck.
They can see that no no. There's another path, that's really quite attractive from an economic standpoint all.
All of the Oems that were talking to around the world have billions of dollars invested in engines and internal combustion engine manufacturing and the supply chain for that manufacturing in the the delivery and how that engine fits in the vehicle and then and it meets their customers in the servicing of those engines around the world. So we have a map.
<unk> installed base of our capability and manufacturing capability to around the internal combustion engine. So when we show you can keep that internal combustion engine.
And make it run on zero carbon hydrogen.
And have all the power actually more power more torque and more efficiency than you can have a diesel engine or with a natural gas engine that makes it very exciting kind of a second step in the thought process as well given that there isn't a massive installed base of hydrogen and this technology that Westport provides also works on.
Methane and bio methane.
Why Wouldnt, we go there now and just on that point with respect to methane. We spent a fair amount of our discussion points with customers at Hanover for example, helping them understand the public data that's out there regarding the efficiency and the capability of our product.
I think there's a significant number of constituents in the in the universe in the public domain again media investors and customers, whose thank all natural gas engines are the same.
That they all involve a sparkplug a reduced compression ratio a three way catalyst and at the end of the day deliver 15% lower torque and dramatically less efficiency and so we spent time at our events and continue to spend time, even privately with Oems of course, helping them understand that the product that we have in there.
The market today with our lead OEM customer the HDI product preserves all of the capability of diesel engine in terms of power torque and efficiency and therefore in real world applications in real World testing and usage is delivering a 30% lower consumption of natural gas, so whether it's natural gas or bio methane reducing that.
Fuel cost by 30% using H PDI as opposed to a spark plug is something that's not as well known as it really needs to be and so we're helping customers understand that pointing to that in the marketplace and I think so now that combination.
Dramatically better fuel consumption figures, all the paranormal Turk with methane with bio methane and with a path to zero carbon hydrogen is super compelling for Oems around the world.
Okay. Thanks, David.
The next question is from Rob Brown with Lake Street Capital markets. Please go ahead.
Hi, good morning.
Yeah, Rob I think you mentioned in your in your script, some hydrogen revenue in the quarter or in the year could you kind of elaborate on the on the revenue you're getting from hydrogen at this point.
And so we have let's take two areas that I would call. It in the category of hydrogen. So we've been talking a lot already this morning about hydrogen H P. D I and I would say our revenues right now with respect to that are really on the demonstration project and I would say I would categorize them as a low single million dollar.
Figures with multiple Oems and really in a cost recovery moger basically partnering with them to demonstrate like we did with Scania.
Our technology on their engines. The other part of our hydrogen business is I would say going visits as part of our or our growth opportunities for the company. We have been supplying hydrogen fuel system components to connect fuel storage.
700, Barnes group's keep our tanks to fuel cells and so we've been doing that business through our <unk> brand for more than a decade, and we're seeing really great growth and we are in this day, a leader with that technology with products available to companies like plug power and other fuel cell makers in both North America.
China and increasingly in Europe , as the European Oems to get their heads wrapped around how they're going to use fuel cells in their product mix. So that's a really important part of our business a growing part of our business and keeps us very busy.
Okay, great. Thank you and then and then you sort of alluded to a path to profitability.
Ill give guidance, but sort of you know what's your view on.
Sort of that trajectory can you be profitable in 'twenty, three and what might that depend on.
Yeah. So we are you know with respect to our profitability trajectory and it's been a let's say an evidence for quite some time that our JV with Cummins ended at the end of last year and so we took this kind of step function reduction in our profit trajectory, but we see this profitability growth that we'll get.
As to profitability, and that's where I talked about or what we previously called out mid decade goals being a little further out fundamentally and so that kind of $1 billion revenue and a 20% gross profit targets are where are fully committed to but clearly after COVID-19 supply chain and our war in Russia, We've had some some months.
Setback from the timetable, but nonetheless, we see that coming it's fundamentally driven by growth Robyn So we need to see our HDI volume growing and the hydrogen story, we're telling right now.
With that but certainly we're also seeing now natural gas prices in global markets coming back down from the extraordinary peaks.
