Thank you for standing by. This is the conference operator. Welcome to the Westport Fuel Systems First Quarter 2022 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.

[Operator instructions] I would now like to turn the conference over to Christian Tweedy, Westport's Investor Relations representative. Please go ahead..

Good morning, everyone. Welcome to Westport Fuel Systems' first quarter 2022 conference call, which is being held following our press release yesterday of Westport Fuel Systems' financial results. On today's call, speaking on behalf of Westport Fuel Systems is Chief Executive Officer, David Johnson; and Chief Financial Officer, Richard Orazietti.

This call is open to the public and the 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, as such, forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. With that, David, I'll turn the call over to you..

Thanks, Christian. Good morning everyone. Thanks for joining us to review Westport Fuel Systems' results for the first quarter 2022. In Q1, we generated revenues of $76 million comparable to the same period of 2021. Excluding for an exchange translation, our revenues increased by approximately 6% year-over-year.

As you know, today's markets are anything but stable. That's true for the broader market as well as our specific automotive markets. Today's markets are volatile, unpredictable and uncertain and then Q1 volatility increased.

Now, we have more inflation and we have the Russian-Ukraine war on top of the existing well known challenges of chip shortages and the still ongoing effects of COVID.

And there are myriad local market changes that matter like the collapse of the Turkish lira and the actions governments are taking to manage their economies and help their citizens through these challenging times, fuel rebates, for example.

So in light of this, matching our year ago quarterly revenue in this most recent quarter, it looks to me like an accomplishment. And as noted, if we were to report in Euro, instead of U.S. dollars, we'd be up roughly 6% compared to last year because foreign exchange rate are also on the move.

And the reasons for this modestly robust quarterly result in these rather turbulent times are as follows. First, our core business is on the right path. Clean affordable transportation is in demand today and in demand tomorrow and in fact demand is increasing.

Ultimately high energy prices and challenging economic times tend to be tailwinds for our business. Transportation is not a discretionary purchase and we make transportation products that are both low cost to acquire and low cost to operate. During times of financial constraints, our business can continue to grow.

Second, Westport Fuel Systems has both product and market diversity. We serve 70 markets and we provide fuel components and systems for the full range of low carbon gaseous fuels, LPG, CNG, LNG, RNG, biomethane and hydrogen. All our fuel systems are applied to a wide variety of engines and to fuel cell in a broad spectrum of applications.

And we sell through diverse channels, both aftermarket and direct to OEMs as well as to other Tier 1 suppliers. And we have a diversity of customers around the world. Finally and most importantly at Westport Fuel Systems, we're on an important mission.

And our 1800 global team members and our partners around the world are each and all committed to our mission to deliver the products and services that enable clean affordable transportation. We're determined and we're resilient.

Looking into the quarter, I'm pleased to report that our OEM business continues to grow, up 21% over the year ago quarter, and including the continued sales growth of our HPDI systems up 16% to our lead European OEM customer.

And why does our HPDI business continue to grow even in this challenging volatile times because HPDI is an excellent superior product and it's only available from Westport Fuel Systems. HPDI is surely familiar to you and let me spend a little more time today reviewing the offer that HPDI makes in the marketplace.

HPDI enables a diesel engine to maintain all the diesel performance and efficiency that fleets and drivers have come to expect, but using clean natural gas and importantly biogas, otherwise known as RNG, biomethane or bio RNG.

A recent article in a French trade magazine, France Routes explains and I quote thanks to Westport Technologies, the compression ratio is that of a diesel engine.

I point to this quote that maybe only an engine geek like me could love because maintaining a high compression ratio and maintaining high boost pressure and maintaining high working pressure inside the engine are the key ingredients, enabling performance and efficiency. HPDI makes that possible with clean low carbon natural gas fuel.

France Routes also documented a substantial efficiency difference. Fuel consumption of the HPDI equipped trucks in their test was dramatically lower than that of a competitive trucks using spark ignited natural gas fueled engines. 25% to 30% lower fuel consumption with HPDI.

That's a huge difference for most any application, but especially in trucking where competitive advantage and bragging rates are often measured in fractions of a percent. And I just have to pile on the torque available using HPDI is 15% higher than those similarly sized engines without HPDI.

HPDI is the right way, the best way to use clean gaseous fuels in internal combustion engines. So where do we go from here? First, we continue to grow to meet customer demand, respond to regulatory requirements and realize economies of scale in our manufacturing and supply chain, and improve our profitability.

As we've reviewed before the fleet average CO2 standards in Europe require a 15% reduction by 2025 and a 30% reduction by 2030. These requirements have not gone away due to COVID nor due to war. And Europe is marketing to make those requirements even more stringent. Natural gas fuel provides an inherent 20% reduction in carbon compared to diesel fuel.

