Westport Fuel Systems Inc. (WPRT) Earnings Call Transcript & Summary

All right. Great. Well, thank you very much, everyone, and thank you for joining us today. Welcome to the Water Tower Research Fireside Chat Series. We're very excited today to have with us David Johnson, the CEO of Westport Fuel Systems; as well as Scott Baker, the Vice President of Engineering. My name is Graham Mattison. I'll be -- I'm a senior analyst here at Water Tower Research in our sustainability and industrial practice. As a reminder, this call and all of our research are available to everyone. It could be found on our website at www.watertowerresearch.com. As well, we will be publishing a report on this call later, which will be available to everyone. We will be taking questions and hope -- from the audience, and this can be submitted via the webcast. Hopefully, we'll be able to get to all of them, but our apologies if we're not able to due to time.

And with that, David, maybe -- welcome, and maybe you could give us a brief overview of your background and tenure at Westport. And then Scott, since this is your fireside -- first fireside chat, can you please tell us about your extensive history in Westport and your current role.

Yes. Good morning, everyone. Good afternoon, everyone. Can you hear me okay?

I can hear you fine, David.

Okay. Perfect. So yes, David Johnson, CEO of Westport. I joined the company just 3.5 years ago but have worked my entire life in automotive for GM, Navistar and running a start-up company in San Diego for a decade. I joined Westport at the great time for the company with really important developments that I'm sure we'll talk about today. Scott?

Thanks, David, and yes, good morning, and good afternoon, everybody. As Graham mentioned, this is my first one of these sessions, so I'm happy to participate and looking forward to some questions. I've been with the company for quite some time. As Graham mentioned when he introduced me, my current role is Vice President of our Global Engineering organization. My tenure with the company goes back many years, joined in 1998 at the time when Westport Innovations was actually still on campus at the University of British Columbia, where the company originated although I was not part of the original research team that invented and started the early development of the HPDI technology. I'm a mechanical engineer, coming up on 24 years with the company of being in and out of engineering a number of times and had a variety of roles, including leadership positions in product planning, product management, purchasing and supply chain and supplier quality and then moved back into engineering in my current role about 3 years ago. Throughout my tenure with the company, I've had my hands and my fingers in a whole bunch of our different technologies, roughly half of my career involved in our high-pressure direct injection technology. I also spent approximately half of my tenure with the company in our recently expired joint venture company working on spark ignited natural gas engines. So I've been involved in alternative fuel technologies of various strikes for the vast majority of my career. Prior to that, a couple of years in the oil and gas industry, but the majority of my time with Westport.

Great. And David, perhaps you could start us off by discussing the evolution over the past number of years of Westport's high-pressure direct injection or HPDI technology and how that can be used throughout a range of different applications in the transportation area.

Yes. Thanks for that, Graham. Basically, as I mentioned in my brief intro, when I joined the company in January 2019, one of the foundational building blocks that I was lucky to inherit with the fact that we had brought our HPDI product to the marketplace. So in 2018, we launched in Europe with our lead partner. And since then, we've got a really important path to scale up and sell more year-over-year coming to a point where we can turn it into a profitable business. This is the path that the company has been on for some decades. But only in 2018 did we bring it to the marketplace in a way that has really responded to the customer challenge. And Scott will talk in detail about the fundamentals of the technology and how it delivers. But in terms of what it delivers, it enables us to run a diesel engine using gaseous fuels. And so this is the ability to preserve all of the benefits and attributes of a diesel engine, but yet using cleaner and more affordable gaseous fuels. And so today, that is in the marketplace with natural gas and biomethane, so renewable natural gas. And we just -- in the recent past, the last -- a couple of weeks ago in Long Beach introduced the potential to use hydrogen, so a 0 carbon gaseous fuel using HPDI in heavy-duty diesel engines. So again, preserving all the benefits of a diesel engine but enabling the use of gaseous fuels.

Great. And David, I think your camera might need to make an adjustment on it. So Scott, turning to you. Scott, we're not all engineers, of course, but perhaps you can give us an appreciation of the HPDI technology in a little bit more depth, how it worked, how it compares to other engines, spark-ignited natural gas, a diesel or just regular gasoline engine.