They've they've seen a in the follow on aftermath, if you will on the initiation of the war in Ukraine by Russia, So that whole dynamic and.
The change in landscape of flows of natural gas with the increased exports from the U S and building new natural gas pipelines and LNG terminals and so forth that takes time and so we are seeing a decrease in natural gas prices and that will help our growth and the growth is the is the key to our profitability.
Got it.
Great. Thank you I'll turn it over.
Thank you Brad.
The next question is from Amit Dayal with H C. Wainwright. Please go ahead.
Just a quickie on the margin on screen for the quarter relative to last quarter.
Anything unique this quarter.
And then last quarter and then.
Going forward should we continue to expect even with the 16% level gross margins.
Why don't I handle that one I mean, the biggest difference that we had probably quarter over quarter for sure. There was an increased performance in our portfolio of our OEM businesses, which in our electronics and hydrogen.
Or fuel storage did very strong and delayed OEM the biggest the biggest difference as well that the.
Which may carry forward as we were.
We had a large amount of.
A particular H PDI component that actually had a lower margin and that was because of a replacement of the component in and that has now gotten much better and so in terms of the performance.
With regards to margins in heavy duty that is somewhat improved and so that should carry three somewhat but in terms of modeling at a specific percentage. It does it does move around a little bit Amit.
But yes, we do expect a little bit of improvement yet.
Understood. Thank you for that Richard.
Hmm.
Hum.
And a lot of macro challenges you're going to the physics.
Hmm.
In that context.
One of the driver.
Actress keeping.
Right.
The.
Thanks.
Hum.
Hey, Amit.
Does it mean.
I mean, I'm really struggling to hear you does seem to be a connectivity issue, perhaps with your phone is there.
Uh huh.
There's nothing you can do on your end because I can't get your question.
I heard macro environment.
Yeah, I was just trying to see if.
If there is any solution to this forex pressure.
I think you know just just talking about foreign exchange I mean, basically as a company. We are a very strong lead naturally hedged the.
The vast majority of our revenues are in euros. The vast majority of our expenses are in are in euros, and so that does a kind of a cushion us against the bottom line impacts of foreign exchange. Unfortunately, it doesn't do anything for the topline because we report in U S dollars and so we have all those.
Conversion is that we do make them.
So that translation of that business about 70% of our businesses in Europe .
That translation it will be what it will be and so that's why we call it out when we announced our earnings and our revenues because fundamentally.
Our businesses are about 70% in Europe , and that's the currency, but it is naturally hedged Richard anything you want to add.
No I think you described it well I mean.
Okay.
Our functional currency more likely than not actually more of the euro and the Canadian dollars is what we have as our functional main functional currency and reporting in U S. Dollars is something we do because many many of them most of our shareholders are U S based.
But it does it does create this distortion here because that was our my comments in terms of the prepared comments the performance of the underlying business was about was up 10% and this is during a period of a you know obviously a lot of a lot of turbulence.
With the macroeconomic and geopolitical environment. So the company actually did pretty good.
In the third quarter, it's something that we have not decided if theres no foreign exchange derivatives are instruments that we would use to modify that it's an unfortunate part of kind of our reporting that you've taken for for investor purposes.
Understood.
Yeah.
Yeah.
I'm going to move on to the next caller, if that's all right.
Well they seem to have difficulty hearing you die out.
The next question is from Colin Rusch from Oppenheimer. Please go ahead.
Thanks, So much guys could you talk a little bit about the progress that you're making on engineering sub components for the hydrogen.
<unk> system, you know, obviously, you know producing a vehicle is a big big deal, but getting ready for mass production is a another level of preparation to just curious how how that's coming along.
Yeah. Thanks for the question Colin So yeah.
You're right that are demonstrating a vehicle is the big deal very happy about that and fundamentally to do that we've used off the shelf components that are in production today for our natural gas production products. So from my perspective, those demonstrators at work great.
We fully recognize that there is some optimization and some development and validation of the cycle that we're proceeding with them in this time, so that we're ready for production hydrogen products I do think those production of hygiene products are kind of in the 25 to 27 time frame and so you know because the.
Normal cycle for four Oems.