HPDI gets the most performance from natural gas. And so in combination, our product responds directly and powerfully to the regulations. An HPDI is fully compatible with biogas, which continues to grow strongly in markets around the world, including the U.S.

where the Natural Gas Vehicle Association recently reported that RNG achieved a 64% mix in transportation last year. Fantastic. Looking at Europe, a key market for our company, their transport sector generates 27% of the EU’s total CO2 emissions. And road transport alone generates almost 19%.

Being able to rapidly reach climate neutrality in this sector will require the combined efforts of all stakeholders. Starting in 2025, OEMs in Europe will face substantial financial penalties associated with missing the fleet average CO2 requirements. Next we move from low carbon natural gas, to net zero carbon biogas, to zero carbon hydrogen.

As we announced last week, this week, we're unveiling our high performance, high efficiency, hydrogen HPDI demonstration vehicle at the ACT Expo here in Long Beach, California.

Our HPDI technology works brilliantly with hydrogen as we've demonstrated in our laboratory with more power, more torque and more efficiency than the original diesel fuel engine and with near zero carbon emissions. HPDI with hydrogen is just what the world needs for heavy-duty, long-haul trucking. It's economical, high performance and clean.

Looking ahead, we're in progress with numerous hydrogen, HPDI projects, including the announced work with Scania, AVL and 2P and Cummins. We look forward to sharing more information at ACT Expo later this year, as we demonstrated our truck and developed the engines in our lab. Hydrogen HPDI is a big deal.

This will make internal combustion engines with HPDI the best way to use green hydrogen for long-haul, heavy duty transport applications. We have disruptive technology and we're pleased to show it off and offer to our customers and the industry.

Next, after that off-road and high-horsepower applications, we see a clear opportunity to decarbonize this very hard-to-decarbonize sector using Westport Fuel Systems patented and proprietary HPDI fuel systems, and by applying our deep expertise in managing gaseous fuel. Mining vehicles are a good example.

Today's mining truck fleets are typically diesel powered and mining vehicle emissions represent about a third of miners’ greenhouse gas emissions.

Our low-cost, affordable and reliable solutions that are available now can play an important role in helping decarbonize mining while maintaining reliability and dependability of their fleet, by continuing to use the well-developed internal combustion engines. But with HPDI fuel systems and clean low carbon gas fuels.

The ongoing Russia-Ukraine conflict will continue to have an adverse impact on part of our business. As we highlighted during our Q4 call, about 10% to 15% of our light-duty OEM and aftermarket business has been sales to Russia, to OEMs and aftermarket customers.

This Russian business has been growing and an important market for gaseous fuel systems and components. Because of the continuing conflict, the future impact to our business of the commercial and economic consequences of the conflict are, of course, uncertain again.

For example, with respect to commodities and component material pricing, 40% of Europe's natural gas and 25% of Europe's crude oil is provided by Russia today. So pricing pressure is expected on components globally as energy costs for reproduction and transport, continue to rise as the conflict drags on.

We'll continue to monitor these developments as the situation is changing rapidly. Despite these pressures, we remain confident that our products will continue to deliver and expand our market share in response to the persistent need for clean, affordable transportation.

We saw this through COVID and we expect to keep seeing it through the current challenges. We are keeping our focus on the long-term, while we work to mitigate the near-term challenges as we have successfully done before.

You might not believe what's happening in India, but having just been there, let me confirm that India is now the market with the highest penetration of natural gas fuel vehicles with market shares growing towards 40% passenger vehicle and commercial vehicles and in India's unique three-wheeler segment.

It's impressive and exciting and Westport Fuel Systems is there supplying all the various components and systems required to enable the transition that's underway in India. Why? First, because regulations have driven a market change away from diesel and towards natural gas because of product affordability.

Second, because Indian customers demand affordable solutions. And third, because the Indian government has made clean natural gas for transportation, a foundational element of their strategy, while also improving their quality.

Natural gas for fueling infrastructure continues to grow now approaching 3,500 stations, up dramatically in just the past years. I'd like to quickly turn our attention to China and provide an update that will look for our business.

Lock downs are back in effect across major metropolitan cities in China and key import-export areas, which is having a reverberating effect on the global supply chain. Meanwhile, natural gas prices there continue to be elevated, putting a damp on our JV’s existing spark-ignited natural gas engine business.

Work continues to bring HPDI to the marketplace, but with high natural gas prices, the governments increasingly focused on the potential for hydrogen. China's hydrogen industry has undergone exponential growth in the recent years and local authorities and enterprises have shown strong enthusiasm for investing in the sector.

A study released by the China Society for Finance and Banking projects that China will invest the equivalent of US$74 trillion in carbon-neutrality financing over the next 30 years, representing five times its 2020 national output. Westport has the product to help China reach their stringent climate goals.

And it's a reason why we have ongoing discussions with potential Chinese partners for the usage of hydrogen HPDI. Hydrogen HPDI can play a large role in transportation, decarbonization efforts in a country that is embracing hydrogen and believes in its long-term growth potential and use case as a future fuel.