Yes, sure. Thanks, Graham. David touched on some of this already, but I'll elaborate on it. The whole -- the premise behind the origin of the high-pressure direct injection technology is that what we set out to do many years ago and what we since commercialized and successfully are in the process of demonstrating in real-world applications in many, many fleets around the world is that natural gas engines can absolutely preserve all of the desirable attributes that have made diesel engines the benchmark in heavy-duty transportation and throughout industry that is high power, high torque, high durability, high thermal efficiency, high engine braking for mobile applications such as trucks. There's nothing inherently wrong with the diesel engine, but by changing the fuel, which is exactly what HPDI accomplishes, we can achieve significant improvements in emissions by burning lower carbon, cleaner fuels, natural gas, in particular as well as in most jurisdictions, achieving an operating cost benefit and a total cost of operation benefit, total cost of ownership benefit because in most jurisdictions, natural gas has historically and continues to be a more cost-effective fuel, cheaper on a more -- on an energy equivalent basis. The way that we achieve that is by, frankly, retaining diesel cycle thermodynamics, diesel cycle combustion but changing the fuel. So the heart of the HPDI fuel system has always been the proprietary fuel injector that Westport developed and has commercialized a number of years ago, which injects 2 fuels, a very, very small quantity of diesel fuel to initiate combustion through compression ignition just like in a diesel engine. But the vast majority of the fuel energy is delivered through the same injector in the form of a high-pressure gas. So the proprietary HPDI fuel injector injects 2 fuels: small quantity of diesel, large quantity of gas through a common injector. And that injector has the same physical footprint, the same external dimensions and geometry as the diesel injector that goes into that applicable base engine. And then working upstream from that, we have various other proprietary Westport-designed components related to fuel storage, fuel supply, fuel pressure regulation and then associated control system, hardware and electronics. But the heart of the system is really the fuel injector that again retains all of the performance and efficiency, durability, attributes of a diesel engine by changing the fuel enables significant emissions reductions and in most jurisdictions, significant benefits in total cost of ownership.

Great. David, Westport recently unveiled its hydrogen HPDI fuel system. Can you explain why or why is Westport looking to expand into hydrogen? And then where does it fit into the overall hydrogen value chain?

Yes, sure. So I think we all have some appreciation in the marketplace today of what hydrogen means for our world in the future and even starting today. Basically, if you kind of look back through history, right, we ran the world as humanity on wood for a long time. Then we moved to coal, then we moved to oil. And if you just imagine a future that may not be too far away, and frankly, I think we all recognize, I'd like to get there sooner to go from wood to coal to oil and then to hydrogen as the fuel of the future, hydrogen being a 0 carbon fuel and a really great way to transport energy for mobile applications. Then the question becomes how can we best use that 0 carbon hydrogen of the future in transportation applications. And so we did some work about 18, 24 months ago to analyze -- as a specialist in gaseous fuels to analyze the potential of hydrogen using our HPDI technology. And we quickly concluded that, in fact, it works quite well. And so we set up our test cell, we've got an engine in the test cell, and we ran an engine using our HPDI equipment, the same exact equipment that we have in production today and since 2018 in the European market for commercial trucking. So no hardware changes on the engine side, simply providing hydrogen to that engine with the HPDI system. And we unlocked a great performance result. So the engine ran very, very well immediately with stable idle and able to pull full torque at full power and then demonstrate the efficiency that is the hallmark of the diesel engine. We built upon that by then calibrating it further to unlock more power, more torque and more efficiencies, so on the order of nearly 20% improvement in power and torque and about a 10% improvement in efficiency. And so with this, we're super compelled by what it offers the marketplace. And so we just did a couple of weeks ago in Long Beach, California at the ACT Expo was unveil a truck that -- demonstrator vehicle that we've already towed loads with using hydrogen fuel in our HPDI system. And we're absolutely thrilled to introduce that to the industry. So we see that as a very important way and maybe the best way to use hydrogen for long-haul, heavy-duty trucking. And so it enable a future hydrogen economy, specifically for long-haul, heavy-duty applications. And we're just thrilled to have that demonstrator vehicle that we'll be showing to customers and fleets and government entities around the United States and Canada over the next year.

Great. And then, Scott, just to dig into that a little further. Can you tell us about how does the hydrogen products differ from the existing HPDI 2.0 system? I mean do you need to make modifications to the truck? Or does it need to carry additional space? And then what are you learning from the testing? And what are you planning in terms of trial activities in the field?

