Westport Fuel Systems Inc. (NASDAQ:WPRT) Q3 2023 Earnings Call Transcript
Westport Fuel Systems Inc. (NASDAQ:WPRT) Q3 2023 Earnings Call Transcript November 8, 2023
Operator: Good morning. My name is Cynthia 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. [Operator Instructions] Thank you. Ms. Ashley Nuell, you may begin your conference.
Ashley Nuell: Thank you. Good morning, everyone. Welcome to Westport Fuel Systems third quarter conference call for the 2023 fiscal year. This call is being held to coincide with the press release containing Westport’s financial results that was issued yesterday. On today’s call, speaking on behalf of Westport is Interim Chief Executive Officer and Director, Tony Guglielmin, and Chief Financial Officer, Bill Larkin. Attendance on this call is open to the public, but questions will be restricted to the investment community. You are reminded that certain statements made on this call and our responses to certain questions may constitute forward-looking statements within the meaning of the U.S. and applicable Canadian securities laws, and as such, forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. With that, I’ll turn the call over to you, Tony.
Tony Guglielmin: 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 an update on our strategic objectives before I turn the call over to Bill to walk us through the Q3 results. We also intend to keep our prepared remarks today brief so we can get to the Q&A. I want to start off by hitting some of the key highlights and top line numbers for the quarter. Key to these is our excitement around our HPDI joint venture with Volvo to accelerate the commercialization and adoption of Westport’s HPDI Fuel System Technology for long haul and off-road applications, which 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 negative $3 million for the quarter from negative $4.5 million for the same period in 2022. Now I’ll leave it there and let Bill elaborate in a moment on 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. A near-term, the immediate priority is to finalize the HPDI 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 progresses against these priorities. First, we entered new markets with our H2 HPDI fuel 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. Now this represents Westport’s first application of the H2 HPDI system for the locomotive sector. In our view, the hard-to-abate medium and heavy duty as well as high horsepower sectors are where HPDI creates significant value. We believe this is an affordable path to decarbonate the rail sector without compromising performance or efficiency. And this 2-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.
In September, we reorganized our business in India, including our partnership in India by reducing our stake in our joint venture, Minda Westport Technologies Limited from 50% to 24%. We expect to close this transaction by the end of Q1 2024. In addition, we are amending our joint venture agreement to include hydrogen components in addition to CNG, LNG and LPG components and kits. Importantly, though, the agreement will exclude any HPDI opportunities. And while this amended agreement will result in rationalization of local costs, we will maintain participation through the joint venture in 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 on to an update on the progress on the joint venture with Volvo. Now I personally had the opportunity over the last month since stepping into this role to meet with Volvo and Westport teams. I 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 say 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. Now Volvo and Westport have collaborated for over 15 years and share the vision of creating sustainable transport solution. Volvo Trucks have been on the road for over 5 years, utilizing our LNG HPDI system, and we look forward to a long and profitable future with the Volvo team.
Now with that, I’ll hand it over to Bill to walk you through our financial results.
Bill Larkin: Good morning. Thank you, Tony. Just an overview on our financial highlights for the third quarter and the third quarter of 2023, we generated $77.4 million in revenue with a 9% increase compared to $71.2 million in the prior year period. This increase was primarily driven by our core business with increased sales volumes in our delayed OEM, electronics, fuel storage businesses and also increased revenues from the heavy-duty OEM business, which were partially offset by lower customer sales in the intent aftermarket and light-duty OEM businesses. Gross margin increased to $13.2 million or 17% of revenue in the quarter. This is up from $11.3 million or 16% of revenue in the third quarter of ‘22. This improvement was mainly due to higher sales volumes across multiple businesses and increased gross margin in our heavy-duty OEM business, driven by higher engineering services revenue.
However, our gross margin was negatively impacted from higher production costs to continue to impact our business coming from global supply chain challenges and inflation, specifically in logistics and labor costs. We are 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. That’s an improvement compared to a loss of $4.5 million in the third quarter of last year. The improvements in revenue and gross margin drove the positive improvements in adjusted EBITDA, which were partially offset by higher selling, general and administrative expenses from increased trade show activity during which we highlighted our HPDI fuel 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 HPDI 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, our OEM revenue for the third quarter was up 20% to $52.9 million 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 and also as we expected and discussed last quarter, our HPDI system line in the third quarter significantly increased compared to Q2 of ‘23, and this was the result of Volvo’s release of more powerful product offering with an extended range, and we expect to see volumes to continue to increase in the fourth quarter.
We also delivered higher sales volumes from delayed OEM business, increased sales volumes in electronics and fuel storage businesses and higher engineering services revenue in the heavy-duty OEM business. Offsetting these increases were lower sales to customers in India in the light-duty OEM business. Gross margins in our OEM business expanded in the quarter, increasing to $7.8 million or 15% of revenue. This is an increase of $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 for our HPDI fuel system. As LNG fuel prices continue to trend positively against diesel and Volvo’s HPDI engine becomes 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 customers for Euro 6 and Euro 7 LPG system has adjusted their start date for the Euro 6 program, just moving the initial delivery dates from November ‘23 to January 2024. As a reminder, this program includes both Euro 6 and Euro 7 deliveries and expected to generate approximately €255 million in revenue through 2028. Affordability drives the buying decision in the LPG market. Currently, on average, the cost of LPG in Europe is less than half the cost of petrol or diesel, and our products enable customers to take advantage of these price differentiation. To the next slide, our independent aftermarket revenue for the third quarter was $24.5 million, down $2.6 million compared to $27.19 million in the third quarter of last year.
Lower sales volumes in African 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 and inflation in South America. Looking ahead, supportive 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 to $44 million. Cash used during the quarter was primarily related to debt servicing payments and purchases of equipment.
In the third quarter of ‘23, net cash provided by operating activities was $1.19. This is a significant improvement in net cash used of $8.6 million in the third quarter of last year. The improvement in cash provided by operating activities was primarily driven by the change in working capital, specifically inventory, accounts receivable and prepaid expenses. As we previously discussed, we built up inventory to manage against supply chain risk 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 action 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 initiatives, either announced or in the way that will have a positive impact on equity.
First, our HPDI JV with Volvo is an inflection point for Westport financially and HPDI commercially. Global Payments for their 45% share of the joint venture included initial $28 million and an earn out of up to $45 million, which is a clear signal of their commitment to the future growth of HPDI. And that also helps short our balance sheet. The JV is focused on driving global adoption of HPDI in the long-term, improving efficiencies and scale, while in the short-term, we have a partner to share in our required investments, including working capital and capital investments. Westport we’ll be receiving the initial $28 million following the closing of the JV. Second, as Tony highlighted, we have reorganized our presence in India to streamline the business, consistent with our objective of improving profitability and strengthening 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 to do so. Non-dilutive financing alternatives remain an option as we look to solidify our balance sheet. We continue to do what is necessary to ensure we are adequately and fully capitalized. Based on the work we have done against some of the initiatives I’ve 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.
Tony Guglielmin: Great. Thanks, Bill. Soon closing then – 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 recognize that we do have more work ahead of us. Now 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’m fully committed to executing against our outline priorities. And with that, I’ll turn the call over to the operator to open the call for your questions.
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