Westport Fuel Systems (WPRT) This autumn 2022 Earnings Call Transcript

Westport Fuel Systems (WPRT -24.15%)
This autumn 2022 Earnings Call
Mar 14, 2023, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Westport Fuel Systems fourth quarter and financial year-end 2022 monetary outcomes convention name. As a reminder, all individuals are in listen-only mode, and the convention is being recorded. After the presentation, there will be a chance to ask questions. [Operator instructions] I might now like to show the convention over to Ashley Nuell, senior director of investor relations.

Please go forward.

Ashley Nuell — Senior Director, Investor Relations

Good morning, everybody. Welcome to Westport Fuel Systems’ fourth quarter and full yr 2022 outcomes convention name, which is being held to coincide with the press launch containing Westport monetary outcomes distributed yesterday. On as we speak’s name, talking on behalf of Westport is chief govt officer, David Johnson; and chief monetary officer, Bill Larkin. Attendance on this name is open to the general public, however questions will probably be restricted to the funding group.

You are reminded that sure statements made on this convention name and our responses to numerous questions might represent forward-looking statements throughout the which means of the US and relevant Canadian securities legal guidelines. And as such, forward-looking statements are made based mostly on our present expectations and contain sure dangers and uncertainties. With that, I’ll flip the decision over to you, David.

David Johnson — Chief Executive Officer

Thanks, Ashley. Good morning, everybody. I’m happy to be with you as we speak to debate our 2022 outcomes for the fourth quarter and full yr. Today, I’ll be strolling you thru our key monetary and working outcomes and our outlook for the roadmap to decarbonize transportation, that’s the want for and potential of unpolluted, inexpensive gaseous fuels, and our merchandise, gasoline techniques for LNG, hydrogen, CNG, RNG, and LPG.

And I’ll share some further insights into our current bulletins associated to hydrogen manufacturing capability in China and our third OEM demonstration program for hydrogen HPDI. Amid final yr’s difficult macro setting, our high line was barely decrease in U.S. greenback phrases in comparison with 2021. As has been a repeating theme by 2022, the dollar-euro change fee motion masked the top-line development in euro that we delivered at an working degree.

Excluding the affect of international change, our enterprise grew 9% or $28 million. Our hydrogen parts, gasoline storage, delayed OEM, and electronics companies all noticed income development in 2022 and have additionally began robust in 2023. The affect of international change and the Russia-Ukraine battle masked a few of the enhancements we noticed in 2022 in our aftermarket enterprise, leading to revenues down barely this yr in U.S. {dollars}.

High CNG and LNG costs in Europe decreased our HPDI and CNG gasoline system gross sales volumes in our heavy-duty and light-duty OEM companies, whereas inflation, ongoing provide chain constraints, and guarantee prices weighed on our profitability. Although we now have no management over gasoline pricing, we now have put measures in place to enhance our bottom-line outlook for 2023 and past within the areas that we now have the affect. I’ll contact on these shortly. In our heavy-duty and aftermarket companies, we now have work to do to boost volumes and margins, supporting profitability going ahead.

Improving profitability by extracting effectivity internally is certainly one of our largest priorities in 2023. And later within the name, Bill will define steps we’re taking to handle this. We proceed to face trade headwinds and felt — really feel each ready and poised to develop sooner or later. We imagine that the robust LPG value benefit, the reestablishment of pure fuel value benefits versus petrol and diesel, and our continued growth into new markets, mixed with supportive world emissions discount necessities, will drive our enterprise ahead.

Environmental, financial, and regulatory necessities won’t cease or wait, and Westport is properly positioned to reply. And additional OEM conversations round HPDI with LNG and biomethane, and now, hydrogen HPDI, sooner or later will drive development and profitability. Wider-felt impacts of rising inflation, provide chain constraints, increased utility prices, and gasoline value volatility have continued to weigh closely on our trade. As a outcome, we recorded a web lack of $32.7 million for the yr in comparison with web revenue of 13.7 million in 2021.

Significant margin stress, mixed with the lack of fairness revenue from the Cummins-Westport three way partnership, weighed closely on the web loss, in addition to the affect of international change. 2022 was additionally a yr of great bulletins with respect to developments of our hydrogen HPDI gasoline techniques new clients and collaborations. I wish to shortly spotlight a number of of these bulletins from the fourth quarter. In November, we had been awarded a program to produce Euro 7 LPG gasoline techniques to a number one world OEM, an add-on to the Euro 6 provide program we had introduced earlier within the yr and a program that begins manufacturing in This autumn of this yr and could have a fabric affect to our income from 2024 on.

In December, we introduced a collaboration with Johnson Matthey, a world chief in sustainable applied sciences, to develop an emissions after-treatment system for hydrogen HPDI. Working collectively, we goal to create a zero-emission resolution for inexpensive and clear transportation that doesn’t compromise efficiency or effectivity. As we have a look at the yr forward of us, I wish to stroll by our go-forward technique and the way we’re positioning ourselves for the longer term. We’ll drive sustainable development in our current markets by a diversified portfolio of applied sciences, merchandise, and companies.

This will probably be seen throughout all our enterprise models. The power of our diversified technique was obvious in 2022, as our income earlier than the affect of FX grew amid vital headwinds, just like the Russian sanctions and gasoline value will increase. Secondly, we goal to unlock new and rising markets by the supply of unpolluted, inexpensive transportation options. This contains opening new geographies, but additionally capitalizing on the power we’re seeing from our delayed OEM electronics, hydrogen element, and gasoline storage companies.

