Q2 2023 Westport Fuel Systems Inc Earnings Call
Good morning, My name is law and that will be a conference operator today.
This time I would like to welcome everyone to the Westport fuel systems Q2.
Only 23 conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press Star and then Mikael.
Yeah.
MS. Ashley Miller, you May begin your conference.
Good morning, everyone welcome to the Westport fuel Systems' second quarter conference call for the 2023 fiscal year. This call is being held to coincide with the press release containing Westport financial results that was issued yesterday.
Today's call speaking on behalf of Westport is Chief Executive Officer, David Johnson, and Chief Financial Officer Bill lacking.
On this call is open to the public that questions will be restricted to the investment community. You are reminded that certain statements made on this call and our responses to certain 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 to you David.
Thanks, Ashley Good day, everyone I am pleased to be with you to review our 2023 second quarter results.
Today, Bill and I will walk you through an overview of those Q2 results also an update regarding our growing LPG business and finally I'll speak about our planned H P. D. I joint venture that we involve BOE announced in July as this marks an important inflection point for Westport H PDI business.
On a consolidated basis last part delivered record revenue of $85 million up 6% compared to last year.
In addition, we continue to deliver improving gross margins both in dollar terms and as a percent of revenue.
This quarter's topline record result was primarily driven by increased sales volumes in our delayed OEM electronics fuel storage businesses and additional revenues in our independent aftermarket business due to increased sales volumes in Africa, Eastern Europe , and South America.
These are partially offset by lower sales to our light duty OEM customers in India, and lower sales volumes in our hydrogen and heavy duty OEM businesses.
Regarding sales volumes in our heavy duty business earlier this year, our European H began launch partner Volvo announced that they would launch new bio LNG fueled trucks with more horsepower increased efficiency lower emissions and an extended drag range.
As is typical with new product introductions, we expected. This model changes to result in lower sales volumes, leading up to the launch and higher volumes. Following the launch we saw exactly that in the second quarter and we're looking forward to the volume ramp starting later this month and continuing into <unk> and beyond Q4 of this year.
We've said for some time that we're a leader in the LPG space and that demand for our clean low cost LPG solutions continues to grow.
Our announcement yesterday morning fully confirmed our leadership claim as.
As a direct result of our excellent products and technical services, we've added to our previously announced euros, having supply agreement and as a result, we will become the exclusive supplier of Euro seven LPG fuel systems to our customer a leading global OEM.
As we announced about a year ago will begin delivering euro six LPG systems to this customer in the fourth quarter of this year and we will continue to supply them as euro seven comes into effect. These.
These supply agreements for Euro six and you also have an LPG systems add materially to our revenue and market share and leverages, our existing engineering and production capabilities.
As a reminder, the euro six deliveries begin in Q4 of this year that will generate revenues of 38 million euro over the following two years.
The newly announced supply of Euro seven LPG system is forecast to generate revenue of $63 million Euro through 2028.
This increases the total revenue generated from the LPG fuel system supply agreements for Euro six and Euro Cebu with this OEM to approximately 255 million euro.
We look forward to the opportunity to continue supplying a new customers for the longer term that is beyond 2028 and in markets around the world.
The ability of our alternative fuel systems to provide customers an affordable way to use cleaner low cost deals is also driving growth in our delayed OEM business.
More Oems are taking notice of our fuel system products and vehicle conversion abilities.
We grew delayed OEM sales volumes again, this quarter as compared to Q2 of last year due to increasing supply of LPG systems to Dr Motors.
Dr Motors has been growing strongly during the last few years by offering low cost LPG fueled vehicles can be Italian market.
Recently, they've accelerated their growth by adding sales in Spain and eastern Europe .
As demand for LPG fueled vehicles increase across Europe , Dr Motors has been gaining market share.
We're pleased to be the key supplier of LPG fuel systems to Dr Motors.
We expect the LPG market to continue growing at the LPG price advantage is substantial and many of our key markets. As an example in Europe , we've seen it LPG price advantage that equates to in U S. Dollar terms more than $6 per gallon for customers, he fueled with LPG compared to those who fuel gasoline.
This kind of LPG price advantages, playing a key role in consumer's decision, making and Westport had the products to respond to this growing customer demand.
Oems are also taking notice of this increasing demand, which we expect will persist in a variety of markets globally for decades to come.
Although our heavy duty business experienced an expected volume slowdown this quarter, we see a very bright future for HPT I.
H P. D is the most affordable and practical product for reducing carbon emissions in long haul and heavy duty applications.
LNG pricing in Europe has returned to an advantageous position relative to diesel fuel and this price advantage is a key driver of fleet demand, enabling fleets to run on cleaner fuel with reduced operating cost that is lower T. C O. The key metric for fleets.