Is going to be a full development and validation of the calibration and the hardware, including both the engine our fuel system the fuel storage the whole integration on the vehicle and so.
So that's kind of the cycle, but we continue to make progress and make investments which are relatively modest because our hardware is largely the hardware that we already have in production. We expect some tweaks as the as you can imagine. So for example, when we develop the injector we.
We do see F D work to analyze the combustion assistant with hydrogen and how it's different than natural gas and then we make modifications to the nozzle. So we're already testing and developing different novel patterns that fit both with our customer's engines as well as with hydrogen fuel and so that is I would say it's normal.
Part of our business, but now a little bit of uniqueness relative to hydrogen.
Okay. That's super helpful. And then maybe I missed it but just can you just give us an update on how the HPT I should point out ramp and in China, and its coming along and any signals that you're getting around inflection points on that in any way.
Yeah, Thanks for asking it but fundamentally we had we didn't talk much about it in the call. So far there is progress we do see that but where we're really a bit gun shy about calling any any timing of when that product might hit the market fundamentally a good thing that we see globally is what I referenced earlier about natural gas.
As commodity prices coming back down that will help the equation because fundamentally a product in China is going to be sold based on the M. T. C O for the most part and so we need that fuel price to come back down to make the any natural gas product in China.
Commercially attractive and so that is happening at our customer has continued to do work.
To be ready to launch the product and so where we're anticipating that but I don't have any timing that I can share with you other than to say, there's work going on and so.
They wouldn't be doing the work if there was an intention to go to market at some future date.
Perfect. Thanks, guys.
And maybe I should just add Collyn. We're actually are spending also a tremendous amount of our.
Time, and energy working with customers broadly in China with respect to the opportunity for hydrogen.
Hydrogen in China today is already I would say like refueling infrastructure more developed in the at the market that I can see so they have more than a thousand hydrogen stations is the information that I've seen and heard about the Chinese market and so that pushed towards hydrogen in China is very very real you've seen a number of announced.
And then perhaps a spark ignited hydrogen engines.
Demonstrating in low volume and so forth of course, we see that with Hudson H P. D. I and this is what we're talking to the Oems in China as well as other markets of course about is the potential to have a much.
More superior product with hydrogen H b I more power more torque more efficiency than is possible with the spark ignited product and so we think that's an important part of what we're doing right now that will pay benefits in the future.
That's that's actually quite helpful. I appreciate the additional color there.
The next question is from Jeff Rossetti with Cowen and company. Please go ahead.
Good morning, David Good morning earlier.
You expect to release results from your ABL to be demonstration at the end of Q1 and I was just wondering if you could provide any findings you might expect and how it might be.
Differentiate it from from Scania and if there was any update.
With testing was Commons.
Yeah sure glad glad to talk about those Jeff So first of all on ABL Tupi.
We have Oh, we have an engineering tests, though with our hardware their engine are there critical engine Oems engine with our hardware in it and we're starting that developed and now we expect to have some results I would tell you in every case Oh, it's up to our partners in this case ABL and to be a two to make the decisions on what kind of announcements we can make win.
But we're hopeful to have some some color at least if not some data to offer the market in Q1 as we said.
What we expect out of that testing I would say is very similar to what we've found with other engines and that is that basically the application of our HDI technology in combination with hydrogen.
On a otherwise formerly diesel engine well off for about a 20% improvement in power about a 15% improvement of torque and about a 10% improvement in inefficiency and these are really important numbers me you don't typically get.
Double digit percentage increases in any of those parameters, let alone all three.
But we've done this on a number of engines already.
You can see on Youtube. Some we talked about in our press release about our Scania work and I would tell you. We expect the same kind of increments and hopefully we can demonstrate even more through the contributions now that <unk> is making with respect to the engine structure. So having greater engine structure in terms of pressure capability can improve.
The engine and then get more out of our fuel system. As a result, so we're very much looking forward to bringing our that are developing.
Development through the cycle and then sharing our results when we can.
You asked also about Kevin's and that.
That work is basically completed from our side we've done the necessary studies that are coming fast is to perform and they are now evaluating where does <unk> sit in their portfolio and we look forward to some opportunity to do some more work with them.
