Westport Fuel Systems Inc. Q2 FY2025 Earnings Call

Thank you for joining us, and welcome to the Westport Fuel Systems Second Quarter 2025 Conference Call. Today's program is being recorded. I would now like to introduce your host for today, Ashley Nuell, Vice President of Investor Relations. Please proceed.

Good morning, everyone. Welcome to Westport Fuel Systems conference call regarding its second quarter 2025 financial and operating results. This call is being held to coincide with the press release containing Westport's financial results that were issued yesterday after markets closed. On today's call, speaking on behalf of Westport is Chief Executive Officer and Director, Dan Sceli; 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 conference 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, Dan.

Thank you, Ashley, and good morning, everyone. We continue to make meaningful progress in transforming Westport and sharpening our strategic focus to achieve that transition. In Q2 2025, our efforts translated into measurable results. Reported revenue was $12.5 million for the quarter as compared to $14.1 million in the same quarter of the prior year. Consolidated revenue, including the Light-Duty segment, which was reported as discontinued operations during the quarter, totaled $88.8 million as compared to $83.4 million in the same period of 2024. In addition, Cespira generated $12 million in revenue during the quarter. Finally, following quarter end, we made significant progress in advancing our strategic transformation this quarter, culminating in the recent successful divestiture of our Light-Duty segment. This transaction strengthens our balance sheet, and sharpens our strategic focus on high-impact opportunities in commercial transportation and industrial applications. With the successful completion of the sale of the Light-Duty segment, Westport is taking the necessary steps to execute on a newly focused and integrated business strategy. What sets Westport apart is our ability to deliver performance, cost efficiency and environmental benefits together. Our company is well positioned with fuel-agnostic technologies that are already available in the market and designed to evolve alongside the industry's transition. Our solutions allow customers to adopt net zero and low-carbon fuels today with a cost-effective pathway to hydrogen adoption as its availability increases. In the short term, RNG represents a significant opportunity to reduce emissions in heavy-duty and off-road applications. We're actively pursuing multiple growth opportunities that are economically compelling right now. In addition, our IP portfolio is expected to provide a competitive advantage well into the future. Further, the company recognizes the evolving macroeconomic environment and is positioning to capitalize on renewed market momentum, especially as it relates to the use of natural gas as a transport fuel. Moving forward, Westport will be focused on the following key drivers: Cespira with its strategic market expansion and technology leadership in heavy-duty transportation; our High-Pressure Controls & Systems, which complement the energy transition regardless of the powertrain and a variety of financial initiatives. The company's goal for the Cespira business is to deliver demonstrated volume growth over the coming 12 months with a backdrop of renewed industry focus on CNG, LNG and RNG for heavy-duty transportation and favorable and more stable CNG, LNG and RNG fuel pricing economics. Westport is also aiming to increase the OEM presence and related new market activity for Cespira. The opportunity for Cespira increases significantly through geographic expansion. In North America, CNG remains a dominant choice for fleets seeking lower operating costs and reduced emissions. Actively looking to expand presence in these regions, we continue to drive innovation through the testing of a CNG HPDI solution. With our High-Pressure Controls & Systems business, we are developing high-pressure components that are critical to performance and reliability. As a reminder, we are selling into three primary markets: China, Europe and North America. Currently, China accounts for over 50% of