Earnings Call Transcript - WPRT Q2 2023

Operator, Operator

Good morning. My name is Myra and I'll be your conference operator today. At this time, I would like to welcome everyone to the Westport Fuel Systems Q2 2023 Conference Call. Thank you. Ms. Ashley Nuell, you may begin your conference.

Ashley Nuell, Conference Moderator

Good morning, everyone. Welcome to Westport Fuel Systems second 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 Chief Executive Officer, David Johnson; 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. 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, David.

David Johnson, CEO

Thanks, Ashley. Good day, everyone. I'm pleased to be with you to review our 2023 second quarter results. Today Bill and I will walk you through an overview of those Q2 results, and also an update regarding our growing LPG business. Finally, I'll speak about our planned HPDI joint venture that we and Volvo announced in July, marking an important inflection point for Westport's HPDI business. On a consolidated basis, Westport delivered record revenue of $85 million, up 6% compared to last year. In addition, we continue to deliver improving gross margins, both in dollar terms and as a percentage of revenue. This quarter's top-line record result was primarily driven by increased sales volumes in our delayed OEM, electronics, and fuel storage businesses, as well as additional revenues in our independent aftermarket business due to increased sales volumes in Africa, Eastern Europe, and South America. These are partially offset by lower sales to our light-duty OEM customers in India and lower sales volumes in our hydrogen and heavy-duty OEM businesses. Regarding sales volumes in our heavy-duty business, earlier this year, our European HPDI launch partner Volvo announced that they would launch new bio LNG fueled trucks with more horsepower, increased efficiency, lower emissions, and an extended driving range. As is typical with new product introductions, we expected this model change to result in lower sales volumes leading up to the launch and higher volumes following the launch. We saw exactly that in the second quarter, and we're looking forward to the volume ramp starting later this month and continuing into and beyond Q4 of this year. We've said for some time that we're a leader in the LPG space and that demand for our clean, low-cost LPG solutions continues to grow. Our announcement yesterday morning fully confirms our leadership claim. As a direct result of our excellent products and technical services, we've added to our previously announced Euro 7 supply agreement, and as a result, we'll become the exclusive supplier of Euro 7 LPG fuel systems to our customer, a leading global OEM. As we announced about a year ago, we'll begin delivering Euro 6 LPG systems to this customer in the fourth quarter of this year, and we'll continue to supply them as Euro 7 comes into effect. These supply agreements for Euro 6 and Euro 7 LPG systems add materially to our revenue and market share, leveraging our existing engineering and production capabilities. As a reminder, the Euro 6 deliveries begin in Q4 of this year and will generate revenues of €38 million over the following two years. The newly announced supply of Euro 7 LPG systems is forecast to generate revenue of €63 million through 2028. This increases the total revenue generated from LPG fuel systems supply agreement for Euro 6 and Euro 7 with this OEM to approximately €255 million. We look forward to the opportunity to continue supplying our new customer for the longer term, beyond 2028 and in markets around the world. The ability of our alternative fuel systems to provide customers an affordable way to use cleaner low-cost fuels is also driving growth in our delayed OEM business. More OEMs are taking notice of our fuel system products and vehicle conversion abilities. We grew delayed OEM sales volumes again this quarter as compared to Q2 of last year due to increasing supply of LPG systems to DR Motors. DR Motors has been growing strongly during the last few years by offering low-cost LPG fuel vehicles in the Italian market. Recently, they've accelerated their growth by adding sales in Spain and Eastern Europe. As demand for LPG fueled vehicles increases across Europe, DR Motors has been gaining market share. We're pleased to be the key supplier of LPG fuel systems to DR Motors. We expect the LPG market to continue growing as the LPG price advantage is substantial in many of our key markets. As an example, in Europe, we've seen an LPG price advantage that equates to in U.S. dollar terms, more than $6 per gallon