Westport Fuel Systems Inc. Q1 FY2025 Earnings Call

Good morning, everyone. Welcome to the Westport Fuel Systems Conference Call regarding its First Quarter 2025 Financial and Operational Results. This call is being held alongside the press release that included Westport's financial results issued yesterday after market close. On today's call, we have Chief Executive Officer and Director, Dan Sceli, and Chief Financial Officer, Bill Larkin, speaking on behalf of Westport. Attendance on this call is open to the public, but questions will be restricted to the investment community. Please remember that any statements made during this call and our responses to certain questions may include forward-looking statements as defined by US and relevant Canadian securities laws. These statements are based on our current expectations along with various risks and uncertainties. With that, I'll turn the call over to you, Dan.

Thank you, Ashley. And good morning, everyone. We continue to make meaningful progress in transforming Westport and sharpening our strategic focus. Our priorities do remain clear, driving success through Cespira, our HPDI joint venture with Volvo, pursuing operational excellence by streamlining operations and reducing costs and positioning Westport as a leader in the shift to alternative fuels. These three pillars are guiding us towards a stronger future. In Q1 2025, our efforts translated into measurable results. Reported revenue was $71 million for the quarter. In addition, Cespira generated $16.7 million in revenue, which isn't reflected in our top line due to the equity method of accounting. When adjusting for our 55% ownership share, total revenue would have exceeded $80 million, higher than the $77.6 million reported in Q1 2024. Net loss improved significantly to $2.5 million from a net loss of $13.6 million in Q1 2024. Gross profit rose by $3.5 million while operating expenditures dropped by $8 million. Adjusted EBITDA also showed marked improvement year-over-year. At the end of Q1, we also announced the proposed sale of our light duty business through which I aim to align Westport more with the hardest to decarbonize applications, primarily long haul and heavy duty transport. Our HPDI and high pressure technologies offer a clear path forward in these segments. This transaction is expected to deliver immediate cash proceeds to strengthen our balance sheet and fuel growth in both Cespira and our high pressure controls and systems business. This is next on time to be doing this. It is clear the market recognizes that the internal combustion engine utilizing alternative fuels will be instrumental in decarbonizing long haul heavy duty transport. And natural gas is no longer viewed as a bridge to hydrogen but rather is the foundation of the future. At our core, we are a clean tech innovation company positioned to help drive this change. Through Cespira, the HPDI fuel system does the on-engine work to our high pressure controls and systems business where our components do the off-engine work. We are providing OEMs with simplified solutions to decarbonize. As you know, we welcomed Carlos Gonzalez as President of Cespira back in April. Carlos is already fully engaged and leading Cespira into its future of growth and success. As stated before, Carlos comes to Cespira with many years of Tier 1 supplier experience and connections. Earlier this month, we were pleased to see Volvo Trucks highlight the success they achieved with their gas powered solution using Cespira's HPDI technology. In 2024, sales increased by more than 25% and we saw demand continue to grow into the first quarter of 2025. Sweden, Norway, Netherlands, Spain, and the UK have been the key markets and we are also excited to see increased interest from the Indian market for this solution. We continue to do things to rightsize the business and cut costs where we can. In Q1, gross margin improved significantly compared to last quarter as well as an increase in efficiencies partly evidenced through the material reduction in operating expenditures. As we mentioned last quarter, we are still charging ahead with the sale of Westport's light duty business. Once we close this deal, we will have the liquidity, and therefore, the opportunity to further rationalize our costs. We will continue to remain diligent when it comes to costs and decreasing expenses, ensuring that the business runs more efficiently and effectively over time. We are pleased with our progress so far but acknowledge that there's still much work ahead of us on this front. We remain confident in the role that alternative fuels will play in driving sustainability in the future of transportation and industrial application spaces. Over the last several months, we have addressed that there is a slowing in hydrogen infrastructure development, which is leading to a slower adoption of automotive and industrial applications powered by hydrogen. We have also presented the solutions that Westport can bring to fruition today specifically related to natural gas applications. While we remain focused on scaling our alternative fuel solutions, including LNG, CNG, RNG, and hydrogen systems, we are matching the cleanest gaseous fuels with the most efficient engine technologies. We are committed to delivering practical, commercially viable low carbon solutions today and providing sustainable high performance solutions that help our customers achieve their goals now and for years to come. Westport is focused on its future and the proposed divestment of our light duty business will lead us to what's next. The transaction allows Westport to significantly strengthen its financial perspective and taper our focus on creating solutions for hard-to-decarbonize segments of the long haul heavy duty transport and industrial space. In the evolving landscape of sustainable transportation, Cespira and Westport stand at the forefront, redefining what's possible with internal combustion engines. This commitment to innovation has led our teams to the latest breakthrough, a CNG HPDI solution running on 700 bar storage without a compressor. This advancement not only enhances its performance but also expands the horizons for cleaner fuel alternatives. Successfully operating at pressures up to 600 bar, the HPDI fuel system demonstrated normal operation even with a 5% to 10% hydrogen blend by volume. This innovation opens up new decarbonization pathways, especially in regions where CNG is more accessible than LNG. Developed in collaboration with GFI, our high pressure controls and systems team, this project exemplifies our commitment to innovation and sustainability. Speaking to our GFI brand or high pressure controls and systems business, we are excited about the upcoming completion of our new hydro innovation center and manufacturing facility located in China. Production at the facility is anticipated to come online later this year and will focus on delivering to the Chinese market. Westport's GFI branded hydrogen fuel system components have had a strong presence in the Chinese marketplace for over 10 years, supporting both fuel cell and internal combustion engine applications that use hydrogen fuel. Currently, China represents approximately half of our high pressure controls and systems revenue. I'll now hand the call over to Bill so he can provide some more information on the financial results.

