Westport Fuel Systems Inc. (WPRT) Q4 2020 Earnings Report, Transcript and Summary

Welcome to the Westport Fuel Systems Fourth Quarter and Full Year Fiscal 2020 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 Christine Marks, Westport's Investor Relations representative. Please go ahead.

Thank you, and good morning, everyone. Welcome to Westport Fuel Systems fourth quarter and year-end 2020 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.

Good morning, everyone. Thanks for joining our conference call to review Westport Fuel Systems 2020 results for the fourth quarter and the full year. This is David Johnson speaking. With me on the line today is Richard Orazietti. Clearly, 2020 was a year filled with challenges. The COVID-19 pandemic challenged the global economy and created headwinds for our business. But there were also unexpected opportunities, and our global team demonstrated outstanding resilience in responding to both the challenges and the opportunities. In spite of the unprecedented events of 2020 it's gratifying to see that the world's demand for clean, low carbon, cost-effective transportation hasn't wavered. That continuing demand helped us to finish the year strong. Looking back on the past year, the impact of the pandemic was most severe in Q2 when we and our customers had to pause production due to the crisis. Q3 saw some recovery and the strengthening continued in Q4, lifting us to a record quarterly revenue. For the year, revenue was down 17% from our record 2019 full year revenue. Overall, nearly 90% of that decline was attributed to the COVID-related shutdowns in the second quarter. However, our Q4 record revenue was a 13% increase versus the same quarter in 2019, driven by a 32% increase in OEM revenue. Looking forward, we're poised for continued positive momentum in 2021, albeit somewhat tempered in the near-term by the lingering effects of the ongoing pandemic and by the global supply chain challenges the automotive industry is facing right now. Aside from the COVID-19 challenges, I'm pleased to report that we advanced each 1 of our 2020 business objectives, including especially sales growth in key market segments and geographies. And overall, we've strengthened the business with balance sheet improvements and cost reductions. In November, we announced new product development work with our current OEM partner to apply HPDI 2.0 to an updated base engine platform that take effect in 2020, the benefits of our HPDI solutions. Our targets for 2020 and for future growth include progress in China, where our joint venture with Weichai Power secured certification for the WP12 natural gas engine powered by HPDI 2.0. As 1 of the largest suppliers of natural gas engines in China, our JV currently supplies sparked natural gas engines to leading Chinese commercial vehicle OEMs, and they, in turn, serve the largest natural gas trucking market in the world. The WP12 HPDI engine certification sets us up to serve that large and growing market as vehicle OEMs complete certifications for their vehicle offerings with our engines. We've also seen growth in India. In 2020, we combined our business with our JV with UNO MINDA to better serve the market and to realize cost efficiencies. We can now offer a broader range of products to this growing CNG market. And also in 2020, we commenced work on developing hydrogen with HPDI. I'll cover that later in more detail. As I said earlier, Q4 sales volumes rebounded very strongly to nearly $84 million. In particular, our heavy-duty market segment saw very encouraging new sales growth as fleets in the European trucking industry continue to gain confidence as they realize significant operational cost savings as well as carbon reduction benefits made possible with natural gas filled HPDI solutions. We finished the year with an HPDI sales rate almost double compared to 2019, and we're on pace for continued growth in 2021. The net income grew to $4.1 million versus $3.4 million in the fourth quarter of 2019. The work we did earlier in the year to shore up our balance sheet, working with our lenders to secure lower cost of capital and access government subsidies positioned us well to navigate 2020, and we finished the quarter with $64 million in cash and cash equivalents. Some growth trends in transportation underpin our confidence in the coming growth opportunities. And perhaps the easiest to understand is the heavy-duty trucking business, where investment decisions are pure business decisions and will fuel price differentials of the pump are driving sales and market share gains today. For heavy-duty long-haul trucks, weight is absolutely a constraint. The other big constraint is cost. Both weight and costs are big disadvantages for the adoption of battery-elective technology and heavy-duty trucking. Based on physics and economics, it's perfectly clear that the lightest weight vehicles that go the fewest miles and return to home have the potential to transition to battery electric, particularly as global infrastructure and development improves. In contrast, heavy-duty long-haul trucks are least likely or hardest to power with batteries. In general, about half all of all trucks sold around the world are heavy-duty long-haul trucks. As populations grow and economic development continues, we'll need to move more freight. The number of trucks will grow and the performance and cost effectiveness of lower carbon solutions will become increasingly critical. In Europe, the market share of alternative fuel trucks increased nearly 40% in 2020, A Stark contrast to the overall commercial vehicle market, which declined markedly due to COVID-19. Governments have a critical role to respond to the challenges of climate change and urban air quality, and at the same time, it sees the opportunity to start a green path to reach their economic development goals. We already see strong regulatory support for transportation, carbon production in Europe, India, China and in parts of the U.S. Governments that properly set the table with economic and regulatory structures, focused on goal achievement can unleash and harness market forces to lead our industry on a green path that can scale. I believe the inability of electric technologies to deliver affordable, effective solutions for heavy-duty