And our planned H B D I joint venture, we expect to accelerate the commercialization of <unk> globally.
Following five plus years of field experience with HDI Vulval has given west parts H B, a a big vote of confidence.
The planned joint venture with Volvo is expected to elevate <unk> market relevance and enhance our competitive position expand our reach to a wider customer base drive growth and innovation by pooling resources and knowledge and strengthen Westport financial position.
When the definitive agreements are finalized a verbal purchased 45% interest in the JV directly from Westport for $28 million.
Following the closing plan for early next year as a JV meet certain milestones Volvo will pay Westport and additional earn out of up to $45 million.
With a lot of work ahead of US both teams will be working diligently to meet our target one states in the first half of 2024.
In the near term I do want to highlight that we're pleased with the agreed pricing structure that will drive improved hbf profitability. This year for Westport and the future for our J D.
Volvo's outlined our strategy to focus on three different technologies battery electric fuel cell electric and internal combustion engines with biofuels.
Our <unk> joint venture will secure the long term future of the internal combustion engine with biogas now hydrogen in the future.
We recognize that our <unk> system offers the most affordable and practical solutions to respond to both environmental demands and fleet performance requirements.
H PDI enables the internal combustion engine to perform life or better than the diesel engine that the industry is counted on for decades.
Today, almost all trucks on the road depend on the internal combustion engine and almost all of which means way too many of those engines around high carbon diesel fuel.
Using H PDI allows diesel engines to use cleaner fuels delivering environmental benefits with economics, we can all Ford.
Both mobile and Westport are committed to attracting new customers globally to adapt H VDI, primarily in long haul and off road applications. Since the announcement last month, our conversations with global Oems have been very positive, including with Oems in Europe , China, Japan, and North America.
Through this partnership Volvo is demonstrating their commitment to the future of HDI and we're inviting other Oems to join them in.
In addition to the conversations we've had work on the HPA development programs. Currently underway is progressing well. This includes our workforce with Scania as well as to other Oems, who are testing and evaluating hydrogen H b I on their engine platforms with both hydrogen and methane fuels.
Focusing quickly on the near term as I previously mentioned in this call HVA volumes saw an expected decrease in the second quarter, which was mainly attributed to the Volvo's model change, we do see orders picking up as a reminder, factories in Europe are closed for about four weeks in the July August period. Therefore, we don't anticipate seamless full impacted this ramp up in volumes until the fourth quarter.
<unk>.
Looking ahead, we remain confident that Westport is offering solutions required by heavy duty Oems in order to meet future emissions reductions requirements, while delivering the efficiency and performance being demanded by their fleet customers.
As LNG pricing re established as a persistent advantage versus diesel and is the 2025 emissions regulations and associated penalties for Oems loop.
The growing realization is that affordable low carbon solutions like HPA are required to meet emissions targets.
H P. D is reducing emissions today with thousands of trucks already on the road.
We're confident that we can continue to grow these volumes with that I'll hand off to bill to walk you through our financial results.
Good morning, and thank you David and.
In the second quarter of 'twenty, three we generated our highest ever quarterly revenue of $85 million.
Percent increase compared to Q2 2022.
Our core businesses had a strong quarter, including arc light OEM electronics fuel storage businesses as well as our aftermarket business, which together more than made up for unexpected but significant decline in H PDI system sales.
Our gross margin increased to $14 4 million or 17% of revenue for the second quarter of 2023 compared to $10 5 million or 13% of revenue for the same quarter last year.
The 37% improvement in gross margin dollars was mainly due to higher sales volumes across multiple businesses.
An increased gross margin and our heavy duty OEM business driven by higher spare part sales.
Unit pricing on API systems, and the engineering services revenue.
However, our gross margin was negatively impacted from higher production costs that continue to impact our business stemming from global supply chain challenges and inflation, specifically on logistics and labor costs.
We are continuously working with our customers to pass through the impacts of cost increases where appropriate.
Couple of other important highlights that I wanted to touch on with solar.
David has mentioned really in the quarter, we entered into an agreement to Cartesian terminate the initial financing and consent agreement.
<unk> for our mutual releases of any future obligations. This included the release of a security interest in or each PDI to Plano fuel system intellectual property.
During the second quarter, we paid $8 7 million, resulting in a settlement the $5 8 million minimum royalty payable balance and record a loss on extinguishment of royalty payable totaling $2 9 million.
We finalize the share consolidation, Jill which led to the regaining of compliance with nasdaq's minimum bid requirements.
And finally, we signed a non binding letter of intent with hold to establish a joint venture to reduce C. O two emissions from long haul transport utilizing our <unk> technology.
This is a transformational events for Westport is expected to not only put us on solid financial ground.
