Westport Fuel Systems Inc. Q3 FY2021 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the Westport Fuel Systems Third Quarter 2021 Results Conference Call. Please remember that all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be a chance to ask questions. I would now like to turn the conference over to Christian Tweedy, Westport's Investor Relations representative. Please proceed, Mr. Tweedy.

Good morning, everyone. Welcome to Westport Fuel Systems Third Quarter 2021 Conference Call, which is being held to coincide with the press release containing Westport Fuel Systems financial results coverage distributed yesterday. On today's call is being on behalf of Westport Fuel Systems is Chief Executive Officer, David Johnson, and Chief Financial Officer, Richard Orazietti. You are reminded that certain statements made in this conference call and our responses to various questions may constitute forward-looking statements within the meaning of 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. Actual results may differ materially from those projected in the forward-looking statements. You are cautioned not to place undue reliance on those statements. Information contained in this conference call is subject and qualified in its entirety by information contained in the Company's public filings. I will now turn the call over to you, David.

Thanks, Christian. Good morning, everyone. Thank you for joining us to review Westport Fuel Systems results for the Third Quarter of 2021. As world leaders meet in Glasgow for the 2021 UN Climate Change Conference, well-known as COP26, we know we're facing a pronounced climate crisis with an increasing need for each sector in our global economy to take action now. Globally, transportation is responsible for nearly a quarter of greenhouse gas emissions. We must continue to use all available options to reduce CO2, and we must do so quickly, effectively, and affordably. We need to dramatically shift the mix of what we drive to affordable, clean transportation technologies that make an impact on our roads today and into the future. At Westport Fuel Systems, our products are already playing an important role in reducing carbon in transportation and helping to enable a clean and prosperous future for all. We're confident that our products will continue to do so with increasing impact in this decade and the next. Additionally, our recent ESG report highlighted operational improvements we've made to reduce our greenhouse gas emissions by 34% and our greenhouse gas intensity by 21% year-over-year. These are good results, and we look forward to continuing to do our part to lower our operational carbon footprint. Furthermore, we know that the biggest contribution Westport Fuel Systems can make to respond to this challenge is to increase the production, sales, and use of our products. Already today, there are thousands of HPDI powered trucks in operations in Europe, fueled by low carbon LNG and bioLNG, a carbon-neutral fuel. These trucks have avoided producing tons of CO2 and will continue to avoid producing tons of CO2 emissions for years to come. Without HPDI, these trucks will be powered by diesel engines and fueled with diesel fuel, and will emit dramatically more CO2. HPDI is making a tangible impact on carbon reduction now, with LNG and bioLNG into the foreseeable future when green hydrogen issues with our HPDI technology. I'd like to draw your attention to a few highlights from our third quarter and share some market insights, then Richard will take you through a more detailed review of our Q3 financial performance. The third quarter was challenging for us as it was for OEMs and other Tier-1 suppliers in the automotive sector. Global supply chain challenges for semiconductors and other commodities are negatively affecting the entire industry. Despite this, we were able to post an improving trend in the Company's performance, but not as strongly as we expected considering the strong end-user demand for our products. Our HPDI independent aftermarket and delayed OEM sales were constrained by lower than forecast production. Despite these challenges, we generated revenues of 74 million in Q3, up 14% compared to the same period in 2020. However, lower-than-expected vehicle production and sales volumes, due to the supply chain shortages combined with higher operating and R&D expenditures, caused us to incur a net loss of $5.8 million this quarter. Our OEM segment rebounded from last year up 26% with revenues of $47 million in the Third Quarter, compared to $37 million in Q3 of last year, bolstered by higher light-duty OEM sales volume, and by our Q2 acquisition of Stadco, a leading manufacturer of LPG fuel storage systems. Despite ongoing headwinds in the global supply chain, we expect Q4 will contribute to and confirm our full-year growth trend. The European market continues to be a key driver for our business. The refueling infrastructure in Europe for alternative fuels continues to grow. NGVA Europe reports there are now 455 LNG stations and nearly 4,100 CNG stations across Europe. Italy, Spain, and The Netherlands continue to offer important financial support for alternative fuels and alternative fuel vehicles, while Sweden has recently introduced long-term support for biogas production to create a circular economy and to increase the use of sustainable energy in the transportation sector. In Germany, the potential for