Sure. Yes, I can elaborate on some of the things that David touched on. Let me maybe start back at the sort of 24 months ago period that David alluded to, knowing that -- certainly recognizing that the transportation economy clearly needs to decarbonize and recognizing the growing and accelerating shift to hydrogen, we really wanted to start this with our own database position on what are the best ways to utilize hydrogen in heavy-duty transportation applications, in particular, heavy-duty being the applications that are, frankly, a lot more challenging to cost effectively decarbonize through so-called existing 0 carbon technologies such as battery electric vehicles and fuel cell electric vehicles. Heavy-duty vehicles have a lot of packaging, operating range, durability and performance demands that may be very challenging to cost-effectively address with noncombustion technologies. And given that we have a broad history and a broad product range along a variety of mechanisms of using and consuming gaseous fuels, we wanted to take this database approach. So what we started with was analytical modeling, combustion modeling of a variety of different fuel and combustion systems, including a couple of different spark ignition applications, which, again, we are well versed in. It's part of our product line and a significant part of our corporate history. And then, of course, HPDI. And as David said, the results of that modeling clearly showed very compelling benefits in both performance and efficiency and, of course, emissions by using our HPDI system with hydrogen as the primary fuel. As David said, we moved -- based on the compelling results, we then moved into our test labs, our engine dynamometer cells. And we took an existing unmodified HPDI natural gas engine and operated that on hydrogen and very quickly demonstrated and confirmed the very compelling efficiency and performance benefits that we had predicted through modeling. And there are some significant fundamentals to explain why that is the case. The fuel mixing and fuel combustion characteristics of hydrogen lend themselves very, very nicely to calibrating an engine, particularly in a direct-injection compression ignition application such as HPDI, such as a diesel engine. The fundamentals of the hydrogen fuel mixing and hydrogen combustion really unlock some levers for our development engineers to tune the engine for higher power and higher performance -- or higher power and higher efficiency, I should say, relative to natural gas HPDI and in fact, relative to the base diesel engine. So from a performance, efficiency and emissions-reduction perspective, where HPDI with natural gas is already best-in-class, hydrogen HPDI unlocks yet another series of levers to further -- to make hydrogen combustion through HPDI that much more compelling. To put some numbers to some of this, what we've demonstrated across modeling and subsequent measurement data across multiple different engine platforms is thermal efficiency improvements on the order of 5% to 10% increase versus the base diesel engine, which is extremely significant in terms of operating costs. We've also demonstrated 15% to 20% increases in power density, meaning higher capability for peak torque and for rated power relative to the base diesel engine without exceeding or violating any of the mechanical limits for the base engine. So although a preproduction demonstration at this point in time based on our extensive history with developing and validating and then eventually emissions certifying HPDI engines, we're quite confident that what we've demonstrated right now is production capable and production representative. The next work in terms of where we go from here is we are underway on continuing the development of the hydrogen HPDI fuel system, in particular, now turning our focus to the off-engine or chassis-mounted fuel storage and fuel supply system, having largely demonstrated that the existing HPDI architecture and existing HPDI components are well suited to HPDI hydrogen operation for the on-engine portion of the fuel system. A portion of your question was asking about what changes, if any, do we need to make? As David said and as I confirmed, the testing that we've done so far on engine uses, it was from an unmodified engine. It uses the existing components. That's very much a proof of the concept that the HPDI architecture and the fundamental designs of our components are well suited to using hydrogen. Given that hydrogen, of course, is a different fuel with some different design characteristics and some different regulatory certifications that are applicable for the components, there will be some product development work required and subsequent validation and certification. That's typical of any transition to any new fuel. There are natural gas component certification standards globally. There are hydrogen certification components globally. We, as a company, are very familiar with all of them, and we have extensive experience elsewhere in our business migrating natural gas components to hydrogen applications and then validating and certifying them to the applicable standards. So there's engineering product development work to be done. We're well versed at doing that type of work. So we look forward to getting into product development with HPDI. At this stage of the game, we have pre-product HPDI hydrogen demonstration projects underway with multiple different industry stakeholders, some of whom have chosen to keep their name out of this publicly right now, but they are actively collaborating with us. One of them that has chosen to publicly disclose their involvement with us is Scania on our website. Again, to quantify some of these benefits, in collaboration with Scania, we have modeled 52.5% thermal efficiency with hydrogen relative to Scania's well-documented 50% thermal efficiency on their base diesel engine. 50% has long been targeted as sort of a holy grail threshold for the internal combustion engine industry. So it's very impressive that Scania achieved that with their latest and greatest diesel engine. We are beyond excited that we were able to take that very impressive baseline of 50% and significantly exceeded by modeling 52.5% with our HPDI hydrogen. And we're now in the process of gathering real-world data in a test cell that we're quite confident will directionally support that significant increase in thermal efficiency from the latest and greatest next-generation base engine. With that, I'll pause there, and we can move on to your next question.

All right. That was very detailed. That's great. I mean, that was -- it's great to know that you can really piggyback off of a lot of the development work in the extensive testing that the HPDI product went through as you look to the future. David, your HPDI hydrogen product was on display at the Advanced Clean Tech conference in Long Beach earlier this month. Can you give us some feedback in terms of the reaction that you had from the people at the trade show, some of your customers, those in the trucking industry?