Thanks, Dan. And good morning to everyone. Moving on to our first quarter 2025 results. We reported $21 million in revenue for the quarter, which was a 9% decrease compared to the same period last year. As expected, the transition of the heavy duty OEM business into Cespira shifted revenue to the joint venture in Q1 of 25% as we are accounting for the Cespira joint venture under the equity method of accounting. This impact to our reported revenue was partially offset by an increase in sales in our light duty segments. We continue to deliver improved margins. In Q1 '25, gross margin increased to $15.2 million or 21% of revenue. This is up from $11.7 million or 15% of revenue in Q1 of '24. This improvement was driven by sales mix with higher OEM and DOEM sales, plus we are seeing the benefits of our cost reduction initiatives. Also, we had significant reduction in our Q1 2025 operating costs where R&D and SG&A expenses declined by $8 million compared to the prior year period. The reduction in operating expenses for Q1 '25 is a combination of the transition of heavy duty OEM business to Cespira, which accounts for approximately $5 million reduction and continuing our disciplined approach to cost reductions and operational efficiency. For Q1 '25, we generated operating income of $1.7 million compared to an operating loss of $12.5 million in the prior year period, which is a $14.2 million improvement. We also demonstrated continued improvement in our adjusted EBITDA for the quarter ended March 31, 2025, reporting adjusted EBITDA of nil, which is a significant improvement over the reported adjusted EBITDA loss of $6.6 million in Q1 of '24. Our light duty revenue for Q1 '25 was $64.2 million whereas compared to $63.3 million for Q1 '24. This increase was primarily driven by an increase in sales in our light duty OEM as a result of the Euro 6 program, an increase in delayed OEM business as compared to Q1 of '24 where we saw a significant decline in sales because of an inventory build within our key delayed OEM customer. Gross margin in our light duty business increased in the quarter to $14 million or 22% of revenue as compared to $12.4 million or 20% of revenue in Q1 of '24. This improvement was primarily driven by a change in sales mix with an increase in sales to European customers and a reduction in sales in developing regions and an increase in sales volumes. High Pressure Control and Systems revenues for Q1 '25 were $1.4 million. This is a decrease compared to $2.4 million for Q1 '24. The decline was primarily driven by a slowdown in the hydrogen industry. Gross margin decreased in the quarter to $200,000 or 14% of revenue as compared to $400,000 or 17% of revenue in Q1 '24. This decrease is primarily driven by lower sales volumes, therefore, increasing the per-unit manufacturing costs of the components in the quarter. Heavy duty OEM revenue for the first quarter of '25 was $5.4 million. The revenue decrease compared to the same period last year was the result of the transfer and continuation of the business in Cespira. Revenue earned in the first quarter 25 relates to our transitional services agreement with Cespira, which is expected to be in place until mid-2025. Gross margin in our heavy duty OEM business in the first quarter of '25 was $1 million or 19% of revenue compared to negative $1.1 million or negative 9% of revenue in Q1 of '24. Gross margin in Q1 '25 was positively impacted by realizing $900,000 credits from component suppliers for inventory sold during the quarter. Cespira generated $16.7 million in Q1 of '25, in the prior year, heavy duty OEM segment, which at that time included our HPDI business of revenues of $11.9 million. This is primarily driven by an increase in HPDI fuel systems sold in the quarter. Gross profit for Cespira was $500,000 for the three months ended March 31, 2025. In the prior year, the heavy duty OEM segment had negative $1.1 million in gross profit. The increase in gross profit was primarily driven by the increase in sales volumes compared to the prior year and reductions in manufacturing costs. Regarding liquidity, our cash and cash equivalents at March 31, 2025, was $32.6 million as compared to $37.6 million at December 31, 2024. For Q1 2025, net cash used in operating activities was $4.9 million. Cash used in operating activities were primarily driven by an $8.1 million increase in net working capital specifically in inventory and accounts receivable related to our light duty business. Net cash provided by investment activities was $2.7 million for the quarter, driven by the collection of a total of $11.4 million from Cummins for a hold back receivable, of which $10.5 million was allocated to the hold back and the remainder was allocated to interest. We purchased capital assets of $3.1 million, mostly for our European operations. And finally, we contributed $4.7 million into Cespira in the quarter, representing approximately a quarter of our anticipated 2025 cash contributions to Cespira. Net cash used in financing activities was $3.9 million in Q1 of 2025 due to payments on our long term credit facilities. This compared to $17.7 million in the prior year period as we had higher payments related to the revolving financing facility that was closed in November of '24. We've had a strong start to 2025 and truly believe that the proposed divestiture transaction will shift our business in the right direction while allowing us to follow through our commitment to strengthening the balance sheet as well as continuing to develop the HPDI and high pressure controls and systems segments.

