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HomeInvestmentWestport Gasoline Methods Inc. (WPRT) This fall 2021 Earnings Name Transcript

Westport Gasoline Methods Inc. (WPRT) This fall 2021 Earnings Name Transcript


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Westport Gasoline Methods Inc. ( WPRT 2.19% )
This fall 2021 Earnings Name
Mar 15, 2022, 10:00 a.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Name Individuals

Ready Remarks:

Operator

Welcome to the Westport Gasoline Methods fourth quarter and full 12 months fiscal 2021 outcomes convention name. [Operator instructions] And the convention is being recorded. [Operator instructions] I might now like to show the convention over to Christian Tweedy, Westport’s investor relations consultant. Please go forward.

Christian TweedyInvestor Relations

Good morning, everybody. Welcome to Westport Gasoline Methods’ fourth quarter and 12 months finish 2021 convention name, which is being held following our press launch yesterday of Westport Gasoline Methods’ monetary outcomes. On as we speak’s name, talking on behalf of Westport Gasoline Methods is Chief Government Officer David Johnson and Chief Monetary Officer Richard Orazietti. This name is open to the general public and the media, however questions will likely be restricted to the funding neighborhood.

You might be reminded that sure statements made on this convention name and our responses to varied questions might represent forward-looking statements inside the which means of the U.S. and relevant Canadian securities legal guidelines, and as such, forward-looking statements made primarily based on our present expectations and contain sure dangers and uncertainties. With that, David, I will flip the decision over to you.

David JohnsonChief Government Officer

Thanks, Christian. Good morning, everybody. Thanks for becoming a member of us to evaluate Westport Gasoline Methods’ outcomes for the fourth quarter and full 12 months 2021. 2021 was a great 12 months for Westport Gasoline Methods.

Regardless of lingering COVID restrictions, provide chain challenges and rising commodity costs, we continued our restoration from COVID-19. We set a brand new annual income file of $312 million, pushed by the power of our OEM enterprise, which was up 31% 12 months over 12 months as a consequence of file HPDI system gross sales, mixed with robust light-duty OEM gross sales, particularly in India. Our revenue improved 12 months over 12 months, and we look ahead to additional enchancment as our manufacturing will increase and economies of scale and working leverage are realized. Along with the constructive monetary outcomes that display our resiliency within the face of world challenges, throughout 2021, we additionally made important progress creating and positioning our firm for future success.

For instance, our buy of Stako. Accomplished in Might of final 12 months, Stako primarily based in Soups, Poland, is a world chief in LPG gas storage programs. Their complete product portfolio provides to and complement our present product traces and manufacturing capabilities. Stako’s merchandise serve the OEM and impartial aftermarket in addition to different markets like leisure automobiles and materials dealing with functions.

And we acknowledged a $5.9 million achieve on the acquisition. In 2022, Stako will contribute a full 12 months of working outcomes to our P&L. One other 2021 accomplishment was the strengthening of our steadiness sheet by the use of an fairness increase and by restructuring our debt to decrease prices and to align compensation phrases with our marketing strategy. And with the efficiently negotiated exit from Cummins Westport, we have additional strengthened our money place.

Additionally, in 2021, we had our preliminary demonstration of hydrogen HPDI. This technical success has led to new hydrogen HPDI tasks with Scania, AVL, and 2P, and as introduced in February, now additionally with Cummins. In our view, the demonstrated functionality of HPDI is a massively necessary improvement for Westport Gasoline Methods, dramatically improves the potential for our near-term and long-term success with HPDI. And internally, in 2021, we introduced the corporate collectively right into a single world group in order that we’re poised to carry all our capabilities to all our prospects and markets all over the world with effectivity and effectiveness, enabled by unlocking synergies all through our world group.

Regardless of the varied challenges we have confronted during the last two years and regardless of the challenges we face as we speak and the brand new challenges that can come tomorrow, elementary market drivers proceed to assist a constructive outlook for Westport Gasoline Methods. The local weather disaster continues to be a precedence. Clear air continues to be a precedence. Inexpensive transportation continues to be a precedence.

COVID, provide chain issues, inflation, and even struggle, none of those diminish the problem we face to maintain the world shifting with out fouling the air and endangering our lives, our local weather, and our planet. We owe this to society and to our kids. International transportation is accountable for roughly 1 / 4 of greenhouse fuel emissions, so we should proceed to make use of all out there choices to wash the air and to cut back CO2 emissions from transportation. We should achieve this shortly and successfully.

To maneuver shortly, we’d like clear know-how now. To be efficient, we’d like scale. To attain scale, we’d like sensible reasonably priced options. Westport Gasoline Methods merchandise are reasonably priced, efficient, sensible, and out there now.

Our technique stands on three pillars that allow progress towards our monetary targets of $1 billion in income, 20% gross margin, and 10% working margin. First, principled progress. Progress that is realized via a various portfolio of applied sciences, merchandise, and providers delivered by a group that is centered on doing the precise factor in the precise method and making a distinction in our world. We’re centered on satisfying the demand for clear, low emissions transportation in Europe, India, North America, and China.

As we have completed up to now, we’ll proceed to enhance our natural progress by including merchandise and scale via related M&A exercise. Second, high quality, reliability are elementary to our efficiency as a number one Tier 1 provider of fresh, reasonably priced gas programs. We should reliably ship high-quality merchandise with increased manufacturing effectivity to allow low price and to realize the dimensions essential to make a distinction in our world and for our stakeholders. Third, via innovation and know-how, we ship transportation options that energy a cleaner future.

Advances in our HPDI gas system know-how, together with HPDI 3.0 and hydrogen HPDI will result in progress and prosperity, together with the power to reuse our prospects’ capital investments in manufacturing provide chain infrastructure whereas reaching their targets to fulfill their prospects’ wants and authorities rules whereas lowering carbon emissions. In the end, the muse for our strategic pillars is the continued power of our organizational functionality and a give attention to operational excellence. Our individuals are on the coronary heart of what we do. We’re one firm working collectively to ship beneficial impactful services to prospects all over the world, enabling an reasonably priced transition to a decarbonized transportation sector.

Within the market all over the world, we proceed to see proof that clear, reasonably priced fuel — are a rising a part of the transportation market, even in or fairly, particularly in difficult financial instances. LPG, CNG, LNG, biomethane and shortly, if not already, hydrogen, will add resiliency to our world transportation system and achieve this cleanly and affordably. International emissions rules demand clear automobiles. Prospects demand sensible reasonably priced automobiles.