Yes, absolutely. So we really did have a great show at ACT in Long Beach week before last. We had an opportunity to, I would say, really turn some heads and open some new discussions with people that have only known Westport as Cummins Westport for a long time. And now they can see through our efforts and the time we spent at ACT, not just who Westport Fuel Systems is but what the opportunity is with our HPDI system in hydrogen. So bringing that technology to the show, the conversations we had with the entire, I'll call it, ecosystem of the -- of our industry was really fantastic. So we are with fleets. We are with fuel suppliers. We are with OEMs, fleets from large to small, by the way. So there are people around the world, specifically in California, for example, struggling with what is the path forward to get to 0 carbon. And for them to realize and understand as we introduced our HPDI with hydrogen to them and what it brings to the marketplace was really, I would say, a head turner. People were coming to us, and then they'd circle around the show floor, and they'd come back to us and do say is it really hydrogen in the internal combustion engine and how efficient and when can I have this? So I would tell you that we were not expected to show up at the show with this kind of technology because that's not what people have traditionally seen us do. And this was really a coming-out party for us, if you will. And the industry from all the players, the fuel suppliers, existing traditional fuels through next-generation gaseous fuels to the fleets and OEMs really was a bit of a surprise and a delight for them.

Great. Maybe just to dig into that a little further. Can you just talk about how the HPDI system compares to some of the other alternative fuel technologies out there, battery electric or fuel cell vehicles?

Yes, for sure. But I think let me start by just kind of establishing the baseline of HPDI versus other technologies for using natural gas and hydrogen. And then I'll come to battery electric and fuel cell. So first of all, and I think this isn't so evident to many people in the industry and certainly in the investing community, but HPDI offers the potential to use gaseous fuels with a significant performance and efficiency advantage versus spark-ignited technology. That is, I would say, far more commonplace. That is spark ignited far more commonplace, certainly in North America. And also in Europe, this is kind of have been well known for a long time, and HPDI is a new player. And with HPDI, we enabled about a 30% improvement in fuel efficiency versus a natural gas spark-ignited engine. And that efficiency advantage, that performance advantage that we have with all the torque, all the power of the diesel engine but the fuel efficiency of diesel engine versus a spark-ignited natural gas engine really sets us apart from those -- that other technology. So with that and moving to hydrogen, we expand that potential. So now if we go to -- you have an even bigger advantage in terms of performance and efficiency. So now if we come to your question about what about battery electric? What about fuel cells? At ACT Expo in Long Beach, there were all sorts of technologies played, including many battery electric vehicles and many fuel cell vehicles. And so there has been for a long time this idea that, that is the way forward. Versus battery electric, I think there is a growing consensus that battery electric and long-haul trucking is too expensive and too heavy. So basically, the batteries are massive. We're talking like 15,000, 20,000 pounds of battery, just tremendous amount of cost. And it really takes away from the utility of that vehicle, right? The long-haul truck is supposed to haul 80,000 pounds. But if you got 20,000 pounds of battery, now it can only hold 60,000 pounds. So we're going to need a lot more trucks if you go battery electric, right? So this is kind of the challenge for better electric trucking. If I compare that to either hydrogen or natural gas HPDI, there's literally no takeaway with respect to the load capacity of the vehicle. So there's no takeaway from the fleet or a truck driver. We expect the utility of the vehicle, the main reason they bought the vehicle. So I think this is #1 relative to the comparison between battery electric and an internal combustion engine with HPDI. With respect to fuel cells, we did a really nice paper last year showing that actually we can have the efficiency with hydrogen HPDI of a fuel cell and yet have a dramatically lower cost equation. So the total cost of ownership of the vehicle is dramatically reduced. By leveraging the existing engine transmission driveline infrastructure and simply applying HPDI with hydrogen to the engine, we can actually have a much more, let's say, useful product and cost-effective product with hydrogen HPDI versus the fuel cell. So we feel like we're in a great competitive position with respect to those competing technologies.

Great. Just a reminder, everyone, if you have questions, you can submit them on the webcast. So we have questions coming. David, could you talk about your existing programs with AVL, TUPY and Scania? And then how does the hydrogen system fit in with those partnerships? And is there a potential for additional partnerships?