bioLNG to reduce greenhouse gas emissions in trucking has recently been shown to be as much as 80% on a well-to-wheels basis. Europe remains supportive, and we believe our products and global footprint will remain an advantage for our OEM customers as they adopt our clean transportation solutions. There are today no other cost-competitive alternative benefits that HPDI delivers for long-haul, heavy-duty transport. With the growth of renewable natural gas and green hydrogen, HPDI will continue to do so for decades. Fleet-type pursuing heavy-duty vehicles equipped with HPDI and fueled by LNG and RNG, for the lower total cost operation, comparable driving performance of diesel engines, and a reduction in their overall carbon footprint. HPDI powered trucks are being deployed in high mileage applications that historically depended on the diesel engine running on high carbon diesel fuel. Our business in Europe is built on fully developed and validated products that use clean alternative fuels and respond economically to the environmental challenges we face. Sales from our European launch partner have grown 43% year-to-date compared with 2020. Customer and market feedback continues to be positive due to the real-world benefits HPDI delivers. Real-world HPDI benefits include vehicle performance for the driver, lower costs for fleets, and environmental benefits for our industry and the climate. We expect a strong Q4 for HPDI and we see opportunities to grow in markets around the world. You may have noticed that markets are experiencing a surge in energy prices. Both natural gas and crude oil prices have doubled over the last 12 months. Instability in fuel prices creates challenges for our business as buyers make purchasing decisions on the total cost of ownership between vehicles fueled by petrol or diesel versus those filled by clean alternative fuel. A meaningful price advantage for alternative gaseous fuels versus traditional liquid fuels provides the economics that support purchasing vehicles with our products. Higher fuel prices make an economic advantage of a lower-cost gas fuel even more desirable. Due to the environmental benefits of cleaner-burning, lower-carbon gaseous fuels, we expect any new normal will continue to offer economic advantages for alternate fuels and therefore support the long-term growth potential of our business. We anticipate these commodity fuel price challenges to be transitory, and with a return to stable market conditions, the outlook for our business and our technologies will be strong. Unstable energy markets are also in China driven up LNG prices significantly in recent weeks, and are creating headwinds for the natural gas truck market there. While these are not expected to endure, they are nevertheless impacting this segment today. That said, HPDI powered vehicle models have been certified and field trials are ongoing. We're continuing to work with our partner Way Chai to launch the product successfully with their vehicle OEM customers. Last week, we announced the award of a tender issued by Naftal, a branch of the Algerian National Oil and Gas Company to supply 60,000 LPG systems over the next 18 months with remitted spare parts for a total value of about EUR9 million. We have a continuing relationship with Naftal, having supplied over 120,000 LPG kits in the last 6 years. One can clearly see in these figures an acceleration of LPG fueled vehicles in this market. There are in Algeria today, more than 500,000 LPG vehicles supported by a network of 680 filling stations. By 2024, LPG vehicles are projected to more than double to over 1 million vehicles, or almost 20% of the vehicles on the road, up from 10% today. And this growth will be supported by an expanded network of 1600 filling stations. Turning now to India. I want to spend some time this morning highlighting the Indian market, some wider trends occurring there, and how we're working to boost our competitive position in that country. At the recent UN General Assembly, India made commitments to increase their installed capacity for renewable energy to 450 gigawatts by 2030 and to develop and implement a National Hydrogen Energy Mission to scale up annual green hydrogen production to 1 megaton by 2030. The Indian and U.K. governments just recently announced a collaboration on clean energy, which will boost climate resilience and advance clean energy deployment. Climate is one of the pillars of the India -UK 2030 roadmap. India was also recently ranked third in the renewable energy country attractiveness index, released by a professional services firm, which ranks the top 40 country markets on their handling of their renewable energy investment and deployment opportunities. These government initiatives helped to support our position as a leading supplier of clean, affordable solutions in the country and taking necessary aggressive steps to decarbonize. The government in India is dramatically expanding the availability of natural gas fuel stations to 10,000 by 2030 as part of their strategy to focus on clean, cost-effective transportation. With the implementation of the broad standard 6 emissions requirements in April of 2020, the demand for our products has already increased significantly as diesel engines with the required after treatments have become far more expensive and less cost effective. With our strong position in India today and the significant growth opportunity