Q3 2023 Westport Fuel Systems Inc Earnings Call
Okay.
Okay.
Okay.
[music].
Good morning, My name is just too and I will be your conference operator today at this time I would like to welcome everyone to the Westport fuel systems Q3, 2023 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 destroy your question. Please press. The Star then Chi. Thank you Ms. Yao you may begin your conference.
Thank you good morning, everyone welcome to Westport fuel Systems' third quarter conference call for the 2023 fiscal year <unk>.
This call is being held to coincide with the press release containing Westport financial profile of a tissue yesterday on.
On today's call speaking on behalf of Westport, as interim Chief Executive Officer, and a director and Chief Financial Officer of Dell lacking okay.
Then just on this call is open to the public 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 think about Canadian securities laws and as such forward looking statements are made based on our current <unk>.
Spectation and involve certain risks and uncertainties.
With that I'll turn the call over to your total.
Great. Thanks, Ashley and good day, everyone I'm very pleased to join you on my first call as interim CEO of Westport today, I'll provide a update on our strategic objectives before I turn the call over to Bill to walk us through the Q3 results and we also intend to keep our prepared remarks today brief so we can get to the.
Q&A.
I wanted to start off by getting some of the key highlights and top line numbers for the quarter are key to these as our excitement around our H P. D. I, a joint venture with Volvo to accelerate the commercialization and adoption of Westport H P. D. I fuel system technology for long haul and off road applications, which are.
I'll provide an update on shortly.
Touching briefly on our financials, our third quarter results saw improvements in many of our key metrics. Our Westport delivered revenue of 77 4 million in the quarter up over $6 million from the same quarter last year.
In addition, we continued to deliver improved gross margins both in dollar terms and as a percentage of revenue.
We also improved our adjusted EBITDA to a negative $3 million for the quarter from negative $4 5 million for the same period in 2022.
I'll leave it there and let bill elaborate in a moment on a more detail on the financials.
In terms of our strategic priorities, we remain heavily committed to these priorities, including driving sustainable growth in our existing markets unlocking new and emerging markets driving operational excellence and extracting efficiencies through prudent capital management.
Now near term yes.
Immediate priority is to finalize the H P D <unk> joint venture with Volvo and to elevate the financial performance across all our businesses.
I also want to walk you through a couple of other recent progress against these priorities.
First we entered new markets with our <unk> two <unk> fuel cell system solution with a proof of concept project with a leading global provider of locomotives and related equipment for the freight and transit rail industries.
Representing Westport first application of the H two H P D I system for the locomotive sector.
In our view the hard to abate medium and heavy duty as well as higher horsepower sectors are aware H P. D I create significant value.
We believe this is an affordable path to Decarbonize rail sector without compromising performance or efficiency.
This two year project will begin immediately and is fully funded by the OEM.
Second consistent with our objective of improving profitability and strengthening our balance sheet.
September we reorganized our business in India, including our partnership.
In India by reducing our stake in our joint venture Linda Westport Technologies limited from 50% to 24% we.
We expect to close this transaction by the end of Q1 'twenty 'twenty four.
In addition, we are amending our joint venture agreement to include hydrogen components. In addition to see LNG, LNG and LPG components and kits.
Shortly though the agreement will exclude 80 H P D I opportunities.
Now while this amended agreement will result, and rationalization of local costs, we will maintain participation through the joint venture.
And a fast growing market in India and at the same time provide access to low cost manufacturing footprint through the joint venture now Bill will provide additional details on the financial impact of this transaction in a minute.
Now moving onto an update on the progress on the joint venture with Volvo I personally had the opportunity over the last months since stepping into this role to meet with Volvo and Westport teams and can tell you that we are in a great place to bring the transaction to a successful conclusion.
The teams have made great progress on all items and I can see now with confidence we plan to have the definitive agreement signed by the end of January of 2024 and have the joint venture closed and operational in the second quarter of next year.
They have all been Westport have collaborated for over 15 years, we shared the vision of creating sustainable transport solutions.
