Westport Fuel Systems Inc. (WPRT) Q2 2021 Earnings Report, Transcript and Summary

Welcome to the Westport Fuel Systems Second Quarter 2021 Results Conference Call. As a reminder all participants are in listen-only mode and the conference is being recorded. [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 second quarter 2021 conference call, which is being held to coincide with the press release containing Westport Fuel Systems financial results that was distributed yesterday. On today's call, speaking on behalf of Westport Fuel Systems is Chief Executive Officer, David Johnson; and Chief Financial Officer, Richard Orazietti. 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 these 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 you, David.

Thanks, Christine. Good morning, everyone. Thanks for joining us to review Westport Fuel Systems results for the second quarter of 2021. This is David Johnson speaking. Richard Orazietti is also on the line with me today. I'm speaking to you from our headquarters in Vancouver, British Columbia, which has experienced record-setting temperatures this summer and rampant forest fires that have claimed lives and devastated homes and families. Beautiful British Columbia isn't as beautiful is meant to be. And we aren't alone flooding and other extreme weather events have affected people around the world in Europe, Brazil, India and China, just to name a few. The climate crisis has never been more evident and the need for action from every sector of society is increasingly urgent. As a society, we really aren't having enough success in the face of this epic environmental challenge. Meanwhile, society's needs for transportation continues to increase, but the earth and humanity urgently need transportation will be much, much cleaner. That means each vehicle must be cleaner and we need to produce, sell and drive those cleaner vehicles. We must dramatically shift the mix of what we drive to clean transportation technologies. Scale is critical. And to be crystal clear, the so-called scale we're talking about here, is 100 million new cars and trucks that are produced and sold and put into use each year globally. And it's also the 1.4 billion vehicles that are already on our roads today. And so to achieve scale on a global basis, we need clean transportation to also be affordable. Governments can't incentivize us to scale. California and the United States have been trying for decades, Europe is trying now. The U.S. Federal EV incentives of $7,500 per vehicle for the first 200,000 units sold by each manufacturer were a substantial incentive. Consider that just 3 major OEMs making and selling a combined 600,000 federally subsidized battery electric vehicles cost U.S. taxpayers $4.5 billion. And yet, sales are so far from significant in global automotive terms. Of those 1.4 billion vehicles on our roads today, battery electric vehicles are not even 1%. In the Netherlands, we have another recent example, Tesla's market share in the Netherlands was nearly 7% in 2019. So far this year, Tesla's Dutch market share is less than 1%. A precipitous fall, incentive sell away and so did sales. Affordability doesn't just matter. Affordability is the key. It's the key ingredient in the other kind of sustainability that is economic sustainability. Slightly obscured by headlines and article after article about the future EVs and fuel cells is the growing success of Westport Fuel Systems right now. Our business is growing because our products are available now, they're affordable now, and they're effective at reducing CO2 emissions now. And with the increasing availability of renewable fuels, including the potential of green hydrogen, our path forward is clear. We're making a difference today and our future contributions will be critical to delivering the global response to our environmental challenges. Our HPDI business continues to see strong growth in Europe. Today, Europe is our main market. And with there, we see the combined impact of growing infrastructure, fuel prices that support increased use of clean fuels and are available now products. In Europe today, low carbon gastrous fuels are less expensive than high carbon gasoline and diesel, and these deals are readily available from a large and growing infrastructure. In Europe today, there are more than 40,000 LPG stations, more than 4,000 CNG stations, and there's more than 400 LNG stations and the station counts are continuing to increase. You can find great data at NGVA Europe's website as well as from other trustworthy resources. Other markets are on a similar path. China is leading the way. India and Africa are following Europe's and China's lead and North America holds great potential. Westport Fuel systems is well positioned. Our goals are significant and we're on track despite COVID. We're seeing fleets adopting cleaner fuels and seeking out viable solutions that dramatically reduce carbon emissions. We offer those solutions today and the market is increasingly recognizing our solutions deliver. They're clean, they perform and they're affordable. So, while we're pleased with the recovery in our forward-looking growth trajectory, all of us are still looking to live with COVID and the COVID-induced supply chain disruptions that continue to ripple through our industry and marketplace. Semiconductor supply shortages remain a headwind for the automotive industry, including our business. While we anticipate that the microchip supply chain disruptions will persist into 2022, we do expect an improving trend in the second half of this year. I'd like to draw your attention to a few highlights in the second quarter and provide a few market insights, then Richard will take you through a more detailed review of our Q2 financial performance. We had record revenues in Q2, up 135% compared to the same period in 2020, and the recovery trend sequentially over several quarters is encouraging, up 10% this quarter versus the first quarter of 2021 and up 56% in the first half of this year versus last year. Revenues was $84.7 million in the first quarter compared to $36 million in Q2 of last year. Net income was more than $17 million, driven by sales growth combined with a tax recovery just shy of $9 million and a gain on acquisition of Stako of nearly $6 million. Stako, by the way, has been immediately accretive to our Westport Fuel Systems bottom line. We're thrilled to welcome our key numbers in Poland to Westport Fuel Systems. In addition to strong revenues in our heavy-duty OEM segment, sales in our independent aftermarket and light-duty OEM businesses recovered in Q2 from the impact of COVID-19 as compared to the same period last year when societies and our customers first experienced COVID-related lockdown. We ended the quarter with $106 million in cash and cash equivalents, including the gross proceeds of $115 million from our publicly marketed equity offering completed in June. We've positioned the company for growth and we're investing in the development of our next-generation products. Overall, our business is growing from a solid foundation and our longer term outlook is very positive. We have a fabulous and committed team and excellent product portfolio, growing sales to global customers