Partnership is also expected to create more opportunities to support a brighter global growth outlook for each PDI.
We are in the next slide.
In Q2, 2023, adjusted EBITDA was a loss of $4 million compared to a loss of $4 3 million in the same period last year.
The improvement in adjusted EBITDA loss was primary due to higher revenues and improvement in our gross margin.
Higher total SG&A expenses, partially offset the increase in revenue and gross margin for the quarter, which is primarily driven by increased activity for trade shows and exhibitions, where we highlighted our <unk> fuel system technology in North America and Asia.
We also had an increase in our corporate SG&A driven by increased consulting and legal fees related to ongoing corporate projects, including the activity related to the letter of intent with Volvo.
We expect legal and consulting fees increase in the second half of the year as we move forward with setting up the JV with Volvo.
So the next slide OEM revenue for the second quarter. This year was $52 4 million compared to $54 3 million in the second quarter of last year.
As I mentioned, we highlighted in our first quarter call that we anticipated a decline in each PDI fuel system deliveries leaning into volvo's updated products release later this year.
Which is a more powerful option with extended range. We also experienced a decrease in revenue due to lower sales to customers in India.
The light duty OEM business and lower sales volumes to our hydrogen customers.
These declines in revenue were partially offset by increased sales volumes from our delayed OEM.
Youll storage electronic businesses compared to the same quarter last year.
Gross margin increased by $3 7 million to $8 4 million or 16% of revenue in the second quarter. This year.
As compared to $4 7 million or 9% of revenue in the second quarter of last year.
In addition to the increases in revenue mentioned above gross margin was positively impacted by improved gross margin in our heavy duty OEM business from higher spare part sales.
Unit pricing on H P di systems and engineering services revenue.
This was partially offset by higher production input costs.
Gross margin gross margin percentage from where each PDI fuel system products will vary based on production and sales volumes level.
Level of development work and successful implementation of initiatives to reduce component cost.
As the LNG fuel prices continued to trend positively against diesel.
And our global releases there.
<unk> equipped engine that delivers increased four horsepower improved emissions and extended range, we anticipate points to begin improving later in Q3.
With Q4 being a full quarter at higher volume levels.
Also we continue to see a significant improvement or a reduction in our warranty claims.
And during the second quarter, we do not have any adjustments to our warranty provision outside of our normal warranty estimation roll process.
On the next slide independent aftermarket the iam revenue for the second quarter. This year was $32 6 million compared to $25 7 million second quarter last year.
The increase in revenue was driven by higher sales volumes in Africa, Eastern Europe , and South America.
Gross margin increased by 200000 to $6 million or 18% of revenue in the second quarter. This year as compared to $5 8 million or 23% of revenue in the second quarter last year.
The increase in gross margin dollars is related to higher sales in South America.
And the decrease in gross margin percentage is driven by lower margin sales mix and increased material costs.
Looking ahead supportive LPG pricing continues to boost the demand trend in Europe .
Important area of growth for our company in the years ahead.
In the fourth quarter. This year, we begin production for our previously announced work with leading global Oems for the supply of LPG fuel systems.
Finally, I'd like to touch on liquidity, our cash and cash equivalents decreased by $19 7 million during the second quarter of 2023 to <unk> $52 3 million.
The decrease in cash during the second quarter is primarily driven by $18 5 million net cash used in our financing activities consisting of $8 $7 million settlement of a royalty obligation a reduction in borrowings under our revolving financing facilities and scheduled principal payments on our term debt.
We did realize a significant improvement in cash used in operating activities in the second quarter, which declined to 41000.
This is compared to $16 5 million in the same quarter last year.
This improvement was driven by a change in working capital specifically accounts receivable and prepaid expenses.
We continue to take actions to monetize existing inventory and optimize inventory levels to further free up cash.
Positive for our balance sheet going forward.
Given the large one time payment in the second quarter cash use was higher than normal.
Although we believe we have sufficient liquidity to continue as a going concern beyond August 24.
Long term financial sustainability of the company and will depend on our ability to generate sufficient positive cash flows from all of our operations specifically through profitable sustain.
Sustainable growth from the ability to finance, our long term strategic objective and operations.
Our recent <unk> announcements with Volvo is an inflection point for Westport financially viable.
<unk> payments.
With a 45% share of the joint venture includes the initial 28 million and an earn out of up to $45 million, which is a clear signal of their commitment to the future growth of <unk>.
And this also helps shore up our balance sheet.
The joint venture is focused on driving global adoption of HCI and a long term improves.
Efficiencies and scale, while in the short term, we have a partner to share and the required investments.
<unk> working capital and capital costs.
We will continue to be prudent in our liquidity management and multiple steps are being taken to do so.
Additional depth remains an option as we look to solidify our balance sheet.