Third, we’ll proceed, as we have performed previously, to drive operational excellence and keep our repute as a Tier 1 provider with enhanced high quality and reliability. Fourth, we’ll extract efficiencies by prudent capital administration targeted on price optimization and margin growth. Each of those initiatives positions us for strengthened profitability throughout our enterprise models. Listening to world markets, there’s now an undeniably louder voice highlighting the necessity for a portfolio of choices, recognizing it will not be a one-size-fits-all strategy in terms of the necessity to decarbonize transportation.

Some are utilizing the phrase eclectic and contrasting that with all-electric. Clever rhyme, but additionally true. We have various applied sciences and fuels as we speak and could have extra variety sooner or later. Gaseous fuels and our gasoline techniques will play an vital and rising function in that eclectic future.

A diverse resolution set that takes into consideration the differing wants of every software has all the time been our view. It’s a welcome and wanted change within the dialog at each the OEM degree and from policymakers alike. This is perhaps the start of a step-change, which we will all stand to profit from. While a lot of the discuss nonetheless factors to gasoline cells and battery electrical choices, hydrogen inside combustion engines are rising as a pretty different for the implementation of decarbonized transport.

In current months, the likes of Toyota, Tata, Kawasaki, Reliance Industries, Tenneco, Volvo and others have more and more expressed this view, decreasing the prices of changing present powertrains, but additionally upkeep prices, in comparison with gasoline cell battery mixture system, allows quicker conversions for fleets. We know that as we transfer as much as long-haul heavy-duty, battery electrical might not have the ability to meet the payload recharging requirement, and, due to this fact, hydrogen inside combustion engines is a really enticing proposition. LNG and biomethane are additionally making a reputation for themselves within the heavy-duty long-haul area. Trucking, at its core, is a conservative trade.

It takes some time to show ideas and to construct the infrastructure that’s occurring now, step-by-step. As an instance of the expansion we’re seeing, Europe added roughly 100 new LNG stations this previous yr, reaching simply over 600 stations and repair now, a development fee of 20%. LNG and biomethane provide clear local weather upsides, stay competitively priced in lots of nations and, extra importantly, utilizing our HPDI gasoline system, provide the motive force the identical expertise as diesel gasoline with its energy, efficiency, and reliability. To paint an image of the momentum with biomethane in Europe, the place the manufacturing of bio LNG is ramping shortly, in Sweden, final yr, for instance, 96% of all of the fuel utilized in transportation was biomethane.

Unsurprisingly, Sweden has the best market share of LNG vans on the highway. It’s not simply Sweden. Germany has been a dominant nation with respect to biogas manufacturing for some time now. And different nations akin to Denmark, France, Italy, and the Netherlands have actively promoted biogas manufacturing.

With OEMs now on the clock to considerably decarbonize by 2025 and rules suggest requiring reductions of 45% in 2030, using LNG and biomethane as we speak is a transparent possibility. HPDI utilizing LNG meets the 2025 carbon targets already and is on the highway within the hundreds, placing us in a stable aggressive place to seize this development. When we take into consideration the way forward for HPDI, we’re hydrogen because the gasoline of the longer term. In our dialogue with world OEMs at IAA final yr, it was clear they’re starting to acknowledge that our hydrogen HPDI gasoline system resolution addresses the portion of the market not addressed by electrification, and does so affordably.

Gaseous fuels are a compelling technique to tackle heavy-duty long-haul purposes, and HPDI presents the bottom price to develop, the bottom price to industrialize, and the bottom price to function. Again, we want a wide range of options and might’t depend on a single thought or idea to work for all the pieces. It’s simply not sensible. The difficult LNG pricing setting and differential to diesel final yr resulted in a troublesome yr for our heavy-duty OEM enterprise, leading to decrease quantity than anticipated.

These decrease quantity ranges really impacted our economies of scale and, when mixed with increased manufacturing prices, drove margin stress. In current months, we’re starting to see a extra favorable LNG value pattern in Europe, with a gasoline value returning to ranges we’ve not seen since 2020, 2021. This extra normalized LNG value is pushing the full price of possession again within the favor of LNG-powered fleets, and we stay inspired by this value pattern. Despite the macroeconomic setting, our European launch associate stays dedicated to the expansion of HPDI.

In reality, just lately, many OEMs have made public bulletins supporting the necessity for a number of technical options because of the availability of vitality and gasoline infrastructure, which differs tremendously between nations and areas, and likewise as a result of the necessities for vary, weight, and payloads will differ by use case. These statements have been supporting the longer term use of LNG and biomethane as part of a multi-option effort to decarbonize transportation. This is thrilling for us. We’re originally of the transition to cleaner fuels, pure fuel, biomethane, after which hydrogen.

This transition to cleaner fuels can be making its presence identified in North America, as a Canadian industrial fuel and engineering firm has just lately dedicated to evaluating Class 8 LNG-powered tractors in its long-haul operations, specializing in measuring efficiency, gasoline financial savings, and different operational components towards its diesel fleet. Turning to light-duty OEM, in 2022, we had a number of thrilling bulletins, together with two main contracts with a number one European OEM for the provision of LPG gasoline techniques for each Euro 6 and Euro 7 requirements by 2035 and past. The LPG car market in Europe stays robust, bolstered by pricing benefit of the petrol. In This autumn final yr, LPG-fueled car registrations grew by over 16%.

This pattern can be constructive for our delayed OEM enterprise, the place we noticed 20% income development in 2022, changing some 40,000 automobiles, a quantity we count on to develop considerably in 2023. In India, we had been inspired by the elevated degree of light-duty gross sales to OEMs, but that market has been negatively impacted just lately by rising CNG costs. To add some perspective, the worth spreads between CNG and diesel have decreased by 19% yr so far. Despite the pricing setting, biogas and bio CNG stay a spotlight for the Indian authorities, with current bulletins supporting the manufacturing and improvement of 500 new biogas crops and as much as 5,000 bio CNG crops, with a manufacturing goal of 15 million megatonnes by 2023, 2024.

