Earnings Call Transcript - WPRT Q1 2021

Operator, Operator

Thank you for standing by, this is the conference operator. Welcome to the Westport Fuel Systems Inc. First Quarter 2021 Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Christine Marks, Westport's Investor Relations representative. Please go ahead, Ms. Marks.

Christine Marks, Investor Relations Representative

Thank you and good morning everyone. Welcome to Westport Fuel Systems first quarter 2021 conference call, which is being held to coincide with the press release containing Westport Fuel Systems financial results that was distributed yesterday. On today's call, speaking on behalf of Westport Fuel Systems is Chief Executive Officer, David Johnson; and Chief Financial Officer, Richard Orazietti. Attendance at this call is open to the public and to media, but questions will be restricted to the investment community. 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 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. Actual results may differ materially from those projected in the forward-looking statements. So, you're cautioned not to place undue reliance on those statements. Information contained in this conference call is subject to and qualified in its entirety by information contained in the company's public filings. I'll now turn the call over to David.

David Johnson, CEO

Thanks, Christine. Good morning everyone. Thanks for joining us today to review Westport Fuel Systems results for the first quarter of 2021. This is David Johnson speaking. If you're new to our story, thanks for your interest, and on this slide, you'll see a brief synopsis about our company. Following a record fourth quarter close in 2020, we started 2021 with solid revenue growth, despite the ongoing challenges brought on by COVID-19. Our HPDI business is ramping well in Europe and our independent aftermarket, delayed OEM, and electronics businesses are profitable. We have a comprehensive global offering of affordable gas and fuel components and systems offered through a global network of distributors and partners. I am pleased to continue to gain confidence that our HPDI Solutions outperform with demonstrated operational cost savings and reduced carbon emissions. As a result, our products are taking on an increasing role in large fleets and accelerating the global transition to cleaner fuels. We're driving innovation to power a cleaner tomorrow and changing the way the world moves people and freight. I'll cover just a few highlights from the first quarter and then provide a business overview before handing over to Richard to go into more details on our financial performance. Our revenues were $76.4 million in the first quarter compared to $67.2 million for Q1 last year, a 14% increase. Q1 sales revenue in our light-duty and heavy-duty OEM businesses also increased significantly, up 25% versus the year-ago quarter. Like many OEMs, our HPDI launch partner is experiencing supply chain production issues due to global semiconductor shortages. While our HPDI manufacturing has thus far been unaffected by this particular issue, global shortages are expected to impact revenues and margins through the second quarter. We do, however, expect the impact of this issue to decrease in the second half of 2021. Our business mix is shifting with growing revenue for HPDI, hydrogen, and our light-duty OEM businesses, especially in India. However, the ongoing COVID-19 pandemic effects and resulting shifts in sales mix resulted in nearly flat performance of our IAM business. In total, gross margins are under pressure and not where we want them to be. We ended the quarter with $59.7 million of cash and cash equivalents, including gross proceeds of $13.2 million raised from our at-the-market equity offering in the three months ended March 31, 2021, for a cumulative total of $27.6 million raised. I am immensely proud of the progress our global team has made towards sustainable profitability, which is the foundation upon which we'll continue to build success. Westport Fuel Systems is addressing a huge market, $100 billion annually of which roughly half is heavy-duty trucking, and market share for gaseous fuel solutions is growing. We have substantial regulatory, economic, and societal tailwinds in markets around the world. Consumers buy our aftermarket conversion kits to save money while using cleaner fuels, and our products also help OEMs respond to regulations while meeting their customers' demand. We've worked hard to develop a solid reputation as an industry leader in gaseous fuels over the last two decades with sales in 70 countries. HPDI was launched in Europe in 2018, and our share of the market continues to grow. The EU market for alternative fuel trucks