India represents to Westport Fuel Systems, I'm pleased to announce that Hitendra Mishra has recently joined Westport Fuel Systems as our Managing Director for India. Hitendra joins Westport from global Eicher commercial vehicles, where he most recently served as Senior Vice President and Head of their components business. I couldn't be more excited to have Hitendra onboard to lead us, what is an important growth market for natural gas vehicles. We'll have more to share on our plans for growth in this important market in the coming months. Over the last 9 months, we've made important progress working with hydrogen. In January, we announced our project with Scania to assess their engine running on hydrogen using our HPDI system. This project is ongoing, and we look forward to the chance to share updates with you. In February, we jointly published a white paper with AVL detailing how our internal combustion engines using hydrogen and HPDI offer a more affordable path than fuel cells for long-haul trucking applications. In March, we announced the successful demonstration of hydrogen with HPDI, showcasing more power, more efficiency, and higher efficiency compared to diesel and natural gas engines. In April, we presented the industry with our results showing that hydrogen HPDI offers the highest targets and improved efficiency. It's the most robust approach using hydrogen internal combustion engines for heavy-duty applications. And in July, we announced our collaboration with Tupy, a leading specialist in casting and machining of highly engineered structural components, and with AVL to develop a highly efficient hydrogen internal combustion engine for heavy goods transportation. The direct collaboration aims to combine advanced material and casting technologies with the latest hydrogen internal combustion engine technology using our high-pressure direct injection system. Interest in our hydrogen HPDI solution is growing, and I'm proud of our achievements in such a short amount of time and I'm bullish on the potential for growth in this important clean fuel area. We believe we have a disruptive, game-changing technology using hydrogen internal combustion engine and HPDI. Being able to offer OEMs diesel engine power, torque, durability of efficiency with near zero carbon emissions, with a lower total cost of operation than fuel cells is a compelling solution for OEMs and our customers. For OEMs, the ability to leverage pre-existing manufacturing and engineering capabilities is vital from both a cost and sustainability perspective, particularly being able to avoid massive manufacturing capital investments and sourcing rare-earth metals required for fuel cells and batteries. We're seeing increasing support globally from both the private and public sectors for the potential of hydrogen as an eventual zero-emissions fuel of choice. Earlier this year, the European Commission announced its 55 packages, proposing measures to reduce greenhouse gas emissions by 55% by 2030 from 1990 levels, as well as outlining a framework for a carbon neutral Europe by 2050. This package is important as it offers a significant boost to the European hydrogen industry through a target on the share of renewable hydrogen consumption and the expansion of hydrogen refueling stations along with core networks. As disclosed by the Hydrogen Council in their midyear update since February, there has been a 60% increase in the announcements of large-scale hydrogen projects, bringing the global total to 359. The total investments into these projects and along the value chain is approximately $500 billion through 2030, of which roughly 1/3 of these investments are considered high-impact. The Hydrogen Council reported that the estimated made in investment in hydrogen projects is increasing by $1 billion every week. As you're all aware, our Cummins Westport joint venture is scheduled to end December 31, 2021. As per our agreement, both Cummins and Westport Fuel Systems have equal rights to the joint venture's intellectual property. We continue to work with Cummins to wrap up the final terms related to the conclusion of the joint venture. We expect engines with our HPDI technology will make an important contribution in the North American market, much as they have in Europe. And that they'll capture market share from spark-ignited products as has been our experience in Europe. The North American long-haul heavy-duty market for natural gas, biogas, and hydrogen combustion engine products is modest insights today, but there are a lot of reasons to be bullish on opportunities in this part of the world. For fleets of large vehicles, we're looking for immediate and significant coverage. Alternative fuels like natural gas and biogas, and eventually green hydrogen, can play an important part in this decarbonization effort. The growing supply and availability of renewable natural gas, originally produced from capturing naturally occurring methane and using it as transportation fuel, is compelling already today. We believe this compelling story for fleet operators needing to decarbonize is working today, while driving continued growth. This two-pronged approach, fossil LNG and renewable natural gas, is the reason why major fleets are recognizing that it's the easiest, quickest, and most cost-effective way to meet their sustainability goals. Now over to Richard for more detail on our third quarter results.