Great and I appreciate the.
Do you tell your providers on.
Your pass through commercialization of Hudson H B.
I was just wondering I think you've called out 25 through 27 as a potential.
The timeframe for commercialization.
Are there any milestones.
Myles stones that you are targeting for sort of 2023 to put you on that path.
We expect in 2023, you'll you'll hear more from us with respect to development like the kind we have already done you know the ABL to be news for example, I expect there'll be more Oems that we'll be testing our fuel systems on their engine I expect that with the Oems are already worked with Scania and others.
There'll be next steps that we will have a chance to announce so I think you'll hear that kind of news from us in the coming quarters, but that looking out further I'm very keen on the opportunity to make some some demonstration fleet. So fundamentally you have seen this in the fuel cell World for example wouldn't buy in Switzerland.
Has been demonstrating fuel cells, there's there's quite a few fuel cell applications that have been announced and you know.
And so I think that same kind of activity for us would be quite straight forward as you saw with our demonstration vehicle that we showed in long Beach and also in Hanover and this is a driving prototype it tows 40 tonnes. So 80000 pounds of freight it it drives very very well and Oh one.
Uh huh or hydrogen zero carbon hydro so actually making demonstrator vehicles are there are some certification and exemptions and things like that that we need to do but I think that's the activity that maybe it will be announcing some of that also in 'twenty 'twenty three for deployment in 'twenty four 'twenty five 'twenty six. So this is this is basically the path that we're expecting.
Thanks very much.
My pleasure.
The next question is from Chris <unk> with RBC capital markets. Please go ahead.
Hi, yes. Thank you I just wanted to I guess hone in a little bit more on some of your comments around policy here and I think you know one of the bigger investor concerns out there is that most.
Most of the policy and incentive programs right now are focused more on on the battery side of technology.
<unk> technology, so as it relates to your your discussions in Brussels in Washington, What's kind of the receptivity of policymakers to you know the technology that might not be exactly zero emissions are and I guess, what's their understanding of the technology today.
Yeah, It's a great question Kristen. Thank you for asking it so we feel it's very important.
For us to carve out the time with the truck and in our team to go and speak with and inform and educate policymakers around the world because fundamentally even just two years ago. There was no idea no concept no discussion around.
<unk> internal combustion engines with hydrogen.
Primarily I would tell you because most people who 99.9% we're thinking about a spark ignited product, which has tremendous challenges with respect to.
Preignition knock and and so forth because hydrogen so combustible and so I would tell you that the basic mentality policymakers and much of the public domain is around if its hydrogen it must be a fuel cell and so we're having to we need to it's our task to do so educate people about the.
Any that we've unveiled and demonstrated in our test cells and with our our demo trucks and so that is what we're doing now and I think that.
And all my experience in the industry a reg.
Regulators like to write regulations like regulators right regulations in most cases for technologies that they know can be applied to achieve that regulation kind of this is the work of the USB Bowie a little over decades has been let's go demonstrate this as possible. So that the regulators can write a regulation, forcing it to happen and so.
Whether it's a 50% beta equals bad for many many years and so that's kind of the I've got the modus operandi of regulators sister REIT regulations for technologies that they know are and they know it can be deployed. So therefore as we go to D C and Brussels and help policymakers understand this is possible no here didn't hear that.
He's driving here's the data here's the here's the development path. This is going to be ready that will.
Inform our future regulatory making that's our approach to the marketplace and approach to policy and fundamentally I believe they're going to be real happy about this and they're gonna be willing to make those changes to regulations, because the significant opportunity decarbonize long haul trucking, which is super super hard to Decarbonize.
Is this.
Let's just call it outright testicles had access to tremendous amounts of capital and yet their truck is still not out announced four years ago and why you know fundamentally because it's got a lot of batteries on it it'll have less payload capability, it's going to be super expensive to acquire and it's a super challenge.
The application to electrify its not Tesla, it's about the physics, the economics, and so forth and so for long haul heavy duty trucking.
And I'll go a step further we talk.
We're a Canadian company, there's a lot of mining in Canada can you talk about mine haul trucks, either super hard to Decarbonize, because they use so much energy and they they run so many hours and so they they can't stop recharge.