for customers who fuel with LPG compared to those who fuel with gasoline. This kind of LPG price advantage plays a key role in consumers' decision making, and Westport has the products to respond to this growing customer demand. OEMs are also taking notice of this increasing demand, which we expect will persist in a variety of markets globally for decades to come. Although our heavy-duty business experienced an expected volume slowdown this quarter, we see a very bright future for HPDI. HPDI is the most affordable and practical product for reducing carbon emissions in long-haul and heavy-duty applications. LNG pricing in Europe has returned to an advantageous position relative to diesel fuel. This price advantage is a key driver of fleet demand, enabling fleets to run on cleaner fuel with reduced operating costs that is lower TCO, the key metric for fleets. Our planned HPDI joint venture is expected to accelerate the commercialization of HPDI globally. Following over five years of field experience with HPDI, Volvo has given Westport HPDI a big vote of confidence. The planned joint venture with Volvo is expected to elevate HPDI's market relevance, enhance our competitive position, expand our reach to a wider customer base, drive growth and innovation by pooling resources and knowledge, and strengthen Westport's financial position. When the definitive agreements are finalized, Volvo will purchase a 45% interest in the JV directly from Westport for $28 million. Following the planned closing for early next year, as the JV meets certain milestones, Volvo will pay Westport an additional amount or up to $45 million. With a lot of work ahead of us, both teams will be working diligently to meet our target launch date in the first half of 2024. In the near-term, I want to highlight that we're pleased with the agreed pricing structure that will drive improved HPDI profitability this year for Westport and the future for our JV. Volvo has outlined their strategy to focus on three different technologies: battery electric, fuel cell electric, and internal combustion engines with biofuels. Our HPDI joint venture will secure the long-term future of the internal combustion engine with biogas now and hydrogen in the future. We recognize that our HPDI fuel system offers the most affordable and practical solution to respond to both environmental demands and fleet performance requirements. HPDI enables the internal combustion engine to perform like or better than the diesel engine that the industry has counted on for decades. Today, almost all trucks on the road depend on the internal combustion engine, and almost all—way too many of those engines run on high carbon diesel fuel. Using HPDI allows diesel engines to use cleaner fuels, delivering environmental benefits with economics we can all afford. Both Volvo and Westport are committed to attracting new customers globally to adopt HPDI, primarily in long-haul and off-road applications. Since the announcement last month, our conversations with global OEMs have been very positive, including with OEMs in Europe, China, Japan, and North America. Through this partnership, Volvo is demonstrating their commitment to the future of HPDI, and we're inviting other OEMs to join them. Additionally, work on the HPDI development program is currently underway and is progressing well. This includes our work with Scania as well as two other OEMs, who are testing and evaluating hydrogen HPDI on their engine platforms with both hydrogen and methane fuels. Focusing quickly on the near-term, as I've previously mentioned in this call, HPDI volumes saw an expected decrease in the second quarter, which was mainly attributed to Volvo's model change. However, we do see orders picking up. As a reminder, factories in Europe are closed for about four weeks in the July-August period, so we don't anticipate seeing the full impact of this ramp-up in volumes until the fourth quarter. Looking ahead, we remain confident that Westport is offering solutions required by heavy-duty OEMs to meet future emissions reductions requirements while delivering the efficiency and performance demanded by their fleet customers. As LNG pricing reestablishes a persistent advantage versus diesel, and the 2025 emissions regulations and associated penalties for OEMs loom, the growing realization is that affordable low-carbon solutions like HPDI are required to meet emissions targets. HPDI is reducing emissions today with thousands of trucks already on the road. We're confident that we can continue to grow these volumes. With that, I'll hand off to Bill to walk you through our financial results.