Thank you, David. As David described earlier, we had a challenging quarter financially and operationally due to the impact of supply chain challenges from the shortage of semiconductors and other materials. Our revenues of approximately $24 million were 14% higher year-over-year, driven mainly by continued recovery of sales volumes in our light-duty OEM businesses, and also the addition of $7.1 million from our recently acquired fuel storage business. This was partially offset by the decrease in revenues in our independent aftermarket business. Revenue is lower sequentially due to the continued supply chain challenges, which were a drag on the growth of our HPDI product sales to our initial OEM launch partner, and also on the production and sale to our independent aftermarket and delayed OEM customers. Gross margin was comparable year-over-year, but decreased sequentially to $10 million for a gross margin percentage of 14%. This was mainly due to lower sales volumes and a higher sales mix to lower-margin customers, particularly to Indian and Russian OEM customers in our light-duty OEM business. Our equity income from CWI decreased by $1.1 million to $3.8 million year-over-year, primarily due to higher extended warranty coverage recorded during the current quarter. Net loss for the quarter was $5.8 million compared to net income of $0.8 million for the same quarter last year. The $6.6 million decrease in earnings was primarily the result of increased spending in research and development expenditures for heavy-duty OEM, lower foreign exchange gain, and an increase in income tax expense compared to the prior-year quarter. The prior year financials also benefited from $1.1 million in government-sponsored wage subsidies compared to $22 million this quarter. This quarter, our adjusted EBITDA was negative $1.4 million, a decrease of $5.4 million compared to the same period in 2020, mainly due to lower gross margin and higher expenses as described before. Now turning to our operational performance from our business segments. In OEM, our revenue for the current quarter was $48 million compared to $37.4 million for the prior year quarter. The improvement in revenues was driven by higher year-over-year sales volumes in the light-duty OEM businesses, particularly from Indian and Russian OEM customers, and was partially offset by pressure on sales to our Western European-based OEM customers. Further, we had $7.1 million in revenues from our fuel storage business, which resulted in OEM revenue on sales volumes being comparable year-over-year. This reflects a negative impact to the growth trajectory for manufacturing delays caused by the shortage of semiconductors on our initial OEM launch partner. Despite the headwinds from supply chain issues and increases in LNG prices, we expect to see continued growth in heavy-duty OEM sales through the remainder of this year as production recovers. Gross margin increased by $0.5 million year-over-year, mainly due to the addition of the fuel storage business, partially offset by margin pressure from delayed OEM, heavy-duty OEM, and light-duty OEM, which contributed to the decrease in gross margin percentage. The operating loss of $7.4 million reflects our investment in the development of our HPDI technology and lower gross margin. As our sales volumes grow, the profitability of heavy-duty OEM will improve through economies of scale in production and through our supplier network. Now turning to the independent aftermarket. Revenue for the third quarter decreased by 6% to $26.3 million compared to the prior-year quarter, primarily due to lower sales caused by disruptions in the global supply chain, including semiconductor chip shortages and the continued pressure in the traditional important Western European markets. Gross margin decreased by $0.4 million this quarter to $7 million for a gross margin percentage of 27%. The decrease in gross margin was due to lower year-over-year sales volumes resulting from the shortage in the supply of semiconductor chips and the increasing sales mix to lower margin emerging markets. We expect to see continued improvement in revenues from the independent aftermarket business segment in the fourth quarter of this year. But we temper expectations due to the ongoing shortage of semiconductors and the recent spike in LPG prices, which could continue to impact the independent aftermarket business. Finally, I want to speak to you about liquidity. As we discussed in the past quarter, we have significantly strengthened our balance sheet and liquidity to fund the growth of our heavy-duty OEM business and our other business plans. Our cash position was $142 million and our debt was $64 million at the end of the third quarter. Since the successful marketed equity offering in June, we have begun our investment in expanding production capacity of HPDI products and increased our spending in R&D for our HPDI technology for the next-generation performance and emission standards, including the application of hydrogen. We're continuing to progress our efforts to align our debt with our growth profile in a sustainable manner. During the quarter, we exercised our option to convert the final principal balance and remaining interest of the Cartesian convertible debt into common shares. The convertible note of $10 million has now been fully repaid and converted into common shares. We're also in the final stages of refinancing our term loan and COVID-19 bridge loan with our banking partner, Export Development Canada, into a long-term credit facility to support funding of our HPDI technologies, commercialization, and R&D. We received further waivers from EDC for the growth principal payments on the loans to the 15th of December 2021 in anticipation of the completion of the new agreement in the fourth quarter of this year. As I've said previously, we're very appreciative of the support and relationship with Export Development Canada bolstering our liquidity to fund our growth of HPDI and all our products and services. With that, I would like to turn it back to David.