grew by 38% in 2020 despite the impact of COVID-19, and we finished last year with an HPDI sales rate almost double compared to 2019. Just to be clear, HPDI is not a concept demonstration; it is a product, and with HPDI, OEMs can avoid penalties for CO2 non-compliance that are built into the regulations in Europe. For example, if no improvements are made to today's European diesel-powered trucks, some of those trucks in 2025 will generate a penalty of €38,000 per truck sold payable by the OEM. This year, we expect to launch HPDI in China, the largest market for natural gas trucking. HPDI 2.0 is the only product in production at scale that can fully and cost-effectively respond to the regulatory standards for commercial vehicles in Europe, India, and China. We've announced the initial demonstration of the efficiency of hydrogen HPDI, and we've shown the cost-effectiveness of hydrogen internal combustion engines using HPDI. It's increasingly clear there is no panacea for zero-carbon transportation across all applications. Today and tomorrow, there will be a diversity of technologies and fuels. Gaseous fuels are cleaner, renewable, and can reach zero carbon-hydrogen, and because our gaseous fuel systems are available and affordable today, we will lead the way. For heavy-duty long-haul applications, the size, weight, and cost of batteries, not to mention the recharge time, make battery electric technology a non-starter for this application. Regarding fuel cells, the demonstration vehicle that OEMs have shown includes not only the fuel cell but significant batteries and electric motors. For both of these concepts, the investments required for industrial batteries, fuel cells, motors, and rearchitecting vehicles is massive. In North America, vehicles using gaseous fuels are not very common. So, the existing and accelerating global adoption of gaseous fuels may be surprising to some. With the increasing substitution of renewable fuels like biomethane, our products can further decrease the greenhouse gas impact of transportation, and they do so much more affordably than battery electric vehicles, for example. Against that backdrop, I also want to share with you the views of two global players, our customer Volvo and our partner Cummins. As you can see, both companies forecast an ongoing important role for natural gas over the next two decades and an important role for hydrogen as key ingredients in the pathway to near-zero carbon and fossil-free transportation. In the long-term view, the mix of products that will be sold is to be determined. We already design, produce, and sell hydrogen components for transportation and industrial applications. This area of our business saw substantial growth in 2020 and remained strong in the current quarter, and we could see a pathway for continued growth. The potential for OEMs and others to avoid new and significant investments required to develop and manufacture fuel cells, electric motors, and batteries is incredibly compelling. Like trucking, other high-load applications like mining, marine, and rail have come to rely on the efficiency, power, durability, and reliability of diesel engines, and HPDI is the only alternative that offers the same performance and yet can leverage existing supply chains, manufacturing infrastructure, economies of scale, and offer a roadmap on a technology platform that has a proven track record and longevity. We believe the potential to use hydrogen with HPDI and to do so more cost-effectively than fuel cells means there's a very large portion of the future product mix for long-haul transportation that will count on Westport Fuel Systems products. In November, we announced new product development work to apply HPDI 2.0 to an updated base engine platform designed to meet Euro 6 regulations that take effect in 2024. We interpret this as our customers' confidence in our HPDI systems and increasing demand from their fleet customers who are already realizing the benefits of our HPDI solutions. In China, our JV's HPDI engine has been certified and we're pleased with the increased minimum volume commitment by Weichai Westport. I'll go into more detail regarding China momentarily. For us, North America is next. UPS has already adopted natural gas, announcing in 2019 that they're adding 6,000 natural gas vehicles to their fleet. In February, it was reported that Amazon ordered 700 CNG trucks. Fleets aren't waiting for technology breakthroughs; they're acting now to reduce carbon with our solutions to save them money. With the path established by our JV with Cummins, HPDI in North America could take natural gas to the next level. The joint venture term is scheduled to end on December 31, 2021, and we're evaluating our strategic alternatives