This remains to be an vital development marketplace for our firm going ahead. Our associate in China, Weichai, stays dedicated to the business launch of HPDI as we talked about in December, our capital markets day. They just lately took possession of practically 100 HPDI models. A unstable LNG pricing setting has hampered the progress on this market.

However, as pricing normalizes, it must be a lift towards the business launch, and we’ll replace the market on this progress. We’ve talked lots just lately about our hydrogen parts enterprise, a enterprise that grew gross revenue by nearly 60% in 2022 and proceed to see robust development. A number of weeks in the past, we introduced our plan to take a position as much as $10 million to broaden our world manufacturing footprint in China, supporting our hydrogen parts enterprise and different different gasoline system applied sciences. China leads the world in hydrogen funding and infrastructure improvement and has a broadcast, bold goal of getting 1 million hydrogen gasoline automobiles on the highway in China by 2030.

The new Westport facility within the metropolis of Changzhou will start operations in 2024 and embrace an ultramodern manufacturing facility and a recent innovation middle. Our hydrogen parts have had a powerful presence in China out there for over 10 years. This announcement is really a stepping stone to proceed our hydrogen know-how development and positions Westport to help a wide range of purposes utilizing gasoline cells and inside combustion engines utilizing hydrogen for gasoline. Globally, hydrogen continues to realize traction as governments, non-public corporations, and policymakers proceed their push for funding and help to solidify hydrogen because the gasoline of the longer term.

In Europe, particularly, 9 EU member states have referred to as on the European Commission to incorporate low carbon hydrogen produced from nuclear electrical energy within the EU’s renewable hydrogen targets, stressing vitality safety and vitality independence. As demand will increase, pricing is anticipated to lower and refueling infrastructure will increase, each driving components for adoption. With these in place, change can occur shortly. The roadmap for hydrogen could be very encouraging for our enterprise.

Our parts enterprise gives all of the requirements for each IC engines and gasoline cells. Because of this, we stand to profit broadly from all hydrogen purposes in transport. When wanting extra carefully at utilizing hydrogen for heavy-duty transport, in February, the European Union made some vital bulletins relating to potential heavy-duty car emission requirements and hydrogen internal-combustion engines. For the primary time, hydrogen IC engines had been included within the checklist of applied sciences that may drive the shift to zero emissions.

Though nonetheless a proposal, this can be a essential step-change from the sooner dialogue. Will be monitoring these developments carefully. And simply final week, we introduced one other collaboration with a world OEM to judge the efficiency effectivity emissions of the OEMs engine geared up with our hydrogen HPDI gasoline system. This collaboration marks Westport’s third main OEM engagement so far.

Funded by the OEM, the work begins instantly and continues by year-end. We stay up for updating the market additional on the outcomes of this ongoing analysis work. Hydro mobility has now develop into way more substantial than simply gasoline cells, as hydrogen internal-combustion engines are set to play an vital function transferring ahead. Operationally, our impartial aftermarket enterprise carried out properly in 2022 amid a troublesome macroeconomic local weather.

The affect of international change and translating outcomes, mixed with decrease gross sales in Russian market and decrease volumes in Turkey and Argentina, resulted in barely decrease income yr over yr. Despite these setbacks, in 2022, we’re inspired by rising volumes in each Eastern and Western Europe, and we’re seeing restoration tendencies thus far in 2023. The decrease volumes in a few of our key markets, like Turkey and Russia, tighten margins already impacted by increased manufacturing enter prices. Plans are in place to handle this, and we’re working to get our margins again right into a extra acceptable vary.

Despite pronounced provide chain and logistics headwinds which might be nonetheless lingering with our clients and companions every day, we count on a busier 2023. We began seeing restoration in Western Europe within the again half of 2022, and this pattern is constant thus far this yr. We’ll look to enter new markets the place the unfold between petrol and different fuels is favorable. We have a number of open tenders that we really feel assured we’ll have the ability to purchase in each new and current markets.

A extra normalized CNG pricing setting in locations like India and Argentina can even be useful for us to develop market share in revenues. As the market chief for the LPG conversion of petrol direct injection automobiles, we have traditionally benefited from this place in Western Europe. As an instance, in Italy, a developed market, we have seen conversions growing as incentives for petrols rolled off, extending the worth benefit of LPG. In new markets the world over, the necessity for LPG conversions offering clients a lower-cost, clear gasoline possibility is growing, and we’re seeing an uptick in demand in nations like Poland and Turkey.

The development of our enterprise will probably be an vital a part of our story transferring ahead with value benefits. In key markets like Italy, Netherlands, and Poland, we will proceed to develop this enterprise properly into the longer term. The price of proudly owning an electrical automobile remains to be costly and is growing in sure geographies because of the hovering commodities prices, like lithium. And the price of working electrical automobile can be climbing as electrical energy costs rise in Europe.

Consumers proceed to search for lower-cost options and might nonetheless make a acutely aware buy with a car powered by clear, lower-cost different gasoline. Despite the macro headwinds that we face, falling LNG costs and the continued give attention to dramatically decreasing carbon emissions create alternatives for our enterprise as each trade operators and finish clients search for decrease price choices to scale back carbon. With that, I’d like to show it over to Bill to undergo our financials.

Bill Larkin — Chief Financial Officer

Thank you, David, and good morning. I’ll begin off by going over the This autumn and full yr monetary highlights. In the fourth quarter of ’22, we generate income of 78 million. This is a lower of 6% yr over yr.