We're excited about this opportunity ahead and look forward to updating the market for the development. Despite the pressures we and our industry are facing in this moment, the outlook for our company is favorable. The world needs clean, affordable transportation.

Westport Fuel Systems has the solutions and will grow to respond increasing the urgent needs of the market around the world. Hydrogen is an important growth factor for Westport Fuel Systems’ HPDI enables the use of cleaner fuels in internal commotion engines from long-haul transportation.

Growth will enable economies of scale that leads to profitability. We're well positioned, ready, eager, and determined. With that, I'll hand it over to Richard to go over the financials..

Thank you, David. Revenue for the first quarter 2022 of $76.5 million was comparable to the prior year quarter, despite the challenging headwinds from volatile fuel prices, the impact of sanctions on our Russian sales volumes and continued inflationary pressure and supply chain challenges, plaguing the automotive industry.

To continue to generate growth in our OEM revenues, primarily due to the addition of our fuel storage business and saw modest growth in light-duty, heavy-duty, OEM and electronics businesses.

Offsetting the growth in OEM revenue, our independent aftermarket revenue was significantly lower year-over-year due to the lower volumes caused primarily by the impacts of sanctions resulting from the Russia-Ukraine conflict.

Excluding foreign exchange translation, revenue increased by approximately 6% year-over-year or an exchange had a significant impact on revenues in U.S. dollar terms due to the 7% appreciation of the U.S. dollar relative to the Euro, which is the currency we conduct a substantial portion of our business.

Net income was $7.7 million for the first quarter 2022, compared to a net loss of $3.1 million for the same prior year period. The increase in net income was due to the gain of $19.1 million recognized on the sale of our interest in the CWI joint venture and the monetization of the related intellectual property.

This was partially offset by lower gross margin from our independent aftermarket business, inflationary pressure on cost of materials and manufacturing inputs and the loss of equity income from CWI.

Normalizing for the CWI gain, we generated negative $6.1 million in adjusted EBITDA for the quarter as compared to $2.7 million for the three month ended March 31, 2021. Turning to our business segments, revenue for the first quarter 2022 for OEM was $51.8 million, up 21% compared to the prior year quarter.

The operating loss from OEM was $6.5 million, which was the same for the prior year. The increase in revenue was driven by additional revenues of approximately $8 million from the acquisition of our fuel storage business in the second quarter last year.

We also saw revenue growth in our light-duty OEM business due to the rapid growth in sales volumes through OEMs in India, which was partially offset by a challenging market in Western Europe due to volatile CNG prices and the impact of sanctions on our Russian sales volumes.

Despite the headwind of elevated LNG prices at the pump, our heavy-duty OEM sales volume to our OEM launch partner, increased 16% year-over-year. Revenue growth was partially offset by the annual contractual price reduction to our OEM launch partner.

As a reminder, the first quarter of 2021 was the start of production challenges at our OEM launch partner from the shortage of semiconductor chips, which has improved since the fall of 2021.

Higher relative LNG prices are causing a significant challenge to the demand for LNG trucks, which is expected to temper our expected sales volume goals to our OEM launch partner through 2022 until relative LNG prices returned to a more favorable equilibrium.

Gross margin was $5 million or 10% of revenues for the quarter compared to $4.9 million or 11% of revenues in the prior year.

Gross margin increased by $1.3 million from our fuel storage business, which was offset by decreases in gross margin across all other OEM businesses due to the increased sales mix to emerging markets with lower gross margins and increases in material costs from the global supply chain shortage and inflation.

Gross margin and gross margin percentage from our HPDI 2.0 fuel systems product will vary based on production and sales volume. Levels of development work, successful implementation of initiatives to reduce the cost input materials and foreign exchange rates.

Margin pressure is expected to continue through 2022 as production costs and contracted price discounts with the existing OEM customers are only partially offset by cost reductions of materials until higher scale is exceeded.

R&D expenses for the first quarter were $4.8 million, which were comparatively lower year-over-year, mainly due to foreign exchange benefit.

Our R&D activities and OEM continue to focus on the development of next generation HPDI fuel systems technology and demonstrations with potential OEM customers on our HPDI fuel systems, hydrogen and natural gas applications. Now turning to independent aftermarket.

Independent Aftermarket business faced significant challenges in the first quarter from reduced sales volumes to our Russian customers caused by sanctions and fuel price volatility. Revenue for the first quarter of 2022 was $24.7 million, down 27% compared to the prior year period.

Besides the impact of the Russian sanctions, we had lower comparative sales to our African customers as the first quarter of 2021 included the recognition of a large onetime infrastructure project and then there was the aforementioned foreign exchange impact of the U.S. dollar appreciation.

Gross margin was $4.9 million or 20% of revenues for the quarter down $3.2 million compared to the same prior year period.

The decrease in gross margin and gross margin percentage was attributable to the lower sales volumes through Russia and Western Europe increased sales to emerging markets with lower comparative gross margin and to a lesser extent higher manufacturing costs in the current quarter due to increased material costs.