across the full range of transportation applications through both aftermarket and OEM channels. It's the right recipe to achieve our mid-decade goal of $1 billion to profitable sales. Our joint venture with Cummins is nearing the 20-year mark. Together, we've enjoyed a very successful partnership, and together, we have demonstrated that natural gas engines deliver in demanding trucking applications. Our JV is scheduled to end this year and that leaves us with several potential pathways forward. Discussions are ongoing, but there's no definitive conclusion to announce today. If the joint venture ends and we go our separate ways, both partners will maintain full and equal access to all of the JV's intellectual property. Meanwhile, you'll note that our current HPDI customers are global OEMs that can more easily launch existing products into a new geography in a company that don't yet have HPDI products fully developed. The opportunity in North America is significant and HPDI offers more performance, more efficiency and the ability to be use today's renewable natural gas resources and also future green hydrogen. HPDI's real-world benefits, both environmental and economics, are being demonstrated every day on European roads by thousands of commercial vehicles and generating raved from drivers to fleet operators. In the U.S. last week, the highly anticipated infrastructure bill was released, largely disappointing EV advocates. The original funding target of $15 billion was cut in half. The encouraging news is that low carbon and zero-emission spending got a massive boost of $7.5 billion with allocations specifically for hydrogen, propane and natural gas stations. Alternative and gaseous fuel infrastructure continues to be built out in the U.S. and around the world, with more customers accessing natural gas or renewable natural gas. Suites like Amazon and UPS aren't waiting for technology breakthroughs, they're acting now to reduce carbon and our clean transportation solutions are saving the money. This is just the beginning for North America. We believe the performance and the environmental and economic sustainability benefits of our products will help the market further develop and flourish. The market in China is massive and promising for Westport Fuel Systems. China is the global leader for natural gas trucking. It's the largest LNG refilling infrastructure in the world and the most natural gas field trucks on the road today. As one of the largest suppliers of natural gas engines in the world, our Weichai-Westport joint venture currently supplies leading commercial vehicle OEMs in China. Last fall, our joint venture with Weichai Power secured certifications for the WP12 natural gas engine equipped with HPDI 2.0. And we've recently seen notification that vehicle certification has also been secured. In March of this year, we announced a co-investment agreement to expand the HPDI injector manufacturing footprint into China. Also in March, we announced amended agreement terms for the supply of at least 25,000 HPDI systems in China through 2024. This represents a significant increase in the minimum volume compared to our 2018 agreement. Last month, the Chinese government announced they will increase the use of natural gas in their overall energy mix from 8.7% last year to 12% by 2030, a 38% increase. This is a strong endorsement for the continued usage, a reliant on natural gas moving forward in the world's most developed natural gas fuel trucking market. The foundations are in place. Multiple OEMs are working to integrate HPDI equipped engines into their trucks and bring those trucks to the market. We're confident that HPDI equipped trucks will enable substantial market growth in China, increasing the share of natural gas in the Chinese trucking market beyond today's already significant 10% market share. Westport Fuel Systems looks forward to being part of that growth. Growth of HPDI today leads directly to the future of clean transportation, green hydrogen. Today, hydrogen component sales represent a small but critically important and growing part of our business. Using hydrogen in an internal combustion engine is not a new idea. Hydrogen in a spark-ignited IC engine has been consistently disappointing with low power, low efficiency and real-world performance challenges. In contrast, high-pressure direct injection of hydrogen, enabled by our patented proprietary HPDI systems is a demonstrated solution. We demonstrated with our HPDI fuel system just this year. Hydrogen HPDI is a game changer. Let me quickly review our accomplishments with hydrogen HPDI already this year. In January, we announced our project with Scania to develop their engine with hydrogen HPDI. In February, we published with AVL a paper detailing how IC engine using hydrogen with HPDI offers a more affordable path than fuel cells for long-haul trucking applications. In March, we announced the successful demonstration of hydrogen with HPDI, which you can see today and hear today on our YouTube channel. In April, we presented in the industry our results showing hydrogen HPDI offers the highest para density, improved efficiency and is the most robust approach for using hydrogen in internal combustion engines for hedge duty applications. And just last month in July, we announced the collaboration with TUPY and AVL to develop a highly efficient hydrogen internal combustion engines for heavy goods transportation. The collaboration aims at combining advanced materials and casting technologies with our patented HPDI fuel system. Hydrogen IC engine with HPDI offer not only high performance, high-efficiency and lower total cost of operations, but they also offer other critical advantages for OEMs and suppliers. Our solution enables the reuse of existing factory capacity for engines, drive lines and vehicles. We'll use existing engineering know-how and draw on existing supply chain and we'll avoid creating new sustainability issues with respect to the supply and recycling of precious and rare earth metals. Therefore, we're confident that HPDI has a long runway from natural gas today, through biogas today and onto green hydrogen tomorrow. We believe hydrogen IC engines provide a compelling future for long-haul transportation and others are starting to share our conviction. I'll give you 2 recent examples. In a recently published paper, the World's Hydrogen Council has shown that from the total cost of operations perspective, hydrogen can become the most competitive low carbon solution in more than 20 applications by 2030, including long-haul trucking. The McKinsey paper published in June confirms that hydrogen combustion will fulfill an important role at harnessing established technologies and supply chain. As a leading expert in managing gas fuel and the inventor of HPDI, Westport Fuel systems is uniquely capable to lead the way with green hydrogen and transportation applications. Westport Fuel Systems have been at the forefront of the shift to cleaner, low carbon and cost competitive alternative fuels for transportation. We continue to remain devoted to the decarbonization of transportation sector and the critical need to deploy scale, carbon mutual solutions. Now, over to Richard for more detail on our Q2 results.