As David talked about, this was primarily pushed by the affect of international change when translating our monetary statements into U.S. {dollars} and a lower in light-duty and heavy-duty OEM gross sales. Both our impartial aftermarket and OEM segments proceed to be impacted by the Russia-Ukraine battle as volumes have decreased from pre-conflict ranges. Also, the rise in European LNG costs slowed demand for HPDI vans and decreased volumes.

However, we did notice robust development in our hydrogen parts, electronics, and gasoline storage companies. Revenues for the total yr of ’22 decreased barely by 2% to 305.7 million. This decline is primarily pushed by the weakening of the euro when translating our monetary statements into U.S. {dollars}.

Fuel change fee, per fiscal ’21, our FY 22 revenues would have elevated by 9% or 27.7 million in comparison with ’21. Apart from international change, the FY ’22 revenues had been positively impacted by a full yr’s income from our gasoline storage enterprise, which we acquired in June 21; elevated gross sales volumes of our hydrogen and electronics merchandise; increased delayed OEM volumes; and elevated gross sales volumes of our light-duty merchandise to OEMs in India. These are offset by decrease gross sales volumes to our clients in Russia in each the IEM and OEM companies, and decrease gross sales of CNG merchandise within the Western European market because of increased pure fuel costs. We report a web lack of 32.7 million for the total yr of ’22 in comparison with web revenue of 13.7 million for the prior yr.

Some of the bigger drivers of this alteration embrace a lower in gross margin of 12 million. This lower is because of a mixture of translating our monetary statements to U.S. {dollars} leading to decrease income and a discount within the gross margin {dollars}; a discount in our gross margin share from the affect of accelerating materials, manufacturing, and labor prices due to world inflation; a lack of $33 million of fairness revenue from the termination and sale of the CWI three way partnership, which was partially offset by a achieve of 19.1 million acknowledged on the sale; and an 8.4 million year-over-year swing in international change, which is a lack of 6.4 million FY ’22, in comparison with a achieve of two million in FY ’21. FY ’21 additionally included tax advantages of 8.9 million associated to our Italian operations.

For the fourth quarter of ’22, we reported a web lack of 16.9 million in comparison with web revenue of 5.4 million within the prior-year interval. Moving on to the following slide, within the fourth quarter of ’22, we reported damaging 12.9 million adjusted EBITDA in comparison with constructive 10 million in the identical interval final yr. The lower in adjusted EBITDA was primarily because of an general lower in our gross margin and the lack of fairness revenue from the CWI three way partnership. As a reminder, the fourth quarter of ’21 included 14.8 million fairness revenue from the CWI three way partnership.

Gross margin for the fourth quarter of 2022 decreased yr over yr to 4.5 million or 6% of income in comparison with 9.3 million or 11% of income for the fourth quarter of 21. This discount was primarily because of decrease gross sales volumes in our OEM segments; a shift in our gross sales combine in our OEM enterprise; and a rise in manufacturing materials, vitality, and utility prices on account of the widespread inflation and world provide chain challenges. Moving on to the following slide, that is our OEM enterprise, our OEM income for the fourth quarter of ’22 was 47.8 million in comparison with 57.4 million in the identical interval in ’21. The lower of 9.6 million was pushed by the weaker euro when translating our monetary statements to the U.S.

{dollars}, leading to decrease income, in addition to decreases in gross sales in each our light-duty and heavy-duty OEM companies. The lower in income was partially offset by increased gross sales volumes in our gasoline storage, delayed OEM, hydrogen, and electronics companies. Touching shortly on our hydrogen parts enterprise, this enterprise grew income by over 60% in ’22 on account of elevated volumes to our key clients. As a reminder, we work with the likes of Ballard and Plug Power and have been invited to take part in lots of extra RFQs for OEM Tier 1 packages.

Also, there is a robust signal of additional development within the coming years with introduced pipeline of potential income totaling 100 million. Our heavy obligation OEM volumes decreased by 50% within the fourth quarter of ’22, which had been a results of the unfavorable gasoline value differential between LNG and diesel in Europe. This is essentially pushed by a scarcity of LNG provide. More just lately, we now have seen a return to a extra normalized LNG pricing setting in Europe, which we anticipate will probably be useful in driving demand for HPDI vans sooner or later.

Gross margin decreased yr over yr by 5.9 million to a lack of 800,000, in comparison with a constructive 5.1 million within the fourth quarter of ’21. Gross margin was negatively impacted by decrease gross sales quantity and continued increased enter price. As a reminder, we did have a contractual value discount on gross sales to our preliminary heavy-duty OEM launch associate. Moving on to the following slide, that is an summary of our impartial aftermarket enterprise.

Our impartial aftermarket income for the fourth quarter of ’22 was 30.2 million in comparison with 25.3 million for a similar interval in ’21. The improve of 4.9 million was primarily because of will increase of gross sales within the Eastern Europe, Italy, and Asia Pacific, partially offset by the international change affect when translating our financials into U.S. {dollars}. We did see a constructive pattern develop within the fourth quarter by a partial restoration of gross sales in Western Europe, notably in Italy, Germany, and the Netherlands.

We stay assured in our potential to ship income development by new and current markets in our impartial aftermarket enterprise. Gross margin was 5.4 million in comparison with 4.2 million within the fourth quarter of ’21. The improve was pushed by increased gross sales volumes in Eastern Europe, partially offset by decrease gross sales quantity in Russia. Gross margin was negatively impacted from increased manufacturing prices incurred for supplies, transportation, and vitality.