Let me share a couple of examples. Markets are responding proper now by including extra refueling infrastructure like in Europe, the place the variety of LNG stations doubled in simply the final two years. Right this moment, there are 521 LNG stations in response to NGVA Europe, and the gas in these refueling stations is getting greener as biogas continues to develop. Greater than 1 / 4 of the fuel utilized in highway transportation in Europe as we speak is from renewable sources.

Likewise, in India, we additionally see compelling progress for pure fuel automobiles. Infrastructure there has lately doubled to greater than 3,200 stations and the federal government continues to champion their plan to succeed in 10,000 stations inside this decade. OEMs in India are dropping diesel engines and shifting to pure fuel at a speedy tempo. Westport Gasoline Methods is properly positioned with the precise merchandise to assist the rising demand.

One other instance, authorities assist. The European Union has only recently added pure fuel as a part of its taxonomy, a big endorsement that may assist make the EU extra environment friendly in using power and extra resilient to power worth spikes whereas offering reasonably priced and clear power to finish customers. One other type of authorities assist, incentives. We noticed in Italy late final 12 months that the Italian Transport Ministry introduced a choice to substantiate, improve and develop incentives for the acquisition of LNG vehicles.

The decree for extremely sustainable investments makes EUR 50 million out there to move corporations via 2026, solely for the acquisition of recent ecological various gas automobiles, together with LNG vehicles. One other one, renewables. We’ve got seen encouraging biogas developments up to now few months. In Germany, the share of biomethane equipped by its stations has ported reached 80% shifting towards 100% in 2022.

Swedish Biogas, a number one supplier of biofuel in Scandinavia, noticed elevated gross sales to the haulage sector of 145% in 2021 in comparison with 2020, citing a 30% to 35% worth differential for heavy-duty vehicles, a big price discount and an answer out there right here and now for long-distance heavy transport that desires to change to fossil feed transportation. And at last, finally, market share progress. Earlier this month, the European Vehicle Producers Affiliation, that may be a clear printed car registration statistics for 2021. Different fuels, which embody pure fuel, LPG, biofuels, and ethanol accounted for the overwhelming majority of the choice powered vehicles bought throughout the EU in 2021, with a complete market share of three.6%, up 40% from 3% within the prior 12 months.

Whereas on the identical time, the registration of hybrid electrical vehicles was down 55% versus the prior 12 months. We’re seeing a rising variety of tales and developments like this in our house, creating a really encouraging outlook for our product portfolio. OEMs With out LPG, CNG, or LNG choices as we speak are at a drawback that our clear portal merchandise can assist them overcome. As you already know, HPDI has been and will likely be a essential a part of our path to progress to profitability.

Let me level out a number of the key developments. First, manufacturing and gross sales of HPDI 2.0 continued to extend as evidenced by our top-line progress and growing weight of our OEM companies, which reached 62% of our income in 2021. Second, we’re creating HPDI 3.0 for our prospects. This subsequent DI permits use of HPDI with next-generation engines that use increased working pressures to — even increased effectivity and better efficiency.

Third, we’re creating HPDI with hydrogen. This mixture of our know-how with inexperienced hydrogen provides extra energy, extra torque, and extra effectivity than an IC engine fueled with both pure fuel or diesel. We have demonstrated and documented this efficiency, together with the financial benefit that hydrogen HPDI provides as in comparison with gas cell applied sciences in heavy-duty long-haul functions. Hydrogen HPDI lengthens and broadens the enchantment of our proprietary HPDI know-how, reaching all the best way to zero-carbon inexperienced hydrogen future that so many are pursuing as we speak with large monetary commitments for each authorities and personal sources.

We’re happy with the developments we have already concluded and people we have now underway and look ahead to sharing extra knowledge with you later this 12 months. Within the meantime, I might level you to the white paper evaluation we lately posted on our web site displaying our expectation to realize 52.5% brake thermal effectivity utilizing hydrogen HPDI on a state-of-the-art 13-meter truck engine. This 52.5% BTE determine corresponds to a 5% discount in power consumption relative to the identical engine platform working with diesel gas. It is a massive deal.

This can make IC engines with HPDI, one of the best ways to make use of inexperienced hydrogen for long-haul heavy-duty transportation functions. I might additionally like to offer an replace on China the place HPDI-powered car fashions have been licensed and discipline trials are ongoing. We’re persevering with to work with our associate to launch our HPDI 2.0 product efficiently with their OEM prospects. A number of OEMs are working to combine HPDI-equipped engines into their vehicles to carry these vehicles to market.

We’re assured that HPDI Group Vehicles will allow substantial market progress in China, growing the share of pure fuel within the Chinese language trucking market past as we speak’s already important 10% market share. Westport Gasoline Methods appears ahead to being a part of that progress. We’re in parallel persevering with our discussions with different potential companions in China because the curiosity in HPDI, significantly hydrating HPDI is rising in China, too. Only in the near past, China Nationwide Petroleum Corp, launched a highway map for the nation’s power sector to satisfy targets of carbon peaking by 2030 and carbon neutrality by 2060.

They forecast a transportation — combine, together with hydrogen at 23.7% and pure fuel at 10.7%, a powerful endorsement for these two fuels. Earlier than Richard takes us via the financials, let me tackle the proverbial elephants within the room, I am speaking about Russia, Ukraine, and gas costs. You might have seen in our press launch that Russian market is related for us, representing 10% to fifteen% of our light-duty enterprise via each our aftermarket and OEM channels. We count on this to be straight affected by the battle and have already seen the start of these results, together with stories of shortages affecting manufacturing and delayed processing of transactions via the monetary programs.

As well as, the contract in Ukraine appears prone to additional exacerbate the availability chain points we face in addition to put stress on gas availability and pricing. I wish to name out three components that do not all level in the identical route, making near-term future fairly unclear. First, increased gas costs. Commodity gas costs are up dramatically, together with crude oil and LNG.

Larger gas costs are usually constructive for our enterprise because it intensifies the seek for merchandise and applied sciences that may cut back gas bills. Gaseous fuels have typically been the treatment for prime diesel and excessive petrol costs. Second, although, gas worth differentials. When gaseous gas costs are decrease than petrol and diesel, then our market strengthens.