Westport's revenue in this segment, almost exclusively focused on hydrogen component sales. Supported by multilayered government support spanning from comprehensive national strategies to targeted regional incentives, funding mechanisms, infrastructure mandates and industry collaboration, the Chinese hydrogen market is anticipated to continue to drive growth for Westport. To drive success in this market, we are opening a state-of-the-art hydrogen innovation center and manufacturing facility in China in late 2025. This pioneering facility will serve as a hub for research, development and collaboration to meet the increasing demand for hydrogen transportation solutions in the region. The new facility enables us to better serve local customers and partners, driving clean energy advancements in one of the world's largest economies. Excitingly, as part of Westport's global restructuring, the company is relocating its European high-pressure controls & systems manufacturing operations to our existing technology center in Canada, aligning the manufacturing facility with our innovation hub in North America. This move enables flexibility in product design, increased speed to market and bolsters our commitment to delivering top-tier clean transportation solutions to global markets while also assessing potential expansion of CNG and RNG systems, creating incremental growth avenues that allow us to strategically refocus on the North American transportation market where the near-term focus has shifted away from hydrogen. Our key focus going forward recognizes both the opportunities and challenges in overall market conditions. We have already begun a strong internal process to review additional ways to maximize our economic benefit from this recent transaction for our stakeholders. Our mission is to focus on growth and improving financial results along with capturing market share. Our overall drive for market expansion and move towards generating positive cash flow may not be the smoothest path, but we believe we are uniquely positioned to take advantage of a more pragmatic moment globally where governments, commercial transport companies and industrial power providers require more affordable solutions than those that exist today. That said, in the near term, Cespira will continue to require cash contributions from its owners. As a technology and innovation company connecting synergistic technologies to power a cleaner tomorrow, we are offering our customers the best value of ownership and environmental performance as they continue to prioritize the total equation. The heavy-duty truck market is growing globally, and natural gas is experiencing a revival, driven by affordability, abundant infrastructure and growing production. In Europe, LNG and RNG adoption for trucking is rebounding sharply with LNG emerging as the preferred fuel due to its decarbonization potential and superior fuel economy. In North America, CNG and RNG are gaining momentum as fleet operators encounter rising skepticism around electrification, citing much higher-than-expected energy costs and persistent hydrogen distribution challenges. At the same time, key regulations are shifting. For example, California has paused or rolled back mandates like advanced clean fleet signaling greater flexibility for alternative fuels. CNG in particular, is emerging as a reliable and cost-effective solution offering fleets a stable and scalable pathway forward. Cespira's flagship LNG HPDI technology continues to gain strong traction, particularly in Europe, although we are also seeing fleets adopt technology in India, South America, Africa and East Asia. With approximately 9,000 trucks currently on the platform, we delivered an impressive 25% year-over-year growth in 2024. The latest iteration featured in the new 500-horsepower Volvo FH Aero cab achieves fuel economy of 10 miles per gallon on diesel, far surpassing traditional spark ignited competitors that typically operate in the 6 miles per gallon range. This performance gap is cementing HPDI's reputation as the high-efficiency choice for long-haul transport applications. I will now hand the call over to Bill so he can provide some more information on the financial results.