Thank you, David. As David described earlier, we had another good sequential quarter of financial results with record revenues of approximately $85 million, which were 135% higher year-over-year, driven mainly by the ramp-up of HPDI product sales and the continued recovery of sales volumes in our light-duty OEM and independent aftermarket businesses. The Stako acquisition also contributed $2.3 million in revenue since the close of the acquisition on May 30, 2021. The year-over-year comparisons to the second quarter of 2020 are somewhat overstated due to the severity of the pandemic impact on our operations and those of our customers that suffered through plant shutdowns and other social distancing measures last year. Nevertheless, the results do reflect the positive recovery and demand for our products, especially a promising outlook for our HPDI technology. Gross margin increased year-over-year to $15.7 million and a gross margin percentage of 19%, mainly due to higher sales volumes despite headwinds from the ongoing semiconductor shortages and supply chain issues. Gross margin percentage improved due to the recovery in higher-margin aftermarket sales volumes and also higher year-over-year sales volumes to our initial HPDI launch partner, including some higher-margin development work. Another positive result for the quarter was the continued performance of the CWI joint venture. Our equity income from CWI was $8 million, an increase of $4 million year-over-year, primarily due to the recovery in sales volumes from the impact of COVID-19 and also a $1 million tax recovery. Net income for the quarter was $17.2 million compared to net income of $3 million for the same quarter last year. The $14.2 million increase in earnings reflect the positive traction in our sales volumes across the businesses in the current period and the increase in income from the CWI joint venture. Net income also benefited from some extraordinary items this quarter. We recognized the bargain purchase gain of $5.9 million on the acquisition of Stako. We were able to acquire the business for less than its fair value due to the seller's interest in divesting their non-core LPG business. On another positive development, we recognized an $8.9 million tax recovery related to an Italian government COVID-19 tax relief program that allowed us to step up the tax basis of some of our Italian assets to increase tax depreciation and thus lower taxes. This quarter, our adjusted EBITDA was $6.2 million, which was comparable to the same period in 2020. However, as a reminder, adjusted EBITDA in the prior year second quarter included a $7.7 million insurance recovery related to a $10 million charge for a field service campaign for the replacement of a pressure release device recorded in the first quarter of 2020. Excluding the insurance recovery, adjusted EBITDA increased by $7.7 million, mainly due to the better performance described before. Now, turning to the operational performance of our business segments. Our OEM revenue for the current quarter was $53.1 million compared to $19.1 million for the prior year quarter. The significant improvements in revenues were driven by higher year-over-year HPDI product sales to our initial OEM launch partner. Despite challenges of the global semiconductor shortage, production did ameliorate in the second quarter compared to the first quarter. Further, sales volumes of our light-duty OEM, our delayed OEM and electronics businesses are also recovering to pre-COVID-19 levels. The impact of COVID-19 was significant in the prior year period, which caused plant shutdowns combined with lower light-duty OEM sales to German and Russian OEMs. We expect to see continued growth in our heavy-duty business and improvements in the light-duty OEM business in the second half of the year. Clearly, the higher sales volumes drove an improvement in gross margin year-over-year in absolute dollars. Excluding the onetime $7.7 million insurance recovery, gross margin increased by $5.7 million year-over-year. This quarter we generated a small operating loss of $3.4 million as we continue to invest in the development of our HPDI technology, and our sales volumes are still relatively modest and growing. As sales volumes grow, the profitability of HPDI will improve through economies of scale on production through our supplier network. Turning to our independent aftermarket. Revenue for the current quarter increased 87% to approximately $32 million compared to the prior year quarter, primarily due to the general economic recovery from COVID-19 and the related shutdowns in April and May of 2020. Gross margin increased by $5.5 million this quarter to $8.5 million for a gross margin percentage of 27%. This improvement in gross margin was driven by higher year-over-year sales volumes. Although we were able to generate better sales volumes, the increasing sales mix to lower margin emerging markets which provide a significant opportunity for growth to Westport Fuel Systems and the challenging recovery in Western Europe has challenged on margins. We expect continued improvement in our aftermarket revenues in the second half of 2021, but temper expectation due to the ongoing global shortage of semiconductors, which could impact the independent aftermarket business. Turning now to our liquidity. Over the past year, we have made significant strides in improving the strength of our balance sheet and liquidity to fund our business plans. Our cash position increased by approximately $96 million since the beginning of the year to $161 million. The increase during the past quarter was primarily the result of the marketed equity offering completed in June, partially offset by a $7.5 million payment of the royalty payable to the Cartesian Group and other debt service. The marketed equity offering in June successfully raised $115 million and approximately $108 million net of transaction costs. The offering generated a lot of interest and was oversubscribed by numerous institutional investors in North America and Europe and retail investors. The Board, the executive management and our largest shareholder all participated in the offering. The funds raised from the offering were a major step to support our growth of Westport Fuel Systems. They invest in CapEx to expand production capacity in research and development for HPDI technology, acquire bolt-on businesses like Stako with complementary capabilities or technologies to existing businesses and also to further strengthen our balance sheet. We also continue to manage our debt profile to align the cash flows from our businesses to our investment plans. During the quarter, we refinanced a EUR7.5 million loan with UniCredit in the second quarter under the Decreto Liquidita program maturing in 2027 that we announced to you earlier this year. We're also negotiating with our partner, Export Development Canada, to refinance our term loan and COVID-19 bridge loan into a long-term credit facility to support funding of our HPDI technology, commercialization and research and development. We received waivers from EDC to defer principal payments on the term loan in COVID-19 bridge loan due in June and July of this year, respectively, to September of 2021 in anticipation of renegotiating the new agreement. We are very appreciative of the support and relationship with EDC and this refinancing would be another significant step to bolstering our liquidity to fund our growth. With that, I would like to turn it back to you, David

