Q1 2023 Westport Fuel Systems Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Westport fuel systems first quarter 2023 financial results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.
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I would now like to turn the conference over to actually New senior director of Investor Relations.
Go ahead.
Good morning, everyone welcome to Westport fuel systems first quarter 2023 conference call, which is being held to coincide with the press release containing Westport financial results distributed yesterday.
Today's call speaking on behalf of Westport, as Chief Executive Officer, David Johnson, and Chief Financial Officer, Bill Larkin attendance.
Attendance on this call is open to the public but questions will be restricted to the investment community.
You're reminded that certain statements made in this conference call and our responses to various questions may constitute forward looking statements within the meaning of the U S and applicable Canadian securities laws and as such forward looking statements are made based on our current expectations and involve certain risks and uncertainties with that I'll turn the call over.
Yeah David.
Thank you Ashley and good morning, everyone.
I'm pleased to be with you today to discuss our first quarter results.
Today. In addition to reviewing our Q1 results, we'll be providing updates on our growing light duty LPG business and of course, our heavy duty business, where our patented HVA products and technology are poised to play an important role in affordably decarbonising heavy duty long haul trucking.
Also we'll share some observations and highlights from last week's Act Expo in Anaheim, California, and from Vienna Motor Symposium, which is held a week before last.
Amid a macro environment that continues to be turbulent we delivered year over year revenue growth of 7% to $82 $2 million, primarily driven by increased sales volumes in many of our business lines, including delayed OEM fuel storage hydrogen and electronics as well as increased sales volumes in our independent aftermarket segment.
In the first quarter. We also delivered gross margin improvement in both our OEM and I am segments, driven by pricing and higher sales volumes and an improving sales mix in our OEM segment.
Westport fuel systems is a leader in the light duty LPG space and demand for our clean low cost LPG solutions continues to grow in Europe and other markets.
Supported by the increasing price advantage for consumers, who can run on LPG instead of petrol and can therefore save money every time, they refuel at their local fuel station.
The LPG price advantage is driving growth in key markets like Italy, Turkey, Netherlands, and also in North America.
At the court as the cost of new cars continues to escalate consumers are looking for affordable alternatives vehicles that are low cost to acquire and low cost to operate that's an LPG and damage.
Advantageous LPG pricing in major markets plays a key role in the decision to switch existing cars from petrol to LPG and we have the products to enable this switch.
Also customers buying new cars are seeking affordable LPG equipped model.
Oems are taking notice of growing consumer demand, which is expected to persist globally for decades.
MS are acting now to commit to the future of LPG, providing a significant runway for growth for Westport fuel systems.
As we recently announced will begin production supply of Euro six LPG systems to a leading European OEM in Q4 of this year.
This new business materially adds to our revenue and market share.
Our LPG market share in Europe is currently about 35% and with this newly announced OEM business, we expect to increase to above 50%.
As a reminder, the euro six LPG system production and sales that begins in the fourth quarter of this year will run for two years generating approximately 38 million euro over the contract period.
The follow on Euro seven business, we secured will double this scope generating approximately 40 million euro per year.
We continue to experience growth in our delayed OEM business and expect this growth to continue.
As a reminder, our delayed OEM businesses than we or our customers apply one of our LPG fuel systems to new vehicle in advance of selling and delivering that vehicle to end use customers.
More Oems are taking advantage of our vehicle conversion capabilities volumes grew significantly this quarter compared to Q1 of last year due to strong demand from Dr Motors, and Italian OEM that provides LPG fueled vehicles to the Italian and other markets in southern Europe .
Moving to our heavy duty business in the first quarter, we recorded a positive pricing adjustment for ache gas field systems sold to our European launch partner.
Our existing contract with a European launch partner concludes in early 2024.
As we have for the rest of the 2023 pricing is being negotiated.
In the first quarter H P. I volume declined by 13% compared to a year ago quarter, primarily driven by unfavorable fuel price differential between LNG and diesel which existed through all of 2022, causing fleets to reduce and or delay their purchases of LNG fueled vehicles as.
As we discussed last quarter.
Production volumes lagged vehicle sales volumes and vehicle sales volumes lagged fuel price changes.
Now that LNG fuel prices have reestablished their advantage compared to diesel we expect improving vehicle sales outlook. Later this year and production sales of HVA systems to follow that trend again with some timing lag.
Looking ahead in Westport fuel systems offers this solutions needed by heavy duty Oems to meet future emissions reduction requirements, while delivering the performance efficiency and affordability that their fleet customers demand.
As LNG pricing reestablish as a persistent advantage versus diesel and as emissions regulations and associated penalties Oems Lou there's growing realization that affordable low carbon solutions like HPA are required to meet OEM C O two emissions requirements and fleet decarbonization goals.
H PDI is already reducing real world emissions with thousands of vehicles neighborhood. Today. We're confident we will continue to grow HVA volumes through this decade and beyond.
Earlier this year, our HPA launch partner announced new trucks that deliver more horsepower increased efficiency less emissions and an extended driving range using bio LNG as is typical with new product introductions. We expect this model change will result in lower volume near term and higher volumes later this year.