Thank you, Dan, and good morning. Before discussing the specifics of the quarter, I want to note that in the second quarter, our Light-Duty business was classified as discontinued operations in our financial statements. Its assets and liabilities were presented as held for sale, resulting in a different presentation compared to previous quarters. The financial statements reflect these changes, and prior year figures have been adjusted for consistency. Please refer to Note 5 for details on the assets, liabilities, revenues, and expenses related to our discontinued operations. Additionally, the Cespira joint venture began in June 2024, so our Q2 results for 2024 include one month of Cespira accounted for under the equity method. Regarding our second quarter results, the $12.5 million in consolidated revenue from continuing operations does not include the $76.4 million from the Light-Duty business in Q2 of 2025. Including that revenue, we generated total consolidated revenue of $88.9 million this quarter, compared to $83.4 million in the same quarter last year. Cespira contributed $12 million in revenue during Q2 of 2025. The reported consolidated revenue of $12.5 million from continuing operations reflects an 11% decrease from the $14.1 million in the same quarter last year, mainly due to lower sales volumes in our High-Pressure Controls & Systems and Heavy-Duty OEM segments. We showed improvement in adjusted EBITDA, reporting a negative $1 million, compared to a negative $2 million in the same quarter last year, primarily due to reduced operating expenses in Heavy-Duty OEM and corporate. Our operating expenses, including R&D, sales, marketing, and general administrative costs, were $15.5 million in Q2 of 2025, down from $21.6 million in the same quarter of 2024, demonstrating our efforts to cut costs. We expect further reductions as we adapt to a smaller organization after the sale of the Light-Duty business. High-Pressure Controls & Systems revenue was $2.9 million for Q2 of 2025, down from $3.6 million in Q2 of 2024, largely due to the slowdown in the hydrogen sector. Gross margin fell to $100,000, representing 3% of revenue, from $1.1 million or 31% of revenue in the previous year, driven by lower revenue and increased material costs. We're moving manufacturing operations from Italy to Canada and China in Q3 2025 to be closer to our customers and improve our supply chain. Heavy-Duty OEM revenue for the second quarter was $9.6 million, a decrease of $900,000 from the previous year, resulting from reduced manufacturing support to Cespira. Starting in Q3 2025, Cespira will operate without manufacturing support from us. Gross margin in this segment was $700,000, or 7% of revenue, compared to $1.3 million and 12% of revenue in Q2 of 2024. Cespira generated $12 million in revenue in Q2 of 2025, up from $4.1 million in the same period last year. Gross profit for Cespira was negative $1.9 million for the three months ending June 30, 2025, compared to $200,000 in gross profit for the same period last year. I’d like to reiterate that our second quarter results show the Light-Duty business as discontinued operations. Specifically, the Light-Duty business generated $76.4 million in revenue with a gross profit of $15.1 million, or 20% of revenue. For further details, please see Note 5 regarding the assets, liabilities, revenues, and expenses related to the divestiture of the Light-Duty business in July 2025. As for liquidity, we had $21.4 million in cash and cash equivalents at June 30, 2025, with $15.3 million from the Light-Duty business and $6.1 million from our remaining operations. The cash decrease during the last three months was primarily due to operating losses, funding the Cespira joint venture, fixed asset purchases, and debt repayments. In Q2 2025, net cash used in operating activities from continuing operations was $5.6 million. The increase in cash used was largely due to a notable rise in accounts receivable from Cespira, which we expect to collect in Q3. Net cash used in investing activities was $5 million, compared to $7.7 million received from continuing operations in the same quarter of 2024, driven mainly by capital contributions to Cespira of $4.2 million and fixed asset purchases. In the prior year, we received $18.9 million from Volvo for shares sold in Cespira. Net cash used in financing activities totaled $1 million for Q2 2025, which represents our quarterly principal payment on our EDC loan. After the quarter ended, on July 14, 2025, we entered a short-term loan with the purchaser of the Light-Duty segment for $5.8 million, which was repaid on July 29, 2025. Post-divestiture, our debt will consist solely of the EDC loan, which had an outstanding balance of $4.9 million as of June 30, 2025. The payment schedule includes $1 million each quarter plus interest, with the final payment due in September 2026. After closing the transaction, we anticipate additional cash expenditures that will impact Q3, including further funding for Cespira, transaction costs related to the sale, relocation expenses for moving our High-Pressure Controls & Systems operations, and restructuring costs, estimated to total around $15 million in Q3. The sale of the Light-Duty business provided $62.5 million in net proceeds, broken down into $41.2 million in initial cash, $8.5 million in deferred payments expected in September 2025, and $12.8 million held in escrow. These figures account for the deduction of net debt in the Light-Duty business and other closing costs. Additionally, up to $3.8 million in potential earnouts is available based on specific conditions outlined in the sale agreement. This transaction is a significant step towards streamlining our operations and achieving financial targets related to our balance sheet. The escrow proceeds will be released in four installments, with the first due by the end of 2025 and the final payment scheduled for May 2027. Pricing adjustments may affect the final proceeds from the sale, which is standard practice. While the transaction enhances our balance sheet significantly going forward, the going concern noted in our interim financial statements is expected to persist. Lastly, our previous base shelf prospectus, effective May 2023, expired in June 2025, and we plan to file a replacement for our preliminary short-form base shelf prospectus this month. I will now pass the call back to Dan.