Bill Larkin, CFO

Good morning and thank you, David. In the second quarter of '23, we generated our highest ever quarterly revenue of $85 million, a 6% increase compared to Q2 2022. Our core businesses had a strong quarter, including our delayed OEM, electronics and fuel storage businesses, as well as our aftermarket business, which together more than made up for an expected but significant decline in HPDI systems sales. Our gross margin increased to $14.4 million, or 17% of revenue for the second quarter of 2023, compared to $10.5 million, or 13% of revenue for the same quarter last year. The 37% improvement in gross margin dollars was mainly due to higher sales volumes across multiple businesses and increased gross margin in our heavy-duty OEM business, driven by higher spare parts sales, unit pricing on HPDI systems, and engineering services revenue. However, our gross margin was negatively impacted by higher production costs that continue to affect our business stemming from global supply chain challenges and inflation, specifically on logistics and labor costs. We're continuously working with our customers to pass through the impacts of cost increases where appropriate. A couple of other important highlights that I wanted to touch on, which some of David's comments have mentioned. Early in the quarter, we entered into an agreement with Cartesian to terminate the initial financing and consent agreement in exchange for mutual releases of any future obligations. This included the release of the security interest in our HPDI 2.0 fuel system intellectual property. During the second quarter, we paid $8.7 million, resulting in the settlement of the $5.8 million minimum royalty payable balance and recorded a loss on extinguishment of royalty payable totaling $2.9 million. We finalized a share consolidation in June, which led to regaining compliance with NASDAQ's minimum bid requirements. Finally, we signed a non-binding letter of intent with Volvo to establish a joint venture to reduce CO2 emissions from long-haul transport utilizing our HPDI technology. This is a transformational event for Westport and is expected to not only put us on solid financial ground, but also create more opportunities to support a brighter global growth outlook for HPDI. Moving to the next slide, in Q2 2023 adjusted EBITDA was a loss of $4 million compared to a loss of $4.3 million in the same period last year. The improvement in adjusted EBITDA loss was primarily due to higher revenues and an improvement in our gross margin. Higher total SG&A expenses partially offset the increase in revenue and gross margin for the quarter, which was primarily driven by increased activity for trade shows and exhibitions where we highlighted our HPDI fuel system technology in North America and Asia. We also had an increase in our corporate SG&A driven by increased consulting and legal fees related to ongoing corporate projects, including those related to the letter of intent with Volvo. We expect legal and consulting fees to increase in the second half of the year as we move forward with setting up the JV with Volvo. On the next slide, OEM revenue for the second quarter this year was $52.4 million compared to $54.3 million in the second quarter of last year. We highlighted in our first quarter call that we anticipated a decline in HPDI fuel system deliveries leading into Volvo's updated products release later this year, which is a more powerful option with extended range. We also experienced a decrease in revenue due to lower sales to customers in India in the light-duty OEM business and lower sales volumes to our hydrogen customers. These declines in revenue were partially offset by increased sales volumes from our delayed OEM, fuel storage, and electronic businesses compared to the same quarter last year. Gross margin increased by $3.7 million to $8.4 million, or 16% of revenue in the second quarter this year, compared to $4.7 million, or 9% of revenue in the second quarter of last year. In addition to the increases in revenue mentioned above, gross margin was positively impacted by improved gross margin in our heavy-duty OEM business from higher spare parts sales, unit pricing on HPDI systems, and engineering services revenue. This is partially offset by higher production input costs. Gross margin percentage from our HPDI fuel system products will vary based on production and sales volumes, the level of development work, and the successful implementation of initiatives to reduce component costs. As LNG fuel prices continue to trend positively against diesel and Volvo releases their updated HPDI equipped engine that delivers increased horsepower, improved emissions, and extended range, we anticipate volumes to begin improving later in Q3, with Q4 being a full quarter at higher volume levels. We continue to see significant improvement or reduction in our warranty claims. During the second quarter, we did not have any adjustments to our warranty provision outside of our normal warranty estimation rule process. On the next slide, independent aftermarket revenue for the second quarter this year was $32.6 million compared to $25.7 million in the second quarter last year. The increase in revenue was driven by higher sales volumes in Africa, Eastern Europe, and South America. Gross margin increased by $200,000 to $6 million, or 18% of revenue in the second quarter this year, as compared to $5.8 million, or 23% of revenue in the second quarter last year. The increase in gross margin dollars is related to higher sales in South America, while the decrease in gross margin percentage is driven by a lower margin sales mix and increased material costs. Looking ahead, supportive LPG pricing continues to boost the demand trend in Europe, making it an important area of growth for our company in the years ahead. In the fourth quarter of this year, we plan to begin production for our previously announced work with a leading global OEM for the supply of LPG fuel systems. Finally, I'd like to touch on liquidity. Our cash and cash equivalents decreased by $19.7 million during the second quarter of 2023, totaling $52.3 million. A decrease in cash during the second quarter is primarily driven by $18.5 million net cash used in our financing activities consisting of the $8.7 million settlement of the royalty allegation, a reduction in borrowings under our revolving financing facilities, and scheduled principal payments on our term debt. We did realize a significant improvement in cash used in operating activities in the second quarter, which declined to $41,000 compared to $16.5 million in the same quarter last year. This improvement was driven by a change in working capital, specifically in accounts receivable and prepaid expenses. We continue to take actions to monetize existing inventory and optimize inventory levels to further free up cash, which is a net positive for our balance sheet going forward. Given the large one-time payment in the second quarter, cash used was higher than normal. Although we believe we have sufficient liquidity to continue as a going concern beyond August '24, the long-term financial sustainability of the company will depend on our ability to generate sufficient positive cash flows from all of our operations, specifically through profitable sustainable growth and from our ability to finance our long-term strategic objectives and operations. Our recent HPDI JV announcements with Volvo represent an inflection point for Westport financially. Volvo's payment for their 45% share in the joint venture includes an initial $28 million and an earnout of up to $45 million, which is a clear signal of their commitment to the future growth of HPDI. This also helps shore up our balance sheet. The joint venture focuses on driving global adoption of HPDI, improves efficiencies and scale in the long-term, while in the short-term, we have a partner to share in the required investments, including working capital and capital costs. We'll continue to be prudent in our liquidity management and take multiple steps to do so. Additional debt remains an option as we look to solidify our balance sheet. We are doing what is necessary to ensure we are adequately and fully capitalized. Thank you. And with that, I'll turn it back to David.