Thanks, Richard. To recap, we've made substantial progress on our business plans this year, despite the challenges of the COVID-19 world we live in, and the ongoing supply chain issues we're facing. We remain focused on our key priorities for the last months of the year. I'm confident in our team, and we're committed to delivering. With that, I'd like to turn it back to the Operator for your questions.

Thank you. We will now begin the question-and-answer session. We will pause for a moment as callers join the queue. The first question comes from Eric Stine with Craig-Hallum. Please go ahead.

David. Hi Richard.

Good morning.

Hi, Eric.

Morning. So, as we think about CWI and obviously, you're working towards ramping them up and looking at options there. Just curious, it was a subtle change in your commentary in the release that when you're talking about your presence expected in North America, obviously HPDI, but in the past you have mentioned spark ignited. Is there anything we should necessarily lead into that or anything you're able to share related to CWI beyond the release?

Glad to touch on that, Eric. I think fundamentally, the key takeaway is that HPDI is a superior product. We see this playing out as we mentioned in our opening comments in Europe where there are vehicles on offer that have spark ignited engines and those that have HPDI-equipped engines. The HPDI-equipped engines are preferred by drivers, they're preferred by fleets, and they're taking market share from spark-ignited engines. So, from that perspective, we feel quite confident in our technological product position. Having said that, spark-ignited is also a good technology. I don't want to dismiss it entirely. We sell a lot of spark-ignited products around the world. Our weighted southern branch in North America has been through CWI historically, but there could be a new path in the future. So, watch this space.

Got it. And then just taking another step in terms of HPDI, when you think about, I mean, what would be your ideal path? Or maybe some ideal ways to think about getting into North America, whether it's with your current partner in Europe, coming to North America, potentially, multiple OEMs. Do you think it's with one or with multiple or how do you envision that?

Well, my preferred path to market is with strong partners, quickly and successfully. Getting the product right and having a partner that supports it and promotes it is important for us. But fundamentally, when I look at it in the long run, I expect there will be a lot of companies around the world offering HPDI because of what it offers to drivers and the environment in combination. And so, I think you'll see that play out in North America as well as in Europe and in China.

Okay. We'll stay tuned on that. Maybe last one I notice as we think about the overall business, light-duty included, obviously electrification gets a huge amount of focus. But maybe just talked about your OEMs, they do have electrification as part of their past, but they also have gas fuels, so maybe your thoughts on how that is playing out even can be in the general press, it might seem that it's all electric.

Yes. Great question. I'm happy to talk about that topic, but just briefly, in the world of transportation today, we have a diversity of solutions in terms of fuels and technologies. When I look to the future, whether it's a year from now or 50 years from now, I expect a diversity of solutions to persist because of the variety of applications. So, what you need for a small car, what you need for a large car, what you need for a dump truck, what you need for a train, and what you need for a boat – they're all different. That diversity drives differences in technologies and fuels. We have an economy and a world demanding transportation solutions. Electrification seems to be the only thing that anyone can talk about in the media and public demand, but we're quietly continuing to grow market share in gaseous vehicles. In many cases, way out in front of electrification. We've recognized there are places in the world that can't afford electrification. More places can't afford it than can. Based on that, we see the need and opportunity to provide our solutions, especially in those markets—not exclusively in those markets—and will continue to do that. We think our OEM customers see it the same way. Some of the largest makers of electric vehicles in the marketplace today have their foot also in the gas-fueled world and find that to be a very important and compelling part of their business and their offerings to their customers.