Looking forward, supportive LPG pricing is making a promising demand pattern for companies as Westport continues to handle and serve markets for patrons wanting to economize on gasoline prices. Moving on to the following slide, lastly, I’d like to the touch on liquidity. Our money place barely decreased to 86.2 million at December 31 in comparison with the September 30 ending steadiness. In the fourth quarter, we noticed enhancements in our web working capital.

Looking on the full yr, web money utilized in working actions decreased by 12.2 million to 31.6 million. This lower was primarily pushed by constructive web modifications in working capital, particularly in stock and accounts receivable. This is partially offset by a rise in our web loss. We constructed up stock in 2021 to handle provide chain danger towards shortages of uncooked supplies and parts in help of our rising electronics enterprise.

However, our stock ranges have remained elevated because the second quarter of ’22. We proceed to take actions to monetize our current stock and optimize stock ranges. This course of will take time that may proceed all through fiscal ’23. We will proceed to be prudent in our liquidity administration, and there are a number of steps we’re taking.

We have outlined a prudent capital program for 2023 with 12 million to fifteen million in deliberate capital expenditures targeted on advancing work with hydrogen and including take a look at cell capability. Our web money offered by investing actions for FY ’22 was 17.6 million, in comparison with 2.3 million for $21. The improve in 2022 was primarily pushed by the proceeds on the sale of our funding in CWI at 31.4 million. Also, within the prior yr, we obtained dividends of 21.8 million, whereas no dividends had been obtained in ’22.

Net money flows utilized in financing actions in ’22 had been 22.5 million in comparison with money offered by financing actions of 104.7 million in ’21. ’21 contains 12.8 million in web proceeds from the ATM fairness providing in Q1 of ’21 and 107.9 million, web of transaction prices, from a market of public providing that closed in June of ’21. Net funds on our working traces of credit score and long-term services elevated to 17.3 million for ’22 in comparison with 8.6 million within the prior yr. Finally, coinciding with the expiry of our present quick type base shelf prospectus in the midst of April, we’re planning to file a brand new shelf to offer flexibility over the following 25 months to entry the capital markets, if vital.

As I discussed previously, ought to we want further funding, our choice will probably be to make use of debt to fund our liquidity wants versus fairness. With that, I’ll flip it again to David.

David Johnson — Chief Executive Officer

Thanks, Bill. Let me shut on a number of factors. In 2022, we made vital progress transferring the corporate ahead, however we totally acknowledge we now have loads of work forward of us. The have to decarbonize transportation and the necessity for our merchandise and to produce clear, inexpensive options to the market is for certain.

Looking forward, 2023 is an important yr for us. It’s the yr of change, setting us up for fulfillment past 2023. We’re dedicated to enhancing our monetary efficiency and driving margin growth, income development, and know-how improvement. It comes all the way down to the truth that we want cleaner transportation, and the merchandise we make allow inexpensive options which might be obtainable for patrons scalable and scalable for OEMs.

HPDI, our marquee product, is on the highway as we speak. We’re on a superb path with our lead buyer and with the event of hydrogen future. We count on further rules in 2025 and 2030 and the elevated alternatives for biogas now and hydrogen sooner or later will drive further clients and income. We’re at a very thrilling time for Westport when the quantity is anticipated to develop.

Economies of scale are achieved, and we will generate money circulation and the profitability that our buyers count on. As we ship on these monetary and operational priorities, we’re positioning Westport for long-term development in 2024 and past. And with that, I’ll flip it over to the operator to open the decision on your questions.

Questions & Answers:

Operator

[Operator instructions] Our first query comes from Colin Rusch of Oppenheimer. Please go forward.

Unknown speaker

Hi, there. You’ve bought Andre on for Colin. First query could be on the light-duty OEM facet. If you can discuss any incremental evolution within the know-how and what sort of particular options your clients are in search of.

David Johnson — Chief Executive Officer

Yeah. Good morning, Andre. Thanks on your query. So, we introduced a initiatives simply in the previous few months for European buyer to handle Euro 7.

I believe that is the most important technical improvement, and so there may be know-how behind that that allows the response to the regulation. But for us, it is an important improvement and scaling of our light-duty LPG enterprise into the — increasing our OEM remedy. You know, we now have seen by 2022 as pure fuel costs had been increased fairly dramatically, dramatic lower in that CNG facet of the enterprise for light-duty OEM. But we see that being offset as we go ahead and totally overcome by the expansion in LPG enterprise, which we have seen on the aftermarket facet, but additionally we’re actually excited concerning the Euro 6 and Euro 7 improvement packages.

Euro 6 then launches this yr, and Euro 7 takes us lengthy into the longer term.

Unknown speaker

Awesome. Thank you a lot. And what are you guys seeing throughout the portfolio on a value leverage perspective? Are there significant alternatives to extend value particularly areas of the portfolio?

David Johnson — Chief Executive Officer

Yeah, basically, that is, I’ll say, an ongoing problem as a result of we have entered, as all people is aware of, a really, I’ll name it, extreme inflationary setting with respect to our enter prices, whether or not that is materials or labor or vitality. And fortunately, a few of these prices are abating. We’re seeing form of a flip of the nook with respect to rising inflationary charges throughout varied commodities. Nonetheless, there’s persistent base that may take a while to unwind and for inflation to return again down.

And as such, our pricing actions are actually vital a part of our margin restoration elements for the enterprise. So, the alternatives are by no means simple to acquire, particularly on the OEM facet. We’ve bought long-term contracts. Nonetheless, that could be a core exercise of our crew.

Unknown speaker

Got it. Thank you. And yet one more from me, on the hydrogen facet, might you communicate to the maturity of potential new improvement companions and form of the place you’re on the pipeline of alternatives that you simply had talked about in your feedback?