long-haul trucking in markets around the world, combined with the urgent need to decarbonize, will drive the growth of HPDI systems. HPDI is ready, in production, for sale and proven right now, no waiting. The growth in our revenues demonstrates the word has gotten out. HPDI with natural gas and renewable natural gas works, and it works well. It's available now, and it's generating operating cost savings and helping fleet to achieve their carbon reduction targets. Fleets vote with their dollars. Take note of what's happening in Europe right now with natural gas and specifically HPDI. China is next. Light-duty OEM sales and our independent aftermarket revenue were slower to rebound, with revenue for the independent aftermarket segment falling 15% relative to the same period last year. In particular, customer demand in Western Europe was impacted due to COVID-19. At this time, we expect to return to 2019 levels with modest growth, thanks to regulatory support in places like Egypt and India and other cost-sensitive markets like Turkey, Russia and China. I'll use India as an example. India's regulatory commitment to emissions reductions from transportation has not wavered through the COVID-19 pandemic. The stringent Bharat Stage VI emission standards came into effect in April 2020 during the lockdown. At the same time, the government has committed to building 1,000 LNG stations in the next 3 years and is doubling its commitment to natural gas as part of its energy mix. Our largest customer in India, Maruti Suzuki responded by discontinuing their diesel product lines, which was 30% of their business, a significant commitment to embrace alternative fuels, specifically natural gas. We have seen an uptick for natural gas products across the full suite of offerings in India from the ubiquitous 3-wheelers up to the heaviest commercial vehicles. Combined with growth in infrastructure and highly cost-conscious consumers who can access a 30% to 50% price savings at the pump for natural gas versus petrol, all of these are excellent market conditions for the success of our products. And in heavy-duty trucking, where fleets replace trucks every 3 to 5 years. There simply is no other viable, cost competitive alternative that can deliver all of the benefits that HPDI does today. Natural gas and renewable natural gas infrastructure continued to grow also in Europe, now with nearly 400 LNG stations and 4,000 CNG stations. And now we also see investments being made to create a hydrogen refueling infrastructure. Hydrogen use with HPDI is extremely compelling with near zero greenhouse gas emissions and much lower cost on fuel cell or battery electric trucks, particularly in heavy-duty applications. This provides a pathway from fossil LNG to bio LNG to green hydrogen. So before I turn the call over to Richard to review financial results, a few highlights of our progress with hydrogen. Although it's rather modest today in the scope of our total revenue, our existing GFI-branded hydrogen business, supplying components to Plug Power, Ballard and others, grew by 75% in 2020. The according to The Hydrogen Council, the total addressable market for hydrogen is about $150 billion, while costs are producing green hydrogen have fallen 50% between 2015 and 2020. So far, hydrogen is produced close to where it's used, and there is limited dedicated transportation infrastructure today. There are only about 5,000 kilometers of hydrogen pipelines around the world in 2016 and compare this with over 3 million kilometers for natural gas. In 2020, worldwide, there were less than 500 hydrogen refueling stations, a good start. Compare this with existing and growth plans for natural gas infrastructure in Europe, India and China, as I mentioned earlier. There is work to be done with hydrogen. But support for hydrogen infrastructure development is growing, with commitments announced in China, Japan and Germany. Hydrogen appears to be well suited for heavy-duty trucking applications where ranges over 400 kilometers are common and fast filling is important for the operator. A few weeks ago, we published a white paper with AVL, sharing our initial modeling for thermal efficiency and total cost of ownership. We are confident that the high efficiency, hydrogen internal combustion engines have the potential to financially outperform fuel cell EVs in terms of total cost of ownership and also lowers the cost of CO2 avoidance, which is especially relevant in jurisdictions with carbon taxes and other penalties for high emissions. Earlier we announced successful first trials of a hydrogen fueled internal combustion engine with HPDI. Our test cell in Vancouver ran an engine at peak torque and rated power, combustion was stable and controllable. Initial test results are highly encouraging and confirmed that HPDI with hydrogen in an internal combustion engine is comparable in efficiency to fuel cells and heavy-duty applications. With this early success of fueling our enthusiasm, we'll continue to collect more data. Technical results we shared and reviewed by independent experts at the upcoming Vienna Motor Symposium late next month. We also announced a project with Scania to commence, development work on their internal combustion engine fueled by hydrogen. We're designing and preparing for that testing program, which we expect to commence in the fourth quarter. According to a recent research report by Morgan Stanley, if hydrogen truck sales account for just 10% of global sales by 2030, that would equate to per annum growth of 30% in the next 5 years alone. And provide a significant runway of growth over the next decade. Capturing just a fraction of this growth is meaningful for Westport Fuel Systems. The potential for OEMs and others to avoid new and significant investments required to develop the manufacture fuel cells, electric motors and batteries is incredibly exciting and compelling. Other high load applications like mining, green and rail have come to rely on the efficiency, power, durability and reliability of diesel engines. And there is no other alternative that offers the same potential to leverage established supply chains, manufacturing investment and infrastructure and economies of scale. Now let me turn it over to Richard to review a few of our financial results.