We continue to do what is necessary to ensure we are adequately and fully capitalized.
Thank you and with that I'll turn it back to David.
Thanks Bill.
I'll close with a few comments.
And then we'll take your questions.
Our products are making material impact on the decarbonization of the transportation industry.
And the magnitude of this impact will only grow as we get these products into the hands of more customers.
Westport core business the strengthening year to date are delayed OEM business, achieving growth of almost 100% with more growth on the horizon.
In Q4, we will launch our euro six LPG systems for global OEM, and we expect the growth of that business. The next few years will significantly add to our topline and bottomline.
The announcement of our expanded scope to be the sole supplier of euro seven LPG system for this OEM is confirmation of our position as a leading supplier to the industry.
In our independent aftermarket business pricing for LPG is favorable in many markets around the world. However, the impact of inflation is weighing on demand in some areas yet in light of these complex market conditions, our high quality cost effective direct injection technology continues to be an industry leader and is driving increased market share.
For any start up entrepreneur market validation is a key marker of future success in an event that can be decades in the making as it has been for us.
The planned <unk> joint venture with Volvo is transformational for Westport and is expected to unlock the future of HDI with this announcement, we secured the recognition of our customer Volvo and the clarity that they want to invest in H VDI and join US on this journey, but accelerating growth H.
<unk> will be a huge part of the future commercial transportation market.
This new era will be one of success with new customers, new projects more volumes and lower costs.
Finally, enhancing our financial performance has been a key focus in 2023 included but not limited to driving margin expansion revenue growth and technology development.
We continue to see improvements as we secure new contracts and Jesup pricing, where we can we also continue to do what is necessary to ensure we are adequately and fully capitalized the planned H B D. I joint venture will go a long way to solidifying our financial viability given we now have a partner in place to share the development cost.
And with that I'll turn it over to the operator to open the call for your questions.
Thank you, Sir ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one on your Touchtone phone and then that's followed by the number one if you would like to thank via request. Please press star followed by the number too.
Your first question comes from the line of Colorado Boss.
Oppenheimer. Please go ahead.
Thanks, So much guys with the Cartesian debt retired can you talk a little bit about some of the incremental flexibility that you have in terms of other instruments around liquidity.
Sure I can I can deal with that.
As part of the Kentucky, Cartesian agreement relationship and security.
Over our API.
Other assets.
As you're aware.
Yes.
In connection with.
Our path forward on setting up the JV that we needed to free up their IP is thats going into the JV itself.
Also.
One of the reasons behind that.
It does give us flexibility from a financing standpoint.
Uh huh.
Terms of freeing up collateral.
That we could potentially pledge.
With that gets into the JV.
As well as the other collateral.
So it does give us quite a bit of flexibility by paying that off in evaluating other debt financing opportunities.
Excellent. Thanks, so much guys and then with the announcement of the JV.
So you were able to make a an incremental announcement around the.
The LPG AR adoption, what can you say about customer engagement willing.
Willingness to work with you guys now that you've got a clear path for folks all the way to zero emissions.
On the solution perspective.
Are you seeing incremental demand and interest and some of the natural gas solutions as you as you've gotten that news item to market.
Yeah, Colin Thanks for the question, it's a super interesting point I think a great time for Westport.
We've been working on each be after a long time, but to have although join.
Join us in that journey, and really put their marker and a bet on this technology for the future is a very positive sign to the other players in the industry and so we've already heard that feedback as we talk with our existing customers and another customer prospects around that role that H P. I will play today with biogas with LNG and <unk>.
Tomorrow with hydrogen and as you know we've got hydrogen engines running in our test thousand it running in other People's test cells around the world. So we see a very very bright future and that having our customer. After all these years of the work we've done together and the experience they have in the field come forward and say, we got to form a joint venture with both with the Westport Super Super exciting for us.
Yeah.
Thanks, so much guys.
Okay.
Thank you.
Our next question comes from the line of Amit Dayal from H C. Wainwright. Please go ahead.
Hey, good morning, David.
Thank you for taking my questions.
Just on the <unk> JV.
How should we think about this.
Impacting the sales pipeline for this offering between now and when the JV is operational.
I guess I would say that thanks for your question.
Don't expect.
Huge.
Lyft in the near term I really expect a huge catalyst to long term mezzanine sign up more customers to do the necessary development work to bring product to market. So the pipeline right now is basically Volvo in terms of production and then wait shy with lunch in the near future and then customers felt like that that are working on hydrogen API today.
Okay understood.
And then just moving on to <unk>.
Some of the operational aspects it looks like you know so the higher input costs are not yet being fully transferred to customers is this something that will get resolved in the near future.
Yes for sure we see inflation inflation in energy cost inflation and labor cost inflation in material costs.