Volvo trucks had been on the road for over five years, utilizing our LNG <unk> system, and we look forward to a long and profitable future with the volatile team.
Now with that I'll hand, it over to Bill to walk you through our financial results.
Good morning, Thank you Tony.
So our view on our financial highlights of third quarter and the third quarter of 2023, we generated $77 4 million in revenue.
It's a 9% increase compared to say $1 2 million in the prior year period.
Increase was clearly driven by our core business with increased sales volumes in our latest electric.
Electronics fuel storage businesses and also increased recognition that heavy duty OEM business.
Which were partially offset by lower customer sales in the independent aftermarket and light duty OEM businesses.
Gross margin increased to 13 2 million towards 17% of revenue in the quarter. This is up from $11 3 million or 16% of revenue in the third quarter of 2002.
This improvement was mainly due to higher sales volumes across multiple businesses.
The increased gross margin and our heavy duty OEM business.
Driven by higher engineering services revenue.
However, our gross margin was negatively impacted from higher production cost to continue to impact our business.
From a global supply chain challenges of inflation, specifically in logistics and labor costs.
We're continuously working with our customers to pass through the impact of cost increases where appropriate.
On the next slide in the third quarter of 2023, adjusted EBITDA was a loss of $3 million.
An improvement compared to a loss of $4 5 million third quarter of last year.
Clearly the revenue and gross margin drove the positive improvements in adjusted EBITDA, which was partially offset by higher selling general and administration administrative expenses from increased tradeshow exiting <unk>.
During which we highlight here are each PDI youll system technology in North America and Asia.
We recorded higher service costs and increased consulting and legal fees related to the ongoing projects, including finalizing our <unk> joint venture with Volvo.
We expect to see the higher consulting and legal fee trend continued through the fourth quarter as we move forward with setting up the JV with Volvo.
On the next slide.
Revenue for the third quarter was up 20% to $52 nine as compared to $44 1 million in the prior year period.
As a reminder, Q3 tends to be our seasonally slow quarter due to the annual summer production shutdown in Europe.
However, despite the seasonally slow quarter.
We expect as discussed last quarter.
Our HCI systems third quarter significantly increased compared to Q2 of 'twenty three and this was the result of bottles release, a more powerful product offering with an extended range.
And we expect to see volumes continue to increase in the fourth quarter.
We also delivered higher sales volumes from blade OEM business.
<unk> clients with electronic fuel storage businesses and higher engineering services revenue in the heavy duty OEM business offsetting these increases were lower sales to customers in India and the like.
Duty OEM business.
Gross margin in our OEM business expanded in the quarter, increasing to $7 8 million or 15% of revenue.
This is an increase from $4 7 million or 11% of revenue in the third quarter of last year.
The gross margin increase was largely correlated with the revenue improvements were partially offset by higher production input costs.
We expect to see gross margin improvement going forward as we achieve scale, sorry, H PDI fuel system.
There's LNG fuel prices continue to trend positively against diesel.
And our hope is that the <unk> has become more available we expect volumes to continue to improve with Q4 being a full quarter with higher volumes.
Moving to the LPG side of our business, our global OEM customer for Euro six in your southern LPG systems has adjusted their start date.
For the Euro six program.
Just moving the initial delivery dates from November 23 to January 2024.
As a reminder, this program includes both euro 607 deliveries and expected to generate approximately 255 million euro in revenue through 2028.
Affordability drives the buying decision LPG market.
Firstly on average the cost of LPG in Europe is less than half the cost of petrol or diesel.
Our products enable customers to take advantage of these price differentials.
So the next slide our independent aftermarket revenue for third quarter was $24 5 million.
Down $2 6 million as compared to $27 109 in the third quarter of last year.
Lower sales volumes in African and European markets drove the decline, partially offset by higher sales volume in South America.
In line with the decrease in revenue, our gross margin declined to $5 $4 million or 22% of revenue in the third quarter as compared to $6 6 million or 24% of revenue in the prior year period.
Margins were negatively impacted by a change in sales mix inflation in South America.