Thank you, Bill. To recap, the closing of the Light-Duty transaction enables Westport to return to its roots where it can focus on solutions for hard to decarbonize mobility, and industrial applications and invest in growth. Needless to say, we are very excited about the company's future. Thank you to everyone who joined the call today. Your continued support is immeasurably important to us. We continue to move through 2025 with purpose to create value for our shareholders. Thank you again for joining us today.

And our first question for today comes from the line of Eric Stine from Craig-Hallum.

So maybe first on HPDI, you mentioned activity outside of Europe, specifically India, South America, and multiple locations in Asia. Can you just provide more details there? I mean, would you characterize these as trials? Are they volumes from Volvo in some of these new markets? Or how does that fit into your goal of adding additional OEMs going forward in Cespira?

Sure. I think what we're seeing is Volvo is planting growth seeds in different markets. They've fully established HPDI in Europe. And now they're going out to other markets to begin that same process, whether it's in Chile and Peru or in India, we see them beginning to move around the globe with the technology to build market acceptance.

Got it. And then in this kind of dovetails with that, you mentioned that Westport developing the CNG HPDI version. I guess, from the way it was worded, unclear if that was a Westport only development or the joint venture because I know that there is a view at some point that Volvo potentially brings HPDI to the U.S.?

Sure. HPDI on the engine is exclusively part of Cespira. Their current off-engine components, like fuel storage and transportation to the engine, use LNG. We observe other markets starting to engage, with CNG being a key method in North America, particularly in the U.S., and there's also some activity in Canada. Westport is focusing on the off-engine aspect, particularly the storage and material handling related to the HPDI system.

Okay. So is Westport's work related to any revenues that come from expenses in the High-Pressure Components & Systems business? What does that look like?

Yes, we'll be structuring that as a separate business somewhat. The high pressure control is a big part of that because to manage any compressed gases in these storage tanks, you need the high-pressure controls. The tank valves, the pressure controls, the safeties all of that kit is needed to manage those high-pressure tanks.

Okay. Maybe last one for me, and this, I guess, kind of plays into the view for additional OEMs for HPDI. But I know that kind of the headlines and some of the market has cooled on hydrogen, but just curious, I mean, are you seeing that as one of the drivers? Is it people looking at natural gas? Is it the optionality of fuel for HPDI? I mean how do you think that plays out?

Certainly, we observe that hydrogen development in China is progressing rapidly, while it has slowed in other regions. You've made an important point. HPDI technology can utilize various fuels, including hydrogen and natural gases. For example, in North America, we're noticing a shift that presents a significant opportunity for natural gas expansion in the heavy transportation sector. We intend to be involved in this growth opportunity and will prepare ourselves accordingly.

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

Just on the High-Pressure Controls business, the current run rate is this sort of a baseline that you can grow from? Or do you see some kind of continuing ins and outs here this year before things ramp?

It's a challenging time right now. I believe we are in a bit of a pause as the new administration establishes policies and regulations. Everyone is closely monitoring the situation in North America. In China, we continue to see opportunities at the government level driving many activities in the hydrogen sector. So we have mixed results. A key priority for us is to improve our control over manufacturing and development by relocating manufacturing from Italy for these components to our site in Cambridge, Ontario. Additionally, some manufacturing will be done in China. The plant we are building in China is specifically for the local market. This is part of our localization strategy and a cost reduction initiative aimed at capitalizing on the growth our customers anticipate in that market.

Okay. Great. And then on the OpEx kind of run rate after things settle here. I think you talked about it coming down, but what's kind of a good directional run rate for the OpEx going forward?

Yes, sure. We have divested of Light-Duty, which required a significant amount of time, attention, and resources. The complexity and scale of that business were quite impressive given its size. This divestment will enable us to streamline our overhead and concentrate our research and development efforts on the expanding natural gas markets.