Well, we can pass those on to customers, we do and I would tell you. That's an ongoing process. So there's always some lag in terms of what you're able to bring back the price in the marketplace and so we have to be very careful about that too because our products are really bought for an environmental benefit but also for an economic benefit and so if it if it cost too much to buy the product it reduces the economic benefit.
So this is something we have to be careful with and managed carefully and it's our daily work of our sales team with our customers around the world to pass on what we can pass on and two to make sure our product is still competitive in the marketplace.
Okay. Thank you David just last one for me in terms of the near term outlook. It looks like you know this model transition at <unk>.
Should we assume that maybe <unk> will be a little bit lower than Q sequentially in terms of revenues.
No I think go ahead bill.
Hello.
I was going to say.
Yes.
When you look at it from a consolidated basis typically our Q3 is historically lower than Q2.
Just because of the seasonality of our business.
With respect to <unk>.
So that's one piece of it.
Which does impact our view of the heavy duty business and delivery systems.
Mentioned, we do expect.
Volt start delivering the updated version of the truck with our H PDI system on it in Q3.
They will ramp up through through the end of that quarter, and then start moving full steam ahead in Q4.
Okay.
Alright, guys.
The other the other piece too I think David mentioned it is we.
We've got.
Fair sales in there.
You know, which would continue to increase over time, as we give more and more trucks on the road.
Also engineering services.
We're getting at a pivotal point, where we can start talking about Europe , seven hydrogen and other programs as well with various customers out there who we M customers. So.
As those.
As we start moving forward with those that will have an impact on revenue as well.
Okay got it thank you guys.
Thank you.
Next question comes from the line of Rob Brown from Lake Street Capital markets. Please go ahead.
Yes.
Hi, good morning.
Hi.
My questions on the JV with Volvo.
It helps understand kind of what drives the milestone payments and additional investment in sort of the timing.
All of that.
Hey, Rob this is bill.
We haven't we haven't.
We'll disclose.
Those milestones consist of and the timing.
What we can say is they are strategically aligned with performance of the <unk> B and what are those key items.
That will all drive successful growth of the JV, so that'll be over a period of years.
Those milestones are laid out.
Yeah.
Okay, Great and then and then maybe help.
We understand the how the JV kind of drives other customer interest in the and the HPA product are you.
Valuable to kind of invest to develop product is it.
Are there customers sort of.
Following Volvo with kind of a rig rigs out there and trying to meet that.
The emission standards I guess just to help understand how how you see additional customer demand coming in the business.
Yeah, I think theres a lot of things going on in the marketplace right now Rob with respect to which technologies will be the technologies of the future.
For heavy duty long haul trucking.
Is it tuck on fuel cells tuck on battery electric and there's biofuels as a lot of I'll say options.
[noise] technical options for Oems to pursue.
And for a long time, we've been touting, our H P. I as a key element of the portfolio solutions that'll be required.
And everyone knows in the industry that the this product has been in the marketplace and selling in and picking up share.
But it's a it's a next step of really understanding and knowing when our customer comes forward and says yes. This is a really important part of our portfolio.
To respond to the regulations to make fleets have trucks that are cleaner and economic to operate and so really it's kind of.
A marker for the industry to have this customer our customer Volvo with all their experience the products say this is part of the future.
And Meanwhile, I'll tell you that.
The Oems have been working with fuel cells have been worked with battery electric we have been doing this there's demos and.
One vehicle here 10 vehicles, they're kind of thing and.
And they're recognizing the cost of these vehicles and the challenge that is for commercial trucking.
And so then to have this formation about joint venture between Volvo in Westport around each PDI and.
And recognizing what we've shown with hydrogen and that being a really important part of future I think it's a new ingredient and added ingredient and hopefully a catalyst for the market to recognize where HPT I can play in heavy duty long haul trucking.
Okay, great. Thank you and then on China could you just give us an update on how that market is developing and.
And maybe where that's at.
Yeah. The good news in China is that we continue to work with way Chi.
Now all the necessary steps to achieve launch they've got certified product.
At the engine level and at the vehicle level with their customers.
And the market is improving so basically globally, our LNG prices natural gas prices have a.
Stabilize at a lower level and so there's an advantage it's been reestablished.
Versus diesel in Europe , but also in China and so this basically is the key ingredient then catalyze the market enable us.
To bring HPT out to the Chinese market is.
Fuel price advantage. It gives you a T C O advantage and a customer with a certified product that can bring that product to market. So we're really excited about the potential to have some good news to share with you in the future.
Okay, great. Thank you I'll turn it over.
Thanks Robyn.
Thank you.
Next question comes from the line of Eric Stine from Craig Hallum. Please go ahead.
Hi, David Hi, Bill.