When fuel gas costs are increased than diesel and petrol, then this can be a headwind for us. We’re seeing each results now. In some markets, for some fuels, we have now a bonus whereas on others, we have now a drawback. In fact, what issues is what drivers see on the pump, which has some relation to commodity costs.

Third, volatility. As costs change, market individuals can pause their decision-making ready to see what the brand new regular will likely be. That is categorically unhelpful to all of us. Whereas it is exhausting to foretell the long run, particularly today, we stay assured that our merchandise will proceed to ship and develop our market share in response to the persistent want for clear reasonably priced transportation.

We noticed this via COVID, and we count on to maintain seeing it via present challenges. We’re preserving our give attention to this long-term outlook whereas we work to mitigate the near-term challenges as we have now efficiently completed earlier than. So with that, let me hand it over to Richard.

Richard OraziettiChief Monetary Officer

Thanks, David. Within the fourth quarter, we generated revenues of $82.7 million, which decreased 12 months over 12 months by 1.4%. The lower was primarily attributable to barely decrease heavy-duty OEM gross sales volumes and a contractual worth discount to our preliminary OEM launch associate. Decrease heavy-duty OEM income was partially offset by the addition of gas storage revenues from the acquisition of Stako within the second quarter this 12 months.

The fourth quarter was difficult for gross margin as we generated $9.3 million, which was a lower year-over-year of 28.5%. Moreover the affect of decrease heavy-duty OEM gross sales volumes and the worth discount, gross margin was pressured by decrease gross sales volumes affected by the elevated and unstable gas costs, decrease margin gross sales combine to rising markets in each light-duty OEM and impartial aftermarket and better materials prices ensuing from world provide chain disruptions and inflation. Internet revenue was $5.4 million for the quarter, an enchancment of $1.3 million 12 months over 12 months. The CWI three way partnership had a stronger-than-expected fourth quarter, producing $15 million to our account, which primarily drove the rise in internet revenue and was partially offset by the decrease gross margin.

Revenues for the complete 12 months 2021 elevated 24% to $312 million because of the continued restoration of gross sales volumes in our OEM and impartial aftermarket companies, and the addition of $13.8 million in income from our gas storage enterprise. In 2021, we generated 21% increased gross sales volumes to our preliminary OEM launch associate in heavy-duty OEM. We noticed speedy progress in our light-duty OEM gross sales volumes in India and skilled a restoration in gross sales volumes in impartial aftermarket, however the headwinds from the pandemic provide chain disruption and gas worth volatility. Additional, we’re seeing progress in our newer companies in electronics and hydrogen.

Gross margin elevated considerably 12 months over 12 months by 22% to $48.2 million primarily as a consequence of increased gross sales volumes throughout all our companies and the addition of the gas storage enterprise. This was partially offset by the HPDI worth discount, a decrease margin gross sales combine in impartial aftermarket and better materials prices attributable to the availability chain scarcity, which we weren’t in a position to go on successfully to our prospects. Fiscal 12 months 2020 additionally included massive COVID-19-related wage subsidies that had been partially offset by a $2.4 million discipline marketing campaign cost. We reported internet revenue of $13.7 million for the complete 12 months 2021, in comparison with a internet lack of $7.4 million for the prior 12 months.

The advance in internet revenue was pushed by a number of components, primarily the rise in gross margin of $8.7 million, $9.7 million and better revenue from CWI, an revenue tax restoration of $8.9 million associated to an Italian authorities COVID-19 tax reduction program and a discount buy achieve of $5.9 million on the acquisition of Stako. This was partially offset by $5 million much less in authorities subsidies acquired in comparison with 2020. Adjusting for nonrecurring gadgets per our definition of adjusted EBITDA, we generated $17.5 million in adjusted EBITDA in 2021, in comparison with $14.7 million within the prior 12 months. Turning to our enterprise segments.

OEM income for the fourth quarter of $57.4 million was marginally decrease and $58.8 million in 2020. Income decreased by $1.4 million within the fourth quarter as a consequence of decrease HPDI gross sales volumes to our preliminary OEM launch associate and the unfavourable affect of the worth discount given at first of the 12 months. The late OEM revenues had been additionally worse year-over-year as a consequence of decrease gross sales volumes attributable to provide chain shortages of automobiles to transform from our OEM companions. This was partially offset by extra income of $6.7 million from our gas storage enterprise.

For the complete 12 months, OEM income of $195.5 million elevated by $45.9 million or 31% over the prior 12 months. The rise was primarily because of the aforementioned increased gross sales volumes in our heavy-duty and light-duty OEM companies, $13.8 million in gas storage and elevated gross sales progress in our electronics enterprise. The affect of COVID-19 was important within the prior interval, which was impacted by plant shutdowns mixed with decrease light-duty OEM gross sales to German and Russian OEMs. Though heavy-duty OEM income was increased 12 months over 12 months from higher gross sales volumes, the constructive momentum on buyer demand was impacted by manufacturing delays attributable to the scarcity of semiconductors on our preliminary OEM launch associate.

Though the long-term outlook for HPDI gross sales volumes is constructive, there’s additionally near-term stress on gross sales volumes attributable to the speedy improve in volatility in LNG costs. For the fourth quarter 2021, gross margin decreased 12 months over 12 months by $1.5 million to $5.1 million, or 9% of income, in comparison with $6.6 million or 11% of income for a similar prior-year interval. The lower in gross margin and gross margin proportion was primarily as a consequence of a rise in materials prices stemming from the worldwide provide chain disruption throughout all enterprise segments, growing gross sales mixture of light-duty OEM gross sales to India, and the aforementioned HPDI worth discount. This was partially offset by the extra gross margin from the gas storage enterprise.

As India will play an necessary position in our light-duty OEM progress technique, we’re evaluating alternatives to localize manufacturing and different worth creation initiatives to enhance our margins. Turning to the impartial aftermarket. Income for the fourth quarter and full 12 months 2021 had been $25.3 million and $116.9 million, respectively, in comparison with $25.1 million and $102.9 million for a similar prior-year intervals. Income progress in 2021 was primarily as a consequence of increased gross sales to African and South American markets, offset by softness in demand from the Russian and Turkish market because of the speedy improve in LPG costs.