Consequently, we recognize the small operating loss of $300,000 compared to operating income of $1.6 million in 2021 and a positive note the LPG price differential to gasoline has improved favorably during the first quarter, which is providing some support to increase sales demand with this positive tale when another countermeasures mitigate the impact of inflation and improve productivity we anticipate a return to profitability of our aftermarket business soon.

Finally, I’d like to touch on liquidity. Our cash position increased by $2.7 million during the first three months of the year to $127.6 million from about $125 million at year end.

The increase was primarily from the $31.4 million in proceeds received from the sale of our interest in CWI and the monetization of the related intellectual property, offset by cash outflows in net working capital, investments in capital assets, and repayments of our short and long-term debt.

Our net cash flow is used in operating activities were $16.9 million in the first quarter 2022, an increase of $14.3 million of cash used compared to the same prior year period. The increase in cash used is primarily due to the net change in working capital from a buildup of inventory and decrease in gross margin.

A net cash from investing activities of $29.2 million consisted primarily of cash acquired through the sale of our investment in CWI partially offset by capital expenditures of $2.8 million.

Net cash flow is used in financing activities were $7.9 million for the first quarter 2022, primarily due to a net repayment of debt as we begin paying down our debt on a quarterly basis, after a period of deferral from COVID-19 relief.

As discussed, COVID-19, the impact of the Russia, Ukraine conflict, uncertainty and utility in our fuel prices, especially in Europe had a negative impact on customer demand in the quarter, further supply chain disruption and high inflation continues to challenge the automotive industry with rising manufacturing costs, pressuring gross margin in the near-term as we respond with pricing and productivity countermeasures to manage our profitability, as a conditions, continue to persist the duration and severity of the impact on future quarters is currently uncertain.

Having said that, we do see positive signals in the growth of our OEM businesses and up past path to profitability as sales volumes grow in our heavy-duty and light-duty OEM businesses.

Our balance sheet and liquidity to fund the growth is currently in good shape and we will remain prudent in our allocation of capital and resources and executing our strategic and operating plans. With that, I would like to turn it back to David..

Thanks, Richard. While current global factors are causing headwinds, the market fundamentals, regulatory environment, and the overall global trends remained in our favor. The world needs clean, affordable transportation.

We’re excited to bring our hydrogen HPDI fuel system technology to the forefront, and we’ll be sharing more of our technical and commercial results with you through the year.

Our team will continue to work hard to meet the needs of our customers and the industry with a focus on executing our long-term strategy, growth in new markets, new product development, and a commitment to quality reliability. Westport Fuel Systems is driving the affordable decarbonization of transportation globally. Thanks for your time today.

Looking forward to your questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Eric Stine of Craig-Hallum. Please go ahead..

Hi, David. Hi, Richard..

Good morning..

Good morning, Eric..

Good morning. So maybe just to start with your heavy-duty OEM with Volvo in Europe and maybe this is tough to answer, but for obvious reasons, kind of a tempered outlook for the end of 2022. I’m just curious, anything you can share relative to maybe the shortfall versus your expectations, potentially versus Volvo’s expectations.

Just anything to add some details and then also would just love your thoughts on kind of the linearity of revenues throughout 2222, at least how things stand today..

Yes. So glad to talk a little bit about the business in Europe with HPDI with our launch partner, fundamentally, a key ingredient in that is the fuel price and fuel prices are a bit elevated these days to giving the LNG price relative to diesel. So that is for sure a headwind.

Nonetheless, looking at our results in Q1 and what we ship to our customer, fundamentally, we’re up 16% year-over-year. And so – and I would also point to in general, our Q1s have been kind of the soft quarters and then Q4 tends to be a stronger quarter. So we’re hopeful for a repeat of that and increase through the year as we go forward.

Nonetheless, we do have this headwind of the fuel prices, but we still have the amount tax abatement of about €10,000 per truck and other purchase incentives. So the market has many factors, and I think, one of the things that we can have some significant confidence on is the fact that it is the superior product in the marketplace.

And so our customer is taking share from other natural gas and other alternatives in the marketplace. And so we feel good about the business in the long run. And we see this up quarter and kind of forecast that will have a relatively a good year although this fuel prices are forever a challenge when they’re elevated at there right now..

Right. Got it. Well, then maybe turn into China, you mentioned that with elevated fuel prices in COVID lockdowns everything going on there that the government is starting to change or look more at hydrogen. Just curious – so you’ve got the take or pay with Weichai.

I mean, is there a mechanism in there where that can be shifted or a portion of that can shift to hydrogen or when you’re talking about elevated interest? Are you talking about potentially other parties as well?.

Yes, I think it’s both. So basically, what we see in China today relative to hydrogen is a lot of push from the government, a lot of funding available, and basically all the OEMs have varying degrees of interest in how to approach the market with hydrogen.

And frankly, we have work to do to make sure they understand, like we do globally, like we’re doing this week today at Expo. So to help the world understand what’s possible with hydrogen and HPDI, because this really is quite novel compared to the other alternative of spark ignited hydrogen engine.