In China, we continue to support weight tie as they work with their customers the Chinese truck Oems to bring <unk> equipped vehicles to their market. This includes demonstrations and field trials.
We remain optimistic about the launch of production and sales, especially now that LNG prices in China have declined.
China is the largest natural gas truck market in the world by far and measured in terms of volume and market share and has stringent emissions targets that are supportive of both LNG and biomethane.
LNG prices had been normalizing in China with prices just recently the 20 months 21 month low a significant drop from the elevated levels, we saw last year.
We're encouraged by the ongoing work, we are supporting and the improving market conditions.
Similar to the rest of the World. We're also building significant interest in China for our hydrogen H began offering as an affordable path to using zero carbon hydrogen in long haul heavy duty applications.
Bottom line, our HPA opportunity in China is significant using LNG and biomethane today and hydrogen in the future.
Our business is on the right path clean affordable transportation is in demand today, and we see that demand increasing into the future Hyatt.
High energy prices and challenging economic times tend to be tailwind for our business transportation is not a discretionary purchase, especially for commercial vehicles and we make clean transportation products that are low cost for Oems to develop an industrialized and low cost for end customers to acquire and operate.
Last week at the Act Expo in Anaheim, California, we showcased two fully functioning heavy duty vehicles with our H P. I feel systems for internal combustion engines, one truck fueled by low carbon nothing either fossil or biomethane.
And the other truck fueled by zero carbon hydrogen we helped act Expo attendees understand how H b die with natural gas and renewable natural gas enables all the performance efficiency and durability of the diesel engines. They are used to with very little change to engines or vehicles and yet all of the low carbon and affordability benefits to enable a scaled.
Solution.
And with hydrogen and H B I performance and efficiency improves quite significantly, enabling an IC engine technology path for decades to come.
Given the growth we've seen in our recent expansion announcements in China. We also displayed at Act Expo are $3 50, and 700 bar hydrogen components that supports both both fuel cell and internal combustion engine applications.
This follows fuel cell Expos, we joined in Germany, and Japan already this year, we continue to generate significant interest from key constituents throughout our ecosystem, including Oems fleet's fuel fuel providers and more.
Importantly, and increasingly hydrogen is considered the zero carbon fuel industry needs. We're continuing to help the industry to understand that internal combustion engines with H P. I will play a critical role in transforming away from fossil fuels to clean and renewable fuels because H P. D. I is most effective and affordable path.
Two papers highlighting how does the H P data were presented at the Vienna Motor Symposium, an industry event, where the latest technological development and product proof points are reviewed with our peers and to the vehicle Oems and tier one suppliers what makes it exciting for the Westport team that these papers, where each written basic engine.
My very testing completed on two different engine platforms.
Our work with Scania is well known and the paper, we presented with Scania outlines our success in demonstrating break thermal efficiency of 51, 5%, while achieving a 97% reduction in tailpipe C O two emissions.
The second paper published by T. N O is based on research conducted using another European OEM engine platform and was focused on outlander with differences in power density efficiency and emissions between spark ignited combustion and H P. I enabled combustion of hydrogen fuel.
T N o's testing and analysis demonstrated that hydrogen H P. D. I clearly outperformed spark admitted hedging question with respect to power efficiency.
And doing so with HDI requires minimal changes to today's diesel engines.
This aligns well with our own results and with the superior performance of cheap today in the marketplace using H P. D I with methane as compared to spark ignited combustion of methane.
The results are clear injecting hydrogen using H B D. I R. In internal combustion engine produces a highly efficient yet practical green solution for long haul heavy duty trucking.
Overall, it was highlighted in Vienna that for heavy duty trucking and other high load high duration applications that required a combination of power density fuel efficiency and durability can be challenging for technologies other than H B D. I.
For certain segments of the transportation sector near zero carbon internal combustion engines continue to be a valued as a key cost effective solution and our <unk> system is well suited to applications requiring high torque and high fuel efficiency.
This not surprisingly has led to interest in H, B, I and evaluation of H PDI by multiple Oems.
Affordable performance will drive adoption the results announced at Vienna confirmed that hydrogen H P. I offers lower C O two abatement costs, although with a high performance demanded by customers.
Our hydrogen H PDI demonstration trucks continue to provide high profile and valuable evidence of the feasibility of H B D. I feel system equipped engine fueled with hydrogen to deliver high performance cost effective decarbonization of heavy duty vehicle applications.
With that I'll turn it over to bill to walk through our financials.
Good morning, and thank you David.
In the first quarter of 2023, we generated revenues of $82 2 million.
An increase of 7% compared to Q1 of 2022.
In Q1 of 'twenty three at all times increased generic later OEM you'll.
Fuel storage.
In components.
Tronox products, along with increased sales volumes in our I am segments, particularly in North America, Eastern Europe , and South America.
However, we did realize a slight reduction in light duty OEM sales volumes to our customers in India.
The unfavorable price differential between LNG and diesel in Europe experienced in the first half of fiscal 'twenty two impacted HPA volumes sold during the first quarter of 2023.