We count on to see continued enchancment in revenues from the impartial aftermarket enterprise phase for the complete 12 months of 2022, however mood expectations within the close to time period as a consequence of unstable LPG costs in our key markets and disruption from the Russia, Ukraine battle. Gross margin decreased considerably 12 months over 12 months by $2.2 million to $4.2 million, or 17% of income this previous fourth quarter, in comparison with $6.4 million or 25% of income for a similar prior-year interval. The lower in gross margin and gross margin proportion was because of the evolving change in gross sales combine towards lower-margin African and different rising markets, slower-than-expected restoration of gross sales volumes in Western Europe, and better materials prices because of the world provide chain disruption. The prior 12 months additionally benefited from authorities subsidies, which resulted in a better gross margin proportion.

To counter this margin stress, we’re actively pursuing price rationalization, manufacturing productiveness enhancements, and gross sales quantity progress. Turning to liquidity. As we have now mentioned over the quarters, we have now made nice strides to strengthen our steadiness sheet and liquidity to fund the expansion in our heavy-duty OEM and different companies via elevating fairness and refinancing our debt to higher match the anticipated natural money circulate profile to the debt compensation. As at 12 months finish, our money place was $124.9 million and our debt was $79 million.

In the course of the fourth quarter, we closed the refinancing of our loans with our banking associate, Export Improvement Canada into one, $20 million time period mortgage be payable over 5 years. We’re very appreciative of the assist and relationship EDC has and continues to offer Westport Gasoline Methods. One other important enhance to our near-term liquidity was derived from the termination of the CWI three way partnership. On February 7, 2022, we agreed to promote 100% of our shares in CWI to Cummins for proceeds of roughly $22.2 million, together with our curiosity within the three way partnership’s mental property for an extra $20 million.

We acquired proceeds of $31.4 million, internet of a $10.8 million holdback after the cut-off date. Shifting away from financing actions. Internet money utilized in working actions was $43.8 million in 2021. The usage of money is pushed by working losses of professional quality OEM enterprise because of the lack of scale and a big improve in working capital, particularly stock attributable to a buildup of professional quality OEM stock for buyer progress, provide chain disruption, and inflation.

We’re proactively managing our working capital to monetize the stock and optimizing buying ranges within the evolving provide chain panorama. Dangers from the Russia-Ukraine battle and unstable gas costs can even trigger near-term stress on revenues and margins. Though the headwinds in 2022 are very difficult, we imagine within the long-term fundamentals of our merchandise that ship reasonably priced clear transportation options will prevail. With that, I want to flip it again to David.

David JohnsonChief Government Officer

Thanks, Richard. To recap, I am happy with our group. We made necessary progress in our strategic positioning for the long run, and we recovered from the pandemic and provide chain challenges within the final two years. Regardless of the brand new challenges going through us in 2022, we see the necessity for our product and the necessity to decarbonize transportation will persist.

Within the coming months, you may discover us collaborating in varied funding conferences, together with however not restricted to, the Core-Mark inflection Convention, Oppenheimer’s Annual Rising Progress Convention, and the RBC Capital Markets Automotive Convention, and we’ll be collaborating on the Advert Expo Lengthy Seashore, California in Might. That is North America’s largest clear transportation know-how and clear fleet occasions the place we’ll be offering an replace on our newest improvement with hydrogen and HPDI. With that, I might like to show it again to the operator in your questions.

Questions & Solutions:

Operator

Thanks. [Operator instructions] Our first query comes from Eric Stine of Craig-Hallum. Please go forward.

Eric StineCraig-Hallum Capital Group — Analyst

Hey, David. Hello, Richard. Good morning. So possibly simply to start out with HPDI 3.0, for those who may give a couple of extra particulars there.

I do know you talked about efficiency advantages. Curious if these are HPDI-related or as a result of it is on the, as you stated, the next-gen engine platforms on the market? After which simply questioning, what your exercise stage is with this know-how up to now, whether or not you’ve got received present improvement applications occurring proper now?

David JohnsonChief Government Officer

Sure. Nice query. So glad to speak about HPDI 3.0. I feel the context, simply to color an image of that must be actual clear.

Out there and media as we speak, many individuals assume the inner combustion engine goes away. However but we see, with our companions all over the world, that individuals are persevering with to spend money on advancing inner combustion engines. And the event of inner combustion engines is way from full and there is all the time extra enchancment that may be made basically these days, which means decrease emissions from the bottom engine and extra efficiency, extra effectivity from the bottom engine. For us, as a gas system provider, that signifies that we have to improve our gas programs to match the engine enhancements which might be being made.

So very particularly, mainly, to make cleaner, extra environment friendly engines, you — the diesel hedge you up the working stress within the combustion chamber. And in order the working pressures go up, the pressures for our gas system must go as much as match and maintain tempo. And so that is what we’re doing. That work to mainly improve the potential of our programs to match and complement the upgrades to the bottom engines.

And we see this throughout the trade within the work we’re doing with varied prospects for making use of our know-how, whether or not it is with hydrogen or with pure fuel.

Eric StineCraig-Hallum Capital Group — Analyst

OK. That is useful. Perhaps simply turning to hydrogen a bit bit right here. And I do know HPDI, together with the remainder of what you are promoting close to time period, it is a bit powerful to name given loads of cross currents.

However as you consider hydrogen within the HPDI model, simply curious how that is likely to be serving to the LNG HPDI model or discussions with OEMs, provided that possibly they do not hesitate to go HPDI with LNG, if they’ve the potential emigrate to one thing down the highway and clearly, everybody’s received to be taking a look at hydrogen?

David JohnsonChief Government Officer

Sure. So the method our prospects and OEMs all over the world are going via evaluating completely different applied sciences and attempting to decide on the trail ahead, if they may put all eggs in a single basket as a result of they had been certain of what the long run lies forward, that is an ongoing evolving course of as they study completely different applied sciences. And once I speak completely different applied sciences, I am together with the complete listing of electrification and gas cell and even autonomy, all of the issues that you just examine and listen to about within the trade and saying. And so with respect to our hydrogen developments, we see this as serving to our prospects to grasp the potential for a inexperienced hydrogen future in long-haul trucking and what that financial and technical equation appears like.