Thank you, David. As David mentioned, our record revenues were higher, 13% year-over-year due to strong sales volumes from HPDI systems and a 7% increase in the euro to U.S. dollar exchange rate. We also saw a strong recovery in our light-duty OEM revenues during the quarter, an increase of 44% over the third quarter of 2020 due to sales in India and Russia. The strength of sales activity in the quarter was partially offset by a large onetime contractual price reductions in our contract with our initial launch partner in the fourth quarter of 2019 and lower year-over-year independent aftermarket revenues still recovering from the impact of COVID-19 on sales volumes. Gross margin decreased mainly due to lower margins realized year-over-year on HPDI systems. Lower HPDI engineering services and lower independent aftermarket sales, partially offset by the large increase in HPDI sales volumes. Net income benefited from $2.7 million in higher income from a strong quarter in our CWI joint venture due to lower operating expenses. And also a $5.3 million unrealized foreign exchange gain compared to $2.6 million in the prior year. We generated higher year-over-year adjusted EBITDA of $8.1 million, bolstered by strong quarterly performance from CWI and lower operating expenses. Our adjusted operating cash flow, which includes the dividends received from CWI, decreased year-over-year due to increased working capital resulting from a buildup of receivables on higher sales volumes and inventory for our heavy-duty OEM business. Revenues were lower year-over-year due to the pandemic's impact on independent aftermarket light-duty OEM, a delayed OEM since the pandemic outbreak. This was partially offset by strong sales growth in the second half of 2020 in our heavy-duty OEM business unit selling the HPDI systems to our initial launch partner. This is net of price concessions and lower engineering services work, which all had a direct impact on gross margins. There was a further impact to gross margins of a $3.2 million charge taken on 2 pressure release device field service actions as well. Equity income from CWI decreased slightly in 2020 and mainly due to the impact of COVID-19 and the related OEM shutdowns in the first half of the year. Despite a challenging year, a net loss of $7.4 million was mitigated from government subsidies of $6.1 million, cost reductions from austerity measures and a $4.3 million unrealized foreign exchange gain. Net income in 2019 included a $3.3 million onetime gain and a $2.5 million unrealized foreign exchange gain. Operating cash flow and adjusted operating cash flow were significantly below 2019 year-over-year due to the impact of COVID-19. Multiple financing efforts, government support and austerity measures mitigated this impact to secure the liquidity of Westport Fuel Systems. Overall, EBITDA continues to be positive. Notwithstanding the many challenges we faced in the first half of 2020, the positive trend in our EBITDA and adjusted EBITDA reflects the commitment of management to deliver sustainable growth. Our product portfolio and the performance of our team continues to strengthen, and I'm encouraged by our progress on the pathway to sustainable profitability. Now turning to our business segments. OEM revenue for the 3 months and year ended December 31, 2020, and was $58.8 million and $149.6 million compared to $44.7 million and $164.7 million for the same periods in 2019. The revenue growth in the current quarter largely reflected an increase in sales volumes in the heavy-duty OEM business from our initial launch partner, combined with a 7% increase in the euro to U.S. dollar exchange rate that I mentioned. This was partially offset by the price reductions of our HPDI product. The year-over-year decrease in OEM revenue for the full year 2020 is mainly due to the impact of planned shutdowns in response to the COVID-19 pandemic in the first half of the year, combined with lower light-duty OEM sales to our German and Russian OEM partners. OEM gross margin increased by $1.3 million to $6.6 million or 11% of revenue for the fourth quarter 2020, which compared to $5.3 million or 12% of revenue for the fourth quarter 2019. The current quarter benefited from volume discounts from HPDI