And so this is our work to help them understand the potential of HPDI with hydrogen. But fundamentally going back to the contract, anything possible, but at this point in time, we have a contract in place and we have a customer, they continue do the work to bring HPDI to the marketplace and pivot to either add or move towards hydrogen.

I would say, would be beyond the timeframe of the contract create that we’re talking about with Weichai..

Got it. Okay, thanks for that. And then just maybe one quick one, bookkeeping here for Richard. Just on the debt repayment, can you just maybe give some color into debt repayment expected for the remainder of the year. And then, I guess, maybe in 2023 as well as you start paying things that were deferred..

Yes. No, its outline in the notes of the financial statements you can see, it’s going to be roughly about $12 million on our debt. And then there’s like usually got $5 million bullet for the Cartesian royalty..

Got it. Thanks a lot..

You’re welcome..

Thank you, Eric..

Our next question comes from Rob Brown of Lake Street Capital Markets. Please go ahead..

Hi. Good morning. Thanks for taking my call. Just wanted to follow-up on the China comments.

Are you implying that that maybe the HPDI product is not launching into the market right now in terms of the natural gas side? Or is that still moving forward? And I guess, just relative to your comments on hydrogen, what does that mean for the natural gas product at the moment?.

Yes. So first of all, the project with respect to natural gas, HPDI with our partner and with their customers, the truck OEMs, this continues to move, right, in terms of the work that’s happening on our customer side and on their customer side to get the validation done and be ready to launch.

The comment I made was in the context that every OEM looks for that launch window, when it be the best time to go to the marketplace and launch a product. This is on the truck OEM side. And so, with elevated LNG prices right now it’s easy to – it’s maybe not the best time right now.

So we’re hopeful for a realignment in the marketplace, but then creates a window for properly launching the product commercially in the marketplace. But we wait for our customers to take those decisions.

With respect to hydrogen, I think we have the same, I’ll call it dynamic sales dynamic with hydrogen HPDI in China that we do with hydrogen HPDI in Europe and in North America.

And that is that the technology we have at Westport Fuel Systems of HPDI, we are demonstrating now with our vehicle at ACT Expo and our diner results we presented in Vienna a few weeks ago, and previously press release to various results.

This offer of more power, more torque, more efficiency using hydrogen HPDI in combination gives all OEMs that are considering how to respond to the marketplace and demands for lower CO2 and clean transportation gives all OEMs this basic vision and potential that they can adopt HPDI today with natural gas, use HPDI today with biogas and use it in the future with hydrogen as hydrogen becomes increasingly available in the marketplace.

So this really provides this longevity of a technology, this roadmap ahead for decades to come, that makes then the decision to adopt HPDI sooner more tenable and more interesting for our OEM customers. And I think that is the key dynamic we see in all markets around the world, including China..

Okay, great. Thank you. That’s helpful.

And within the pricing environment maybe between – differentiate between OEM and independent aftermarket, how much pricing kind of ability do you have in each of those markets and how quickly can you change price as your cost structure changes?.

Yes. Great question. And I think it’s a different time in the marketplace than we’ve seen for some decades, frankly, with respect to inflation being relatively low and stable for many, many years. And now we have this high and unstable – high and growing in many markets around the world.

You’re right, our aftermarket business and the ability to price in that is different than our OEM business. Typically OEM business is characterized by long-term supply agreements that have some clause to them, allow you to go back and renegotiate and pass on costs.

And so each one of those contracts with OEMs is different and requires going back and talking to the OEMs and negotiating discussing. And so it takes some time and some work. And we’ve been doing that and we’ve had numerous successes, but there’s more to be done because of course the metro costs keep going up with the inflationary environment.

On the aftermarket side, frankly we can raise prices, I would say more easily recognize that on the aftermarket side not too dissimilar from the OEM side, but the different equation. Customers are buying those products to save money on fuel.

And so the key ingredient to pay attention to is the fuel price differentials in the various markets and then the cost of the product. And so, while we can price if the truck cost goes up, it makes – the attractive is the product less in all cases. So that’s our challenge.

And so as we see oil prices going up and gasoline and petrol and diesel prices going up as Richard mentioned, relative to LPG today, that price differential is actually working in our favour.

Also in general, higher fuel prices just in general, make people more sensitive and look for ways to save money on fuel and LPG kits as an example are I would say increasingly in favor in this moment because of this rising fuel price, rising fuel price differential. And so into this environment, we can price. But we have to do it market by market.

And as we talk about, we have 70 markets around the world and they’re all different and not all of them are LPG markets by the way. And so that’s a more challenging when we talk about natural gas markets, for example..

Okay, great. Thanks for the color. I’ll turn it over..

Thanks, Rob..

Our next question comes from Colin Rusch of Oppenheimer. Please go ahead..