David Johnson — Chief Executive Officer

Yeah, thanks for the query. So, this, clearly, for us is a very vital a part of our know-how improvement roadmap and product improvement roadmap. And we’re really happy with the response we have seen from the work we did in 2022, displaying off our hydrogen demonstrator vans, first in North America after which in Europe, and likewise buyer by buyer world wide. So, we’re happy that form of work has led to the signing of our third OEM demonstration program.

So, I believe it is clear. But simply to recap, we signed a venture with Scania, demonstrated nice leads to our [Inaudible] and are persevering with our work on that venture. The subsequent one we signed was the AVL-TUPY venture, which is ongoing. And the outcomes from that will probably be offered on the Vienna Motor Symposium on the finish of April.

So, we’re eager to get that information into {the marketplace} so individuals can see the actually basic providing that’s hydrogen HPDI because it compares to spark-ignited product and actually what a step-function enhancement of the diesel engine it’s by unlocking extra energy, extra torque, extra effectivity, and but doing so with a low-carbon gasoline hydrogen. So, only a improbable alternative for our trade and the setting. And so we see these developments being realized as we do the work in our labs and with our clients, after which transferring on, stepwise to packages that may result in manufacturing. So, that productionization will take a while, however I count on there will be some demonstration packages on the way in which to manufacturing as a result of there may be, within the trade and with our clients, substantial pleasure, if you’ll, concerning the potential to take care of their investments in factories, in knowhow, in provide chain by reusing the present diesel engines, however feeding them with the clear hydrogen gasoline and but preserving and enhancing the efficiency of these engines.

So, it is actually a fantastic mixture that we see as an actual huge driver of our HPDI enterprise in complete, and let me simply broaden on that. As our clients acknowledge the chance that hydrogen HPDI presents them with respect to efficiency, with respect to effectivity, with respect to a low-carbon future, they’re seeing additionally that with that arduous work of their engine, they’ll adapt and use methane as we speak as a result of the know-how is so related between the hydrogen providing and the methane providing. And due to this fact, we see that as a driver extra near-term for our HPDI enterprise in complete, as clients undertake the know-how and apply for methane and biogas as we speak and hydrogen into the longer term.

Unknown speaker

All proper. Thank you guys a lot.

David Johnson — Chief Executive Officer

Thanks, Andre.

Operator

Our subsequent query comes from Rob Brown of Lake Street Capital Markets. Please go forward.

Rob Brown — Lake Street Capital Markets — Analyst

Hi. Good morning.

David Johnson — Chief Executive Officer

Good morning, Rob.

Rob Brown — Lake Street Capital Markets — Analyst

Just wished to get a bit of additional colour on the demand setting for the HPDI in Europe. I believe you talked about gasoline costs normalizing. Have you seen that demand selecting up but? And what’s your expectations for development in that enterprise this yr?

David Johnson — Chief Executive Officer

Yeah, it is a fantastic query as a result of I believe it is typically, possibly oftentimes, very exhausting to see this market dynamic. And so let me simply form of return. We’ve been on a development curve with HPDI till 2022. And the rationale for that sag within the quantity and the lower in quantity that we reported as we speak and our numbers by the yr is all because of LNG costs.

So, the LNG costs, or let’s simply again as much as the commodity value of pure fuel, went up on the order of sixfold, relying on precisely which period factors you are taking. But I imply, actually, enormous improve. And fortunately, there’s been some restoration, and we’re now again into low commodity costs. And we’re beginning to see these costs present up on the pumps.

And so, we want that value differential, that value benefit that we had, as an example, in 2020 and earlier than. Not solely reestablished as mainly the case already in Europe and likewise in China, but additionally we wanted to persist, in order that clients which might be shopping for vans, that are, you realize, lengthy held belongings, three, 5, seven years, might be comfy that they purchase it as we speak and get monetary savings working it, and that it is going to preserve saving the cash. And so, there must be this stabilization that lasts some time. And that’s beginning to present a pickup in quantity.

So, we’re inspired by the outlook. We’re wanting on the fundamentals and saying thank goodness that pure fuel costs have come again to form of the place we predict they belong relative to diesel, and that may drive our enterprise. And so, we’re wanting ahead to that restoration within the quarters forward.

Rob Brown — Lake Street Capital Markets — Analyst

OK, good. Next query is on price construction. You talked about taking steps to regulate that. How a lot price can you are taking out, or what’s your plan when it comes to price take-out?

David Johnson — Chief Executive Officer

Let me discuss at a excessive degree first, after which I’ll ask Bell to chime in with possibly some extra specifics. But basically, the corporate, Westport Fuel Systems has been constructed over years by merger and acquisition. And solely throughout the previous few years have we put a drive in place to essentially drive to search out the efficiencies, unlock the efficiencies, and notice the effectivity of backside line. And that is additionally beginning to bear fruit now.

So, we now have a one firm precept that we’re — one nation firm tradition that we’re constructing, and that’s providing up the chance to leverage the important thing belongings of the corporate that had been in separate pockets now as one firm and unlock the synergies that enable us to develop the corporate with out rising our opex, I might say, is basically the precept.

Bill Larkin — Chief Financial Officer

You know, additionally, I believe, you realize, except for, you realize, as David talked about, you realize, this firm has grown over acquisitions, and we now have fairly a little bit of manufacturing capability throughout all these bodily places. And so, you realize, we’re going by and analyzing, you realize, what parts can we produce in every of these places, what’s our capability in every of these places. And, you realize, you realize, what degree of extra capability do we now have after which search for alternatives. We’re going to go refill that capability, or are we going to, you realize, shrink that capability within the associated price.