Thanks, Richard. Looking forward, not only are we optimistic, but we're committed to deliver. We expect continued post-COVID recoveries in markets around the world and continuously increasing demand for transportation. We also see continued regulatory and societal pressure for clean transportation and the persistence of the economic fundamentals that mean only affordable solutions can scale in a way that is meaningful in both automotive and environmental terms. For Westport Fuel Systems, we're well positioned and expect growth in all our businesses, but especially growth of HPDI in existing markets, launch of HPDI in new markets and the development of HPDI for hydrogen with existing and new partners. I'm proud of our team and of all of their efforts remain focused on our objectives in the challenging conditions we faced during the last 1.5 years. We're well positioned to continue meeting the market in gaseous fuels and believe we have the best team, technology and partners to secure the sizeable opportunities ahead. With that, I'd like to turn it back to the operator for your questions.

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

So, maybe just starting on HPDI. And I just want to clarify, so did you say that second quarter volumes did improve sequentially. And then also, would just love your thoughts on some expectations, obviously, very bullish, but some expectations for the second half of '21 maybe versus what the run rate you had in 2020.

Well, we're -- as you mentioned, we had the sequential growth already this year, quarter-over-quarter. Obviously, I say, year-over-year growth in Q1 year-over-year growth in Q2, which, of course, is like the COVID time, but also the continued growth. So, fundamentally, this is a product launch that started a few years ago and continues. The goals for the industry and the world really drive our business. So, in Europe, for example, in 2025, the remains is 15% reduction in CO2. And as that goal comes closer and closer, we expect the volumes to continue to ramp in response to trying to meet that goal by our need customer, but also by other customers. So, I think we're on a very good path, and we do expect that continued growth through this year and into the coming years.

And then maybe just transitioning to China, you've been waiting on vehicle certification for quite some time. I mean, anything you can discuss in terms of when you actually might start to see volumes given that when you do, I would think that the ramp maybe is gradual for a couple of quarters, but then can be pretty significant.

I think you characterized it correctly. We expect to see a launch. We may expect to see volumes grow. And the market in China is a huge market, as I've pointed out regularly. They're already in China having a 10% market share of natural gas vehicles and that's a spark-ignited engine. So, it's like a 10x kind of performance with gaseous fuel vehicles in China versus what we have in North America. So -- and the market is 3x or 4x larger than North America. And so we're really well positioned. Weichai Power is a great partner of ours. Our joint venture is doing excellent in the market in spark-ignited product. And when we're able to add and bring HPDI to that marketplace, we expect a really strong response because it offers that improved performance, improved efficiency and really nothing to be taken away from the fleet driver and the truck driver and that really reflects back on what we see in the market today in Europe, where basically, HPDI is winning versus spark-ignited product because of its superior performance. And so we expect a really important development for ourselves and for our partners in the Chinese market as HPDI launches.