And as per the paper that we printed final 12 months with — together or partnership with ABL, we see our HPDI with hydrogen as a really financial and actually a simple path ahead to make use of inexperienced hydrogen very successfully as a result of we have now this important effectivity enchancment versus diesel and pure fuel on combustion engine utilizing hydrogen HPDI, but in addition provides extra efficiency, extra energy, and extra torque. So higher effectivity, extra energy, and extra torque offers it a bonus that even extends its lead over different applied sciences from a technical standpoint and in addition a business standpoint the place it’s totally reasonably priced to undertake HPDI onto an inner combustion engine as in comparison with the choice of making a gas cell car. So this actually is an training course of that as we generate extra knowledge and display to prospects just like the partnership and tasks that we’re doing with Scania, this then components into their work and their decision-making on the place to put their bets and what priorities to make internally for future know-how. And I will say, seeing that HPDI can take an OEM all the best way to zero-carbon hydrogen with extra torque and extra efficiencies than they’ve as we speak on their engines is a very compelling imaginative and prescient that permits them then to consider, OK, let’s think about HPDI even sooner and we will use it as we speak with fossil pure fuel and biogas.

And this pattern I discussed a couple of moments in the past in regards to the biogas growing as a share of the gas provide to {the marketplace} is admittedly necessary for everyone’s mission to try to clear up transportation. Reusing pure fuel or methane that will in any other case go into the setting is a really lovely environmental reuse situation that HPDI permits.

Eric StineCraig-Hallum Capital Group — Analyst

OK. Nice. Perhaps final one for me. Just a few ideas on plans in North America.

I do know it is solely been, what, a month and a half since — or a few months right here for the reason that finish of CWI. However simply possibly what your present thought course of is on North America?

David JohnsonChief Government Officer

Sure. The North American enterprise case for pure fuel can also be enhancing proper now. I discussed in my feedback that the — these gas worth differentials are actually the driving force of our enterprise. And we see a widening hole the place mainly in North America, diesel costs are going up greater than pure fuel costs.

And so the benefit for pure fuel is rising on this second. In order that’s a constructive signal. Moreover, as talked about in my feedback, we’ll be going to the Advert Expo this 12 months. We actually look ahead to becoming a member of that permit’s say, on our personal at Westport Gasoline Methods this 12 months and displaying the trucking trade, what we have now to supply with HPDI for pure fuel, HPDI for biogas, and HPDI with hydrogen.

These are actually nice combos of fuels and our know-how that may very well be an necessary a part of what trucking does in North America. So we’re keen and excited. We acknowledge on the identical time, there are steps that have to be taken. A few of our prospects all over the world, after all, are already current in North America.

So we’re hopeful that, that would speed up the trail towards commercialization within the close to future.

Eric StineCraig-Hallum Capital Group — Analyst

OK. Thanks, David.

David JohnsonChief Government Officer

Thanks, Eric.

Operator

Our subsequent query comes from Rob Brown of Lake Road Capital Markets. Please go forward.

Rob BrownLake Road Capital Markets — Analyst

Actually across the query is across the EU market. And what are you seeing when it comes to visibility now on the HPDI heavy-duty market when it comes to demand with pricing? Is it — how a lot are you seeing a decline? Has it occurred but? Or are you simply type of getting cautious? Just a few shade about how that market is trending now with the pricing setting.

David JohnsonChief Government Officer

Thanks in your query. So within the EU market proper now, we face increased LNG costs than we have now traditionally, and that’s, for certain, some headwind for our enterprise. Moreover, the Russia-Ukraine battle and the shutoff of — or the not realization of Nord Stream 2, all these items weigh on {the marketplace} relative to our product. So we have now seen some moderation of demand, to illustrate, however we’re hopeful that that is a brief factor.

In the long run, I can keep in mind two years in the past when the COVID was being unleashed, we noticed a moderating of land demand then as we work via sort of what’s the brand new regular going to be, what’s required sooner or later. And so my expectation is that that is non permanent. In the long run, I am very snug with the truth that we have to transfer items and we have to do it cleanly and our programs allow that in an financial method on an ongoing foundation. So we’ll need to see all shakes out, however for the close to time period, some moderation and hopefully, a restoration within the coming quarters.

Rob BrownLake Road Capital Markets — Analyst

OK. Good. After which — and I feel Richard stated that you just count on the impartial aftermarket to develop in ’22 regardless of these headwinds. I simply wished to make clear that, what’s your type of view on progress within the impartial aftermarket within the present setting?

David JohnsonChief Government Officer

Sure. I might let you know that the impartial aftermarket is already a large enterprise all over the world for us on the order of a 3rd of our revenues. And so we’re not anticipating super-strong doubling or tripling sort progress. However nonetheless, we do see alternatives in varied markets all over the world that actually are opening up and changing into new markets for us.

So we have talked about in prior discussions, Egypt, Algeria, India. We had at the moment, within the final interval, seeing some softening in locations like Turkey and Poland. However now with the outbreak of the battle, I feel LPG turns into more and more one thing that, to illustrate, native governments have and make out there. And so we have now a number of the largest worth differentials as we speak between petrol and LPG in varied markets in Europe.

And we do count on that to persist and to drive our progress in these markets. So we’re hopeful, and our outlook is constructive with respect to the aftermarket enterprise persevering with to be an necessary a part of and a rising a part of our enterprise.

Rob BrownLake Road Capital Markets — Analyst

Thanks. I will flip it over.

David JohnsonChief Government Officer

Thanks, Rob.

Operator

Our subsequent query comes from Amit Dayal of H.C. Wainwright. Please go forward.

Amit DayalH.C. Wainwright and Firm — Analyst

Thanks. Good morning, everybody. So, David, simply with respect to the macro developments in Russia, EU, and so on., are there any accounts receivables or funds tied to these markets that could be in danger?

David JohnsonChief Government Officer

And so we’re monitoring this very rigorously. And you may think about with respect to our enterprise in Russia that with all of the sanctions being put in place, there is a excessive diploma of tension and, to illustrate, extra friction within the system. In order that, I discussed in my feedback, some slower funds. And I feel that is simply the banks being cautious to guarantee that they comply with all of the sanctions exactly.

We’re not doing enterprise as we speak with any authorities entities in Russia and — however but we have now prospects in Russia who’re searching for clear transportation, reasonably priced transportation and we intention to proceed to assist these prospects entry these. However it certain is getting increasingly more difficult as the times of this battle roll on. And so our outlook on that enterprise is kind of guarded that we may see it truly come all the best way to zero sooner or later, relying on what occurs. However frankly, we do not know.