Okay. Thanks, David.

Thank you.

The next question comes from Colin Rusch with Oppenheimer. Please go ahead.

Good morning. This is Kristen on for Colin. Thank you for taking the questions. Actually, I'd like to start with a follow-up to the prior question, just on the diversity of fuels. And as you're thinking about the overall hydrogen opportunity, is there an opportunity for you to integrate some of that technology into light-duty vehicles?

Yes, hydrogen today has actually started in fuel cell applications in passenger vehicles. So, as a general picture for hydrogen, is there an opportunity in light-duty vehicles? I think there are people who think, yes, there is. I think you'll see that alongside what we've analyzed and demonstrated this year: hydrogen in an internal combustion engine has an advantage over fuel cells that is quite substantial and has to do with the load factor of long-haul heavy-duty trucking. When you load a propulsion system, whether it's an internal combustion engine or a fuel cell, you get different efficiency levels based on load. The efficiency of an internal combustion engine goes up with load, while the efficiency of a fuel cell goes down. That basic physics strongly suggests that internal combustion engines are a fantastic application for heavy-duty long-haul trucks because we can address cost issues in a more practical manner. While hydrogen in light-duty vehicles will certainly occur, we have to account for trade-offs with respect to efficiency, costs, and investments, and it will be interesting to see what the future looks like.

I appreciate that detail, David. My next question is just about the Way Chai ramp; you touched on it briefly, so I'm wondering if you can provide a little bit more detail on the progress of that ramp. And as a related question, how you're feeling about supply chain readiness as you look to launch that product? Thank you very much.

Yes. Let me answer the second one first: supply-chain readiness. We're ready. From my perspective, the investments we've made to have the capacity available to support the launch in China are in place, so really what we're waiting for is our customer's actions in the marketplace to launch the product. We mentioned that field trials are ongoing and certifications have been achieved. We're essentially at a pivot point and are waiting for announcements; I know our investors are too. So, we're hopeful to have further news to share. But the status is what we have to share today. Fundamentally, the market in China is big, and we're eager to have our marquee product launch there.

The next question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Hi, good morning.

Morning, Rob.

Just following up on the HPDI in Europe that you've talked about, I think you mentioned Q4 should start to get better. What's the picture in terms of pent-up demand, and how quickly can that supply chain loosen up? How do you see that trajectory playing out at this point?

Thanks for the question, Rob. Fundamentally, we do see strong demand. We're getting very positive feedback from the customers that have taken product, not just this year, but in prior years. Our reputation is building strongly, and people recognize it as the gaseous-fueled long-haul truck they want in the marketplace. I think that bodes well for the mid and long-term future for our relationship with our OEM partner in Europe. In terms of support for that ramp, we're in a very good position to do that, as mentioned just a moment ago. We have the capacity necessary to respond in the marketplace, and we're eager for growth. As we look through the year, the supply chain challenges mainly originate on our customer side, and it's difficult for us to see since each one has its story. We expect these to be resolved step-by-step, and that the demand will come through from the customer to our end and then to our dealers.

Great. Thank you. And then on the light-duty side, you talked about some of the commodity fuel price dynamics going on. Has that resolved yet in Q4? Are you seeing that business come back yet, or is it still too early to tell? What are the ins and outs of how next year develops? Is it dependent on fuel price stabilizing, or do you have some visibility on next year yet?