Our European launch part.
However, this quarters volume decline was offset by an increase in the H P. D I system pricing as well as higher engineering services revenue.
Yeah.
Our gross margin increased to 16% in Q1, 'twenty twenty-three compared to 13% in the prior year period.
We reported a net loss of $10 6 million for Q1, 2023 compared to net income of $7 7 million, where the prior year period.
Prior year period included $19 1 million gain from the sale of our interest in the <unk> joint venture.
During the first quarter of 'twenty, three we increased our research and development expenditures by $1 4 million compared to the prior year period, focusing on our <unk> technology.
And hydrogen components.
Moving on to the next slide.
In Q1 of 2023, we reported adjusted EBITDA loss of $4 5 million compared to a loss of $6 1 million in the same period last year.
The improvement in adjusted EBITDA loss was probably due to the result of higher revenues and an improvement in our margin.
Gross margin increased year over year to $13 3 million or 16% of revenue compared to $9 9 million or 13% of revenue for the same period in 2022.
This improvement was mainly due to higher sales volumes across multiple businesses.
Positive sales mix and or delayed OEM business segment.
However, our manufacturing costs continued to be impacted by higher material energy and labor costs as a result of widespread inflation and global supply chain challenges.
These cost increases continue to weigh on our gross margin.
So the next slide OEM revenue for the first quarter of 2023 was $56 3 million compared to 51 8 million in the same period in 2022.
The $45 million or 9% increase was driven by a significant increase in sales volumes in our delayed OEM business.
As well as an increase in volumes in our fuel storage hydrogen and electronics businesses.
However, we did see year over year decreases in sales volumes are light duty OEM products in India and Eastern Europe .
Beginning late last year, we've been talking more about our hydrogen components business and the growth we are seeing along with our expansion plans in China, we continue to see year over year revenue growth in the fill up hydrogen components of over 50%.
Compared to the same quarter in the previous year.
And expect our hydrogen components business revenues to continue to increase won't begin production in China in 2024.
The unfavorable fuel price differential between LNG and diesel in Europe in fiscal 'twenty, two negatively impacted our each PDI sales volumes to our European launch partner.
In the first quarter of 2023, we saw a 13% decline in volumes, which were offset by an increase in the H P. D. I just on pricing.
More recently, we've seen a return to more normalized LNG pricing environment in Europe .
We are encouraged by this recent trend in fuel prices, which we anticipate will be helpful in driving demand for trucks with our HCI systems.
As a reminder, our European launch partner earlier, this year announced new H P. D. I equipped engine with higher horsepower and extended range.
As is typical in the released new products, we predicted seeing decline in sales with the current offering as customers opt to wait for the updated.
More powerful option with extended range.
This will have more of an effect.
On our top line given the current tight margins and our H PDI business and expect to see an increase in claims in the second half of 2023 with a launch with a newer product offerings.
Also in the first quarter of 2023, we saw a significant improvement in reduction in our warranty claims.
And did not have an adjustment to our warranty provision outside of the normal warranty estimation process.
Gross margins in the first quarter of 2023 was $8 1 million, which was a $3 1 million increase over the prior year period.
Increased sales volumes in multiple OEM businesses, along with improved sales mix of delayed OEM volume in each PDI system pricing positively impacted our gross margins.
This was partially offset by higher production input cost inflation.
Well go next slide our independent aftermarket revenue for the first quarter of 'twenty, three was $25 9 million compared with $24 7 million for the same period in 'twenty two.
Gross margin was $5 2 million compared to $4 9 million in the first quarter of 'twenty two.
The increase in both revenue and gross margin was driven by higher sales volumes to North America.
We also realized an increase in sales in eastern Europe , and Argentina markets, which were partially offset by lower sales volumes in the middle East and Africa, along with higher production input cost.
Looking ahead supported the LPG pricing continues to create a positive demand trend in Europe and will be an important area of growth for our company.
In the years ahead.
In the fourth quarter of this year, we will begin production for our previously announced business with a leading European OEM for the supply of LPG fuel systems.
Both euro six and Euro seven standards.
This business will significantly increase our OEM revenue.
As a reminder, the euro six delivery begins in Q4 this year and run for two years generating approximately 38 million euros of revenue over those two years.
Euro seven delivery approximately double the related revenues generating approximately 40 million euros per year through 2035 and beyond.
Okay.
I'd like to touch on liquidity.
Our cash position decreased by $14 2 million to $72 million during the first quarter 'twenty three.
The decrease was primarily due to net cash used in operating activities of $8 6 million.
Purchases of fixed assets of $3 million net debt payments of $3 5 million.
Inventory level slightly increase during the quarter following delay in the shipment of products related to our tender in Bolivia, let's.
These products will be shipped during Q2 of this year.
Despite the increase in inventory in the quarter work is ongoing to reduce our inventory on hand to free up cash which.
This should be a net positive for our balance sheet moving forward.
Okay.