Looking ahead supported LPG pricing continues to boost demand in Europe, which is an important area of growth for our company in the years ahead.
On the next slide regarding liquidity, our cash and cash equivalents decreased $8 3 million during the quarter.
It's a $44 million cash used.
During the quarter is primarily related to debt servicing payments and purchases of equipment.
In the third quarter of 23 net cash provided by operating activities was $1 109.
A significant improvement from net cash used of $8 six nine in the third quarter of last year.
The improvement in cash provided by operating activities was primarily driven by the change in working capital.
Inventory counts receivable and prepaid expenses.
As we've previously discussed we built up inventory to mitigate supply chain risks as well as shortages of raw materials and other components.
We've had some success in reducing inventories during the quarter and we continue to take actions to monetize and optimize inventory levels to further free up cash.
This will be a net positive for our balance sheet going forward.
Looking forward, we have multiple projects and this shifts either announced or underway. They will have a positive impact on our liquidity.
First our <unk> JV with Volvo flexion point for Westport financially and commercially.
Global payments for their 45% share of the joint venture includes the initial $28 million earn out of up to $45 million.
It is a clear signal of their commitment to the future growth of HCI.
And then also help shore up our balance sheets.
So TV is focused on driving global adoption of <unk> and the long term.
Moving efficiencies of scale, while in the short term, we are a partner to share in our required investments, including working capital and capital investments.
We will be receiving the initial 28 million following the closing of the JV.
Second as Tony highlighted Yep.
<unk> reorganized our presence in India to streamline the business consistent with our objective of improving profitability.
Our balance sheet.
As part of the India transaction upon closing, we expect to receive approximately $3 million from the sale.
Also we anticipate this reorganization of our presence in India will improve our cash flows going forward.
Moving forward, we will continue to be prudent in our liquidity management and multiple steps are being taken are due so non.
Non dilutive financing alternatives remain an option as we look to solidify our balance sheet.
We continue to do what is necessary sure, we're adequately and fully capitalized.
Based on the work we have done against some of the initiatives.
Mentioned here I expect our cash balance at the end of 2023 to be above $50 million.
With that thank you.
I'll turn it back over to Tony.
Yeah.
Great. Thanks Bill.
In closing down or our products are making a material impact on the decarbonization of the transport industry and the magnitude of this impact will only grow as we get these products into the hands of more customers.
Now, while we've made significant progress against our key strategic priorities in the quarter. We recognized that we do have more work ahead of us.
Before we open the call to Q&A I just wanted to provide a brief update on our CEO search transition.
Getting the right person for the role is obviously a priority for the board, but this does take some time the status is ongoing and we will have additional details for you as soon as we can.
I want to stress, though that through this transition as interim CEO I am fully committed to executing against our outlined priorities.
And with that ill turn the call over to the operator to open the call for your questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone sign.
Last question comes from the line of Chris <unk> from RBC Capital markets. Please go ahead. Your line is open.
Yes. Good morning, Thank you.
Good morning, I guess I wanted to begin with the locomotive opportunity.
So I just get some more color around the opportunity here.
How long have you been working on this agreement with this company.
Yes.
What's been the messaging from the OEM on their thought process around the hydrogel and <unk> and then I kind of recognize that it's still very early in this process, but.
Can you maybe discuss just any kind of unique design challenges that you might face.
With the adoption of <unk> HPV Astra the locomotive setting thank you.
Okay.
Great Chris its Tony here I'll, let me take a quick stab at the Big picture.
So I'll, let bill jump in perhaps on some more details.
Just from a high level point of view I think what's very exciting.
For us and.
It's actually part I would say of a broader theme over the last year or so which is the opportunity for hydrogen in H P. D I.
Way to Decarbonize.
Without having to change the.
Overall.
Shall we say the layout of the engines and so forth and that's an important point because for US. This is really an opportunity to retrofit the existing locomotive fleets.
Some of the numbers, we've seen theres, probably about over 100000 installed base of locomotives.