in anticipation of this termination. We see a growing opportunity to sell our alternative fuel systems, especially our HPDI technology in heavy-duty applications in the North American market. We're making significant progress in China where our joint venture with Weichai Power secured certification for the WP12 natural gas engine powered by HPDI 2.0. As one of the largest suppliers of natural gas engines in China, our JV currently supplies engines to leading Chinese commercial vehicle OEMs who serve the largest natural gas trucking market in the world. The engine certification sets us up to serve that market as vehicle OEMs complete certifications of their vehicle offerings with our engines. In the first quarter, we announced a co-investment agreement to expand the manufacturing footprint for HPDI 2.0 injectors in China and also announced amended agreement terms with Weichai Westport for the supply of a minimum of 25,000 HPDI systems through December 31, 2024, which represents a 39% increase in the minimum volume compared to the original agreement. China has already planned for the largest LNG retailing infrastructure in the world and has hundreds of thousands of natural gas trucks on the road. And we're optimistic about the opportunity in front of us in China. Recently, we presented alongside AVL, a leading independent engineering firm an analysis showing the cost advantages of hydrogen-fueled HPDI equipped internal combustion engines for trucking. Next, we demonstrated that hydrogen with HPDI works very well out-of-the-box, delivering efficiency on par with fuel cells in heavy-duty applications. We presented that data at the Vienna Motor Symposium for review by industry experts just last week. Among the combustion systems we investigated, we determined HPDI combustion offers the highest power density, efficiency, and is the most robust system for using hydrogen in internal combustion engines for heavy-duty applications. We're in discussions with potential partners and customers to gain input and further develop and validate this exciting opportunity. Although it's still early days, we don't think it's a stretch to say this could be a game-changer for the internal combustion engine and for clean transportation globally. Before I hand back to Richard, I'd like to highlight our commitment to strong governance, social responsibility, and environmental sustainability. This is inherent in Westport Fuel Systems' DNA. The strength and diversity of our Board is a critical asset that provides oversight and guidance to the implementation of our strategies and achieving our goals. At the Board level, we have a 50/50 gender mix and more than one-third of our global workforce identifies as female. We're committed to our employees' health and safety, with 97% of our employee base being represented by joint health and safety committees. Our major operational sites are also ISO-certified for Environmental Management and Product Quality. In 2018, we established the sustainability working group that reports directly to me. Our commitment to the environment is in our DNA. It's in our products, and we're committed to reducing the energy and carbon intensity of our global operations. For those of you who know the transportation sector well, you'll recognize some of the talented individuals who've joined our team and led their considerable expertise. On our Board, Dan Hancock, our Chair brings 43 years of experience with GM to our company. During his career, he was CEO of Allison Transmission and CEO of the Fiat-GM Powertrain joint venture. Rita Forst led vehicle and powertrain engineering during her 36-year career at Opel in Germany. Dr. Karl Viktor Schaller led Purchasing and Vehicle Engineering as a Board member at MAN and later was the Chief Technical Officer of BMW's Motorcycle division. Many of you will have also known Tony Guglielmin, retiring CFO of Ballard, who joined our Board earlier this year. On our management team, Jim Arthurs and Lance Follett have 30 years of Westport Fuel Systems leadership experience. Tim Smith joined us late last year bringing his 30 years of experience with Daimler, Navistar, and Tier 1 automotive supplier, Dana. Nicola Cosciani joined us from the Italian automotive industry and leads our global manufacturing operations in Italy. Our CFO, Richard, has extensive public company leadership experience with an international mining company and in the telecom sector with Bell Canada earlier in his career. Our leadership team together represents impressive skills, experience, and rich geographical and cultural diversity, and we're grateful for their commitment to excellence in the pursuit of our objectives. Now, over to you, Richard for more detail on our Q1 financial results.