component suppliers achieved at the end of the year and recognized during the quarter. Turning to our independent aftermarket business. Independent aftermarket revenue for the fourth quarter of 2020 was $25.1 million and $102.9 million for the full year 2020 compared with $29.6 million and $140.6 million for the same prior year periods. The year-over-year decline in revenue for the IAM business segment are primarily due to the continuing impact of COVID-19 on customer demand in Western Europe and the related shutdowns in the second quarter of 2020, partially offset by the stronger euro to U.S. dollar exchange rate. Independent aftermarket gross margin decreased by $2.1 million to $6.4 million or 25% of revenue for the current quarter compared to $8.5 million or 29% of revenue for the same period in 2019. The decrease in gross margin and gross margin percentage was due to lower sales caused by the impact of COVID-19 on customer demand in the higher-margin markets of Western Europe. Now turning to our CWI joint venture. Revenue from our CWI joint venture for the fourth quarter decreased by $6.5 million to $96 million or 6% versus the same period last year due to lower engine sales during the quarter. Unit sales were lower for full year 2020 compared to the prior year, reflecting the impact of OEM factory shutdowns in April and May in response to the COVID-19 pandemic. Despite the lower revenues, gross margin for the fourth quarter 2020 was slightly higher year-over-year at $28.5 million or 30% of revenue. The increase in gross margin and gross margin percentage resulted primarily from product mix, which more than offset lower revenues in the current year quarter. Net income for the fourth quarter 2020 increased by $5.3 million to $18.8 million or 39% higher over the same period last year. Primarily reflecting lower operating expenses, combined with the increase in gross margin. Westport Fuel Systems share of CWI's net income for the fourth quarter 2020 increased to $9.4 million from $6.7 million in the same period last year. Now turning to our balance sheet and liquidity. As mentioned earlier, we have made significant strides to secure the liquidity of Westport Fuel Systems through the past year, which included the restructuring of our convertible debt held by the Cartesian Group. Due to the significant appreciation a Westport Fuel Systems share price. The Cartesian Group converted $7.5 million of the $10 million in debt outstanding, $5 million in the fourth quarter of 2020 and $2.5 million in the first quarter of 2021. As part of our efforts to improve our liquidity and funding, we are also actively managing our debt profile to align that to our long-term capital investment needs. And discussing with our lenders about modifying or renewing some of our term loans to extend terms and improve borrowing rates based on our improving credit profile. Under the market program that was launched after we released the third quarter results last year, we issued 5 million shares at an average price of $5.48 for net proceeds of $27 million equity from the period of November 2020 to January 2021. This equity raise has significantly ameliorated the liquidity of the company to operate as a going concern in the near-term and provides a buffer against the continuing challenges of COVID-19. Recently, we have issued a preliminary base shelf prospectus to issue shares from time to time, during the 25-month period that this prospectus is effective, up to $400 million. Due to the outlook of significant growth of our HPDI sales volumes with our initial launch partner and with Weichai, there will be a need for investment to augment production capacity as well as continued investment in the evolution of our technology and potential expansion of the application of the technology and other industry verticals beyond on-road transportation. We are also excited about the potential industrial and clean energy benefits from applying our HPDI technology in an internal combustion engine using hydrogen. Based on our current and long-term prospects, we anticipate additional investments in these opportunities that potentially can create shareholder value and benefits for our current and potential customers. With that, I turn it back to you, David.