So, we’re going by this evaluation proper now, and that is an ongoing course of that is going to maintain happening by the yr and properly into subsequent yr. However, you realize, I believe there are some alternatives to assist actually form of optimize our manufacturing services throughout the corporate. And, you realize, I believe sooner or later, you realize, that may — we are going to begin seeing hopefully discount in our price, in addition to enhancements in our general margins.

David Johnson — Chief Executive Officer

And possibly, Rob, simply add a bit extra on. Thanks, Bill. Fundamentally, you realize, being an environment friendly firm, using our capability and functionality to their fullest is simply basic to being that responsive, environment friendly, efficient Tier 1 provider that we goal to be. At the identical time, I believe it is actually clear that the form of losses that we had in 2022, we won’t repair all that with cost-cutting.

It is about development. Westport Fuel Systems is pushed by development. What we wish to let you realize and let the market know is that we’re not ready for development to develop into environment friendly. So, we now have to do each.

And that development is absolutely essential. On the light-duty facet, the contracts we signed final yr begins within the fourth quarter. That’s vital development for us and can improve our utilization of our productive capability and drive economies of scale. And the expansion that’s the way forward for HPDI is completely essential.

You know, we have been speaking about that for a very long time. We noticed a dip in 2022, which is the mistaken course. We count on to get well that dip and press ahead with the expansion curve that we began out in 2018. And meaning development from our authentic European buyer, but additionally development in different markets as is so vital to our enterprise equation.

Rob Brown — Lake Street Capital Markets — Analyst

Thank you. I’ll flip it over.

David Johnson — Chief Executive Officer

Thanks, Rob.

Operator

Our subsequent query comes from Eric Stine of Craig-Hallum. Please go forward.

Eric Stine — Craig-Hallum Capital Group — Analyst

Good morning, everybody.

David Johnson — Chief Executive Officer

Morning.

Bill Larkin — Chief Financial Officer

Morning.

Eric Stine — Craig-Hallum Capital Group — Analyst

Hey, so simply sticking on the associated fee facet, so I do know it is nonetheless early within the course of and going by and your services and the overlap and all of that. But would you agree that — I imply, it sounds to me prefer it’s extra you count on to develop and multiyear probably fairly considerably. Your purpose is extra to only preserve your prices the identical somewhat than, you realize, looking for a quantity that you’ll take out of the enterprise. Is {that a} honest characterization?

Bill Larkin — Chief Financial Officer

Yeah, I would not say preserve the associated fee the identical. But what I might say is, you realize, we now have to watch out to not damage our basic development prospects within the cost-cutting, proper? So, for instance, we’re investing proper now in next-generation know-how for HPDI. Engine working pressures are going up, and we now have to spend money on that. And so, it will be foolhardy to price reduce in our know-how improvement space as a result of we’re on this for the lengthy recreation with respect to HPDI being a dominant know-how of the longer term with cleaner, inexpensive fuels, pure fuel, biomethane, and hydrogen.

So, what we’re saying, although, is that we have to have a look at, OK, so very clearly, what’s our footprint as we speak, what’s our footprint sooner or later, how can we traverse this time interval in a means that units us up for the longer term but additionally is tremendous price acutely aware within the current. So, it’s that steadiness of each. And, yeah, we can’t be on the market, I do not suppose, with here is our price slicing technique and — that is not Westport Fuel Systems. Our major driver of future profitability is development.

But within the meantime, we see loads of alternatives to develop into extra lean.

Eric Stine — Craig-Hallum Capital Group — Analyst

OK. That’s useful.

David Johnson — Chief Executive Officer

No, I — let me simply reiterate, we — you realize, we’re not going to chop our means out of this course of. You know, it is going to be a balanced strategy between rising the highest line, in addition to managing our price construction.

Eric Stine — Craig-Hallum Capital Group — Analyst

Yep. OK. Understood. Maybe simply turning to gross margin.

You know, clearly not a quantity you are pleased with, only for the fourth quarter. And you cited quite a few causes. You know, simply curious, in gentle of a few of the steps that you take there, you realize, within the enterprise in ’23, how do you envision that? I imply, what’s form of a means to consider that and the place the restoration, you realize, is perhaps and the way it would possibly play out?

David Johnson — Chief Executive Officer

Yeah. You know, sadly, after we have a look at the fourth quarter, we had loads of damaging issues lined up the mistaken means that impacted our margins. You know, as we talked about, we had the combo. You know, we had a bit of little bit of slowdown demand in Western Europe, which is what I name a higher-margin marketplace for us versus, nevertheless, we did see will increase in gross sales to India.

However, it is a lower-margin market. So, you realize, combine performed an enormous a part of that. So, once more, you realize, we’re our price construction. We do count on, you realize, as we glance into ’23, you realize, we’re all these initiatives that we’re speaking about from rising high line; you realize, working with our suppliers; you realize, passing on value will increase to our clients.

All these collectively, you realize, are going to enhance our margins and our backside line. So, it is not going to be one particular merchandise the place we will see, you realize, vital enchancment within the margins. It’s going to be a mixture of many initiatives. And so, you realize, as we glance into ’23, you realize, we’re going to count on, we will see some enchancment in our general margins clearly after we evaluate that to our fourth quarter margins.

Eric Stine — Craig-Hallum Capital Group — Analyst

Got it. OK. That’s useful. And then, final one for me, simply on the hydrogen parts.

You talked about the $100 million OEM pipeline. You know, simply curious, any commentary on how that is expanded, say, during the last yr or two? And I’m additionally simply curious, you realize, in your ideas on the aggressive setting. You talked about an elevated variety of RFPs or RFQs that you’re responding to. And, you realize, so simply ideas on that as properly.