Richard Orazietti, CFO

Thank you, David. As David mentioned earlier, our revenues increased 14% year-over-year to $76.4 million compared to the first quarter of 2020, mainly due to the strong performance from our OEM businesses, driven by improving sales volumes in light-duty OEM and continued year-over-year growth in our HPDI product sales. As much of our sales are in euros, revenues also benefited from a 9% increase in the average euro exchange rate period over the period. Year-over-year gross margins increased to $13 million compared to $4.3 million, primarily due to a $10 million charge for the fuel service campaign for a pressure release device taken in the first quarter of 2020, which excluded the $7.7 million in insurance recoveries recorded later in the second quarter of the year. Excluding this charge, gross margins experienced pressure this quarter due to the continued impact of COVID-19 on customer demand, primarily in our independent aftermarket business. We also realized lower margins on HPDI product sales and engineering services than in 2020. Equity income from the CWI joint venture increased $6.4 million, a year-over-year improvement of $1.2 million, primarily due to reduced R&D expenses. We recorded a net loss of $3.1 million, or $0.02 per share for the first quarter of 2021, compared to a net loss of $15.3 million, or $0.11 per share for the same period in 2020. Besides the positive change in gross margin and the pickup in equity income from CWI, the current quarter benefited from a decrease in unrealized foreign exchange losses, due mostly to the strengthening of the Canadian dollar, partially offset by increasing operating expenses, including one-time severance expenses. Notwithstanding the challenging business environment, we continue to generate positive adjusted EBITDA of $2.7 million compared to negative $3.6 million in the first quarter of 2020. Turning to our business segment performance, OEM revenue for the first quarter of 2021 was 42.79%, which was a 25% increase year-over-year in revenue that was primarily driven by increased light-duty OEM sales volumes to Russian and Indian OEMs, growing sales in our electronics business, and higher year-over-year HPDI product sales more than offsetting a decline in the OEM business that has been affected by the impact on customer demand due to COVID-19. As David mentioned previously, global supply chain issues related to a lack of semiconductors have been impacting production and creating bottlenecks in the automotive industry, including our HPDI launch partner. Although the demand for our HPDI technology continues on a positive trajectory, our HPDI product sales were lower than in the second half of 2020 due to the supply chain challenges that have affected the production of trucks at our HPDI launch partner. These shortages do not currently affect the manufacturing of the HPDI system directly, and demand for HPDI products has increased even more significantly as reflected in the year-over-year increase in revenues. Gross margin for OEM increased by $11 million to $4.9 million, or 11% of revenue for the current quarter compared to negative $6.1 million in the same period of 2020. Gross margin in the prior period reflects the aforementioned $10 million charge for the fuel service campaign. Excluding this charge, gross margin for the current quarter increased by $1 million at a consistent gross margin percentage of 11%. This increase in gross margin was largely due to the higher sales in light-duty OEM, as discussed previously, more than offsetting the pressure on margins from HPDI product sales. OEM recognized an operating loss of $6.5 million compared to $14.5 million for the same period of 2020. Normalizing for the $10 million charge, the operating loss in OEM increased by $2 million year-over-year due to the increase in the average euro exchange rate and higher compensation expenses. Turning to the independent aftermarket, revenues for the current quarter increased modestly year-over-year by 2% to $33.7 million, primarily due to the higher average euro exchange rate, which offset comparatively lower customer demand from our Western European customers affected by the continuing impact of COVID-19. Notwithstanding the comparable sales performance, gross margin decreased by $2.3 million to $8.1 million in the current quarter, due to the increase in sales mix from lower margin emerging market customers and the challenging recovery in Western Europe. Besides the gross margin impact, operating income decreased $3.2 million to $1.6 million due to some one-time severance expenses. CWI revenue for the first quarter 2021 was $82.3 million, a 7% increase compared to the first quarter 2021. Unit sales for the first quarter were 18,173, compared to 15,113 for the first quarter of 2020. The increase in unit sales in the current year largely reflected the timing of sales and an increase in demand. Parts revenue decreased from $21.1 million to $25.8 million due to fewer parts purchases for repairs, reflecting improving product quality. Gross margin decreased by $0.6 million to $21 million, or 26% of revenue compared to $21.6 million, or 28% of revenue in the prior year period. The decrease in gross margin and gross margin percentage primarily reflects product mix and a $1.9 million warranty provision. Operating income for the first quarter 2021 increased by $3.7 million year-over-year to $17.1 million, primarily reflecting lower R&D expenses. As mentioned at the outset, our share of CWI net income for the first quarter of 2021 increased to $6.4 million from $5.3 million in the same period last year. Turning to the balance sheet and our liquidity. Cash at the quarter end was approximately $60 million, a decrease of $4.5 million compared to the fourth quarter of 2020. The decrease in cash was primarily due to debt repayment, cash used in operations, capital expenditures, and a lower euro exchange rate on our cash held in euros. This was partially offset by proceeds of $13 million from equity issues from our ATM program during the quarter and $7.9 million in dividends received from our CWI joint venture. At the quarter end, our total debt stood at $62 million, down from $85 million in the fourth quarter 2020 largely due to the repayment of debt on our revolving receivables credit facility from our collections, scheduled debt repayment on our term loans, and a partial conversion of $2.5 million convertible notes. We are continuing our efforts to strengthen our balance sheet and our ability to fund our long-term growth and financial stability. Two UniCredit loans were refinanced subsequent to the quarter, with principal increased from €5.4 million to €7.5 million maturing in the first quarter of 2027 at a lower cost of borrowing. Furthermore, we are also actively discussing with our lenders about refinancing other terminals, extending maturity, and improving borrowing rates based on our investment horizon and improving credit profile. With that, I would like to turn it back to David.