Thank you, Richard. To recap, I'm immensely proud of our team and the substantial progress we made on our business plan throughout 2020 despite COVID-19. In 2021, our focus will be on continued growth at scale in key markets. For HPDI, that means Europe, China and then North America. And for our light-duty business, profitable growth through the aftermarket and OEM channels in markets like Turkey, Russia, Egypt, India, and other cost-sensitive markets where our products resonate strongly that needs to deliver affordable transportation and reduce emissions. The market fundamentals are in place. Societal expectations and regulatory requirements, demand response to the need for clean, cost-effective carbon-reducing transportation and our products provide that response. They're developed, validated in production our efforts as well as innovation as Richard said, we think it's a good indicator that at the current rate of growth for HPDI and the heavy-duty OEM business will lead to expand production capacity and also fund growth potential of emerging technologies such as hydrogen HPDI. I'm confident in our team, and we're committed to delivering value for our customers and shareholders. With that, I'd like to turn it back to the operator for your questions.

[Operator Instructions] This question comes from Eric Stine of Craig-Hallum.

So just wondering if you can start on hydrogen. You've had a pretty busy start to the year. I mean, clearly, this started in 2020, but in terms of what you've shared publicly in the Scania announcement. Just curious what that has meant for your development pipeline. I know you've got a number of potential partners looking at LNG, but giving them the additional path to hydrogen. Just curious what that's meant.

Yes. Thanks for the question, Eric. I think it's a really important dynamic for us because in the marketplace, there are customers, there are OEMs out there who thought, let's skip it and go straight to hydrogen. And I think now seeing that actually HPDI with hydrogen is not only a good solution, but perhaps a far better solution, 1 that enables them to reuse all their industrial complex that's already built. All the engine plants, all the transmission plants all that capability and know-how they have with respect to internal combustion engines can now be used with hydrogen based on our initial test results. Of course, there's work for us to do. But I think companies and OEMs that we work with are technically focused and engineering driven in terms of products, and the test results are very, very strong. I expect a further bounce when we get through a deal, all the test results that the symposium late next month. So it's, I think, a very important dynamic for us and changes the positioning of our product as a long-term viable zero carbon product for transportation and long-haul specifically.

Got it. And then maybe just sticking with HPDI and the current offering with your current partner, well, I guess, #1, I know you don't give out units, but anything you can share? I mean it seemed if I'm trying to back into some kind of a number. It seems like it was -- you did see sequential growth in the quarter. So maybe if you could confirm that? And then maybe just talk about with the baseline being set last July 1, I mean, how much has that been a part of the growth in addition to, obviously, fleets just starting to roll out more units?

Yes. I think there's a whole bunch of dynamics that play out there, are playing out and will continue to play out. And 1 of them is the regulation. Another 1 is, I would say, normal fleet adoption cycle with respect to new technology like HPDI is for commercial trucking. What we saw, clearly, we shut down and our customers shut down in Q2, and that included our lead HPDI customer in Europe. And that was a very slow and difficult time for us. But when Q3 started up and factories restarted. I think there's a clear picture, recognizing that a 13% lower revenues in Q3 versus 2019 and 13% higher revenues in Q4. And versus 2019. So I think this kind of trend of 13% lower, 30% higher, gives you a flavor for what was happening. And as we mentioned in our discussion, that call -- or that number was really driven by our OEM business. So with that, I think you can kind of, as you say, back into some analysis, but as you say, we don't talk about the details of our volumes unfortunately.

Okay. Got it. Fair enough. Maybe last 1 for me. You have talked about the investment. And it sounds like it's both some internal, but also doing some -- or some steps within the supply chain? I mean, is that -- should we take that as securing more capacity for injectors? Is it more on the tank side? I mean, maybe just dig into the -- into kind of all the things that you're referencing there, if you could?

Yes. Of course, we sell a complete system from the tank to the injector and some electronics along the line. We have capacity challenges in various parts of the system. Injector is a big part of it for sure. We use 6 in every engine, of course. So that is -- we're excited about this challenge to our business to say, "Hey, you need to grow your capacity to respond to demand.” And thinking that at this point in time, we're servicing 1 customer in 1 market of the world and the potential for growth with respect to the Chinese market is really tremendous. We've talked about that this is already in the world the largest natural gas trucking market. And the infrastructure there is built out. We are, through our JV, the leading manufacturer of natural gas engines for commercial vehicles. And those are spark-ignited engines. And so when you bring the superior product of HPDI, which improves the economics for the operator, reduces the carbon footprint and we've already developed and validated in the European market. So we're looking forward to that launch and the volume curve that comes along with that. So we will be investing. We are investing in expanding that capacity and we think that's something that we've been looking forward to for some time and are glad the time has come.