Good morning.
Good morning.
So I know you've talked a lot about <unk>, yeah, So maybe I'll focus on some other areas.
For the OEM I mean, this is kind of momentum that we haven't seen in quite a while and I know Dr.
Strong in Italy, taking it to other markets. So curious your thoughts about.
How early or what that means.
In terms of going to other markets, but also I would assume other Oems are seeing the market share gains they see the economic benefit of using LPG.
So maybe what that also means for your D OEM pipeline.
Yeah. So I think this is.
A really interesting story relative to Westport, we've announced the just yesterday additional sales.
Supply agreements for Euro seven so out into the future with leading OEM and really when you look at our our aftermarket business and the LPG business in general which are highly linked.
We're seeing benefits in markets around the world for our LPG systems, and it's a low cost access technology and it's a low cost to operate so that that figure I talked about just a little bit ago of $6 per gallon.
I turned it into gallons so it would be easy to understand.
All of us in the U S.
This drives the behavior of customers that people are looking for lower cost ways to access transportation and excess clean transportation and our systems, whether they are applied an aftermarket basis or that are planned at a delayed OEM basis, where we do the install of where our customer or whether they're applied by buying in LPG vehicles.
By an OEM, we see this growing and so in places like Italy, and Turkey, and Poland. There is a substantial market share of LPG vehicles, and we see that growing in markets around the world because of this economic advantage and so it's a real bright spot for US we're super excited to have secured this new business on the OEM.
Side and that we think the delayed OEM is a quicker way for Oems to get to market and that we're glad to help with that and the D. Our story is a great success story for Dr. But also for Westport fuel systems.
Yes, absolutely, Okay, and then maybe last one for me.
I will go back to each PDI and you've detailed kind of.
The change in stance from Volvo certainly bring.
Validation.
Then other Oems as well, but.
Curious what this means for other markets.
Correct me, if I'm wrong, but I think theres been some penetration small in Canada under some waivers.
Curious I mean is this something that in the call. It the next European we should expect that.
If you were to penetrate North America women's pediatric be under those waivers on kind of a case by case basis or is it possible that volatile brings it to North America under this JV.
So first of all thanks for the questions Great question right because today in the marketplace around the world. The only place you can buy an HPA equipped truck or in Europe .
For our from our perspective the.
The opportunities in China, and North America, and really a rest of world are quite significant and so.
So there's activities going on.
By our current customer and there's activities going on with the with respective customers their testing engine.
We see application in basically all the markets. So the question is when and how quickly and I'm glad you raised the point on Canada. We did some work with partners in Canada that enables.
<unk> and their customers to bring European trucks into Canada, and so we have the first of those trucks, arriving in Canada around now and we look forward to the validation of those vehicles in the Canadian market.
Because that will then prime the prime the pump so to speak for more imports. It's a it's a really exciting development for us that the.
The European Volvo truck with HP I can be imported into Canada, now and we look forward to the market understanding how much better and HPA equipped trucks is versus a spark ignited natural gas truck in terms of fuel efficiency and performance and truly delivering what the customers need.
In the field with their heavy loads and long distance travel that is certainly a key part of the market in Canada.
Okay, that's great. Thanks.
Thank you.
Thank you.
Next question comes from the line of question Dana from RBC Capital markets. Please go ahead.
Yes. Good morning, Thank you.
I guess I kind of wanted to just follow up on the second half of the year and sort of expectations and the cadence you mentioned some softness in <unk>, just due to natural kind of seasonality.
Is there anything I guess with <unk>, and then that LPG system ramp that we should be kind of thinking about our accounting for I guess, maybe specifically.
Any kind of like near term margin pressure, just with the volume ramp or anything like that thanks.
And so maybe just to hit on H P D. A.
On that topic first Chris we did we are having let's say this lower volume in Q2 because of model changes and the new model with more horsepower more efficiency longer range as we've talked about earlier.
Launches after the summer shutdown so as soon as this summer shutdowns, we'll see some ramp of that volume in and I'm looking we're looking forward to that right. What the numbers are exactly it is not perfectly clear to us, but definitely we see an uptick and so then we'll have an uptick in volume in Q3, and then more in Q4 is our expectation and that's with the improved price.
That we've been able to negotiate so kind of hitting both things some margin improvement and some volume improvement. So it should be better going forward and then in the broader scope. When we think about Westport fuel systems as we launch our LPG customer our new LPG customer in the fourth quarter.
I'd also add to the equation and again I think in the industry and with these launches it's not a step function. It is it a ramp for sure and so as we look into 2024, we have very positive outlook for the business.
Great. Thank you.
I guess, maybe just as my follow up.
I guess now that you guys have announced the JV with Volvo.