Yes. So these companies that you mentioned, AVL, the Austrian engineering company that works with the auto industry globally; TUPY, a leading casting manufacturer headquartered in Brazil; our customer partner, Scania, that makes trucks as part of the TRATON Group, the Volkswagen group of commercial vehicles; and our work now with Cummins on hydrogen HPDI, all focused on hydrogen HPDI. These companies actually are leading the way, right? They are actually engaged with us, and we're working on projects that demonstrate our technologies with them in various forms. Each one of them has kind of a different path. Every customer is a little different as usual, right? And so our work with Scania is actually in our labs. Our work with AVL and TUPY is actually in the labs of AVL in Austria. And our work with Cummins is a study and a technology exchange so they can better understand our technology. Each of the paths is a little different. But these companies all have recognized the potential and the opportunity that we've demonstrated in our labs and now want to prove it for themselves and understand it in more detail by the work that we're doing with each of them. And so all of that is in advance of what we did at ACT Expo just 2 weeks ago. So I expect as we go forward, we'll have more announcements like that, more projects like that, that -- because fundamentally, the world is struggling with how to decarbonize long-haul entity trucking. Battery electric looks too expensive and too heavy. Fuel cells, perhaps the technology of the future and always will be, right? So these kinds of challenges are weighing on truck drivers and fleets and OEMs. And now we've introduced hydrogen HPDI with Scania, AVL, TUPY and Cummins, they're investigating now, and we expect through our work going on that we'll have more doing the same as time progresses.

Okay. Great. Another question. Coming out of the Q1 results and then the unveiling at the ACT Expo, what are the biggest questions you're hearing from investors? And then what do you think investors are missing or overlooking in regards to the Westport Fuel Systems story?

So I think fundamentally, kind of what's transpired over the last 6 months, if you will, for our company is really the coming to understand the fact that Cummins Westport was a chapter in our company's history and successful during that chapter. But now we're on to a new chapter, where our focus is 100% on HPDI for heavy-duty, long-haul trucking with the opportunity to go from fossil natural gas to biogas to 0 carbon hydrogen all with HPDI. And so we have a really tremendous future ahead of us. I think there is -- this, therefore, is really weighed on the stock. What's going to happen with Cummins Westport now it's done? So what's the future? And so these kinds of things that we're doing today with you, Graham, to help the investors understand what that path forward is really important to us to help us -- help the investor community understand that Westport, Westport Fuel Systems is a global company with a book of business that's $300 million and growing with tremendous potential because of the technologies that are in our company, Westport Fuel Systems and what that means to the industry around the world. So as an example, we're talking mostly about HPDI today, but our business in India is really exciting from the perspective of that market is transforming itself from a diesel petrol market like what many markets around the world to a petrol gaseous fuel natural gas. And so the natural gas products are taking the place of diesel in a very important way. We're talking about market sales mix about 40% of natural gas in both passenger cars and commercial vehicles going forward. So this then becomes on a sales mix basis the highest sales mix in the world for natural gas vehicles going forward. So really, really important developments in that country, for example, that complements and is in addition to the HPDI growth trajectory we're on, starting in Europe and then expanding to other markets.

Okay. Great. And then finally, what catalysts should investors be looking for throughout 2022 and beyond?

I think the important thing that the investors are going to see are those announcements of results and announcements of additional projects that we're doing with customers around the world. Underlying that, which will also become, let's say, more visible as time goes on is the continued growth of HPDI with our existing launch partner in Europe. So this is -- it has been a good trajectory for us. We're still not to the volume that we need in order to make the business a profitable business. Nonetheless, that volumes on the horizon is getting closer and closer. 2025 is not so far away. And 2025 is a very important year for Europe and the commercial trucking industry in Europe because this is the year that the CO2 standards come into effect requiring a 15% reduction in CO2. And that challenge, that requirement is placed on the OEMs. It must reduce their fleet average CO2 by 15% by 2025 to avoid financial penalties on each and every vehicle they sell. So as an example, if they don't improve their CO2 performance, right, and just to put a number on it, HPDI enables a 20% reduction. So it's a really important potential to leverage HPDI to reduce their CO2. But if they don't reduce that CO2, if it were flat, no improvement whatsoever, they would end up paying EUR 38,000 per truck of penalty starting in 2025. So this really is an important date on the horizon for us. As we've talked about, we're already in the market with HPDI, and HPDI is taking share from both spark-ignited natural gas engines and diesel engines. So the share is growing, the volume is growing. So we feel like we're very well positioned. And now layering in hydrogen, we have this trajectory that has decades ahead of us with respect to HPDI and going all the way to 0 carbon hydrogen and long-haul heavy-duty trucking.

Well, great. Well, that brings us up to about 30 past the hour. So that's all the time we have right now. But Scott and David, thank you very much. And again, thank you, everyone, for joining us today, and we look forward to seeing you on the future fireside chat. Thank you very much, everyone.

Thank you.

Thanks, Graham. Thanks, everybody.