This is where we play this.
This is where we play in helping regulators understand that will allow them to write regulations that then promote and encourage our technology to come to market. So we think it's a really important part of what needs to be done what we are doing and we expect it to be effective.
It'll take some time that it would be affected.
Thank you I guess, maybe just kind of.
Switching gears here really quick.
Maybe on some of that inventory levels. I think you had previously mentioned that you were looking to monetize some of that or draw it down and I guess, maybe more efficient use of your working capital can you can you provide any updates on that process of kind of what are you thinking right now and maybe the ease of the ability.
To monetize some of that.
Yeah. So so good good question happy to talk about their inventory for sure. It's too high it's not at the level that we wish to have and we expect to sustain so it is an active.
Effort on our part to move that inventory and reduce our levels I would tell you. There's two fundamental drivers and that there's a lot of drivers of course, but to two big elements. One element is on the electronics side.
You all recall I'm sure how chips were in short supply and still aren't so easy to get and we had a lot of our chip suppliers come to us and say listen.
We need to know exactly what you need and so please place orders now for material 18 months out and you can't cancel these orders you can't change. These orders we need to know what you need to commit to it. So we're sitting on quite a bit in inventory chips and and everyday we're working to get that last chip that's required to make that easy you are.
That controller that we need to make and some are moving to a more let's say normalized supply chain dynamic with respect to electronics will allow us to unlock on the order of.
6 million $8 million of inventory that's on our books right now just in electronics. So that's kind of a I'll say a perturbation of the market that's happening right now whether you call it from COVID-19 or inflation or whatever those dynamics aren't that causes. The place you can do that we're just dealing with it and we expect to unwind that and monetize that inventory in electronics as an example going forward.
The other one is is our is our H PDI inventory, our HPA inventory is higher than it should be and that's because we haven't seen the growth volume.
<unk> sales that we were forecasting and so we were we were building inventory to not even trade, but we had the the pipeline full for a certain kind of volume expectation that was pre the war with with Russia and Ukraine.
And so as LNG prices have gone up and the volumes have been a flattening.
We built some inventory in H PDI that we do expect to monetize and that includes our expectations on our part that we will move our product to China.
With way try and so those things we still have on our list of things to do and that will help us to NY that inventory and turned it from inventory into cash.
Yeah.
Got it thank you.
My pleasure.
The next question is from Bill Peterson with Jpmorgan. Please go ahead.
Yeah, Hi, good morning, guys and Richard just want to say it was a nice working with you over the last couple of years. So good luck in your next endeavors.
On conventional HCV I H H D. P I started getting to FID.
Last year, you had some really nice growth with your lead customer in Europe . So I think you said you have 1000 trucks on the road or thousands of trucks on the road wanted to discuss what Youre seeing in terms of reliability of upside relative to diesel like you talked about some of the performance benefits, but yeah.
I guess it was it was the warranty issue related to that at your lead customer trying to trying to understand what the interest in these trucks could look like should Natgas price you can start to normalize if you can answer that and then I guess, she got second point about Nat gas normalizing, but the U S. Though actually is a relatively less expensive place compared to other places.
Diesel is in short supply, particularly in the northeast. So do you see additional interest maybe stemming from from from that spread. Thank you.
Yeah, great questions Don Thanks for joining us this morning, so with respect to the durability and reliability of our product in Europe .
We have been on a let's say a journey from the launch in 2018 through now and we have had a a variety of challenges that the product along the way, but the team has done exceptional work to really stomp out those problems early and minimize the impact and so right now.
Now in the marketplace I would tell you that people are thrilled with the durability reliability and the primary reason for that is because fundamentally we have developed a system that we've solved the early problems and it's the basics of the system are based on a diesel engine. So we're not asking the engine itself to do anything that its not used to doing and I guess.
Contrast that spark ignited natural gas engines are run hotter or they they have challenges that that diesel engines with our HPA system don't have and so we feel we're in a very good place.
The fleet's love the product and really all that's tempering demand at this point in time is the high price of natural gas and so as we see that commodity prices come down we need to see that commodity price flow through all the way to the pumps, so that fleets can say.