Maybe last one for me, just on hydrogen. Anything you can discuss about the pipeline now that you've got Scania in-house at least for a development agreement. You've had a number of data points in progress here. Anything you can share on the pipeline.

From our perspective, we've shared what we can in terms of actual mains and results and outlook. But fundamentally, I think the important big picture is that we've already demonstrated very clearly and brought to date with the marketplace showing that hydrogen with HPDI is super effective. It's a great solution. It's a great way to use hydrogen. It's a great way to use HPDI. So, the combination is really fantastic. And we expect that really to accelerate the progress of bringing HPDI in the marketplace for natural gas, for biogas and for hydrogen as a function of time as those fuels become increased and available. So, yeah, we think it's a really important part of our portfolio and our technical capability to respond to the future green hydrogen fuel capabilities.

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

Just sort of following up on the European HPDI growth. If you -- you expect -- I think you said expect improvement in the back half. Are you seeing pent-up demand maybe from supply chain issues that are going to alleviate or are you -- where are you seeing the demand growth in the back half of the year? And how do you [Technical Difficulty] first half?

So, general trend, which has played out since we launched. It's been a nice growth trend with a volume growing quarter-after-quarter. One thing that's very frustrating for all of our shareholders and the investor community is not being able to see that in detail. We look forward to breaking that out in some detail in the future when we have more customer volume to aggregate in the show. But fundamentally, there have been some constraints in the marketplace in the first half of the year that despite those we've still grown. And those constraints are related to all the supply chain shortages, which includes microprocess, as we mentioned, as well as other materials and just a pent-up demand and a residual COVID effected the marketplace globally and certainly still in Europe. So, all those factors, we think, have been a headwind for ourselves and our customers. And then our results are up and we expect that as those headwinds ease, whether it's COVID or supply that the market will continue to grow. And that's just on the foundation of the fact that it's a better product and a response to both the customer demand and regulatory requirements. And as I mentioned in the comments earlier, the key ingredient for all of the things that we bring to the marketplace to have cleaner transportation is their affordability. And you can read a customer testimonial after customer testimonial in Europe saying that the trucks performed really well and the trucks save needs money. And that combination is the perfect set of ingredients for success.

And then on the North American market, you talked sort of alluded to some activity there. How do you see that developing? What's your approach to enter the North American market with HPDI?

I think it's something that's truly important in this equation is the fact that the world of commercial trucking and heavy-duty engines for commercial trucking is supplied by just a handful of companies around the world that make and sell the best majority of the product and all these companies basically are global. So our current partners are global OEMs. They have brought and are bringing HPDI to the marketplace in their home market. And I think having done that then that offers the opportunity to expand to markets around the world and that includes North America. Clearly, the North American market has historically been a little bit slower to develop with natural gas and market share around the world in places like China and Europe, for example. And that's primarily due to the fuel price dynamics in North America, where that fuel price differential isn't as significant and it's as persistent historically as it has been in other markets. So, I think that's an important part of the equation. So, we're really excited about the opportunity in North America based on the need from an environmental perspective and the effectiveness of our product to respond to that factor. So, we see companies that have made the analysis of natural gas in trucking in North America, leaning forward and buying more and more and shifting their fleet. But we're expecting that will increase in the future as ESG requirements and societal demands and regulations and fuel price dynamics modify over time and get more and more European and Chinese, like in the North American market.

Our next question comes from Colin Rusch of Oppenheimer.

Could you give us an update on where you're at now with the HPDI for hydrogen testing and risking? Have you begun those tests full in? Are you still doing preparation work? What's the latest on that front?

So, our projects are proceeding. So, we have engines in the test cell doing work. And as we develop results that we're able to share and as our customers allow us to share, we've been sharing that with the marketplace. So, we did a presentation of our own results in Vienna in April that we referred to earlier. And we have an upcoming presentation in Venice, Austria in early September. And so we'll continue to bring that news to the marketplace as it becomes available. For us, development of hydrogen HPDI is an ongoing effort on our own R&D dollar as well as with our customers' projects as announced Scania and TUPY and AVL. These are really, I would say, meaningful developments, important developments. And for us, very exciting, because it's moving on to this next fuel of the future of greenfield for transportation. And our results already are very exciting. So, yes, as we have more to share, we'll certainly be sharing. You can count on us to do so.

And then with the potential for adding in new HPDI customers on the natural gas side because of the runway that you provide into hydrogen. Can you talk about the benchmarks that those customers are looking for before they would move forward with you guys on the natural gas side from the hydrogen testing?

I think the real question, Colin, is when do our customers make announcements, right? The business of developing engines and bringing into production in -- for any technology, including ours, is a multiyear activity, where we engage with customers as we did with our lead customer in Europe and our customer in China many years ago, and we need to developing the test cell and we need to develop new vehicles. And so this is a multiyear activity. And in many cases, as of a vacation with our lead European customer, the announcements don't come in direct alignment with what's actually happening. So, I apologize for that. It's just the way it works in our industry. And we're looking forward to being -- hearing and seeing the announcement from our customers as they grow ready to influence.