Thank you, Bill. To recap, the proposed light duty transaction allows for the company to return to its strategic routes with a focus on providing solutions for hard to decarbonize mobility and industrial applications, significantly strengthen the balance sheet and provide essential proceeds to focus on strategic growth opportunities and continued leadership in fuel system solutions for clean low carbon fuels. Thank you to everyone who joined the earnings call today. Your continued support is immensely important to us. We are excited about what's in store for the future of Westport, and we want to move through 2025 with purpose, creating value for our shareholders and cultivating opportunities to grow as a company. We believe that shifting our focus to our HPDI and high pressure controls and systems segment will provide us with the best possible future. Finally, we are holding a virtual Annual General Meeting tomorrow morning, 7:00 a.m. Pacific Time, 10:00 a.m. Eastern Time and encourage current and prospective investors to join us. The details for the call can be found on our website. Thank you again for joining us today.

Our first question comes from Amit Dayal from H.C. Wainwright.

Just to clarify on the divestiture. Is this closing in Q2 or has it already been closed?

Closing in Q2?

And that is when the cash proceeds, etc., will show up in the Q2 financials or will we see those in the third quarter financials?

No, I expect that we should close by the end of the quarter, so therefore, we expect the cash to show up in our June 30 balance sheet when we present that.

And then sort of with respect to Cespira margins going forward, any color on what the path to higher margins looks like? Is it just more volume that will drive this or are there any other factors that we should keep in mind?

Well, getting Cespira profitable is a combination of things. Volume is the number one key to that business, and we're on a projected growth path. Also, the efforts of the team to reduce their costs to become more efficient and manage the supply base better. So as in many businesses, it's a multifaceted attack to profitability.

And then last quarter, you mentioned the CNG related opportunity in North America. I know it's still sort of early in your transition phase, but any progress on that front and any new developments that we should be aware of?

So I actually just came back from California from the Clean Truck Show and sat through all of the discussion panels, the presentations, talked to a lot of customers on the floor. And I can tell you, the pendulum is swinging hard back to the natural gases. I think the world has recognized that the hydrogen solutions are further off than anyone would like and that's a reality. So the combination of that and the new administration in the US pushing for natural gas, I think we're going to see the pendulum swing even further. And I think the opportunities are going to start rolling in fairly quickly. And on the back of that, we still have a very strong liquid natural gas market in Europe that's starting to pick up volume. You heard me talk about a 25% growth on HPDI; it's on LNG in Europe. And I think that we're all going to be participating in a natural gas market that is a foundational market, not a bridge to hydrogen.