In the first quarter of 2023 net cash used in operating activities was $8 6 million compared to $16 9 million in the same period last year and $8 3 million decrease.
It was probably driven by changes in working capital, specifically inventory accounts payable and accrued liabilities and accounts receivable.
We will continue to be prudent in how we manage our liquidity as a reminder, we have outlined our prudent capital program for 2023 with about $12 million to $15 million focused on advancing our work with hydrogen and adding test cell capacity.
Again, we invested about $3 million in Capex during the first quarter of 'twenty three.
I'd like to take a moment to provide an update on a few items that occurred in April .
On April 1st we entered into an agreement with Cartesian to terminate the initial financing and consent agreement in exchange for mutual releases any future obligations.
This included the release of a security interest in our H P. D. I, two point out fuel system or intellectual property.
Paid $8 7 million, which resulted in elimination of the minimum future royalty payments totaling $7 9 million.
On April 26, we announced that our board approved a share consolidation on a 10 to one basis, which is expected to be effective in early June .
With that I will turn it back to David.
Thank you Bill.
Westport fuel systems products are critical to Decarbonize travel transportation.
And because our products are affordable they can and will scale as the world gets more serious about Decarbonising transportation Westport is ready.
2023 is an important year for us as we focus on enhancing our financial performance driving margin expansion revenue growth and technology development.
While we're pleased with the progress we demonstrated in Q1 of this year, we recognized that we still have substantial work in front of US we know we need to deliver both financially and operationally.
Capturing efficiency delivering revenue growth increase the margin and developing great products and technology are our priorities, our recently announced Chief Technology Officer, SAPIEN Rodin will lead our team to develop and deliver clean alternative fuel system products from concept to customer so the global transportation and off road markets.
And with that I'll turn it over to the operator to open the call for your questions.
Thank you we will now begin the question and answer session analysts who wish to join the question queue May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing.
Keith.
To withdraw your question. Please press Star then two.
The first question comes from Colin Rusch with Oppenheimer.
Please go ahead.
Thanks, so much guys.
Could you talk a little bit about the competitive landscape for hydrogen with internal combustion engines. You know we've seen some announcements around spark ignited solutions just wanted to get your sense of immaturity and relative performance.
Performance that you're seeing and expecting the two approaches.
Hey, good morning, glad to talk on that topic. Thanks for the question.
So interestingly you know I think everyone in the world sees the hydrogen opportunity right as we think about how do we get to a zero carbon fuel that's basically the only one before or.
For the long haul heavy duty application.
And I think everybody is realizing that the challenges that remain but fuel cells are they'll have a place but that.
That leaves the door open for the internal combustion engine, which has a tremendously well established reputations installed base around the world.
But the vast majority.
Are headed down the path of spark ignited engines I'll say as their first attempt.
And what they're finding is that this is challenging so I E.
You commented a little bit about the Vienna Motor Symposium.
There were a quite a few papers about spark ignited internal combustion engine.
What this requires and what results from a changing and engine into its broken that engine is really tremendous in terms of the effort required and rather poor in terms of the performance that results.
So basically with our HDI product.
We eliminate those challenges. So I think people are literally a GOG when they understand that we can apply H PDI to a diesel engine.
Change almost nothing right not changed the piston no change to the air handling system no changes to the the combustion formula or the peak cylinder pressures or any of the fundamentals of the engineer hardware. The engine just adapt our fuel system.
None that engine on a diesel cycle and half performance better than the base diesel engine by 20% on power about 15% on the tour.
10% of efficiency.
And.
That sets us apart from the spark ignited engines by <unk>, which really is a consistent with what we have today with HPA and natural gas.
We're a leading market magazines and journals have demonstrated that our products that use HP I had a significant fuel efficiency and performance advantage in the marketplace today with natural gas and that advantage is accentuated as we go to hydrogen.
Does of all the changes that are required if he chooses spark ignited approach and so while people are trying a spark ignited because it's a I would say relatively obvious to try.
The results are less in compelling in terms of the performance of the engine the fuel efficient engine and and and the offered in the marketplace in terms of how much you have to invest to create such a different engine in order to work with hydrogen and yet how simple it is with HBO. So I think we're well differentiated.
And that acts Expo and hand over last year, we were able to have these conversations to help people understand and then again at the end of mothers symposiums and so we'll continue to do that so we had team members had an important conference in Sweden, just last week and will continue to help our customers understand.
The opportunities for the present and that manifests itself.
When those customers bring their engines to us and say show us an RMT.
So we've talked about the projects we have going already we think it's a really exciting time for us to demonstrate that that differential that we offer with each PDI that can't be replicated with somebody else's system.
Perfect. Thanks, So much and then just a quick follow up on our supply.
Supply chain.
Are you seeing a real easing the you know to the point, where you might be able to come down inventories just from an overall level.
As we go throughout the balance of the year that's it for me. Thanks.
And so I think fundamentally on supply chain. We have two stories. One story is our electronics and that story is somewhat improving but not to the point that it's going to allow us to dramatically change our inventory situation as the players are still allocating products, we're still having to.