David Johnson, CEO

Thanks, Richard. In 2021 our focus remains on continued growth at scale in key markets for HPDI — that means Europe, China, and North America. For our light-duty business, we aim for profitable growth through the aftermarket and OEM channels and markets like Turkey, Russia, Egypt, India, and other cost-sensitive markets where our products resonate strongly with the need to deliver affordable transportation and reduce carbon. We are continuing our development work with Hydrogen HPDI. Looking further ahead, we believe $1 billion in annual revenue is a very attainable goal and expect the margins to improve as we gain economies of scale and operational leverage, getting closer in line with industry standard performance. The market fundamentals are in place, and the next catalysts for growth are clear. We have a talented team dedicated to delivering continued value through affordable and sustainable transportation solutions. With that, I'd like to turn it back to the operator for your questions.

Operator, Operator

Thank you. The first question comes from Eric Stine with Craig-Hallum. Please go ahead.

Eric Stine, Analyst

Good morning, everyone.

David Johnson, CEO

Good morning.

Eric Stine, Analyst

I would love if you could just expand a little bit on your commentary on HPDI in North America. Just in the context I know it's a different market, especially the standpoint of not as vertically integrated as say Europe is, you know, just maybe some things we should look for as part of that, because clearly, you're focusing on North America more than, you know, we've heard on past calls?

David Johnson, CEO

Yes, thanks for the question, Eric. We're really inspired by the opportunity in North America. Most importantly, what we see is the success in CWI over a long stretch of time to bring natural gas engines to the marketplace. This creates, from our perspective, the opportunity for HPDI, which provides better performance. As the infrastructure is built out, and customers have become more comfortable with natural gas, the benefits of HPDI, now being demonstrated in Europe, are helping the market to develop and flourish in North America. The OEMs we work with around the world are all global OEMs. When we have a product in one location, bringing it to another one is a little easier than starting from scratch. We see a big opportunity, and we think that the move to clean up transportation on a global basis is indeed a global trend. We're prepared and eager to serve the North American market with our technology.

Eric Stine, Analyst

Got it. Is this something that we should think about as a 2021 event or something that — I mean, I guess it's up to your OEM partners, but something that if not in 2021, at least it is a potential near-term event?

David Johnson, CEO

We see it in our sights, but I have to be pragmatic and reasonable about the timeframe. The emissions regulations in North America are different from those in Europe. Some work is required, and the vehicles are different. There's a fair number of differences. It's not just about rolling the product off the ship and starting to sell. Having said that, we don't often get chances to discuss our development contracts in advance of actual production start, so I'm going to leave the announcements to our customers. I can’t provide a clear timeline on when we might expect those announcements. Sorry for that.

Eric Stine, Analyst

Right. No, I understand that. Encouraging nonetheless. Okay. Maybe just the last one for me, this billion-dollar target by the decade, nice to see that. Just maybe a little more in-depth on your thought process, obviously HPDI heavy, but whether it's that or how that breaks down between your segments, from a high level, and then also how you foresee the mix when you're at that level by geographic area? It would be great.