Thanks so much guys. You’ve got a certain amount of engineering work that you have to do to get the HPDI 2.0 for hydrogen to market.

Can you just give us an update on where some of the balances system engineering and preparation is at this point?.

Yes. Thanks for asking Colin. Good to speak with you this morning. So fundamentally, the applications that we’ve done so far of our HPDI system to existing engines have been to apply the product that we use today for natural gas, with no modifications.

We expect that there will be some modifications as we develop and optimize the system to production, but we’re in this phase basically demonstrating the capability, which has been really I would say, frankly exciting, right, for us and for our customers to see the potential to apply our fuel system off the shelf, if you will.

And already achieved this on the under 15% to 20% improvement in power and torque compared to diesel or natural gas, which in general, our parity [ph] rate, we’re talking about HPDI with natural gas tends to be at the parity with the diesel engine on power and torque.

Whereas with a hydrogen HPDI, we can actually increase by 15% to 20% similarly with efficiency, we see this five percentage points, four percentage points to five percentage points improvement in brake thermal efficiency, which turns into about a 10% improvement in engine efficiency on the kind of miles per gallon, or liters per 100 kilometers kind of basis.

So, vehicle type efficiency. So these are really big benefits that we’re demonstrating the lab, and now we’re looking forward to demonstrating them on the road, and basically handing people the keys, but fundamentally the product development to support that so far is relatively straightforward from our perspective.

But we have work to do, no OEM is going to take it, the HPDI system bolted onto their engine and start feeding in hydrogen and selling the customers without the validation steps.

So, I think, these are programs that are multiyear programs to bring hydrogen market, but frankly that’ll be plenty fast enough relative to the infrastructure, developing the availability of affordable hydrogen..

That’s super helpful.

And then could you just a sense of where things are from a labor perspective on your manufacturing side, certainly labor’s been an issue all over many geographies, but just wanted to see where you guys are at, in terms of labor inefficiency or concerns as you navigate through some of these ups and downs of the market?.

Yes. I would say that in general, we don’t see ourselves having, let’s say a labor problem of any kind, right. We’re able to access the quantity we need. Of course, there is inflationary pressure people want let’s say to raise their salaries, and their pay in order to respond to the costs they’re seeing in the marketplace.

We have to manage that, of course. But it’s just another element of our cost structure, but in terms of labor in total, we don’t have an access to labor problem or a quantity of labor problem.

And I would say the one thing that we are seeing is still some trailing effects of absenteeism due to people getting sick and wearing its COVID or having it actually be COVID its vet still is a challenge for us. But I would say one we’ve been managing now for two years and not one that really affects our operations. It’s just something we manage..

Perfect. Thanks so much..

Our next question comes from our next question comes from Amit Dayal of H.C. Wainwright. Please go ahead..

Thank you. Good morning, David, good morning, Richard.

Just on the pricing question earlier, have you started implementing some of these price increases and by the time maybe you get through some of it, is it like a 2022 time period, where you can achieve most of these price increases and any color on how that is being executed would be helpful? Thank you..

Yes, great question. I think as mentioned earlier, kind of a new regime we’re in the inflationary time. So, we did a bit of this last year specifically related to the chip shortage and the extra cost we were paying to find and access the materials we needed in the marketplace.

And so we did make pricing changes, I’ll say historically during 2021 on some of our aftermarket products to mitigate those added costs. And we’re doing that now as cost continue to rise across all sorts of commodities, raw materials, as well as some labor cost increases and from the Colin’s question.

So all these costs, and even right now in Europe, we see it with the Russia-Ukraine war, our energy costs have almost doubled. So kind of a structural cost change on our OpEx side. So fundamentally we’re seeing these cost increases. We’re able to pass them on to our customers.

But with the OEM business, it takes, I would say more time, we can’t be as quick to implement because it means going back and seeing with our customer to negotiate the passing on of those costs.

In most cases, that means we have to – I would say it’s a typical thing for a Tier 1 supplier to sit with in front of their customer and say, here, our cost increases that we’ve had to pass on to you. And everyone, I would say is very understanding of that. Of course, they don’t want the cost either. Nobody wants a price increase.

But at the end of the day, we’re able to justify those that take some time. Therefore, there’s a lag, there’s a lag between costs going up and prices going up that does put pressure on margins in near term.

And that you can imagine two thirds of pricing over time and pricing costs and how we might have on the backside of that hopefully, when prices stabilized some benefits to our margins..

Understood. Thanks for that, David.

And then with respect to the independent aftermarket business, is the pressure primary coming from Russia? I mean, is there, what are the other sort of drivers that could help you recover in this segment?.

Well, so, relative to our Q1 results, we saw a direct impact of the sanctions and the – therefore, the tapering or the reductions in our Russian business in the aftermarket, which is good business for us, typically a profitable business for us. So that was a consequence of the war started by Russia.

So this is the situation we face with respect to the aftermarket in the Russia-Ukraine conflict. That as far as we can tell, it looks like it’s going to persist and we don’t know when it might end. And so that’s just special case.