David Johnson, CEO

Thanks, Bill. I'll close with a few comments and then we'll take your questions. Our products are making a material impact on the decarbonization of the transportation industry, and the magnitude of this impact will only grow as we get these products into the hands of more customers. Westport's core business is strengthening. Year-to-date, our delayed OEM business is achieving growth of almost 100% with more growth on the horizon. In Q4, we'll launch our Euro 6 LPG systems for a global OEM, and we expect the growth of that business in the next three years will significantly add to our top-line and bottom-line. The announcement of our expanded scope to be the sole supplier of Euro 7 LPG systems for this OEM is confirmation of our position as a leading supplier to the industry. In our independent aftermarket business, pricing for LPG is favorable in many markets around the world. However, the impact of inflation is weighing on demand in some areas. Yet, in light of these complex market conditions, our high-quality, cost-effective direct injection technology continues to be an industry leader and is driving increased market share. For any startup or entrepreneur, market validation is a key marker of future success and an event that can be decades in the making, as it has been for us. The planned HPDI joint venture with Volvo is transformational for Westport, and it's expected to unlock the future of HPDI. With this announcement, we secured the recognition of our customer Volvo and the clarity that they want to invest in HPDI and join us on this journey of accelerating growth. HPDI will be a huge part of the future commercial transportation market. This new era will be one of success with new customers, new projects, more volumes, and lower costs. Finally, enhancing our financial performance has been the key focus in 2023, including but not limited to driving margin expansion, revenue growth, and technology development. We continue to see improvements as we secure new contracts and adjust our pricing where we can. We are also continuing to do what is necessary to ensure we're adequately and fully capitalized. The planned HPDI joint venture will go a long way to solidifying our financial viability, given we now have a partner in place to share in the development costs. And with that, I'll turn it over to the operator to open the call for your questions.

Operator, Operator

Your first question comes from the line of Colin Rusch from Oppenheimer.

Colin Rusch, Analyst

With the Cartesian debt retired, can you talk a little bit about some of the incremental flexibility that you have in terms of other instruments around liquidity?

Bill Larkin, CFO

Sure, I can deal with that. As part of the Cartesian relationship, the security over our HPDI and other assets was crucial. In connection with our path forward on setting up the JV, we needed to free up that IP, which will be entering the JV itself. Also, this gives us flexibility from a financing standpoint in terms of freeing up collateral that we could potentially pledge once that gets into the JV, as well as other collateral. So it does give us quite a bit of flexibility by paying that off and evaluating other debt financing opportunities.