About over 30000 of those in North America.
There's only a few Oems that do this so what's unique here is and what the what this OEM is looking at US is effectively retrofitting an existing locomotive, which is which will have some challenges and fundamentally that's really what the projects about over the next.
A years is too it's just to go through that process. So it's a very exciting opportunity as part of the transition to.
To cleaner energy, which the locomotives. These are all very long life assets not just similar to somebody on highway truck markets.
This is where the hydrogen.
Elements of H P. J I think can be a quite a unique proposition. So we're quite excited about the big picture opportunity, but it is a this is a two year program and will both learned a lot about this going forward.
So that's kind of the big picture I don't know Bill if you wanted to add any color on the specifics around the how long is it going out with the customer just answers from our Christmas other questions, but I'll leave it there at the high level Chris.
No.
We've been looking at.
The locomotive market for many many years and.
What type of are excited to partner with them on this process.
Typically these are fairly lengthy conversations before getting to this point.
And we're excited about the opportunity.
Just just to add a little bit more Tony mentioned this isn't going to be a new bill this'll be would I expect to be a retrofits and neo typically.
These engines get overhauled about every 14 to 15000 hours. So that's about every year.
So that's the opportune time.
Retrofits and integrate our technology on the engine platform. So there's a natural cycle there to do the installations.
Actually it doesn't.
Technical standpoint, we're just dealing with.
Bigger injectors more fuel flow. So the packaging is not going to be that challenging as matter of fact, it should be.
A little bit easier because we're going to have a larger packaging to put on our technology and that of course, ultimately you're going to start with fuel.
Probably in a tender car buying locomotives so from a billing standpoint.
I think it's less of a challenge so we're yes.
Just going back to your projects in it.
Could turn into a significant opportunity.
Great. Yes, thank you for all that color.
I guess as my follow up and sticking with the H PDI here.
You mentioned.
No.
Volumes with Volvo or maybe picking up some I know previously there were some dynamics around the changeover to the new model, what that Volvo truck and that was kind of laying out maybe a little bit near term can.
Can you maybe just provide a bit more color on sort of what the messaging from Volvo has been.
As of late and Sir.
Our expectations going forward, if theres been any kind of changes in the past couple of months. Thanks.
Yes.
Look I think Paul was committed to HPE either they are very excited about <unk> is there a factor is a podcast.
One of their technical leaders.
And again he mentioned API.
Their technical podcast too.
Really excited.
Leave in HDI technology so.
One of the biggest takeaways is just just having that vote of confidence in our technology.
On the right solution.
For Decarbonising, yes.
Yes.
Industry.
So we as we mentioned.
Kind of switching over we didn't expect.
Lower decline in our unit volumes.
Second quarter.
We start scheme.
The ramp up.
Third quarter is still kind of a partial quarter and some of the.
Summer shutdowns.
And so we expect that to continue to increase in the fourth quarter, even with the.
The slower holiday slower sales during the last couple of weeks for the year.
Got it.
We're really excited and motivated.
Two.
To continue to increase and drive demand for this product.
Okay, great. Thank you very much.
Thank you. Our next question comes from Colin Rusch from Oppenheimer. Please go ahead. Your line is open.
Thanks, So much guys can you give us an update on where things are with wage high end.
The H PDI deliveries that you've had in Q here for a little while and how that relationship may change tactics with those guys.
First I'll tackle the second one I don't the dynamics I don't think its going to change.
That activity will go into the JV that'll be part of the JV.
So.
Overall relationship will change regarding wage high they continue.
We will move forward with their.
Their development activities around.
Hi.
Integrating API on certain engine platforms as well as certain.
The applications.
Right now we continue to support these initiatives.
<unk>.
Sure.
Of course, providing.
Pricing information.
Right now I don't have any we don't have anything else to add other than.
We continue to support their initiatives and where their support we Chinese supply <unk> systems and components when they're ready to launch.
Super helpful. Thanks.