With respect to the rest of the markets around the world, the operating characteristics of the marketplace really are fuel price differentials. And so I’ll give a very specific example. So we had – have had for some time relatively a depressed market in Italy where basically our business, the aftermarket historically has been the strongest in Italy.

And during the COVID period with lockdowns and everything it was hard for us to decide or understand exactly how much is the COVID effect that people not buying vehicles or not converting vehicles and so forth. And how much was through the market dynamics that actually alternative fuels.

What we saw in March actually was a steep uptick in our business, basically with the outbreak of war in Russia-Ukraine, fuel prices really went up dramatically and the price differential between petrol and LPG got much larger. So there was this huge benefit in moving to LPG, and we saw a big uptick in our sales and deliveries in the month of March.

Unfortunately, I would tell you the government came in the month of April and offered some incentives, some free gas cards, or I’m not sure what the mechanism they were used exactly was in Italy, but we’ve been doing this around the world. We’re helping the population by giving money back from the government to ease the pain at the pump.

And when they did this, it had a differential effect, more savings, more help with respect to petrol prices than LPG prices. So we’ve seen some tapering down of that good demand spike we saw in March. So this is just an example and it really depends to market and market around the world.

And we’re managing all those and doing the best we can in these turbulent times..

Understandable, David.

With respect to China, could you give us any sense of sort of what your overheads are in terms of just maintaining status quo at this point for that effort?.

Yes, this isn’t a lot of effort on our part. Basically, we support our customer through regular dialogue and answering technical questions as they come up. But frankly it’s not so much work on our part. We’re not spending a lot of money on it. I would say the biggest impact to our business is the absence of the volume that which we planned on, right.

So we expected volume from the – from our business in China now, already, of course like you did, like we’ve been discussing for some years. And the absence of this volume means that we’re not able to access the economies and scale that we wanted to have. Therefore, our profitability is still challenged.

So this is, I would say the big effect of our business, China being in this day to days right now, but in terms of actual day to day work and spending and R&D and cost, there’s very, very little..

Okay. Okay. All right. That’s all I have, David. My other questions were already discussed. Thank you so much..

Perfect. Thanks, Amit..

Our next question comes from Mac Whale of Cormark Securities. Please go ahead..

Hi, David. I think I just missed the answer to one of the earlier questions about expectations for volume sales in OEM heavy-duty, HPDI with Volvo in Europe.

Did you say 16% was the year-over-year increase in volume?.

Yes. It was 16% in Q1 of 2022 versus 2021 – Q1 2021..

And what would've been like entering into the quarter, what was sort of the expectation of growth?.

What we've seen over a long period of time since we launched in 2018, nearly a doubling kind of year-over-year of the volume. So it's been in some cases larger than that, in some cases smaller than that but kind of year-over-year over a long period of time kind of a doubling.

So our expectations are very yes, we have big expectations for the product in Europe. We think it's really important in the marketplace. We think it's very well received.

We can see the testimonials from customers and frankly it's hard to understand exactly how the higher LNG prices in this moment are affecting sales because sometimes sales are booked and then the trucks come later.

And so it's tough to tell in this moment what the rest of the year will be, and of course if LNG prices decline or diesel keeps going up and the price differential gets reestablished in a favorable way, that'll propel sales and there's CO2 regulations that come into play in 2025 that OEMs need to meet and then 2030.

So there's really a lot going on and it's hard to even for us and our customer on the inside to figure out all the factors and forecasts where it's go out, so hence no forecasts for the market. Sorry for that..

So if the – let's suppose the various regulations they don't move. Is there, as the shipments are low, how do you expect the next few years to play out in terms of catching up to where they need to be.

Like can you – is there enough slot capacity where you would see much greater than doubling or in order to catch up by sort of mid-decade, but how would it play out do you think?.

Yes. The way I view it is that we have a really good future in Europe specifically with our launch partner and we expect other companies and customers to come along and join me because the CO2 standards have not moved through all of COVID through, through ship supplies through now war.

None of these things are deterring the European Union from their goals with respect to de-carbonizing transports to the heavy transport. And we see our product in the marketplace proving itself as very effective at de-carbonizing and providing all of the fundamental transportation capability that a fleet or a truck driver expects from their truck.

And so in terms of scale and where it could go we have the capacity installed and we're ready to scale up significantly and so does our customer, because basically for them, all it means is instead of grabbing a diesel tank and putting it on the truck to grabbing an L&G tank and put it on the truck.

Same thing with the injectors, instead of grabbing, instead of six diesel injectors they grab a set of six HPDI injectors. So for them this is kind of normal production and they have their full production capacity available. There might be some constraints along the way as they break bottlenecks to actually change the mix.

But these are relatively easy for them to overcome. So the capacity is there and the requirement fundamentally doesn't come into play, play until 2025.