Put out long orders, yet as far as those long lead time used to be you can get chips in a matter of a few months and now it's 18 months. So this is really constraining our supply chain management, and causing us to have to have that extra stock on hand, if we don't see that abating significantly with respect to electronics.
With respect to the rest of the supply chain I would say the only battle of inflation there.
Placement on material costs, and so we see inventories going up just because that's your costs more but in terms of adding a hold more inventory because of supply chain problems. We don't see so much of that other than electronics.
The next question comes from.
Rob Brown with Lake Street Capital markets. Please go ahead.
Good morning.
Good morning, I was wondering if you could give some further color on the price adjustment that the OEM launch partner with that for the old system orders that apply to this sort of next generation system and really what was the sort.
I guess, a sense of scale on what that price adjustment.
Yeah, Thanks, Rob either obviously.
You'll have to take that Bill go ahead.
No you go ahead.
Got it.
Yeah, we've been as he talked about you know we've been dealing with inflationary pressures on our system pricing.
And you know we've been in discussions with with our partner.
On for <unk> systems and came to an agreement.
On incremental pricing to cover offset some of those.
Increases as a result.
The inflationary pressures that we're seeing.
So you know that definitely helped.
Both the topline and bottom line kind of mitigate some of those pricing increases that we're seeing.
Yeah.
Yes.
Okay, great to see.
And then I.
I guess sort of the environment is stabilizing in terms of LNG pricing, but you said they would there would be some timing differences in terms of demand response, I guess, what's your latest view and when that price improvement has sort of translate into demand improvement.
Yeah, So I think that the market behavior, we see obviously every customer does their own thing, but fundamentally when you aggregate all of that our people are quick to to stop purchasing and slow to restart purchasing so because they really when you buy an asset like a truck.
You want to know that it's going to be a fruitful asset tier lead operations over three to five years and and then have a good resale value at the end.
When there is a price shock like we endured in 2022, there is a hesitancy throughout the industry about going.
Getting back into LNG trucks Nonetheless.
They can't stare that fuel savings and operating cost savings in the face for too long without taking actions and we're confident the market will come back the kind of aberration in the market behavior. We had in 2022, primarily due to the war in Ukraine, and the disruption of LNG supplies from our natural gas supplies from Russia really in.
Back to the market heavily and now we have a normalized situation again and this applies around the world. We're also seeing that in China, and so that's really important for our business and we already see a customer interest coming back.
We think this too shall pass it does take some time, hence the comments about the lags in the marketplace you see you know when customers.
Do place an order for a truck.
Then that truck is scheduled in the truck is built in the circuit. So limited that takes some time, so where do you see the kind of the return being more robust in the third and fourth quarters of this year than in the second quarter.
Okay great.
The next question comes from Chris <unk> with RBC capital markets. Please go ahead.
Hi, Yes, good morning, and thanks for taking my questions.
I guess I just wanted to go back to that last question and maybe asking a little bit differently. You know I guess I understand that you can't really provide too much detail on price renegotiations with the OEM customer, but maybe just thinking about the.
The impact Holistically on the on that segment in the OEM segment.
How should we think about contribution margins on the H PDI sales kind of going forward.
Does this really put you in a place where that at current volumes is it kind of contributing more meaningfully or are you still kind of.
In a situation where volumes really need to come up a lot more before yeah.
Yes margins can can really be accretive.
So Chris Thanks for the question fundamentally you know I think it's important to say every system. We sell it is accretive to the bottom line today elevates PDI, but fundamentally what we do want to see is kind of a bit of a chicken the chicken and egg problem.
I'll, let the volumes to be high so that we can get the economy of scale to get the cost down so that a customer can sell both high volume and we can offer them a price that's attractive in the marketplace.
And we can have a margin that are beneficial to our shareholders and our bottom line of our company. So that's the the jarrah generic textbook Ah, let's say playbook for our business and our what we're coming out of it right now with the low volumes due to the higher LNG prices last year.
And so we're looking forward to the higher volumes.
And the ability to offer customers the product at an attractive price in the meantime, we will work with our lead customer to make sure that we work through this and do so in a way that's good for both parties.
Got it okay I.
And I guess, maybe just shifting gears, a little bit to the a M business.
Yeah Yeah.
It's a good growth potential here in the back half of the year and kind of thinking about that that I went through that I think a year or six business.
How should we think about the margin of that of that new win.
In relation to where you're at kind of today at around 20% margins as that business sort of in line with what your where you're at today.
So for that business you know, we're really excited about the launch in Q4, and and really not just a lunch with the fact that we've learned also the follow on business to keep going and grow that business as a function of timing as new Newport customer. So that's a very <unk>.
<unk> business in terms of margins, we do see it I would say more in the kind of standard range than something that exceptionally high or low. So I think it's fair to say that.
Got it thank you.
Okay.
The next question comes from Amit Dayal with H C. Wainwright. Please go ahead.
Andrew Good morning, everyone just quickly on sort of the well.
The hydrogen components pipeline David.
This was around the 100 million.
You in the last conference call.
Has any of this started converting into orders yet.