The rail application of a nice win and I'm just curious about the maturity of any other customer conversations around stationary or our marine applications, obviously, there's going to be a role for hydrogen and a variety of areas of the economy and just get a sense of how robust.
The various applications can be for for the technology.
I know.
For the larger applications.
It is ideal for those larger applications.
We have had some conversations but nothing substantive.
Substantive it leads to.
Some sword.
Proof of concept.
Type work typically.
Just to even get to the start line they are very long years.
Conversations with.
The engine manufacturers the end users.
There's a lot of education that goes into it in terms of the overall.
Market texture technology.
Also benefits regularly.
Regulation also helps as well.
Kind of drive interest.
Four.
In HDI technology.
These.
Larger.
Engine applications displacements.
There is a huge push decarbonize, especially in the marine.
Theres been a big push.
Especially in the ports.
And minimize our essentially eliminate the use of bunker fuel just because of the pollution related to that.
So there's always conversations going on there's a lot of interest, but these are very very long.
Conversations.
Yeah.
I could jump in it's Tony here Bill It is call it.
Just a quick.
Two seconds on the marine market, because it's a it's a really interesting market I know bill touched on obviously, they're one of the biggest polluters out there, particularly in the ocean going in bunker fuel, what's interesting of course and marine markets Theres sectors within so many sub sectors and as you kind of start at the I'll say the smaller to mid size, there's a lot of the.
Suffice it to say some of the engine manufacturers and marine.
Are some names that also were engine manufacturers.
In some of the.
Heavy duty applications. So.
Meaning there is a fair there starts to be some overlap at the smaller end of the of the space. So we're H PDI.
Can make a fairly significant difference so bill's absolutely correct early stage, but I think there's some interesting opportunities where there's potentially some Oems who we know already or you got to know, particularly on the not so much on the ocean going side at this point, but perhaps on the on the smaller end of the marine scale.
I think some very interesting opportunities there, but early days.
Thanks, so much guys.
Thank you. Our next question comes from Eric Stine from Craig Hallum. Please go ahead. Your line is open.
Good morning, everyone.
I'm wondering are deploying.
Hey, so.
I'm just curious so this process with Volvo and working towards Finalization of that joint venture.
I guess part one and the question is anything you can share how the view of the opportunity has changed as you've gone through the process.
And then really interested in how it accelerates the business beyond the Volvo I know that.
It's become more commonplace for Oems to collaborate together.
And so just curious your thoughts on what this means more broadly for <unk> adoption.
Eric It's Tony here.
I'll, let bill go first and then I'll pile on so sorry Bill go ahead.
Yes, I think.
So I've mentioned it is this is about.
Getting up the scale and scaling the technology.
And pulling out cost out of the complete.
Fly chain to make this technology, even more and more affordable.
Track compared to alternative for competing technologies like fuel cells or or electrification.
That's where the huge benefit.
And.
Because when you look at the end users the operators.
Hey.
They know their cost per mile.
Very economic driven so theyre looking at what is the upfront cost.
The fuel price differential then ultimately what's the payback period.
For converting or buying.
The truck with HPA system on.
No.
It behooves us to scale reduce costs, which ultimately reduce the cost of the customer which will make it more attractive.
For them.
No I think that's yet.
Yeah, Bill it's Tony here, just kind of a pilot that's absolutely spot on I mean volume is what's going to drive this the other part the other dimension to this if I may just jump in.
Beyond Volvo.
We had the opportunity.
Summer is we were I'd say, we the board and management had an opportunity to spend some time with Volvo.
I'm going back to one of our meetings in Europe and I'm just speaking from a personal point of view here as a yeah I was actually very impressed with volvos vision.
For this they.
To your point about there's a changing dynamic in all Oems are working with each other and Volvo has a number of other partnerships.
Europe. There is many of these were shall we say parties that you wouldn't normally expect to be doing these things together are and Volvo at the most senior levels indicated to us that unequivocally their objectives is to make this joint venture a successful business, which would by definition there.
Looking at the opportunity well beyond their own needs for them for their internal products. So I can say with great confidence that all of those on the same page here I want to make this a global make us this joint venture a global leader in <unk>.