Nonetheless, we’re being very, to illustrate, cautious about what we do and altering our phrases to our prospects, so we receives a commission prematurely and issues like this. So we do not see any important danger from that perspective. Simply one thing we handle.

Amit DayalH.C. Wainwright and Firm — Analyst

Understood. And type of the gaps from that market towards revenues and margins, and so on. Are there different avenues so that you can possibly make up a few of these? Or do you simply need to get via this and that scenario has to normalize earlier than you may make some recoveries from these markets?

David JohnsonChief Government Officer

Sure. It is really exhausting to say. What I feel typically is that we must always count on that our gross sales in Russia will decline and in order that’s a stress on us. Nonetheless, one of many benefits we have now within the firm is that we’re current in 70 markets all over the world.

Russia and Ukraine are simply two of these markets. So we have now a number of alternatives in different places. And as talked about earlier, this worth differential between petrol and LPG, for instance, in quite a few markets is widening versus shrinking and so we do see some brilliant spots within the enterprise all over the world. And we’re hopeful these will offset or greater than offset any decline that we have now in Russia.

That will likely be a problem for us, however that is definitely our objective.

Amit DayalH.C. Wainwright and Firm — Analyst

Understood. That is all I’ve for now, David. I will take my questions offline. Thanks.

David JohnsonChief Government Officer

Thanks.

Operator

Our subsequent query comes from Colin Rusch of Oppenheimer. Please go forward.

Colin RuschOppenheimer and Firm — Analyst

Thanks a lot, guys. Are you able to speak a bit bit in regards to the Cummins testing course of and the length? How lengthy do you assume that is going to take earlier than you are in a position to get some type of outcomes you may communicate of that?

David JohnsonChief Government Officer

Sure. So this, for us — 2020 — sorry?

Colin RuschOppenheimer and Firm — Analyst

Sure. Simply particularly round hydrogen, sorry — sorry to make clear that.

David JohnsonChief Government Officer

Sure. No downside. Sure, the work we’re doing with Cummins is as introduced on hydrogen. So we’re getting that began now, and I count on that to be accomplished inside the 12 months.

The precise tempo is not one thing we management as a result of we do it with our companions. And so there’s — as you noticed with our work with Scania, final 12 months, there may very well be some massive delays. We do not count on the sort of massive delays that we have now with Scania to be the case of Cummins, but it surely’s to be demonstrated versus know prematurely. However I feel I can say confidently, we’ll have some progress inside this 12 months.

The secondary issue that can matter to you, Colin, within the market is OK, after we end that work, what does Cummins say — permit us to say within the market? So our prospects have that necessary proper to determine what we are saying is the provider. And so we have now that as the very best precedence in our to-do listing, if you’ll.

Colin RuschOppenheimer and Firm — Analyst

Sounds good. After which simply across the provide chain, clearly, you guys noticed some of these things coming early round — again in 2020 round COVID and pointing then to have stock readily available to get that. With a number of the issues that we’re seeing proper now in China and potential for another disruptions given the battle in Europe, what are you able to discuss — factors in your provide in now and the way you are managing that?

David JohnsonChief Government Officer

Sure. I might let you know that we’ve not had any extreme issues at this time limit, however we’re completely on high of it with respect to attempting to handle the availability chain. These sanctions that come into place are one thing that can not be ignored and need to be abided by. So that is what we do.

On the identical time, we’re not sourcing any supplies from Russia. And we do not have actually an enormous publicity to Ukraine to the one commodity that’s sort of difficult for us is metal for our plant at Stako. So that is sort of one instance. Nonetheless, there are different sources.

And up to now, we’ve not been in a position to — we’ve not had any bother that we’ve not been in a position to maritage. So — however I might let you know it is — sure, there’s some anxiousness related to it as a result of we do not know what tomorrow holds, and we’re working very exhausting to try this with out having to extend our inventories the best way we did via the COVID interval. So hopefully, we’re in a great place, and we’ll handle it day-to-day.

Colin RuschOppenheimer and Firm — Analyst

Thanks a lot.

David JohnsonChief Government Officer

Thanks, Colin.

Operator

Our subsequent query comes from Invoice Peterson of J.P. Morgan. Please go forward.

Invoice PetersonJ.P. Morgan — Analyst

Yeah. Hey. Good morning, and thanks for taking my questions. I do know you sort of refrained or wished to chorus from offering ahead steerage.

However Russia, Ukraine sort of began towards the top of February. Are you able to remark simply on the demand tendencies with the OEM and IAM not less than heading into that, not less than if not quantitatively, not less than qualitatively?

David JohnsonChief Government Officer

Sure. Certain, Invoice. Good to listen to you this morning. In order a normal premise, we had a great fourth quarter, and we have seen a bit little bit of softness within the first quarter up to now.

However typically, we have now demand and order books that — sure, usually are not as thrilling as we might wish to see, however they’re OK up to now. We’ve got not seen a tail-off in demand. In truth, we have seen some uptick in demand in sure markets all over the world as individuals acknowledge these massive worth differentials and prospects are fascinated with our merchandise. So on one hand, so tremendous ambiguous reply, I apologize as a result of what we’re seeing mainly is we’re seeing sort of continuation of restoration pattern popping out of COVID that we noticed in ’21 coming into ’22 on the identical time that we’re seeing this anxiety-driven in volatility worth — gas worth volatility pushed anxiousness that sort of tempers the market.

So therefore, no steerage for as we speak as a result of it is actually difficult to see how it will all play out close to time period and thru the later components of this 12 months, how lengthy will the battle final, for instance, and what’s going to all of the actions we taken all over the world. Nonetheless, I assume, my overriding precept right here and thought is that in powerful instances, individuals go in search of cheaper methods to maneuver and entry to lower-cost fuels. And so I feel that worth differential is admittedly the important thing driver of markets all over the world for us has been all the time, and I count on it all the time will likely be going ahead.

Invoice PetersonJ.P. Morgan — Analyst

No. That is useful. I assume possibly simply talking on the price facet and a few — and in addition a few of your money outlays and so forth. Once more, understanding you might not wish to present sort of quantitative, however I assume, how ought to we take into consideration your opex trajectory in addition to capex given, I assume, a number of the pauses or near-term dynamics? And the way ought to we take into consideration that trending via the 12 months for 2022?