Yeah. So thanks for the question Amit good to hear you this morning.
Our hydrogen business is really a great growth story for the company, but I would say we're still in the early stages, so and when I talked about previously the the $100 million of new business that you can secure a this is really all I would say in our future still so the growth. We're having today is the sales of our current 350 bar systems and components.
In North America, and China, primarily and Meanwhile, because of the push around the world on hydrogen we're just fielding a tremendous amount of inbound RF queues and project requests from customers and in basically every geography.
Europe , North America, and Japan are really around the world everyone recognizes that a hydrogen is an important fuel for the future for many modes of transportation fuels that will be a part of the solution and we have a great products that are recognized around the world also in China. So are we.
We see a really big opportunities, but the the $100 million has it started to hit the income statement at this point in time.
Understood. Thanks.
Thank you and then for the Euro six and Euro seven you know.
Revenues coming through those contracts is that a base case scenario, David or is there upside to those numbers.
Yeah. It's a good question. So so this is a.
How our customers seeing the market developing there is a ramp that has been going on for years with respect to LPG products in the marketplace being more and more meaningful we see this in our delayed OEM business as an example, a different business than what we're talking about but fundamentally the same phenomena work basically.
Customers are able to or are interested in asking for LPG products and Oems are responding somebody having a delayed OEM product others by having a direct OEM supply, where they're installing the or parts of them are in their factories. So looking forward.
I think it's a it's a lot of crystal ball gazing AR as we try to understand where the market will be a two or three or four years out, but what's the very compelling to us is that our customer is committed to high volume production and next generation emission standards and the continuation of this product and has chosen us as their supplier.
Okay.
Okay.
Thank you David that's what it is.
Thanks Alan.
The next question comes from Bill Peterson with Jpmorgan. Please go ahead.
Hi, This is Maggie Mexicana Peterson and thank you so much for taking our question.
Maybe touching on the E on contract as well how should we really think about the cadence of revenue generation.
Beginning in 2023 onwards.
And is there any additional spend kind of required to help ramp up that production as well.
Yeah, Great question. So good to speak with you. This morning and thanks for your question at the the spending required actually this is largely the case, where Ah theres minimal spend requirement that there's a bit of development and validation that we do and there's a bit of augmenting our our capacity as the ramp occur some.
More in the out years, not in 23 or 24.
But basically the our customers come to us with a number of models and as they increasingly as they change those models and change in sourcing and like that.
Provider do you want to.
Higher for them the volume grows for us and so you kind of see that in the revenue figures you provided $38 million over the next two years, and then $40 million annually going forward that that volume ramp.
Progresses over time for Us and and then you have the market dynamics and so when we get into the out years. There is a Muslim capacity when you put in place in the in the 'twenty five 'twenty six time frame to support that that ramp with the euro seven product, but nothing in the near term.
Got it that's really helpful. Thank you.
And then how should I think about Chris Mike.
And how should we think about gross margin trajectory as we move through the year and what are some of the puts and takes that could really drive it.
Or maybe potentially a little bit weaker.
Yeah, I think you know from a gross margin perspective, you know we're really excited about you know what we generated during the quarter.
And there's still work to do on improving our gross margins and a lot of it is you hope that you know, we're starting to see somewhat of a stabilization.
In our supply chain and.
Are you passing on those incremental cost to our customers.
Just to try to preserve that margin and you know, but we got to be very careful.
Terms on how much we pass on a.
Price yourself out of markets.
Another important factor.
Proves our gross margin and you know this is.
Uh huh.
New LPG business Thats coming on later on this year will help our <unk>.
Margins as well because it drives throughput within our existing capacity.
And so we will expect more of that.
You know profit dropped to the bottom line.
No, we really don't have to make.
Significant investments.
This additional capacity in terms of Capex, so there'll be a little bit from from working capital, mostly inventory to start preference for that so.
So we still have work to go on our margins.
And you'll eventually.
We do expect to hopefully see some improvement hopefully.
Inflationary pressures come down we start.
Increasing.
Taking out the capacity that we have more production standpoint.
But we still have work to do.
Yep.
Okay. Thank you so much.
The next question comes from Eric Stine with Craig Hallum. Please go ahead.
Good morning, everyone.
Good morning.
Hey, So I know you touched on it a lot here, but I just wanted to go back to the.
The situation with the contract with Volvo.
I mean should we think about the so the price adjustment in the first quarter. I mean is this something that we should kind of view as more of an interim.
Agreement, while you work towards you know potentially a new one or is this one where there may be some quarter to quarter variability, where it's kind of an ongoing.
Negotiation basis.
Yeah go for the second category of Eric. So so we have ongoing negotiations so and as mentioned in prior.
Calls, we do have a contract with expiring early next year and that will be or are in the process negotiating oh.
What would be the next turn of that contract and in the future. So so it's a it's a work in process and we feel good about the results that we achieved.
So far this year, but as the market moves and as our material costs rise and as the business unfolds. We have to continue to work with the customer to do that but we see.
A productive environment with our customer to do that.