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

Has the COVID sort of impacting the recovery process, made any difference in the historical seasonality. We typically see the fourth few quarters the strongest for you guys. Because of what has transpired over the last 12 months, should we anticipate any change to have some that revenue gains plays out at least.

I think I understand your question about how does COVID and seasonality fit together. To me, it's a simple, super position. So, can we just add the 2 effects together. I don't think there's any fundamental change in the seasonality of our business. And a clear example that we control is in the month of August, coming up the next couple of weeks, we have our typical Italian holiday period. And so we'll close the factories for a couple of weeks. And of course, we'll continue to do business, but there is this drop in supply in the month of August. It always happens for us. And the second quarter tends to be a strong quarter. Fourth quarter tends to taper off a little bit. But some of these trends and our seasonality are changing as the mix of our business changes from heavily reliant on aftermarket to more of a mix of OEM and aftermarket. We've talked and put up the results, so you can see it as the mix between OEM and aftermarket. We break that out in our financial analysis. You can see what that mix looks like. And as we increasingly become an OEM business and a Tier 1 supplier to those OEMs, that seasonality will change more to an automotive as opposed to consumer products. Meanwhile with respect to COVID, that has been an affect in the marketplace. I would say not so much on the heavy truck side, although there's been other supply side challenges that have been induced by COVID I believe and other factors, of course. So, to me, you kind of have to do a little math and kind of make the forecast on what you think the COVID effects are and what's the seasonality is and how it changes between aftermarket and OEM to try and get an idea of how all those effects are coming out in our results. Fundamentally, the backdrop of all that are going to be the foundation of all that, is the fundamentals of our business, clean affordable technology and need for those new marketplace. So, we do see this growing business and that's why we're excited to have another quarter -- another record quarter, and we look to look to more in the future.

And just one more from me. With this Cummins contract coming to an end potentially in December, for renewal, I guess, is there a potential strategy to fill gap from those contributions if the relationship does not continue?

So, we have quite a few additional alternatives. And of course, our business is global. It's not just a North American business. Our business is varied in terms of market segments we address. And so frankly, we see growth across all of our different geographies, product segments. Of course, HPDI is an important part of that. We think HPDI has an important role to play in North America as the market continues to develop. So, yes, there's lots of different opportunities to back fill in the case that our joint venture wind up as is currently contracted to do. But we're also continuing to have the discussions with our partner around other alternatives and what might happen in the future. So, yes, stay tuned. So, as we have some news, we'll share it with you.

And maybe sneaking one last one, sorry. How many customers for HPDI do we have [Technical Difficulty].

So, I think the way I count is that we have the customer that's in production in Europe. We have the customer that has a production in China. And then we have the 2 customers that we've announced that are developing hydrogen HPDI with that. And so one is, I would say, not a typical OEM customer, our partnership with TUPY and AVL. But certainly, we think and they think leads to customers that bring hydrogen HPDI in the marketplace. So those are kind of four announce. I don't have any more announcements on that, but you can imagine that we have other projects that aren't announced. So, that's just the way the business works.

Our next question comes from Jeff Osborne of Cowen & Company.

A lot of my questions have been answered. A couple of clarifications. Just on China, I thought the -- in your prepared remarks, you said they had certification. But then to Eric's question, you didn't. I thought they received batch 344 certification in mid-June.

So, we found in the public domain some announcements of vehicle certification. So, we know those steps have been completed and we can reference them in a public way. And so that's what has happened and as we mentioned in my earlier remarks.

So, once you have that certification, you then need to get designed into a truck OEM. Do you have any sense in working with them that it's actually being marketed or sold?

So, these are the announcements, Jeff, that we have to lead to our customers. But basically, the certification that's been achieved is both the engine cert, if we did, our joint venture did last year and then our customers are doing the vehicle search and we've seen those published in China. So, we know those have been achieved. So, with that, basically, then the next steps are basically on to the marketplace. But again, these are the announcements that will come from our JVs customers benfit truck OEMs, not from us.

And then how is the expansion in China with your manufacturing partner there? Is that up and running? Do you have the capacity to meet the agreement that you've extended through 2024 or can you remind us on how...?

Thanks for asking this. It's really important that we have made these investments and are putting the equipment into place. That's a this year activity and that will support the ramp that we forecast in the Chinese market. We have a long-standing partnership on our fuel injector with BorgWarner and we're excited about this development and making the investment necessary to support the marketplace. So, it's happening now, and the capacity will be available to support the launch trip that we expect. That's our business. We put the best in place, so we get the port of the ramps that we even forecast and expect and understand from our customers.