Colin Rusch, Analyst

And then with the announcement of the JV, obviously you were able to make an incremental announcement around the LPG adoption. What can you say about customer engagement, willingness to work with you guys, now that you've got a clear path for folks all the way to zero emissions on the solution perspective? Are you seeing incremental demand and interest in some of the natural gas solutions as you've gotten that news out into the market?

David Johnson, CEO

Colin, thanks for the question. It's a super interesting point. I think it's a great time for Westport. We've been working in HPDI for a long time, but to have Volvo join us in the journey and really put their marker and bet on this technology for the future is a very positive sign to the other players in the industry. We've already heard that feedback as we talk with our existing customers and other customer prospects about the role that HPDI will play today with biogas and LNG and tomorrow with hydrogen. We have hydrogen engines running in our test cells and with other entities' test cells around the world. We see a very bright future, and having our customer, after all these years of the work we've done together and the experience they have in the field come forward to say we want to form a joint venture with Westport is super exciting for us.

Operator, Operator

Your next question comes from the line of Amit Dayal from H.C. Wainwright.

Amit Dayal, Analyst

Just on the HPDI JV with Volvo, how should we think about this impacting the sales pipeline for this offering between now and when the JV is operational?

David Johnson, CEO

Amit, thanks for your question. I don't expect a huge catalyst in the near-term. I really expect a huge catalyst in the long-term as we sign up more customers to do the necessary development work to bring product to market. So the pipeline right now is basically Volvo in terms of production and then reaching out with launches in the near future, and then customers following that, who are working on hydrogen HPDI today.

Amit Dayal, Analyst

Then just moving on to some of the operational aspects. It looks like some of the higher input costs are not yet being fully transferred to customers. Is this something that will get resolved in the near future?

David Johnson, CEO

Yes, for sure. We see inflation in energy costs, labor costs, and material costs. When we can pass those on to customers, we do. That's an ongoing process. There's always some lag in terms of what you're able to bring back the price in the marketplace. We have to manage this carefully since our products are really bought for both environmental and economic benefits. If it costs too much, it reduces the economic benefit. This is something we must handle carefully, and it's a daily task for our sales team to work with customers worldwide to pass on increases and maintain our competitiveness.

Amit Dayal, Analyst

Last one from me. In terms of the near-term outlook, looks like this model transition at Volvo. Should we assume that maybe Q3 will be a little bit lower than Q2 sequentially in terms of revenues?

David Johnson, CEO

No, I think—go ahead, Bill.

Bill Larkin, CFO

When you look at it from a consolidated basis, typically our Q3 is historically lower than Q2 just because of the seasonality of our business. That impacts our heavy-duty business and deliveries of systems. As we mentioned, we expect Volvo to start delivering the updated version of the truck with our HPDI system in Q3, and that'll ramp up through the end of that quarter and then start moving full steam ahead in Q4. Additionally, David mentioned that we have better sales, which will continue to increase as more trucks are on the road. Also, engineering services are at a pivotal point where we begin discussions about Euro 7 hydrogen and other programs with various OEM customers. So, these developments will also impact revenue.

Operator, Operator

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

Rob Brown, Analyst

My question is on the JV with Volvo. Just to understand what drives the milestone payments and additional investment and sort of the timing window of that?

Bill Larkin, CFO

Hey, Rob, this is Bill. We haven't disclosed what those milestones consist of, nor the timing. What we can say is, they are strategically aligned with the performance of the JV and those key items that will drive success and growth of the JV. These milestones will be laid out over a period of years.

Rob Brown, Analyst

Can you help us understand how the JV drives other customer interest in the HPDI product? Are you now able to invest to develop the product? Are there customers following Volvo with the regulations out there trying to meet emission standards? Just help us understand how you see additional customer demand coming into the business?

David Johnson, CEO

There's a lot going on in the marketplace right now concerning which technologies will be the future for heavy-duty, long-haul trucking. There's talk about fuel cells, battery electric solutions, and biofuels. We've been promoting our HPDI as a critical element of the portfolio solutions needed. Everyone knows this product has been established in the marketplace, gaining market share. The next step is understanding our customers’ perspectives. When our customer, Volvo, recognizes this product as vital to their portfolio for regulations and cleaner fleets, it's significant for the market. Meanwhile, OEMs are also working on fuel cells and battery electric vehicles with demos of limited quantities. They are recognizing the cost challenges for commercial trucking. The joint venture strengthens HPDI's standing in this field.