More <unk> equipped trucks, so I can deliver freights and do it with a lower T C L.
Really the story there.
With respect to U S and natural gas prices and frankly your point than a scarcity of diesel.
Fundamentally in the marketplace for all of our products.
The equation isn't so much about the price of natural gas at a price of LPG in the price of gas at the price of diesel it's really about the delta between the two can I save money by using natural gas versus diesel can I save money by using LPG instead of petrol it's the price differential between the two fuels.
So when diesel gets scarce and diesel prices go up that will help our natural gas and our LPG business as people look for alternatives and I'll say it even more broadly.
<unk> mentally in every market around the world when energy gets more expensive all energy electric by the way with its natural gas petrol diesel when energy gets more expensive people are looking for alternatives and it's where there's that price differential that offers our customers a savings by using natural gas.
Biomethane hydrogen or L. P. G. That's how we win because we're the gaseous fuel specialists.
Okay. Thanks for that color I think the next one is probably for Richard.
Just the last quarter or two but.
When we think about the costs and the use of cash.
Opex you should be getting advantages I guess, an opex the same way.
With the USD relative to other currencies, but offsetting that you have inflation.
Try to understand how we should think about opex trajectory looking out over the next few quarters and then I think in terms of Capex you I think you've talked about maybe about $15 million. It looks like you're going to be probably ended up a little short of that but I guess it was just pushed into next year or I guess any color on how we should think about capital intensity as we're looking at 2023.
In terms of the use of cash thanks.
Okay.
Thanks, Bill and thank you very much much appreciated your comments before it's been great working with you as well.
With regards to yeah for sure on the foreign exchange because we do do a lot of our engineering is done in Canada, and so we did get the benefit of that we're in a rationalization moment right now because we're we're you know quite well aware of our liquidity and trying to be responsible clubs you know physically disciplined on that.
So next year I mean, we're in the neighborhood between 15 and $20 million. We're trying we've got obviously a lot of investments in the in the future in our hydrogen being one of it and we're doing some work on LPG for Euro seven and then there's the natural increase of capacity for H P. D I b.
But we're trying to stay in that number and the purchasing that we're doing is in euros predominantly so theres a little bit of advantage there, but there we are purchasing certain equipment from from the U S.
With regards to Opex that we spent a little bit more money. This year, probably we're trying to promote a H b D I and build awareness of specifically with hydrogen.
I will call it the sort of the education process that David referred to.
And that's gaining a lot of actually interest within the industry that it didn't just come from us or everybody.
Every major OEM is considering hydrogen ice programs as well.
As part of their portfolio and so there was a little bit of extra money that we have spent there but you know generally the you know our operating expenses will be more or less in line. If anything we're tightening the belt as well as as the year progresses.
Thanks, Richard Thanks for the color and good luck.
Thank you Bill.
Yeah.
This concludes the question answer session I'd like to turn the conference back over to Mr. David Johnson for any closing remarks.
Thank you very much and thanks, everyone for joining our call. This morning.
I think at the top line for our company.
We've been through a very challenging time and the challenges keep coming but.
We keep making progress are fundamentally to think about our revenues being up 10% year over year on a you know absent foreign exchange.
It's just the translation error in.
In the context of a place where we've got high natural gas prices will see N G in LNG.
A war in Russia training constrained supply of LNG.
I think theres a lot of people out there that can understand in 2025 and 2030 in Europe specifically.
We need to make really big improvements in C. O two of long haul trucking, 15% by 2025, 30% by 2030 and everybody in Europe is thinking about how do we make those standards tougher when you think about a technology like hundred HP die being able to offer at 98% reduction in carbon.
And do so very affordably right that will have a huge impact on the fleet average for the fleet. So we really see a bright future ahead I appreciate the chance to speak with all of you today and field your questions and look forward to the chance to meet with investors at the Craig Hallum Conference next Thursday in New York City, and then we haven't got an upcoming capital markets day that we'll do in Toronto.
To December 8th so look forward to continuing the discussion and helping to understand better the future for Westport fuel systems. Thanks again 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.
Okay.
[music].