Then I had a question on the hydrogen side. You mentioned the performance of HPDI versus spark-ignited and you saw similar trends with nat gas, with torque and whatnot. But my understanding is I thought hydrogen with engines, as you indicated in your prepared remarks, has been tried for years. One of the challenges I thought was embrittlement of the hydrogen molecule into the metal itself where it sort of diffuses into the metal. Is there anything unique about HPDI that would avoid that problem or can you talk about what embrittlement trends have been in terms of performance and measuring NOx and SOx with the various different tests that you've done with Scania?

So, glad to talk about that. So, we are in this phase and you can tell from our announcements with both Scania, AVL and TUPY that we need to go do some work and actually develop the product all the way to production. The initial demonstration that we've done show the clear promise and potential of the fundamentals of the combustion system. But as you know well and everybody on the call should really understand the world of commercial trucking, the first priority of every tractor is to make sure that their truck always runs and has its long durability for thousands -- hundreds of thousands of kilometers and miles. So, that long-term durability is something that we need to develop and demonstrate. And quote unquote the hydrogen embrittlement challenge, which is a real material science type challenge, is still to be, let's say, fully addressed. I don't anticipate any problem to do that, but yes, we have to go do it. And so that's some of the work that is ahead of us still. I can't say it's fully solved, but at the same time, I can also say that so far our tests have no issues identified. But it's a real plan and we need to work on it and that's engineering work that would be done.

And just a follow-up on that, hopefully, a non-technical question, but the intent is to allow the installed base to use this. So, there's no augmentation of the metals within the engine block versus you could avoid embrittlement by using different materials, but is that correct? The idea would be to upgrade existing nat gas engines to something greener.

I really don't expect this to be a retrofit activity. In other words, we're not going to pull a truck into a shop and change injectors and fuel systems into hydrogen just like we don't take a diesel truck today and pull it into a shop and turn it to an HPDI. The business of making engines for long-haul trucking is an OEM business, and I expect it to remain an OEM business. And so we'll develop the hardware that has the fuel injection system as well as the engine hardware and make whatever necessary changes are required in order to produce a product that customers can count on and that delivers the benefits that we've already demonstrated with hydrogen and HPDI.

[Operator Instructions]. Our next question comes from Mac Whale of Cormark Securities.

Just a question on long-term goals. David, you mentioned the profitable sales target mid-decade, what -- in broad strokes, what would the segmentation and gross margin look like under that scenario? What is it just that you're aiming to achieve or think you can achieve on that profitable sales target?

Thanks for asking. So, this goal that we've set for mid-decade to have $1 billion in revenue is not just a revenue goal, but also includes a 20% gross margin on our business in total. And then in terms of how does that business develop, we see growth across all our segments. Richard mentioned earlier, some of the developments we're seeing of our aftermarket business in developing markets around the world in places like Algeria and Egypt and India. And so as we look at our full suite of business, really, we will hit on all cylinders, so to speak, to build that $1 billion book of business with the profitability that we can be proud of. And so that's the plan and the outlook for our growth of our company. Of course, a key ingredient in that is the growth of HPDI from one product in one market with one customer to a product that's selling broadly around the world, China being next, North America after that and then more and more OEMs at the hydrogen future starts to hit the road with our technology.

And then following up on that or maybe linked to that. On the hydrogen side, so I suppose the hydrogen portion of that is sizable because you get investment on infrastructure and development along the cost declines for hydrogen, let's just suppose all that happens. Do -- what level of spend do you foresee sort of on an annual basis? Is this like a -- is it a $10 million a year sort of tax, is it $25 million? Is it like -- can you just give an idea of what the next sort of 4 or 5 years will require in terms of spend on getting that commercial?

So, I think the key ingredient here, actually, in terms of spending going forward, I would say, is not so much on the R&D side. Of course, there is some spending. We'll continue to invest in new products and that's part of our road map and business plan. But I would tell you that the bigger spend is getting the capacity in place to grow and support our customers as more and more HPDI customers adopt the technology and then follow their own launch and growth curves. And so that would be the bigger part of the spend. And yes, I don't have figures to share with you, but as I mentioned, we see a relatively modest curve of spending going forward, not some huge capital need that anybody needs to bake into a model.

And then just lastly, on the future of the JV. Is there -- and perhaps if it's available online, just point me to that, but is there details on how the roll-off would occur like in terms of -- like is there a stipulation that one partner buys out the other or that you have to share in the roll-up cost or anything of that nature that's available?

So, a decade ago, when we signed the current JV agreement, we did post that as one of our material agreements and filed that with some reactions. But basically, the fundamental structure of that is all laid out in the agreement. The question that everyone is asking and we don't have an answer for it today, but we'll have to into the future is, will there be any change that that we'll just follow that formula. So, yes, we can point you to that document, so you can come up to speed on what the current agreement says.

Our next question comes from Eduardo de Jambin from the webcast. His question is any sale of HPDI in South Africa or Australia, and what about HPDI in off-road applications, any update?