Rob Brown, Analyst

On China, can you give us an update on how that market is developing and maybe where it stands?

David Johnson, CEO

The good news in China is that we continue to work with Weichai on all the necessary steps to achieve launch. They've got certified product at the engine level and at the vehicle level with their customers, and the market is improving. Globally, our LNG prices and natural gas prices have stabilized at a lower level. There's now an advantage versus diesel not just in Europe but also in China. This key competitive pricing allows us to bring HPDI to the Chinese market effectively.

Operator, Operator

Your next question comes from the line of Eric Stine from Craig-Hallum.

Eric Stine, Analyst

I know you've talked a lot about HPDI, so maybe I'll focus on some other areas. For DOEM, I mean this momentum that we haven't seen in a while, and I know DR strong in Italy, taking it to other markets. So curious about how early this is and what it means in terms of going to other markets. I assume other OEMs are seeing the market share gains and the economic benefit of using LPG. So, what does that mean for your DOEM pipeline?

David Johnson, CEO

This is an interesting story relative to Westport. We've announced additional sales and supply agreements for Euro 7, looking ahead at more business with leading OEMs. In our aftermarket business and LPG business, which are closely related, we're noting benefits in markets globally. LPG systems provide low-cost access to technology, creating a viable economic model for transportation. This notable price advantage, approximately $6 per gallon, is driving customer behavior toward LPG transportation. Our systems, whether on an aftermarket or delayed OEM basis, are witnessing robust growth. We're excited about the new business secured on the OEM side, and there is a quicker route for OEMs to market through delayed OEM systems. The story of DR Motors represents success for both them and Westport Fuel Systems.

Eric Stine, Analyst

Lastly, back to HPDI, you've detailed the changing stance from Volvo. Certainly, this validates HPDI and draws interest from other OEMs. However, what about market penetration? Currently, there's some penetration in Canada under certain waivers. Should we expect that, over the next year or two, North American HPDI penetration will be under those waivers, or is it possible for Volvo to bring it to North America under this JV?

David Johnson, CEO

Currently, the only place you can purchase an HPDI equipped truck is in Europe. The opportunities in China, North America, and globally are significant. There are ongoing activities with both current customers and prospective customers testing engines. The timeline depends on many factors, including our work with partners in Canada to permit Volvo customers to bring European trucks into Canada. We have the first of those trucks arriving shortly. It's an exciting development to show how much better an HPDI-equipped truck performs versus a spark-ignited natural gas truck in terms of fuel efficiency and performance, especially for fleet customers needing heavy loads for long-distance travel.

Operator, Operator

Your next question comes from the line of Chris Dendrinos from RBC Capital Markets.

Chris Dendrinos, Analyst

I want to follow up on the second half of the year regarding your expectations and cadence. You mentioned some softness in Q3 due to natural seasonality. With regards to Q4 and the LPG system ramp, should we account for this in our models, especially regarding any near-term margin pressure during the volume ramp?

David Johnson, CEO

Yes, let me address HPDI first. We have lower volume in Q2 due to the ongoing model change for a new truck version with more horsepower and efficiency. After the summer shutdown, we anticipate volume ramp-up, with specific numbers still uncertain. However, we expect an uptick in volume in Q3 and more in Q4 alongside improved pricing we negotiated. This addresses both margin and volume improvements moving forward. Regarding Westport Fuel Systems, as we launch our LPG customer in Q4, this will also contribute positively. It will not be a step function but a gradual ramp as we transition into 2024 with strong outlook expectations.

Chris Dendrinos, Analyst

As a follow-up, now that the JV with Volvo is announced, you've previously been quiet about any testing with them regarding hydrogen HPDI. How consistent are your efforts with Scania in terms of engine testing right now, or where are you in that development plan?

David Johnson, CEO

We routinely collaborate with our existing customers—Volvo's engines are regularly tested in our test cells. Even amid the JV formation, Volvo remains a customer of this partnership. We can expect announcements of significant development contracts as they occur. Continuous development, technology evaluation, and running durability tests are part of our regular business activities right now.