David Johnson, CEO

Yes, absolutely. Our HPDI product is a very important part of that equation. It has gotten off to a strong start — essentially, this is the market for us in Europe today with HPDI and our lead customer. We expect the Chinese market to be very important as part of this equation. We're very pleased to announce the contract amendments we made with our JV, which are set to increase the minimum volume commitment. I want to reinforce that this is a minimum volume commitment; we're talking about 25,000 units through 2024 at a minimum. We're entering the largest market for natural gas in the world with a superior product. Europe and China are very critical for us, and we expect North America to come along, but perhaps more in the mid-decade context. While HPDI is critical to this growth trajectory and our targets of a billion dollars by mid-decade, it's not the only ingredient. We have a comprehensive portfolio of products and ways to go to market, including the OEM and aftermarket channels, and I expect growth from all aspects of our business, including volume, revenue, and profitability. All that adds up, and we're excited about the prospects for the company, but there's lots of work to be done to realize it.

Eric Stine, Analyst

Okay. Thanks a lot.

David Johnson, CEO

Thank you, Eric.

Operator, Operator

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

Colin Rusch, Analyst

Thanks so much, guys. Can you speak to the timeframe for the next several important benchmarks around proving out the hydrogen technology? And how you guys are progressing along that timeframe?

Richard Orazietti, CFO

Yes. Thank you. This is a really exciting development for the corporation. Fundamentally, as you know, Colin, we had an analysis late last year that showed that it would work well. We tested an engine or test cell with hydrogen, and it worked very well, exactly in line with our analysis. And for us, with HPDI hydrogen is a great fuel. Just to clarify, for a spark ignited engine, hydrogen does present some challenges. But for HPDI, it's absolutely fantastic because the fuel is injected at high pressure. This is very much in our favor. We demonstrated that in the engine. Where we go from here, you know about the project we have with Scania; we expect to have discussions around other projects like that that will take our hardware or HPDI hardware, put it on other engines, and then demonstrate the technology first on the dyno and then in vehicles. That’s a normal development process. We're looking forward to moving through that early demonstration phase and into the product development phase. An important ingredient in bringing it all the way to production will be how infrastructure develops. There is a vital role for governments around the world to play. There are a lot of ingredients, but hydrogen is clearly established as a zero-carbon fuel for long-haul heavy-duty transportation going forward. We see tremendous potential, and we've demonstrated our engine. We're looking forward to those next projects with customers to further develop, validate, and bring it to production.

Colin Rusch, Analyst

Perfect. And then just around the current supply chain and what's going on globally at this point, I know that you guys had been proactive, but what's your sense of how things are trending in terms of procurement, availability of components, and availability of hardware as you navigate through the second and third quarters here?

David Johnson, CEO

Yes. I've been reflecting on this, Colin, because it is a global problem, not just a Westport Fuel Systems specific problem. However, we are affected too, and it comes at us in a couple of different ways, affecting our customers, as discussed previously. So far, it hasn't impacted us considerably in terms of our ability to get components, but if our customers are affected, that negatively affects us. Reflecting on this time last year, as the pandemic started in China and then in Italy, we were trying to build up those inventories. We were ordering more than we needed to create a buffer stock. I can only imagine that basically everyone was doing the same thing. So, there was a huge wave of orders, and then suddenly, factories shut down, and everyone stopped their orders. I think, as a world globally, we've perturbed the supply lines in an unnatural way due to the pandemic's management. It will take some time to recover from this. Supply lines are very long, especially regarding chips, and it's astonishing how far back in the supply chain the problem is, starting with making the silicon wafer. We’ve disturbed that, and while I don't doubt we will recover, it will take time. In the meantime, it affects our operations, but overall, we have managed fairly well, not without impact.

Colin Rusch, Analyst

Thank you so much.

David Johnson, CEO

My pleasure.

Operator, Operator

The next question comes from Amit Dayal with H.C. Wainwright. Please go ahead.