So, generally speaking, we have our business with our lead European customer and they are a global OEM, as you well know, and consider markets around the world as potential markets for HPDI. I can't go into any geographic details. That's their business, not ours, but we're certainly pleased to support them as they investigate the opportunity for HPDI in the market. In terms of off-road markets, we certainly see an opportunity there. This has been something that Westport Fuel Systems from the Westport innovations days has proceeded and investigated. And certainly, there are opportunities. As a general premise, I see those to be kind of right in this time frame kind of as a follow-on activity to on-road. So, in my experience industry, on-road trucks leads with technology and off-road comes as a follow-on. So, we certainly see that as an opportunity and we recognize in industries like mining, for example, there is a big push to clean up the, let's say, industrial side and the internal combustion engine side of their business to move towards greater and lower carbon technologies like ours.

Our next question from the webcast comes from David Douglas. What is the true state of play with Weichai and Cummins? If not yet, when will we know is date certain, if neither is likely to come to fruition, what is the plan going forward?

So, I think we've covered this quite well, David. And while I appreciate the question. We're offering in this call the state of play and that is we have a joint venture with Cummins. It's scheduled to end at the end of this year and we're in discussions with our partner on alternatives to that ending. And if there's some change, we'll certainly announce it in -- when we have that conclusion. The same is true with our partner, Weichai. We've been very transparent about what's happening to the best of our ability. And when we have some more news, we'll share that. So, you might recall that we signed a new agreement with Weichai earlier this year, committing to the business and an increased volume of now 25,000 systems at a minimum through 2024. And meanwhile, the market in China and our partner are poised to bring HPDI to that market. So, we, yes, we're excited about the future and anxious and eager as you are.

Our next question from the webcast comes from Charles Orensky. Your European -- is your European partner also stressing its future of electric trucks? How long is that away and it seems they're not interested in hydrogen? Any comments are greatly appreciated.

So, I can read what you can read in terms of what our partner is doing in Europe. And then in addition, I have kind of the insights into how we see the HPDI growth curve of that partner in Europe. And I think, broadly speaking, across the industry, including our lead partner in Europe, everybody is kind of placing their bets and not putting all their eggs in one basket, right? So, I would tell you from just observing the industry as you can also that people are making bets on fuel cell, people are making bets on battery electric. And I guess the big picture from my perspective is that recognized that these truck manufacturers, all of them make a full breadth of offerings to the marketplace from transit vehicles for intercity that carry relatively light loads and doing a lot of stop and go to long-haul trucking. And in some cases, they're also offering off-road equipment. So, it's a full range of applications. And what I would point you to is that over a long period of time, I'm talking the full century of the development of the internal combustion engine and our industries for automotive and off-road and propulsion systems, that there's always been a diversity of solutions that applies in the marketplace. It's never been one thing that solves all our needs from a motorcycle to a long-haul truck to an earth moving equipment in a mine in any geography around the world. And so these diversities of solutions have evolved over time as technology has evolved over time and as the requirements in the marketplace has evolved over time. So, just to put a point on it, a real clear example is basically before World War II, all engines for almost everything were spark-ignited gasoline, petrol engines. Post-World War II, we saw the real development and proliferation of the diesel engine and trucking, and now basically, all trucks are diesel engines, quote unquote all like 98% and all cars quote unquote and roughly speaking, almost all of them are gasoline engines. And so you have this split of the market. And as we go forward, OEMs are investing in a suite of technologies and there's going to be a mix of those technologies going forward. What I can clearly point to is that the mix of natural gas and trucking has grown very strongly in very specific segments, and it's continued to grow in Europe and better technologies like ours that are affordable, we'll win at the end of the day. And so that, to me, is the overall picture that I can put to.

Our next question is from the webcast from James Warner. Are there penalties if wage does not meet the HDPI purchase goal of 25,000 units by the end of 2024?

Not so much penalties, James, but actually, there the contract we've signed is very similar in form of the contract you signed back in 2018, and that is they're committed to buy a minimum of 25,000. So it's this kind of they're committed to making these purchases at a certain price. And the only question is, what is the curve of those purchases that ends up a 25,000 systems purchased by 2024.

Our next question from the webcast comes from Peter Wong. Will HPDI 2 in North America require LNG infrastructure first?

Basically, at the engine, the fuel that we're injecting into the engine with our HPDI system is basically, I would say, mid-pressure. It's not liquefied, it's a gas. And so we can run HPDI with a gaseous fuel system, with the CNG fuel system. We don't need an LNG fuel system. And so both options are possible for us. Today, in the marketplace for both Europe and China, we're bringing to market an LNG system. And the reason we bring in LNG system is that LNG is a much more dense form of natural gas and therefore, you get better range. So, it's really about the application. So, if you want to apply HPDI in an application that doesn't have a longer range, you can use CNG or you can use more tanks of CNG. And in the North American market, as you know, it's very possible to put a back of cab, tank system and have plenty of CNG. And so we definitely see that as an option for HPDI in North America, a CNG HPDI option.

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, 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 Fuel Systems Investor Relations team. Thank you again for your interest in Westport Fuel systems, and have a wonderful day.