So as you so there'll be other Oems, obviously that we intend to take it to end.
There's a number of them that we're talking to already who looked at this product so.
No hesitation in saying this is gonna be a well beyond just volatile, but as bill says, it's really at the end of the day the more product that we can move the better pricing that all of the Oems involved one particular can enjoy so spot on this is a different model, but one that we're well aligned with volatile one.
Okay got it that's helpful.
And then maybe just specific to Volvo I mean, good to hear the color and thanks for it on the fact that you really just got a partial.
Impact on the volume side from this new engine launch with H PDI.
And growth going forward, obviously with the joint venture you are now going to have a much more motivated partner.
Can you update on maybe Volvo's geographic expansion plans I know, Canada was a spot that potentially might be a little easier to get into just from a regulatory perspective, but maybe how <unk> always thinking about that as well.
I can tackle that.
There are as we go through.
Working on the business plan.
For the JV, Yeah, and this is not this is a long term business plan and in there we're looking at.
What are the opportunities what are the various markets, yes will predominantly in Europe today.
There's been a few trucks that have been imported into Canada.
We're running around but.
We are continuing to evaluate.
All the markets globally and awareness of the opportunity and together with our partner we will bake.
Baked those into our business plan. So yes, we are looking at every opportunity and making that assessment clear.
Clearly.
There are clearly opportunities in North America.
But.
We're going to have to make an investment in the technology too.
Bring that vehicle.
Bring a application to North America, and that's something that we'll have to work together with our partner <unk>.
Ultimately.
Allocate capital towards.
And that's why there's a lot of other opportunities out there that we will continue to evaluate with our partner, but again.
As you mentioned Eric is we've got a motivated partner now make this as successful as possible.
Okay, that's great I'll take the rest offline. Thanks.
Thank you.
Thank you. Our next question comes from Sameer Joshi from H C. Wainwright. Please go ahead your line is.
Yeah, Good morning, Tony.
In terms of hook.
In terms of.
Improving margins on the OEM business.
Can you give a little bit more insight into how the discussions on price increases going and also.
What is buses.
Once you can see them on.
On the gross margins going forward.
Okay, I think it was a little bit hard to hear but.
Improving margins in the OEM business.
Uh huh.
A big chunk of that is just mix.
You know of where our revenues are generated.
That's one.
And with the heavy duty OEM, we did have quite a bit.
Engineering services revenue, which helps improve margin.
We are looking through our supply chain to one try to reduce cost and try to mitigate any potential future cost increases.
Having a conversation with our customers about price increases so mix does have a big impact on that.
So.
Organizationally and operationally, we're looking internally at our operations and we are.
Taking steps.
To reduce our cost structure.
Primarily in Europe, where a lot of our manufacturing activities are.
And we're also looking at.
Where.
Our essentially our manufacturing footprint and we've done some consolidation of smaller operations into our existing facility. So so we're tackling it from <unk>.
Ingalls through supply chain two.
Internal production delivering the product and then also quite clear so that's an ongoing athletes.
Yeah. Thanks, Bill it's Tony I, just wanted to let you know I'll just add a little color too.
Certainly over the last 12 18 months.
Supply chain has been had been an issue cost pressure has been an issue.
Some of those supply chain pressures some of them continue to exist.
But that's starting to alleviate somewhat I think to the other point that I wanted to hit.
Hit it.
It kind of commented in my highlights the two two big priorities for the company.
In the near term one of course is the Volvo getting the Dibaba JV closed as I mentioned and the other one is improving the financial performance and margins.
There is a.
Theres a discipline.
Needed while while we're certainly seeing good revenue growth, we're not going to be we're not and never were chasing revenue.
The expense of margin, but but bill I got to say bill and his team have done a great job of it.
Sterling and changing a bit the discipline around pricing.
In terms of ensuring that that were.
Working with our customers, but ensuring that we can push through as much of the price pressure, we had seen in that really frankly has had.