Amit Dayal, Analyst

Thank you. Good morning, guys. Looks like we're bracing for some variability in sort of how the quarterly results may come through for the remainder of 2021 compared to the historical periods? Could you give us some sense of the revenue cadence potentially that you have visibility on for the rest of the year on a quarterly basis?

David Johnson, CEO

Yes. Amit. The fact is visibility isn't great, as we just discussed. Supply chain challenges are a significant variable. COVID continues to impact our business as well. India is an important market for us currently facing severe challenges, and Europe is still working through getting vaccines distributed. A fair bit of our revenue and profitability is from consumer products in our aftermarket business, so that continues to have a lingering impact. Turkey is still facing shutdowns. The varying conditions around the world understandably affect us. Therefore, this is the reason behind the lack of guidance for the year. However, we're thrilled to see a 14% year-over-year revenue increase, which we see as a positive sign in total, even given the challenges.

Amit Dayal, Analyst

That's understandable. Thank you, David. With respect to some of the same challenges, on the margin and OpEx front, I mean, factories are open now compared to being shut down last year. How should we think about some of these expenses moving higher for you this year versus last year?

David Johnson, CEO

I will come in with the mix, and perhaps Richard can give insight on our OpEx view. Right now, some of our most important markets are still significantly depressed; for instance, Italy. In short, our aftermarket business in that market is still struggling with COVID impacts, and India is also struggling. These difficulties are affecting metrics like profitability in the current quarter. Consequently, sequential-quarter improvement is what we hope to see as opposed to year-to-year improvements. I don't have a specific number to share; however, we’re working hard to manage all the challenges and to be prepared when our customers are ready to purchase our products.

Amit Dayal, Analyst

Understood.

Richard Orazietti, CFO

I think David’s right. The challenges we're facing are the lingering impacts of COVID. The markets where we've had a lot of profitability in independent aftermarket, particularly in Western Europe, are still recovering. We can call it the beginnings of recovery in those markets, leading to improving profitability. Regarding our heavy-duty OEM business, while HPDI sales are currently experiencing challenges, there is also a lot of interest in HPDI products that the launch partner is dealing with, and it's a matter of wait time before we see profitability trends return to better levels. Additionally, we had wage subsidies last year coming from the Italian and Canadian governments which won’t be as prominent this year. Overall, our operating expenses and some of our SG&A will bear differences due to fewer of those subsidies compared to last year.

Amit Dayal, Analyst

Okay, yes. That's helpful. Thank you, Richard. Just one last question for David; could we get clarity on who the deal partner is for the HPDI production expansion in China? Is that the same partner we have in Europe, but the facilities are in China? I don't know if you can share this, but it would be helpful. Thank you.

David Johnson, CEO

Yes. We have a longstanding partnership with Delphi, which is now BorgWarner, for our injectors. They are our global partner for this production and realization of the injector. We're very happy to be working with them and bringing this product to market while also expanding capacity to meet the anticipated demand in our forecast. So yes, I’m pleased to be partnered with such a capable company.

Amit Dayal, Analyst

Understood. Thank you for that, David. That's all I have.

David Johnson, CEO

Thanks, Amit.

Operator, Operator

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

Rob Brown, Analyst

Hi. Good morning. I'm just wondering if you could expand a little bit on your comments regarding the demand with your European launch partner. You're seeing good order activity even though it's not coming through the production line yet. What are you observing in demand trends there?

David Johnson, CEO

Yes. Overall, Rob, the demand looks good to us. We're very encouraged by the order book. The challenges we’re facing with our partner relate to component supply and their ability to keep production lines running due to those challenges. We can produce the necessary HPDI products, and the order book looks good. As I described before, the market appears to be growing significantly. We've seen this since our launch in 2018 through 2019, with volume increasing significantly despite the pandemic in 2020 reinforcing our view that this is a growth product. It plays a crucial role in the compliance scenarios that OEMs are continuously calculating for CO2 regulations in 2025 and 2030. The build-out of the infrastructure supports that vision, with over 400 LNG stations in Europe, which is a doubling during our partnership. All the elements align well with the order book looking strong, and I'm excited to get through the supply chain challenges to serve our customers and their fleets.