Yeah, I mean, it would seem to be a good at least a good indicator in advance of that okay.
Maybe just turning to you know again sticking with H P. D. I N LNG the the launch of the new the new longer range higher powered.
Truck offering.
You know I I I can understand a pause or a little bit softer in advance of that but maybe you know thoughts on you know maybe over the next couple of quarters or maybe even into the first half of 'twenty for you know what that potentially looks like when you kind of balance that pause and then you know what.
Potentially as you know pretty nice demand there with what we also have talked about for quite some time, it's the impact that lingering impact of the price the 2022 higher LNG prices.
Yeah. So I think you understand it well in terms of you know model change and what that means is a now the announcement is out there our customers are saying that's the product. They want you know I think 500 horsepower is a really important figure in trucking around the world.
Of course, everyone can drive the 460 horsepower product or the 420 horsepower.
But fleets really like to have that added capability of 500 horsepower and so there is some kind of magic number that's a really important in the marketplace and customers are wanting that Moreover.
In long haul trucking.
People want to go as far as they can go with the tracking so the extended range that is offered through the efficiency.
That was unlocked in the product and the range that was unlocked by a larger tank also very appealing. So we have this phenomena kind of the opposite of a pre buy instead of instead of buying in advance of the emissions change they're waiting in and buy later when the new practice available. So and then I would say importantly in the marketplace you know.
I think our product is generated in our customers' product generated a very strong reputation and there's a lot of pull for it and through all the difficulties that we've had in the last few years in Europe , with Covid, and Ukraine War and inflation and chip supply all these challenges.
We see that the trucking and the admissions pushed around the world to clean up trucking has persistent and even accelerating so when we think about our 2030, but that 45% reduction in C. O. Two now being proposed turns requirement in terms of reduction of Seo to 90% by 2040 <unk>. This is really pushing in the direction.
And in fleets understand and Oems to understand that they need to move in the direction of a cleaner trucking and then they see how our offerings at H B D. I first with LNG, then with bio LNG then with hydrogen is a really excellent path to follow very affordable very practical delivers for the trucker.
And that doesn't require a lot of investments. So we see that the all the all the indicators are pointing in the right direction. So we have to get through this year, a challenging transformational year for us and that would be a very bright future already and hopefully in the fourth quarter and then into 2024.
Yep understood. Thanks last one for me maybe for Bill just you know I know that.
Potentially securing more debt just to feel more comfortable on the balance sheet has been a priority and I know that that's often centered in Italy, where you know a lot of the operations are in the light duty business. So maybe just a status update on that.
Okay.
Yeah, No we are continuing to pursue.
Options around that.
Or is.
In Italy, a few weeks ago.
Meeting with our you know our local bakes in talking about what options, we do have available.
You know it is attractive you know there are still.
Hi, Ian.
Government programs.
Billable, which you know, especially the guarantee of the deaths.
Which in turn drive substantially low interest rates on those loans.
We're gonna go you know we're in discussions with the banks and pursuing those as well as we're evaluating other options.
Here at the corporate level in terms of debt financing.
Okay.
Okay. Thank you.
The next question comes from Jeff, Jeff or Osborn.
T D. Cohen. Please go ahead.
Yeah.
Hey, good morning, just a couple of questions on my side, what's been already addressed.
Should we think about linearity through the year I know you don't give quarterly guidance, but should we think about <unk> being similar to Q1, and then a ramp up in the second half.
Well as you know we.
We do.
You know, we do have seasonality in our revenues and typically our second quarter.
Is kind of the highest quarter in terms of reps during the year. However.
As David mentioned, we expect we're seeing a little bit of a pause.
In the heavy duty business until the Ohio horsepower six Senate range.
Comes online and you know of course in the third quarter, we start seeing a dip because of the holidays and then we see the ramp up back in the fourth quarter. So you know that's how we're looking at the rest of the year.
Got it and then on the are you seeing any impact on the delayed OEM side or you know straight OEM side in <unk>.
Given where fuel fuel mixed prices are.
No I think I think you know David that you can elaborate on this thing I think that's one of our bright spots in the Toledo OEM business, we've seen significant increase.
With with D R.
And that's going to go really well.
Bright spots.
In our business and we continue to see year over year growth in our Toledo young business.
Yeah, I think the element there that's hard for us to really put our hands around and be confident in on is how many vehicles are the OEM is able to produce and ship.
Like us they are facing chip correctly, too and so far that hasn't adversely impacted our customer D R, but our Korean customers have been.
Affected as well as our Japanese customers, so it depends customer to customer, but I definitely see an opportunity in the near term, it's still a for them. They don't have these LPG price spreads.
Or really a serious driver of our business right now where frankly, we have never been as large as they are right now with the people able to say you know 50 60 Euro every time, they sell that they run and LPG and that and frankly, you know a lot of jurisdictions around the world to have backed off on the incentives for battery electric.
And hybrid vehicles, that's another's vehicles that looked attractive because of the incentives don't look so attractive and people are looking for lower cost opportunities in that point. So that's straight away to LPG little cost to buy and lower cost to operate.