As much as the biggest impact including mix, but also the biggest impact in the last year has been on on.
On having some hard conversations with customers and I can say that we're starting to see the benefit and will continue to do so but having said that there has been a bit of an alleviation on the supply chain and as Bill said, we're taking some cap taken steps and we will take steps to further.
Improve our manufacturing footprint and efficiency, which will help gross margin as well.
Thanks, Thanks for that color Tony.
Just staying on the cost front I think the.
Maybe I missed it but what is it.
More details given on what level of savings, we expect from the India JV.
The sort of reduced responsibilities.
In terms of dollars and when should we see that impact.
Two Q of next year <unk> of next year, so the impact or benefit I should say.
I'll take that the 19 wants to chime in Tony is.
Haven't we.
We didn't put out specific.
Dollar amounts.
We've had a long relationship with our partner and looking at the new market is a very attractive market. We've got we've got a great partner there.
And.
We looked at how do we address the smart market to take advantage of the growth opportunity.
And.
Hence we did.
The restructuring and our relationship with Linda to take advantage of the absolute leverage which will help improve our cash flows and that's principally going to I think we'll start seeing some benefit in Q4, but.
We will.
We'll start team.
<unk> benefit.
Next year.
Uh huh.
New relationship.
Got it and just one last one maybe.
Well I know the delayed from November to January 24 is not a significant daily, but instead any reason for that and Oh.
What is the level of confidence that the in January.
Systems like Euro six.
Would it be.
Subgroups.
Yes.
This.
It doesn't surprise me you know what happens all the time it is a two month lag.
I'm trying to get production up and running.
I'm trying to do all the validation it just takes time to get through that process.
I don't have any concerns here with this short delay.
Have lots of confidence that we will start delivering.
The components to our OEM partner.
Early next year.
Got it thanks, Thanks Bill.
That's all from me.
Thanks.
Thank you. Our next question comes from Rob Brown from Lake Street Capital Markets. Please go ahead. Your line is open.
Good morning.
Thank you Rob.
Good morning.
The heavy duty OEM business.
You've got the model changeover, you've got kind of the improved feeling price spread environment, just wanted to get a sense of how you see that.
Maybe in terms of market share gains or penetration gains into into next year.
How do you see that kind of turning around.
Since none of the direction there.
Hi.
I think there is.
There is.
Couple of market drivers one we've talked about the economics, but also the other side of equation regulation.
And trying to get to.
Kind of a net zero carbon we're seeing broader use of biogas.
And.
In addition to just.
And I think that will drive a lot of adoption.
It's getting more and more broader market share adoption of HPV I am getting the traction in more markets in Europe.
No.
Formulas partner leveraging their marketing and sales machine will help drive that but also a regulation is our friend as well in today's environment and driving that adoption.
From our side.
On the cost perspective.
It's in our best interest to continue to pull costs out of the system.
To make the overall upfront investments more attractive for these with these owners and operators.
So it's going to be really for a couple of different angles that will have a.
Really a positive benefit.
On.
Each PDI adoption.
Okay. Okay, great. Thank you.
And then just back to the Volvo kind of JV closing and timing.
Just wanted to clarify is that as that comes through you get the cash from them and then additional Pat cash through earn out activity.
And are there are there cash contributions that you need to make ultimately to that JV or would this be a kind of a net cash positive to the west coast.
Sure.
So youre right. So we'll get the upfront when 8 million upon closing.
JV.
The earn out to $45 million will be based on achieving certain milestones.
And.
We're actually going through that process right now and standing up the JV.
We're working with our partner on the business plan.
And doing a really detailed roll up budget for 'twenty four and beyond.
And that business plan would determine.
How much cash will be needed in the JV.
And the other part of this will contribute to a portion or a pro rata basis.
So.
We're going through that process right now so I would expect there'll be some level.
Cash contribution.
From both us and <unk> too.
To make sure the JV is fully funded.
Yes.
Rob It's Tony Yeah, I'll, just pile on to say absolutely.
<unk> had a bit of patients certainly.