Previously been kind of I guess pretty quiet in regards to maybe any testing that you had been doing with them as far as.
The hydrogen H PDI goes so.
Anything to comment there I guess should we can.
Consider this kind of what youre doing with Volvo is maybe more.
With Scania, where it's kind of engine testing right now or I guess, where are you kind of that in that development plan or a testing environment. Thanks.
Yeah. Thanks, So one of the things we do with our existing customers is work goes on right. So.
We are regularly having.
Our current customers' volvo's engines in our tests out and doing work and certainly there are still even in the case of the JV as we as we get to those markers in the first half of next year.
<unk> will remain a customer of the JV and so I would expect that when there's a significant.
Development contracts signed there'll be an announcement from either us or the JV in the future. Thank these things are happening so.
I would expect you'll hear about those in due course, but let's say it is a normal course of business for us to be continuously doing development activities and evaluating certain technologies and calibrating running durability test. So that's normal business for us and that's running right now.
Got it alright, thank you.
Thank you.
Your next.
Next question comes from the line of Mark Wilde from Cormack Securities. Please go ahead.
Hi, David.
When you look at the new business. This fall the you talked about 38 million euros coming from that that that customer today isn't a customer. It also there isn't that's not like there's.
Revenue, that's being that it will disappear as to the new Euro six shipments on the LPG.
<unk> built is that correct.
Ooh largely correct. So basically for us this new OEM and we are southern product, it's a new customer for US we do have some parts of what they're currently using in their system that we supply through one of our competitors. So basically were a sub supplier to our competitor and they're supplying that customer today. So there is a piece of that.
We knew that overlaps but for the most part that $38 million is largely incremental.
Over the next few years.
Okay. So then in 'twenty five when you go to the Euro seven do you expect to continue to make euro six.
Shipments and I'm wondering if that 63 million comes in that's the 38 go away.
And what I mean, not exactly so what we're talking about here is first of all on the emission standards Theres still some room.
Lack of clarity in the regulations in terms of when Europe seven's required in and when it might launch and you can also understand that the Oems when they launch a new model independent of the emissions regulations, whether it is new vehicle hears it answered that.
They want to have the fuel system, there and available for LPG and so these different awards that we've announced are associated with different vehicles and so we're picking up different vehicles, along the way and when we get into euro seven we've become the exclusive supplier. We were doing all the models for this OEM and so that really is a.
Stepwise increase in our revenues and our market share of LPG systems in the market.
Okay great.
And then just lastly, I think you've already addressed this.
With one of the questions on the margin outlook in that second half of the year. Just asked another way does the the euro six LPG is that business significant enough to put pressure on the margins.
Or do you eat.
Expect to see that continue improvement as these new products launch.
The business that we have secured we feel quite good about.
The pricing, we've been able to obtain in the merchant will yield and so we see this really as accretive to the income statement and very helpful to our business I think there's also an element and I mentioned it earlier that really this business in LPG system Leverages capacity and capability, we already have in our in our Westport fuel Systems' world.
So in terms of ability to produce the parts having the capacity.
The engineering capacity to support this customer we're not adding a lot in order to respond to the needs. So it should drive a more favorable bottom line. Okay. Great. That's certainly our goal.
Great. That's all my questions. Thank you.
Thanks, Matt.
Thank you. Our next question comes from the line of Bill Peterson from Jpmorgan. Please go ahead.
Yes, hi, good morning, and thanks for taking the questions wanted to ask a question on the natural gas.
You talked about the potential for wayside coming back, but when we see natural gas prices improve.
What's the lag time on when you see that kind of roll through and result in new business opportunities.
I guess with that in mind, especially in Europe is there other opportunities or you just have to get past this sort of model changeover for.
For the business to be maybe even larger than it was steady state.
Last year.
Yeah. Thanks, Bill for your question.
Fundamentally in the marketplace.
Fleet operators.
Our buying vehicles and using them three to five years before they turn it over to get new vehicles and those vehicles become used vehicles.
And so they're doing the calculations and it's their confidence around the ability to deliver freight and do so with an economic advantage. So in environmental vintage an economic advantage and so that price differential between natural gas and diesel is something that weighs heavily in the equation and I do think it takes.
Some time right. So we had to get a price spike primarily in 2022 that LASA.
More or less the whole year following Russia's invasion of.
Ukraine so.
With that kind of history. There is some hangover. Some some some baggage that comes along but now that the price of reestablish has gone back to normal.
And yet that war is ongoing I think the fleets are getting more comfortable with the fact that they can count on that advantage and that really is when it takes us. So you asked what's the lag time, well it depends on which state you talked to them and what their competence is what their outlook is but I think are having.
Vulval, then say we're betting on this technology for the long term because we see the long term benefits.
Really helps too.