That's when OEMs, if they don't meet the 15% reduction requirement from the baseline established 2.5 years ago, that's when they'll have to start paying penalties at which point in time they'll make the decisions about whether they're – they prefer to pay penalties or they prefer to incentivize and otherwise help the sales of a product that reduces CO2 like HPDI does.

Well given that the customers are so focused on total cost of ownership and not the pricing for the – for the fuel is volatile and you have this additional cost coming on to regulation? Is there any exploration of different pricing regimes where, say for instance you capture some of the potential given the fact that your technology is helping them to be very efficient with beating the lower carbon? So in other words, as pricing differentials increase that you could over time capture some of that so that the save like because the customer really only cares about TCO, and you're giving them some stability and you're sort of taking a little bit of, you have to wait so-to-speak to get paid, but you don't have to really give up the price of your product.

Is there any ability to do that, to think of new ways or better, or, to capture some of that that volatility or is it impossible?.

I think – no, no, I don't think it's impossible, but I do think it's challenging. I would say especially for us, perhaps easier for OEMs to make this kind of transaction if you will with their customers.

So if you look at for example, what Nicola’s proposing to do with their trucks, where they're, saying, hey we're going to put the fueling infrastructure in place and here's these trucks and well, you have a business model in which we can share and the fuel efficiency benefits or some savings.

I think the same thing could be construct on the OEM side for HPDI trucks, but really it's on the OEM side. It's not something that, we're not off Westport Fuel Systems selling to fleets a product. We sell our product to OEMs; we then sell trucks to fleets. But the basic idea that you raise is very interesting. I believe. Okay..

Okay. That's all my questions. Thanks guys..

Thanks Matt..

[Operator Instructions] Our next question comes from Jeff Osborne of Cowen & Co. Please go ahead..

Yes, good morning. Quite a, bit's been discussed already, but a couple of housekeeping questions and clarifications.

One Richard, I was wondering can you just maybe for all of last year disclosed, what percent of revenue is zero denominated, just as we think about FX changes and the impact to you folks?.

I want to say it's close to like the 85%, the significant portion..

Okay. Got it. That's helpful. And then I wanted to dig into the LPG comments. You talked a lot about in the Q&A, on the LNG side, but I thought you had said that the differential between gasoline and LPG is improving in some markets.

So I just wanted to clarify A, if that's right and then B, if you can talk about which countries that is, and then maybe as a second derivative, what the impact of those differentials are to your tank business, which was, give or take 10% of revenue this quarter..

Yes, thanks for the question, Jeff. So fundamentally it is different market by market and I don't have a long list in front of me, but as an example in Italy, we saw these price differentials very favorably moving in the favorable direction. In the Netherlands and Germany, Poland, Turkey.

So kind of, I would say our typical markets in Europe where we saw it moving in the right direction as basically gasoline and diesel prices went up quite significantly and LPG prices didn't move up so significantly. They did go up some, but not nearly as much as LPG excuse me, as petrol and diesel.

So this is where we've seen this benefit but it's a modest benefit it's in the right direction helps us. But it doesn't overcome some of the challenges we see with respect to CNG as an example. So CNG prices are some of the highest fuel prices in Europe right now.

And so on the passenger vehicle side, we've seen a significant pullback in our CNG business in various markets..

Got it. That's helpful, David. And then maybe just the last one for me is, you touched on the demand side in China and the potential shift to hydrogen.

I was curious on the supply side, are you having any issues with your manufacturing partners on availability of fuel injector technology or any other adjacent equipment you need or produce yourselves or through third parties?.

No, I would say no specific issues. I would tell you in general that, we're kind of embracing is the wrong word, but we're, we have big anxiety around, okay.

So what is the COVID lockdown in Shanghai and Beijing actually going to affect us tomorrow and the next day? And so we're doing, what we can working with suppliers to try and make sure that our supply chain is continuing to move.

But fundamentally we haven't, I don't have a specific issue to call out that says, this hurt us by X in Q1, or is about to hurt us in Q2..

Got it. That's helpful. That's all I had look forward to seeing you later this week at the ACT show..

Sounds great. Thanks, Jeff..

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

Yes. Thanks everyone. Thanks for your time today. Appreciate your questions and tuning in for the call. We are, it's a challenging time for sure in the marketplace, but I think fundamentally we have great products. We have a great presence around the world. I think the diversity of our markets that we serve.

So the fact that CNG markets are down but LPG markets are up, hopefully Russia is down and hopefully we could be up another markets.

And fundamentally that the key ingredient here is that we continue to build with respect to HPDI and I can't the, let's say clear enough about how we see the HPDI hydrogen opportunity affecting our business in the mid to long term, as we unveil this technology and demonstrated around North America and later this year in Europe.

So that's a really exciting part of our business. And we're looking forward to the chance to speak with you more about that in the coming days, we have some Investor Conferences coming up the RBC Auto Conference in Toronto and H.C.

Wainwright’s Conference in Miami and looking forward to seeing you there and speaking more about the business, then thanks for your time and have a good day..

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