And with respect to China, is China going to be a focus for you as well in the new emerging Westport?

I mean China has been an important piece of our business. It's been 50% of our high pressure components business for some time, and that GFI brand is very much a world leader. And in China, and specifically for those markets, we are seeing natural gas accelerate in China. Hydrogen is still being developed in China. We're developing lots of products with customers there. So yes, China is a very important cog in our wheel that we're going to continue to develop.

Our next question comes from the line of Eric Stein from Craig-Hallum Capital Group.

Well, you just kind of touched on it, everything going on out in California a couple of weeks ago, and I did talk to Volvo and it sounds to me like they do not have a natural gas product in North America, which would sure seem to be an opportunity for Westport down the road, but that begs the question. You mentioned the development of a CNG HPDI solution that you have done. But how long if Volvo work to take that decision to bring it to North America because their customers clearly wanted, how long would that take from a development perspective?

We previously discussed this during our time in California. Engine development, particularly for heavy-duty engines, involves a lengthy process. A significant portion of that time is taken up by certification, which requires extensive testing over many miles or kilometers. Typically, heavy-duty truck engine development takes about four years. Our recent work has shown that we can run CNG and CNG hydrogen blends on the same HPDI system, which is a crucial step toward encouraging Volvo to introduce a CNG engine in North America, although we have other customers in mind as well. Our solution is compatible with any platform. As we've mentioned over the past year, the Cespira joint venture was designed to be more than just a collaboration with Volvo; it aims to establish an independent business that supplies all original equipment manufacturers.

I'm curious if your recent development is in response to requests from OEMs or if it's more of a proactive step on your part to get a jump on things and potentially shorten the long development cycle, or is it a combination of both?

Well, it's actually very proactive on our part trying to pull the market. I mean, HPDI was born and raised on pulling the market to it and we intend to continue to do that type of activity while the OEMs evaluate the business cases for each of their regions. And I think that the head start that we have would help any OEM that chooses to move forward. And one of the things I think you probably heard as well in California, the market only has one solution today and they're looking for alternative solutions.

So maybe just the last one from me, just on the divestiture. Can you just remind us of the steps that are needed? I mean, clearly, you've got a high level of confidence that that closes, but maybe things to look for between now and the end of the second quarter?

We are in the final stages now; all the necessary work has been completed. It's a time of transition leading up to the actual closing. Everything has been prepared, and we expect no obstacles to hinder us from reaching the closing date.

Our next question comes from the line of Rob Brown from Lake Street Capital Markets.

Just want to get a sense on the high pressure controls business. What you sort of think that runs at this year and kind of where you see some of the growth opportunities in that segment?

If you look back a few quarters at our reports on high pressures, we were securing new contracts for components in the hydrogen sector at a significant pace, totaling around $170 million to $180 million in new contracts. While those contracts are still progressing, there has been a delay as many hydrogen projects globally are slowing down. We expect this business to continue growing over the next few years. Additionally, we are winning more contracts and are currently unable to keep up with the volume of quotes for hydrogen-related projects. We are also working to redirect those pressure control components into the compressed natural gas (CNG) market, which we believe will see substantial growth. With minor modifications, these components can also be used with CNG. We see high pressure controls as a growth opportunity; it might be early, but that growth is coming. This is one reason we are finalizing our plant in China, as there is a strong demand for local supply of these components.

And then on the Cespira business, you talked about nice growth of 25% or better. Where is that coming from now in Europe in general, but specifically, where do you see the activity there and sort of the dynamics and pick up?

It is primarily in Europe and in those countries I mentioned in my earlier statements. Volvo is starting to market heavier, Volvo is starting to put their foot on the gas pedal, no pun intended, to build that market out. They're also looking at India as a beachhead. They've got trucks going to India. So the 25% growth that we're seeing was always actually built into the business plan to build out Cespira, and we anticipate to see continued growth.

Thank you. At this time, I would now like to turn the conference back over to Daniel Sceli, CEO, for closing remarks.

Thank you. I'd like to thank everyone again for participating in our call. I hope you are going to share in our excitement about the future of Westport. I think we have reestablished our positioning strategically to take advantage of what's happening in our markets and we'll continue to drive for an efficient, well-run business. And again, thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.