Westport Fuel Systems, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Cespira Operations: First full quarter operational with $16.2 million in revenue. Name unveiled as Cespira at IAA. Work with Weichai continues but no significant orders expected against the technology development and supply agreement by end of 2024.
• Cost Cutting: SG&A expenses decreased by almost 40% ($6.6 million) and R&D expenses decreased by over 40% ($2.5 million) compared to Q3 2023, driven by Cespira and other initiatives.
• Light-duty Segment: Performing well with Euro 6 LPG program for global OEM, expecting to exceed delivery expectations in 2024. Euro 7 LPG deliveries start mid-late 2025. Part of Kia Niro Tri-Fuel and prince brand LPG system for RAM 1500.
• Hydrogen Market: Acknowledges slowdown in hydrogen infrastructure development but remains confident hydrogen will play a role in decarbonization of transportation and industrial applications.

Segment Performance

• Light-duty segment: In Q3 2024, revenue was $61.5 million, up from $60.2 million in Q3 2023. Gross margin increased to $13.9 million or 23% of revenue. Driven by change in sales mix with more sales to European customers and reduction in sales to developing regions, along with evolution of LPG fuel system solutions.
• High pressure gas controls: Revenue was $1.6 million in Q3 2024, down from $3.7 million in Q3 2023. This was primarily due to a slowdown in hydrogen markets. Gross margin decreased to $400,000 or 25% of revenue.
• Heavy-duty OEM: Revenue was $3.1 million in Q3 2024, a significant drop from $13.5 million in Q3 2023. This was because the heavy-duty business was transferred to Cespira. Gross margin was flat compared to Q3 2023 but up as a percentage of revenue.
• Cespira (joint venture): Generated $16.2 million in revenue in Q3 2024, a $2.7 million increase from the same quarter last year. This was the first full quarter of Cespira's operations, and it transitioned heavy-duty OEM HPDI revenue from Westport's segment.

Guidance

• Cespira: Breakeven/gross margin positive level revenues not pegged yet, as it depends on mix and ongoing setup. No exact number can be provided currently.
• Gross Margin: Ongoing cost reduction efforts continue, but no specific forward-looking guidance on gross margin improvement beyond reviewing entire cost structure.
• Inventory: Expecting inventory reduction back to normal levels by end of 2024 and working on reducing working capital through better inventory management and payment practices.

Risks

• Hydrogen Infrastructure: Slowdown in hydrogen infrastructure development leading to slower adoption of hydrogen-powered automotive and industrial applications.
• Weichai Orders: Uncertainty with Weichai as no significant orders expected against the technology development and supply agreement by end of 2024.
• Cost Volatility: Volatility in raw materials and energy costs affecting cost structures and gross margins.

Question and Answer

Q: Could you speak to the contributions of pricing, supply chain optimization and mix driving gross margin improvements?

A: Bill Larkin mentioned it's a combination of supply chain, overall cost structure review, and sales mix changes across various segments.

Q: Sense of breakeven or gross margin positive level revenues for Cespira?

A: Dan Sceli said it depends on mix, hard to peg a specific number as it involves final product assembly parts, aftermarket parts, and truck service, and is still in the setup phase.

Q: Exposure to U.S. tariff developments?

A: Dan Sceli is optimistic on natural gas products in the U.S. due to election outcome, seeing an opportunity for longer runway and bigger volumes on natural gas.

Q: Thoughts on gross margin improvement and how much can be achieved?

A: Bill Larkin said ongoing cost reduction efforts across input costs (material, labor, manufacturing) continue, but no specific guidance provided yet; Dan Sceli emphasized putting in place operational processes to hold onto improved margins.

Q: Euro 7 shift and opportunity?

A: Bill Larkin said light-duty business will start transitioning to Euro 7 kits with seamless production transition, already producing components and going through certification.

Q: Pipeline increase in heavy-duty business?

A: Dan Sceli said volumes are increasing and they're working hard to meet demand.

Q: Cost cutting efforts and EBITDA break-even?

A: Bill Larkin and Dan Sceli stated targeting EBITDA break-even and maintaining it through ongoing restructuring and cost reduction efforts, acknowledging it will take at least another year to complete.

Q: Cespira and Weichai interaction?

A: Dan Sceli confirmed Cespira handles interaction with Weichai, and the second OEM is not Weichai, with no preclusion on location.

Q: Hydrogen infrastructure benchmark?

A: Dan Sceli said hydrogen critical mass is further out, possibly 7-8 years, driven by total cost of ownership and country-specific investments.

Q: Pickup in delayed OEM customer?

A: Dan Sceli and Bill Larkin said they're more than halfway back to normal run rate for the delayed OEM customer.

Q: Cespira and second/third OEM?

A: Dan Sceli said Cespira is structured to take on additional volume with second and third OEMs, but development work is needed first.

Q: Cash needs and ATM usage?

A: Bill Larkin said ATM is available but no shares have been sold yet, as they're focused on reducing cash burn through inventory management and working capital reduction.