Rob Brown, Analyst

Okay. Thank you. In terms of China, I think you're waiting for vehicle certifications at this point; where does that stand, and what is the outlook?

David Johnson, CEO

Yes. We are seeing good progress and are encouraged by the prospect of getting the product into the marketplace and into the hands of customers. I believe that was best represented publicly by the announcement we just made — we rewrote the contract to expand the minimum commitment. My view is anytime a customer is willing to sign up for a commitment means they are planning to build themselves beyond that, and it indicates their confidence in the product and their plans. I'm really excited to get the product to market. Multiple OEMs are working to integrate our engines into their trucks and ensure those trucks fulfill customer requirements. The market in China, as you know, consists of around 100,000 natural gas trucks per year, with spark ignited engines from our joint venture being a significant part of those sales. We think when HPDI is added to the mix through our joint venture with Weichai, that it will grow the market significantly. We expect to shift from 0% of HPDI to a much more interesting portion of the mix. You can track that against what's happened with our lead customer in Europe and their spark ignited engine competitors. Thus, we are genuinely excited, eager, and attentively waiting for announcements from the OEMs regarding their launches.

Rob Brown, Analyst

Okay. Thank you. I'll turn it over.

David Johnson, CEO

Thanks, Rob.

Operator, Operator

The next question comes from Thomas Boyes with Cowen and Company. Please go ahead.

Thomas Boyes, Analyst

Great. Thank you for taking my questions. Just two quick ones for me. The first one would be, could you provide a quick update on what you're seeing in the passenger car market in places like Italy or maybe some other key geographies?

David Johnson, CEO

Yes. What we see in the passenger car market overall, maybe just to start with India, has been very strong. This is a critical part of the story, though we are seeing some headwinds with the COVID challenges they're facing. That's temporary, and we wish everyone in India safety. The market itself adopted new regulations last April, and our customer and leading passenger car OEM in India, Maruti Suzuki, has moved away from diesel engines because of the new emissions regulations as they became costly. They are pivoting toward natural gas vehicles to replace them, which are more affordable with lower acquisition costs while being environmentally friendly. They also benefit from adequate natural gas infrastructure, which remains strong for us. In Europe, I would say that the market is still facing a significant decline from COVID pandemic impacts. While we are seeing some improvements in Western Europe, particularly in Italy, it’s relatively modest. We expect the Western European market to recover over time, but it’s challenging to predict exact timings regarding Q2 and Q3.

Thomas Boyes, Analyst

Great. I appreciate the color there. The last one from me is I was wondering what the next steps are around service support for the Cummins Westport joint venture in the longer term, specifically what you’re communicating to fleets that may be reluctant to invest in the last year of the JV.

David Johnson, CEO

We've been clear with our JV that there will be no disruption to service support for customers, and they need not worry about that aspect when considering a purchase of a Cummins Westport engine in Q2, Q3, or Q4 of this year. While we continually evaluate strategic alternatives while Cummins does, customers’ operational support will remain consistent.

Thomas Boyes, Analyst

Great. Thanks again. I appreciate it.

David Johnson, CEO

Thanks, Thomas. It’s good to hear from you.

Operator, Operator

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

David Johnson, CEO

Yes. Thank you very much, everybody, for joining us. I’m quite pleased and proud of what we accomplished in 2020. I'm happy to report year-over-year performance improvements in terms of the top line. We face ongoing headwinds from COVID for sure, but the fundamentals of our company, the products we are bringing to the marketplace, and the way the market is developing now in Europe next, then in China, and already in North America with respect to natural gas tells the story that underlines our $1 billion target for mid-decade. The narrative of Westport Fuel Systems, with the products we bring to market, is a growth story. We’re working hard to restate that growth story and realize it in the coming years. Thanks again for your time and attention and all your support. Have a good day.

Operator, Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.