Richard OraziettiChief Monetary Officer

I wish to deal with that one, Invoice. Look, when it comes to capex, we’re within the vary of $15 million to $20 million, relying on our applications. I imply, we’re clearly attempting to rationalize our capex. It will be a bit bit prudent throughout this time period.

The HPDI itself right here, as David talked about earlier on the outset of the decision, just like the HPDI 3.0, there’s type of longer-term applications. It might be silly for us to not proceed. We’re on a time line with our launch companions. So these issues must proceed.

However $15 million or so can be a great quantity when it comes to capex. When it comes to opex pattern, we — materials prices and inflation are displaying up, and we type of offered that steerage in there. Having stated that, clearly, we’re taking actions to offset these via our — simply the opposite productiveness initiatives that we had ongoing there. So in the intervening time, I might say they’re comparatively secure when it comes to percentages.

We’re spending extra on R&D, however you may see that type of present up in our P&L. The G&A must be roughly the identical as you see there. Margins are those which might be coming a bit bit extra below stress. And that is — and sadly, it is a bit bit exhausting to mannequin that simply given what number of markets we’re in.

The fourth quarter was significantly unhealthy, we’ll say, in comparison with the place we — our expectations are. So we clearly we’re working ahead to enhance these margins to get — we’ll name extra of our focused charges there.

Invoice PetersonJ.P. Morgan — Analyst

All proper. That is good shade. And possibly simply sort of an enormous image query. And once more, acknowledges, it is exhausting to name a few of how a few of these geopolitical issues prove.

But when we had been to reconvening a 12 months from now, what are the important thing milestones we must be looking for? Like what would you could have completed throughout this 12 months that we glance again on and name it a hit?

David JohnsonChief Government Officer

Sure. So let me simply look again on 2021. I feel actually necessary in 2021 had been the developments that we began with prospects. One of many key markers that I take into consideration is after we’re putting in our HPDI gas system on a brand new engine, virtually would not matter what gas we’ll use.

That is a very necessary step towards beginning a program that can result in manufacturing for me. We will not get to the end line until we get to the beginning line and get began. So the work we’re doing with Scania, the work that we introduced with Cummins, the challenge we have now with ADL and 2P. I count on all of those may have actually necessary milestones via this 12 months.

And a few of these milestones will likely be introduced, hopefully, and we’ll present progress towards business — additional commercialization of HPDI. We’re nonetheless pursuing our enterprise curiosity in India and China and see actually nice alternatives there. And so I look ahead to having extra to speak about via this 12 months for each of these markets additionally. So sure, I feel there will be some actually necessary enterprise progress that we will share with the market via this 12 months, and you must undoubtedly search for that.

Invoice PetersonJ.P. Morgan — Analyst

Thanks.

Operator

Our subsequent query comes from Mac Whale of Cormark Securities. Please go forward.

Mac WhaleCormark Securities — Analyst

Good morning. I used to be simply questioning just a bit little bit of element on the impact {that a} narrowing within the unfold between gaseous fuels and diesel and gasoline have when it comes to — like how lengthy does it take for that to get well or to kick in once you see that swing from one route to a different?

David JohnsonChief Government Officer

Sure. It is a actually good query. It would not have a closed discussion board reply as a result of, frankly, it is determined by the merchandise and the markets and the channels. So we promote, proper? We promote merchandise for three-wheelers in India which might be tremendous cheap, we promote high-end HPDI programs within the European marketplace for massive vehicles and all the things in between.

And so each market’s a bit completely different. And so we promote on to OEMs as a result of we have this channel via the OEMs the place in addition they have sellers and stock. And so I might let you know, there’s all these lags within the programs that actually make it exhausting to categorize as we see it inside three weeks. We see it inside three months.

However typically, the opposite factor I might level to is that a lot of the markets all over the world have some sort of what they think about regular, proper, that it is sort of a 30% low cost on a gaseous gas versus petrol or a 35% low cost to diesel between LNG. And so when that strikes, if it strikes a few proportion factors, that is sort of regular. We’re all used to this, the pump on the costs transfer. However once you begin to discover it, like, hey, wait, these costs are near the identical, and so they was once completely different, that does have an effect on the buyer habits and the fleet habits, and this comes again via the system to us.

However the time constants are powerful to name and stuff to categorize as only one.

Mac WhaleCormark Securities — Analyst

OK. And does that — would you say that that is mainly a misplaced sale? Like is {that a} scenario the place, say, a fleet supervisor is taking a look at changing a car and it is like, OK, we’re changing that one this quarter or this time period and so you are not going to see that till that is changed on the following cycle? Or do — is it a delay after which a pent-up demand?

David JohnsonChief Government Officer

Sure. I feel it is extra of the latter. I feel it is extra of a delay. So particularly with respect to volatility.

So when gas costs are unstable, then it is sort of like, properly, I used to be planning on shopping for 20 vehicles each quarter or 10 vehicles each month or regardless of the sequences that standard fleets are going via, relying on their fleet dimension, their shopping for behaviors, and patterns. They usually simply say, properly, let’s wait and see earlier than inserting that order. And so I are likely to imagine generally, it is extra delayed than it’s dropping off that order. And so it does come again — assuming the circumstances come again, proper?

Mac WhaleCormark Securities — Analyst

Sure. Sure. That is smart. I assume, whether or not you are going to downsize or upsize your fleet is extra in regards to the fleet outlook on their enterprise versus —

David JohnsonChief Government Officer

Sure. That is proper. Sure. That is proper.

So mainly, fleets are shopping for some mixture of pure fuel automobiles, completely different applied sciences, and so forth. And it is actually that call on the combination and what they’ll purchase that — after which when financial instances are difficult, they often delay their — as an alternative of shopping for 10, they will solely purchase 5 or change their order timing. So all these issues are the behaviors of fleets which might be fairly constant all over the world when it comes to how they behave primarily based on macroeconomics and gas costs.