The marketplace see that this is not just a token effort that actually a fundamental effort by Westport by Volvo and by others to bring natural gas trucking and in the future headed in trucking to the marketplace. So that the fleets can access cleaner transportation and low T C L.
It takes a second question on the LPG in the progression from Euro six events in Euro seven how should we think about the margin structure between your wins in neurosurgery neuro seven it looks like you have a higher revenue base should we expect better fixed cost absorption.
This is going to be a higher margin just based off your once you're designed in just trying to get itself into margin margins as we look ahead.
And I think the I think the biggest factor here is.
Good margins on the business itself and then more absorption of the fixed cost on higher higher top line.
That makes the gross profit improved from there. So I think fundamentally it's a big piece of business that we've secured and will fundamentally improve our P&L accordingly.
Thanks for that.
Thank you. Your next question comes from the line of Jeff Osborne from TD Cowen. Please go ahead.
Hey, Thank you. Good morning, just a couple of questions on my side are back on the joint venture I was wondering at this point or if we've determined sorted the board structure, and whether you'd be able to consolidate the financials or not.
I can.
So the board structure.
Yes.
Both both partners will have equal members on the board at this point.
All the specific details will be laid out in the definitive agreements, which where we'll work on over the next.
A few months.
Respected consolidation.
We are currently looking at it we are evaluating consolidation.
Initially you know first looking at it I don't think we're going to be able to consolidate it.
And as we go through and.
Look at all the criteria as you are aware.
Several years ago used to be quantitative.
Uh-huh analysis now it's more qualitative around the decision making at the the.
The board level and how those decisions are made.
So as we go through and you'll kind of formalize the the structure. The arrangements we will continue to evaluate.
Consolidation, but as we sit here today I.
I don't think we're gonna be all consolidated however.
Irrespective of that we will have.
<unk> disclosure in the footnotes of our financial statements are you going to be able to see volumes revenues margins for that business.
You know very Florida, how we disclose the <unk> JV.
Got it that's helpful Bill.
And then I was just curious is there any feedback from.
Non Volvo Oems around sort of information sharing with our perceived competitor that's part of the JV I'm just wondering what types of information barriers and other sort of blockades, you'll be able to put up to give potential future customers assurances because my understanding is it pretty much everyone I'll need to be buying through the JV is that correct.
Just walk us through that process.
Yeah for sure. So this is.
In the industry I'll say done all the time so companies.
Major Oems work with their suppliers and sharing information with their suppliers and the suppliers responsibility.
Is to keep that information from their customers competitors.
It happens all the time and so our JV will need to do that too and that's a I'll say normal business that every supplier needs to be cognizant.
Cognizant of where of and manage because if they fail they'll lose business right. So.
In the Grand scheme of things I think at first blush people say Oh little Volvo's in this JV now now they're going to know everything and that cannot be the case. It will not be the case and we just have to demonstrate that to our customers over and over again as we do today. So we're working with multiple Oems Westport is today and in the future our JV will be doing that but I think showing.
How we do it and reassuring our customers that their confidential information will be protected is it is our job and so we'll do that.
Got it my last quick one if I could squeeze it in just for Bill you gave some comments around revenue trajectory for Q3 Q4 can you just walk us through sort of major sources and needs of cash for the third and fourth quarter.
So I think as we look forward as I mentioned Q2 it was.
We had higher than normal debt servicing payments. So I think we're going to go back to normal.
Just kind of our normal principal.
Principal payments as well as our Capex here as you mentioned, we're gonna be in $12 million to $15 million range, we're about 75 million year to date.
I don't expect any major changes in our Capex.
What are the critical areas that.
So I had in my prepared remarks is really focusing on working capital.
And you know trying to drive that down to improve our collections, we get it we have to drive inventory down.
I think.
Through those initiatives wont be able to free up some cash.
And put that on the balance sheet.
As we go forward. So that's that's what we're really focusing our efforts right now.
Perfect Thats all I had thank you.
Okay.
Thank you.
There are no further questions at this time I'd now like to turn the call back as I can be Johnson for any closing remarks.
Yes, thanks, everyone for your time this morning I think.
When I look at our Q2, a record revenues and improving gross margin I think it's a solid quarter and good performance, especially in light of the fact that our volumes on our marquee product H P. I a word.
We're rather low so with net a grand scheme of things and now with this additional LPG business to me the signs are super positive for our light duty OEM business, our heavy duty OEM business and of course, our hydrogen.
Trajectory that we have with.
With the developing for both fuel cells and internal combustion engines. So theres a lot of bright signs on the horizon for us and we're really looking forward to the quarters ahead. Thanks again for your time and the interest in Westport fuel systems and look forward to speaking with you again.
Thank you, Sir ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your line.
Lovely day.
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