Got it.
My last question David is just that the extra one of your competitors on the spark ignited.
Presented sort of a vague timeline as to when they thought.
Their solution with commercializing I think they talked about a field trials to field testing in the second half of 'twenty.
Through 'twenty six and then volume production for revenue and 27 is there any rough timelines that you can put out there for your H P. D. I hydrogen solution and when do you think you'll start actually havent field trials as opposed to testing that's presented at shows like Vietnam and others.
Yeah. So I think what I would call as we will have maybe in the more near term. Then you were just talking about demos of vehicles. So we're talking with a number of different parties now about where we can demonstrate our technology in a larger way Oh 510, 15 trucks within that that are.
In terms of Oh, maybe we call those field trials to see about the word but fundamentally that that is in a in the near future.
In terms of production I think this really depends more than anything else on availability of fuel in the marketplace and frankly, we need green hydrogen I think.
Gray hydrogen this might be good for a transition period, but frankly were making hydrogen from natural gas, we shouldn't bothers just sneak a natural gas into LNG trucks that are very efficiently using our fuel system. So that's my view is really the timing of production and volume is more driven by the <unk>.
Availability of green hydrogen affordable green hydrogen in the marketplace.
We're ready.
It's all I had thank you.
Thanks, Jeff.
The next question comes from Mac whale with <unk> Securities. Please go ahead.
Hi, just a follow up on that the Euro seven LPG business you talked about in 2025 I'm. Just wondering if you could give us the basic underlying assumptions on that forecast and how do they compare to today I'm, assuming you have things in there like truck sales cost LPG diesel spread that type of thing I just wanted to understand what you've put into your model.
In that timeframe.
Yeah. So maybe it's a two part question Mexico, So with respect to the Euro seven that we've been talking about primarily this is on the light duty side and this is a new customer for us and what we see with the Euro seven is that we've been awarded more of the total models are that this this OEM mix and so therefore, our volume will grow.
What exactly the market is in 2020 five 'twenty six 'twenty seven timeframe as a zero seven comes into play and how that how the business looks at that point in time is maybe anyone's guess, but definitely our customers says it's up into the right. The market is growing people are asking for and demanding a these are.
The low cost to acquire a low cost operator product.
In terms of the trucking market with our with the Euro seven I think that no. One sees this really is a barrier to further growth of our clean fuels in trucking, whether that's natural gas or hydrogen.
So we responded to the regulations has no problem and again the driver in the second half of this decade or the C. O. Two standards starting in 2025, and then going into 2000 32040 and that applies also to cars as well as Texas really driving customers to look for cleaner fuels that they can use.
With that with our technology.
So as the projection and one based on your view of a certain number of vehicles have to be cleaner of a certain amount. So it's top down on emissions basis rather than.
Our bottom up looking at particular customers and and and sort of a production schedule is that how youre doing that I'm just trying to figure out with 40 million euros pretty precise number I was just wondering what goes into that.
Ah I see its afford them. Okay. So so basically this is a this is the calculation based on a combination of units and selling price and it is our expectation.
On us by our customers. So there's always a chance to exceed that as always since the fall short, but that seems to be an appropriate number for us it's very meaningful obviously for our P&L and of course, our top line and so we're yes. It's.
It's a combination of factors and Mac, we looked at all the factors in the marketplace, we listen to our customer we can make our own judgment and ER and then we get some rounding so it it sounds good and easy to remember.
Okay, but it is based on its based on reaching certain points like cost points I'm trying to figure out like.
We have our own forecast and I'm trying to figure out whether you are 40 million Euro forecast is consistent with the assumptions that I'm using so it maybe it maybe it is maybe it isn't so I'm just trying to figure out how how much of that do I do I incorporate into our model because it said.
A good number to have that you've put out there I just wanted to make sure.
It's based on things that I'm thinking are are are aligned with my own thoughts.
Okay.
Yeah, and I'm not sure how to advise you on how to how to do your model in this regard, but I can say that this is this is our calculations based on our read of the marketplace and.
Our work with our customers. So I think it's a good number.
Okay, great. Thanks, that's all I have.
Thanks Mac.
This concludes the question and answer session I would like to turn the conference back over to Mr. David Johnson for any closing remarks.
Thank you very much.
Thanks, everyone for your time today really appreciate you joining in the Q&A.
Really as we look at this quarter, where we're quite I'm satisfied that it is an improvement over prior year. Nonetheless this for us the 2023 is quite a transformational year as we put the past behind us and set our sights on the future we have really important.
This is coming as the heavy duty LNG market recovers and as we launch for our new customers. Later this year and so looking forward to continue the conversation we have a number of opportunities yet this month, we're oh at the Oppenheimer emerging growth conference. This Thursday next week with RBC at their automotive.
And Industrials conference.
Then we'll be with investors in London, and it with TD Cowen and we'll end the month at Craig Hallum Conference in Minneapolis, and be glad to be back there in person with a fabulous team.
So thanks, everyone for your time and have a good rest of your day and see you soon.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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