Mac WhaleCormark Securities — Analyst

Sure. OK. After which Richard, I feel you already answered a query on the R&D, excited about the opex. What proportion of that spend of the opex typically, or possibly you wish to discuss R&D, is would you say is stuff you are going to spend no matter your revenues and margin? Is it — like how do you price range? Like what stage — I assume, I am attempting to suit for the query, what stage of opex spending is type of not negotiable since you’re taking a look at sure applications that simply aren’t going to be impacted by like quarters of income or margin? You simply say we’re doing this 12 months, and so we’ll spend x thousands and thousands on this.

I am questioning what — how massive that’s?

Richard OraziettiChief Monetary Officer

I might say on the R&D, in all probability, I might say, 90% to 100%. Like we’re pushing that. I imply, we raised the cash particularly as a result of the corporate itself was ravenous itself. Over a time frame there, to illustrate, between the interval of 2016 to even as much as 2020, clearly going into COVID.

And so now we’re attempting to speed up, particularly on the heavy-duty facet. There have been sure issues that wanted to — and now must get completed. In order that’s why extra towards the 100% on R&D. We’re attempting to all the time optimize the spend of the place we do work.

The place you’d truly see you name it, austerity measures as we’ll undergo this 12 months. I imply, clearly, the Russian disaster causes an issue. It is only a bunch of headwinds, sadly, which have all proven up on the identical time. Clearly, G&A and opex are those the place we’ll take a look at the discretionary spend there.

Mac WhaleCormark Securities — Analyst

Proper. After which is that — once you take a look at the tendencies, clearly, you could have additional cash on the steadiness sheet. It sort of went up in ’21 by single-digit thousands and thousands. It is like $4 million, $5 million or so.

Then does that incrementally go increased from there once more, or is it extra flat line?

Richard OraziettiChief Monetary Officer

Extra flat line.

Mac WhaleCormark Securities — Analyst

Yeah. OK. OK. That is all my questions.

Thanks.

Richard OraziettiChief Monetary Officer

Thanks.

Operator

Our subsequent query comes from Jeff Osborne of Cowen and Firm. Please go forward.

Jeff OsborneCowen and Firm — Analyst

Hey. Good morning. Simply wished to revisit the aftermarket enterprise and the ten factors of gross margin differential sequentially. How a lot of that was the regional combine? In your slide, you could have three factors — I am attempting to get — is almost all of it, the overemphasis of India in This fall? After which as a associated query, if we take into consideration Russia being weaker in 2022, does that phase have a number of the identical pressures which might be linger assuming that Russia is a extra worthwhile market relative to others?

Richard OraziettiChief Monetary Officer

Jeff, so the reply is sure. I imply, the — for certain, there was extra — there was much more in India. So it was one of many markets that we did not talk about particularly that has been rising in a short time. And we’re seeking to attempt to optimize, clearly, our — how we do enterprise in that nation, and that would come via localization.

However that was an enormous, we name it, a good portion of it. We did see inflation as properly that’s displaying up that we’re attempting to go these prices on. So you do not see that within the margin proportion as a result of we’re simply actually passing the price on, not essentially with the markup as a result of we’re cognizant of attempting to guard market share. It is case by case.

The query with Russia is roughly about half when it comes to the publicity, we quoted about half of the enterprise is in impartial aftermarket. So name it the — about $12 million — $12.5 million or so. And so that can have an effect on our aftermarket enterprise.

Jeff OsborneCowen and Firm — Analyst

And Stako, their gross sales out of Poland, the place do these go geographically, $6 million, $7 million 1 / 4 from that?

Richard OraziettiChief Monetary Officer

These ones are all going primarily towards Renault in Western Europe. So they’re much less — not the — and never impacted by the battle from a income perspective.

Jeff OsborneCowen and Firm — Analyst

After which my final query was simply on the localization in India. May you stroll via what the capex burden of one thing like that will be? And is that within the, I feel, $15 million to $20 million steerage that you just offered or commentary you offered for 2022?

Richard OraziettiChief Monetary Officer

It isn’t within the $15 million. It will be, we’ll name it, extra of one thing that will occur over the following few years. However David, possibly over to you. I imply, pondering $5 million is roughly what that will be, however I will let the professional reply that higher than I.

David JohnsonChief Government Officer

Sure. In order we take a look at the Indian market, we’re responding proper now with respect to including capability. And mainly, we have been ready to try this with out capex simply via working patterns. And so a few of these items that we make are made in our JV in India already, after which a few of these are made in Italy and in addition in North America.

So we have now a distributed provide base. In order we take a look at localization, I do not count on we’re speaking about massive capex for that. And Richard is definitely proper that it’ll be over a time frame. I might let you know extra of the localization is simply shopping for the subcomponents domestically than it’s having to speculate closely ourselves.

So there may very well be a couple of million, however it is going to unfold over time.

Jeff OsborneCowen and Firm — Analyst

Bought it. That is all I had, David. Thanks. Admire it.

David JohnsonChief Government Officer

Thanks, Jeff.

Operator

This concludes the question-and-answer session. I want to flip the convention again over to Mr. Johnson for any closing remarks.

David JohnsonChief Government Officer

Sure. Thanks, all people, in your time this morning and in your questions and the dialogue. Loved it very a lot. The 12 months previous was, typically, a great one for us.

I be ok with what we completed. We set the groundwork for our future. Actual blissful about our hydrogen work and excited for what we will carry again to {the marketplace} with information via this 12 months. So there is a good bit of problem forward, however we really feel fairly strongly that we’re well-positioned to handle that.

As we handle via the COVID interval, we’ll handle via this one, too. and proceed on our path to ship clear transportation in an reasonably priced method for markets all over the world. Thanks in your time and look ahead to seeing you on the varied conferences within the close to future.

Operator

[Operator signoff]

Length: 63 minutes

Name individuals:

Christian TweedyInvestor Relations

David JohnsonChief Government Officer

Richard OraziettiChief Monetary Officer

Eric StineCraig-Hallum Capital Group — Analyst

Rob BrownLake Road Capital Markets — Analyst

Amit DayalH.C. Wainwright and Firm — Analyst

Colin RuschOppenheimer and Firm — Analyst

Invoice PetersonJ.P. Morgan — Analyst

Mac WhaleCormark Securities — Analyst

Jeff OsborneCowen and Firm — Analyst

Extra WPRT evaluation

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This text represents the opinion of the author, who might disagree with the “official” suggestion place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis – even certainly one of our personal – helps us all assume critically about investing and make selections that assist us turn out to be smarter, happier, and richer.



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