Our next question comes from Colin Rusch of Oppenheimer & Company.

In China, can you just speak to the expected cadence of the ramp and what that might do to gross margins as you guys scale up from reasonably low volumes?

Yes. The -- I think the speculating and forecasting the ramp is very challenging, but I do expect that we'll be able to witness that this year and hopefully soon. Basically, we have this opportunity with our JV to supply all the OEMs in China. We have a unique product that should be appealing to many OEMs in China. That differs from our European market where we have just the 1 OEM, and it's a vehicle OEM. And so that dynamic is different. And then it's also the largest market. So I do think -- and we're going into it with product that's had multiple years of experience in Europe. So there's more confidence globally in our industry around industry, around the product. So I think we can expect a steeper curve but yet at the same time, it's still a launch curve. So not a lot of specificity there for you, but I think it's important for us, and it is factoring into our equations with respect to growing our capacity to support that expected demand. In terms of margins, I won't make any specific comments at this point in time, but the key ingredient for us is to grow the volume to get the economies of scale that will improve our margins and launching in China is a very important part of that equation for us.

Okay. And then can you just give us a state of the state on how you're thinking about the medium-duty market. Certainly, there's a lot going on all across the different class of vehicles. But as you have the potential to drive both natural gas and hydrogen, it seems there's probably an opportunity for you to creep into some different vehicle designs as you go forward. So just wondering where you're at with that opportunity.

Yes. The medium-duty market is, I'll say, 2 things, more fragmented, and I'll say more economically challenged in terms of -- in order for the economics to work for or any fuel based product like ours where we're saving money every mile you drive, the more you drive the more mass you carry, the quicker you get your payback. So that's where in the medium-duty market, it is more challenging. There's more diversity of applications, which don't go very far at all and some of which approach kind of, I don't know, half the distance of long-haul. So quite a significant reduction. They also use the vehicles longer, tend to have longer cycles for their turning over the fleet. So I do think there are opportunities there. Clearly, that's on our radar. But I think actually, with HPDI, we could see the opportunity to move in the other direction towards mining and rail and other applications that are kind of bigger engines and really see excellent economics there with HPDI.

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

Just following up on the European market. Maybe if you could give some more color in terms of the demand drivers there. Are you seeing this -- any RNG activity in that market? Or is this sort of a cost savings-driven market, maybe just a sense of what the demand drivers are in that market?

Yes. I think for sure -- okay. So we have just to be very clear, right? It's still trucking. So the economics are the supreme ingredient, I'll say, after you’re confident in the technology and the products to deliver the reliability, durability that the truck fleets expect. If you can't deliver their freight, it doesn't matter how efficient it is or how clean it is. So that's #1. #2 is the economics. And then I would say, in Europe, especially, there is a tremendous societal pressure and momentum with respect to greening transportation. And this works for us, both on the front of our current product with LNG as well as the potential for that product to respond to zero carbon hydrogen, green hydrogen in the future. So I think those dynamics are very much in our favor, and we're really happy to be with our partner in Europe and to have launched when we did and be able to ride this pressure in the marketplace and to do it on the basis of a great product. That delivers for the fleets and saves the money.

Good. And then on the capacity additions you're thinking about, could you give us a sense of the scaling there? Is it a doubling, tripling, kind of multiple of current capacity? Or how do you sort of see that overall capacity addition playing out in the next year or so?

Yes. It's a really important parameter to manage for any supplier is to match your capacity with your demand as closely as possible. We don't want to be running any part of our manufacturing system or our suppliers manufactured system at 10% of capacity. And we also don't want to run into a bottleneck then we can't supply the demand that occurs. So that's the general equation. As we look at it, we are expecting multiples of growth because right now, we're moving from 1 customer in 1 market to 2 customers or maybe 3 or 4, when you think about the vehicle OEMs in China that we'll be able to serve. And so we're making those plans carefully. But there's also some challenge. So I think you can imagine that we'll be leaning forward a bit on capacity so that we can serve every unit of demand that eventually has come to us in the near term.

Our next question comes from Amit Dayal of H.C. Wainwright.

With respect to cadence of revenues in 2021, how should we think about the quarterly revenue that may play out given that you are seeing recovery in your segments, your HPDI is getting traction, but at the same time, there are some supply chain challenges that are also in the market right now? So any color on how to model for the next 4 quarters would be helpful.