Operator, Operator

Your next question comes from the line of Mac Whale from Cormark Securities.

Mac Whale, Analyst

Looking at the new business this fall, you mentioned €38 million. That customer today is not a customer at all. So isn't all of that new revenue?

David Johnson, CEO

Largely correct. This new OEM is a new customer for us. We do have some parts currently supplied through one of our competitors. We're a sub-supplier to them, so there is a revenue overlap. The €38 million is largely incremental over the next two years.

Mac Whale, Analyst

In '25, when you transition to the Euro 7, do you expect to continue Euro 6 shipments? And when the €63 million comes in, does that mean the €38 million goes away?

David Johnson, CEO

Not exactly. Regarding emissions standards, some clarity is still needed on when Euro 7 is required, and OEMs often want to have the fuel system available for new models, regardless of emissions regulations. The awards are associated with specific vehicles, and we expect all models for this OEM once we move to Euro 7. This will significantly enhance our revenues and market share for LPG systems.

Mac Whale, Analyst

Lastly, regarding margin outlook in the second half of the year, do you expect the Euro 6 LPG business to apply margin pressure or continue to improve?

David Johnson, CEO

We're positive about the pricing we've secured and the associated margins from this business. This will be accretive to our income statement and beneficial for us, leveraging existing capacity and capabilities at Westport Fuel Systems.

Operator, Operator

Your next question comes from the line of Bill Peterson from JPMorgan.

Bill Peterson, Analyst

Regarding natural gas HPDI, what is the lag time we should expect when natural gas prices improve?

David Johnson, CEO

Fundamentally, fleet operators buy vehicles and use them for three to five years before turning them over. They're looking at the economics of delivering freight while considering environmental benefits. The price differential between natural gas and diesel significantly influences their decisions. It can take time for fleets to appreciate the price advantage, especially following the price spikes we saw in 2022. Having Volvo's commitment to this technology presents a significant affirmation for the market's long-term benefits.

Bill Peterson, Analyst

Regarding LPG and transitioning from Euro 6 to Euro 7, what should we anticipate regarding margin structures between your wins?

David Johnson, CEO

The business we've secured comes with strong margins, improving due to better absorption of fixed costs from higher sales. This will positively impact our gross profit

Operator, Operator

Your next question comes from the line of Jeff Osborne from TD Cowen.

Jeff Osborne, Analyst

On the joint venture, what is the status of the Board structure and whether you'll be able to consolidate the financials?

Bill Larkin, CFO

I can take that. The Board structure will have equal members from both partners initially. We are assessing consolidation as we formalize the structure. As of now, we don't expect to consolidate it, but we will provide expanded disclosures, including volume and revenue details for that business.

Jeff Osborne, Analyst

Is there any feedback from non-Volvo OEMs regarding information sharing with competitors as part of the JV?

David Johnson, CEO

In the industry, it's common for OEMs to share information with suppliers, and it's the suppliers' responsibility to protect that information from competitors. Our JV will adhere to this standard, and while some may think Volvo's involvement means access to everything, that's not the case. Every supplier must demonstrate their commitment to safeguarding confidential information to retain their business.

Jeff Osborne, Analyst

Could you provide insight into the major sources and needs of cash for the third and fourth quarters?

Bill Larkin, CFO

Looking forward, we had higher-than-normal cash uses for debt servicing in Q2; going forward, expect to normalize to standard principal payments as well as our CapEx, projected in the $12 million to $15 million range. We won’t foresee major changes in CapEx. A critical area is to strive to drive down working capital, improve AR collections, and reduce inventories to generate cash flow for our balance sheet.

Operator, Operator

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Johnson for any closing remarks.

David Johnson, CEO

Thanks everyone for your time this morning. Our Q2 resulted in record revenues and improved gross margin, marking a solid quarter, especially given lower volumes on our marquee product, HPDI. We are optimistic about the additional LPG business, signaling a bright future for our light-duty OEM, heavy-duty OEM, and hydrogen trajectories in development. There are many encouraging signs on the horizon for us, and we look forward to future quarters. Thanks again for your time and interest in Westport Fuel Systems. I'm looking forward to speaking with you again.

Operator, Operator

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.