I would like to add that our R&D spending will be a gradual process. We expect to see a significant reduction by 2026, as we need to complete the full year audit. There are audit fees, tax fees, and many external services related to the consolidated business that we will continue to incur for the remainder of this year. As we mentioned, we are in the process of adjusting the business and reducing costs wherever possible, and this effort will extend into 2026. Therefore, the normalized run rate will become clearer in 2026.

Yes. Yes, good point, Bill.

And our next question comes from the line of Sameer Joshi from H.C. Wainwright.

Just sort of a clarification on the continuing operations revenue. I think the first half revenue is around $19.8 million versus $12.5 million for the second quarter. That implies a $7.3 million in the first quarter. Is that sort of seasonality? Or is that lumpiness? Or like how should we look at it as we model this in the coming quarters?

Yes. Outside of China, we are noticing that several programs are being delayed. One example is Stellantis, which has canceled its hydrogen program for commercial vans. This pause in the hydrogen sector that I mentioned is currently happening. The decrease we are observing is largely due to our customers slowing their pace and awaiting clarity on developments in regions like North America compared to what we are hearing about China.

Understood. And then just one on the transaction. The $12.8 million that are in escrow, is there any conditionality to it? Or is this just a timed disbursement that you will get on those set dates without any conditions missed?

Yes, it's customary to cover any potential undisclosed liabilities as part of the transaction. A portion of the funds, $5.5 million, will be released at the end of January 2026, leaving about $2.5 million remaining. A significant part of the holdback in escrow will be accessible by the end of January 2026.

Got it. Understood. And then the $3.8 million is pure earn-out based on some performance criteria?

Correct. Yes, based on the specific items.

Yes. And then just one last one. You did mention the $15 million amount in 3Q for all the sort of onetime relocation and transaction expenses. But for the hydrogen innovation center, is there any additional CapEx in addition to this $15 million, which includes other items that you would expect over the next few quarters?

No. A significant portion of that is our Q3 contribution to the Cespira joint venture, which accounts for most of that amount. Additionally, we have some transaction-related costs and costs related to capital expenditures. While a large part of the CapEx has already been spent, there are still some remaining expenses we need to incur to facilitate the relocation from Italy to our facilities in Cambridge and China. All of this is included in the $15 million for the third quarter.

Yes. I just wanted to ask one like a macro question. We talked about the dynamics of the fuels, the hydrogen stepping back, but natural gas still active, hydrogen active in China. But we didn't talk about all the tariff and trade uncertainties between North America, U.S., Canada and China. Do you have a view on how it will play out and how it impacts Westport and your operations?

Sure. We don't have any real direct impact from the tariffs. And for sure, one of the strategies is localization in China for what we sell in China. So it's going to be protected that way. But we have no direct tariff impacts. They're more indirect when the overall economy is adjusting to tariffs, we might feel in general volume. But no, there's no direct tariff impact for us.

Our next question comes from Chris Dendrinos from RBC Capital Markets.

I wanted to just ask about the Heavy-Duty business. You mentioned the Cespira transitional, I think revenues are in there. And to confirm, is that rolling off at the end of this coming quarter? And then is there any revenue, I guess, outside of that in that segment?

So we actually consolidate as part of the really kind of the transition to a stand-alone to Cespira that was substantially completed in the second quarter. And so from third quarter and beyond, there will be very, very little revenue what we consider in the HD OEM business going forward.

Got it. And then maybe just on funding of Cespira going forward, and you mentioned a big chunk of that $15 million this coming quarter is for that. Are there additional commitments that you all need to make going beyond 3Q? And just how should we think about that funding level going forward?

Yes, sure. And I think we've mentioned on a number of the previous earnings calls, when we set up Cespira, it was going to be a 3-year build-out where there would be cash required from the parents to continue to build Cespira for the 3 years, and that will continue.

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dan for any further remarks.

All right. Well, thank you very much. I appreciate the support. I appreciate all the questions. And I wish everybody a good day. Goodbye.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.