Yes. Thanks for the question. It's still playing out in the marketplace; it hasn't been settled or re-stabilized. I mentioned in my opening comments that commodity prices on gas and crude oil have doubled over just last year. We’re now back in the territory of expensive energy. The dynamics around pumps in different countries and the differentials between petrol and metric gas or diesel and natural gas do matter market-by-market. Changing prices cause people to pause a bit in their purchase decisions. We're hearing that and seeing that in our forward-looking order books. That is a concern for us, and we would like to see the prices stabilize. We're happy if they stabilize at a high level since that will encourage energy conservation. However, we need the price differential between gaseous fuels and liquid fuels that has persisted for a long period of time and expect that to persist going forward in markets like Europe, India, and China.

Okay, thank you. I'll turn it over.

Thanks, Rob.

The next question comes from Bill Peterson with J.P. Morgan. Please go ahead.

Hi. Good morning, and thanks for taking the questions. Firstly, I'm coming back to the hydrogen application. I guess you mentioned a little bit, but what additional areas do you think are remaining to be solved? Can you give us a better feel for what additional type of customers, maybe beyond the ones you've been working with, are interested in the technology, and conceptually, what could be the timing of commercialization?

Great question. It's a pleasure to speak with you this morning, Bill. Let me dial back to the beginning of this year when I would argue that almost no one was talking about hydrogen internal combustion engines. It's new; Westport Fuel Systems has demonstrated how effective HPDI is for hydrogen in an internal combustion engine. In my experience, hydrogen internal combustion engines have always been dismissed because they were tried as spark ignited in traditional internal combustion engines. We have to educate customers about what we've done with HPDI and hydrogen in an internal combustion engine because it is counter to their experiences. We've been doing that, and the reception is strong due to the compelling data. What remains to be done is the normal development work of developing an engine for a unique fuel that hasn't been done before. Our technology in HPDI is ready, but the system needs development and that takes a lot of work. Meanwhile, vehicle manufacturers aren't in a big hurry due to insufficient infrastructure. We need cooperation between infrastructure build-out and product build-out. We're working on these projects; the technology has already demonstrated its value. I haven't heard any announcements yet of a customer saying they're bringing HPDI to market with hydrogen, but I do expect those will come.

And thanks for the color there. I guess, coming back to the conventional HPDI, particularly in China, you said you're waiting on your customers' customers. Is this related to a backlog issue or what else is going on? Is there more commercial negotiations on your side? I'm just trying to get a better feel for what needs to get cleared before the ramp can happen.

Yes. Fundamentally, it's for our customers—the vehicle OEMs in China—to choose their timing for launching what they've got going on. We mentioned earlier that we have rising prices for natural gas, which presents a headwind for launching a new product that runs on natural gas. We're still convinced that there is a long-term and important place for HPDI in the market in China, and we have the right partner in Richard Power. In terms of an actual launch date, we are at the mercy of our customers to pick that date and make announcements.

Okay, thanks for the clarification.

Thanks, Bill.

Any analyst who wishes to ask a question may now do so. The next question comes from Amit Dayal with HC Wainwright. Please proceed.

Thank you. Good morning, everyone. Richard, you mentioned capacity expansion for HPDI might take place. Can you give us some color on what levels we're looking at currently for HPDI production capacity?

Hi, Amit. As for capacity, we’re looking to expand from levels of 28,000 to 50,000. We're trying to build it up according to our demand forecast. Sometimes these thresholds are all or nothing; we have a lot of capacity in that range, but we're working between 30,000 to 50,000 and looking beyond to 100,000 in a systems clearance as the first step in the initial program.

Okay. Thank you for that. One more question: are you guys potentially moving any price increases with petrol in this environment?

Great question, Amit. I feel like it's clear we're living in inflationary times, so part of that means costs go up and prices need to follow suit. It's daily work for our team to engage with our customers in finding the right time and right amount to adjust prices as necessary. I think we're seeing this phenomenon across the global marketplace, and we need to factor in commodity price increases like steel, energy, copper, and microchips. All these elements affect us and ultimately need to be considered.

Thank you, David. That's all I have. Appreciate it.

Thanks, Amit.

This concludes the question-and-answer session. I would like to turn the conference back over to David Johnson for the closing remarks.

Thank you very much and thanks everyone for joining our call today. We look forward to providing you with further updates in the future, and certainly to seeing those of you who attended the Craig-Hallum Conference. Thank you very much. Have a good day.