We talked about getting through the signing of definitive agreements and closing and bill spot on you know that one of the the mutual deliverables is a detailed business plan, which we presented our first scrap. So we will have more I think it's safe to say, we will have a bit more color.
Year end and going into early next year on on the business plan, maybe a bit more color on the burn, but yes, there'll be some some mutual investment as we stand this up and get it up and running but it is expected.
It will be.
Based on the business plan it won't be a protracted.
Our cash investment in terms of the timing we expect this thing to quickly move to cash flow breakeven, but we'll have more color on that in the new year.
Okay. Thank you I'll turn it over.
Thank you. Your last question comes from Bill Peterson from Jpmorgan. Please go ahead. Your line is open.
Yes, hi, good morning, Thanks for taking the questions.
The cash I guess exiting the year at $50 million.
I guess within that how should we think about the drivers, especially including working capital here into the fourth quarter and I guess.
And you mentioned some of the cash things in a prior question how should we think about working capital or use of cash at least at the start of the year before the JV is consummated.
Consummated.
Yes.
I can't comment right now on next year, but I can talk about through the end of the year had mentioned as we do.
We have multiple initiatives in place to try to.
Convert our working capital and the cash and so continue to bring down our inventory levels, we have seen some easing in the supply chain.
Looking at our purchasing.
And.
Trying to bring down the inventory levels and convert that to cash same thing with receivables.
We're trying to shorten the cash conversion on that and drive down our receivables and drive down our dsos, we'd look at that very closely.
Also you know as I mentioned, we do are looking at some debt financing opportunities.
Over in Europe, and we had a couple of term sheets actually multiple churches in the hand that we are working through that process.
That will provide.
Additional debt funding.
<unk> operations.
Okay, Thanks for that and.
And I guess, just coming back to the JV. So I was wondering if you can provide more information I guess is what remains to be ironed out here in the next few months and I presume. These are straightforward based on your commentary and confidence that it's going to be signed early next year, but I guess, how should we think about a plan b if for whatever reason this doesn't work out and.
Along those lines like what would then be the best means to commercialize and scale H PDI I mean are there.
Other Oems that can maybe interested in stepping in and maybe even somewhere to what I guess, Israel OEM did in terms of funding funding the efforts.
Okay. So it's Tony here.
I'm not going to take the bait on what happens if it doesn't close by that per se, but I, just I will say that.
And I say, it's with confidence I don't think Theres any concern that we're not going to get to closing the signing of definitive agreements.
Which is really the we'll call it a signing and closing is really a two step the definitive agreements are very close on.
Theres not a lot there's a couple of issues, we need to work through but I would expect.
We're very close on those.
The reason.
Why for the delay in closing is not.
And nothing to do with any additional negotiation to be done it's just going to be literally working through the carve out of the business out of out of out of Westport, including.
Our large engineering team that will bring over setting up the legal entities getting the getting the assets transferred in so so the delay.
Really the timeframe between today and closing in Q2 next year.
It's frankly, just the time, it's going to take to execute on it.
No I said I wouldn't take debate on it we.
We have all the confidence that we're going to close with Volvo.
But but theoretically sure there's lots of other Oems who are cool.
We're interested to see what we've done and I'm sure that wouldnt be a concern.
We would we would continue to execute and grow this business with or without but.
I just wanted to say unequivocally, we have confidence we're going to get there.
Okay. Thanks for sharing your insights.
Okay.
Okay.
Thank you Sam appear to be no further questions I'll return the conference back to the speakers for closing comments.
Well, great. Thank you operator, and its Tony here again, I actually I want to thank you all for joining us today.
As you gathered were.
So very excited about not just the future business, but we're seeing improvements in our current business and I and we are executing we intend to execute against our key strategies and we'll look forward to providing you further updates over the course of the next few months and beyond that we'll look forward to speaking you again at our year end in the new year. So thank.
<unk> you very much for joining us.
Thank you. This does conclude today's conference call. Thank you all for attending you may now disconnect your lines.
[music].
Yes.
[music].