Yes. Absolutely, glad to kind of try to paint the picture a little bit of what we expect. First of all, we are still dealing with some COVID situations around the world. We're fully recognizing how wonderful the vaccines are, and we expect those to have an effect. But in the meantime, our factories in Italy, for example, and our customers around those factories and so forth and our distributors, they're in orange and red zones. And so that COVID impact is still with us. And we see that affecting our light-duty and our aftermarket business. On the heavy-duty side, we've seen a bit more stabilization, and you can see that the growth is coming through in kind of the fourth quarter. And we expect a good year for HPDI going forward. And then maybe the other thing that's important to mention is that, as you've heard from in the media, there are supply side challenges that all the OEMs are facing. And that includes us, and we're managing that on a daily basis to try and make sure that we can meet our customers' demand. But I think there is risk that, that could impact us and constrain us in some days, some weeks, hopefully not any month from achieving everything we want to achieve in 2021. I think we aren't back to full normal. And so kind of the normal seasonality you might see and expect it will be still perturbed by cope this year? And I think those are kind of the factors, at least that are on my mind with respect to the market outlook for 2021.

That's helpful. And then Richard talked about some concessions on the margin front that may have been provided in the fourth quarter. Are these behind the company? And do we see gross margins bouncing back in 2021 relative to the fourth quarter?

Yes. The price reductions were made in the fourth quarter of 2019, and they were significant, and we saw sort of muted sort of the growth that we had, especially in the second half, going into the new year. There was a question with Weichai. We can't go into specific contracts, but there is -- we'll call that a little bit of near-term gross margin pressure that then yields to better economics as more volume starts ramping up and the numbers start getting significant, but we have contractual price savings with our supplier base.

Okay. Just 1 last one, I guess, then. With respect to the China milestones for 2021, can you share any key highlights that we should be looking for?

Yes. In China, I think we've made good progress. Of course, we had substantial delays through 2020 with COVID and other challenges with the certifications. But we expect to see the certification of the vehicle side shortly. And then thereafter, so through this year, start the project -- process of launch and production and sales. So we're looking forward to that, but I don't have any more specifics to offer you than that today.

Our next question comes from Thomas Boyes of Cowen & Company.

Most have been asked, but I wanted to maybe just follow-up on the question about China just because, obviously, you're going -- the certification through the Weichai accomplished. The OEM level, how long do those tests usually take on their side? Is it different for everyone who's testing the engine? Or is most of them completed in, say, a quarter or something like that?

Yes. So I think the process is not a short process, but we are aware that the there are cases with specific OEMs where the testing is complete. So then it's just a matter of, let's say, getting the paperwork through the officials and having them bless it and issue the certification. And I can't comment on those timelines. It's challenging for us to see and it's also challenging for the -- for our JV and the OEMs to see into that process. But the testing is done at least in 1 [case].

Perfect. And then it was nice to see. I think as Amazon had ordered around 700 vehicles through the JV with Cummins. I was just wondering if you could talk maybe how that business is secured and how you're seeing potential discussions with other customers, just obviously given the rise of e-commerce from the pandemic, how that market has been.

Yes. I think it was a real promising report from Reuters about that order. Because I think what it says is that the fleets, large fleets in North America consider and according to the report are purchasing natural gas product to green their fleet. The economics in North America -- because our fuel prices are relatively low and the fuel price differential is not so great, the economics are more challenging and not as compelling. Nonetheless, you have a big fleet, whether it's UPS, they made their announcement previously. And now this report from Reuters about what Amazon is doing. These are really good signs that fleets are taking their responsibility with respect to carbon emissions very seriously and taking action and recognizing that natural gas is an important part and an important step, and it works for them in their fleet operations, where, again, even for Amazon, UPS or any other fleet in North America, the 1 thing is get the freight there on schedule. And don't pass up capability and reliability to try and get to low-cost or green. And so I'm real compelled and really excited about the opportunities in North America, and we look forward to the chance to bring HPDI to North America and go a step further than you can with this market for natural gas engine.

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

Thank you, operator, and thank you, everyone, for joining us today. If you do have any follow-up questions, please feel free to reach out to us at the Westport investor Relations team hotline, and thanks again so much for your interest in Westport Fuel Systems.

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