David Johnson — Chief Executive Officer

Yeah. Thanks, Eric. This hydrogen parts enterprise. And so, simply to be clear, for everyone, mainly, hydrogen parts enterprise to us means all these issues that connect a gasoline tank to a gasoline cell or an engine, so all of the regulators and valving between the tank and the gasoline cell, the engine.

This enterprise for us has been a very a rising enterprise during the last 5 years, however possibly even long run than that. We noticed vital development in 2022. And as per our announcement earlier this yr, we might have — excuse me, manufacturing capability in China going ahead. That development has been dominated by our North America market and our Asian market.

And so, what we’re seeing now and the brand new enterprise that we have secured is increasing into Europe. And so, that work to — that the governments are doing world wide to construct hydrogen economies is absolutely to the advantage of our hydrogen enterprise. And so, we see this development trajectory not simply as a brief time period, “Hey, this has been nice over the last few years,” however really is a long-term path the place hydrogen more and more is a vital a part of what transportation depends on. And from a aggressive standpoint, we really feel very a lot within the lead.

There are opponents, and we quote towards them. And we’re having a superb hit ratio when it comes to profitable that enterprise as evidenced by that $100 million pipeline. And so, we really feel good in our place, and we predict we have to spend money on that place to boost our provide to {the marketplace} in locations like China, therefore, the funding we’re making there.

Eric Stine — Craig-Hallum Capital Group — Analyst

OK. Thanks.

David Johnson — Chief Executive Officer

Thanks, Eric.

Operator

Our subsequent query comes from Amit Dayal of H.C. Wainwright. Please go forward.

Amit Dayal — H.C. Wainwright and Company — Analyst

Thank you. Good morning, everybody. Most of my questions have been requested, however simply wished to the touch on these guarantee prices that you simply highlighted that impacted, I assume, revenues or margins for you guys. Could you discuss a bit of bit about what these had been and whether or not these are probably in play for 2023 as properly?

David Johnson — Chief Executive Officer

Yeah, for positive. This, I’ll say, vital price that we skilled in This autumn and booked is said to a provider high quality challenge that we had in our system. It was a good quantity of labor, and that is an space the place, you realize, we won’t reduce. We should ship on high quality, and we now have to have the ability to work with our suppliers to unravel these sorts of points.

We have solved that challenge. It’s mainly behind us when it comes to addressing the elemental provider high quality challenge we confronted. And so, that is, hopefully, a one-time prevalence, proper? But within the enterprise of supplying to the OEMs, it’s important to stand behind your product, it’s important to do what’s proper. And that is one which we needed to cowl on this previous quarter.

Amit Dayal — H.C. Wainwright and Company — Analyst

Understood, David. And then, when it comes to the worth will increase you are planning to implement, have these already been initiated or are these coming within the subsequent few quarters?

David Johnson — Chief Executive Officer

I believe that is an ongoing course of, proper, as a result of inflation continues. So, we have performed quite a few value will increase. I’ll inform you, it’s kind of simpler within the aftermarket as a result of, mainly, we have no long-term provide agreements and — to our clients, proper? It’s all on transactional foundation. Whereas with our OEM enterprise, there are long-term provide agreements.

We have their clients. We have to return and sit on the negotiation desk and exhibit the associated fee will increase that we have skilled and cross these on. One of the issues that does do, once you have a look at margin share, is we’re passing on price will increase for essentially the most half at price. And so, that squeezes margin by definition.

Nonetheless, that exercise will persist as inflation persists and is part of our every day enterprise versus a one-time exercise. Importantly, in that, you realize, we do have long-term provide agreements, for instance, with HPDI with our lead OEM buyer in Europe. That was a contract that was penned again in 2015, and we have been dwelling with that contract which referred to as for vital value downs yr over yr that we have been mentioning, yr over yr as they’ve come into impact. But basically, we’re developing on an opportunity to revisit that that provide settlement and reset the desk there.

Amit Dayal — H.C. Wainwright and Company — Analyst

Understood. Thank you. And then, you realize, you are focusing on development for 2023. Should we count on form of year-over-year development every quarter? I’m simply making an attempt to suppose by form of know from a modeling perspective, you realize, how this can play out.

Or ought to we count on a heavier second half, or are you already seeing some traction, you realize, with gross sales relative to final yr?

David Johnson — Chief Executive Officer

What I might say there, Amit, is that we now have — excuse me, we now have some seasonality for positive in our in our gross sales cycle. Typically, as you realize, August is our shutdown interval, and so the third quarter tends to be a bit of decrease. So, I’d say that seasonality will persist. And thus far, so good within the first quarter of this yr because the gross sales have been unfolding in January and February.

We be ok with the progress, however there’s loads of work to be performed. The markets aren’t stabilized. You know, I really feel — frankly, as I look again on ’22, I really feel fairly good that we had the numerous problem with the lack of our Russian enterprise, which we had quoted this time final yr as 15% to twenty% — excuse me, 10% to fifteen% of our enterprise. We had been capable of largely offset that.

And so, we’re within the good combat, and we now have work to do. But thus far, so good. Natural fuel costs being decrease, good value benefits between LPG and petrol in our principal markets, we see that restoration. But once more, it is not a steep restoration.

It’s a restoration.

Amit Dayal — H.C. Wainwright and Company — Analyst

Appreciate it, David. Thank you. That’s all I’ve.

David Johnson — Chief Executive Officer

Thanks, Amit.

Operator

Our subsequent query comes from Chris Dendrinos of RBC Capital Markets. Please go forward.

Chris Dendrinos — RBC Capital Markets — Analyst

Yeah. Thank you. I assume simply echoing a few of David’s feedback earlier in his ready remarks, you realize, we had been down at CERAWeek final week and really inspired by a few of the commentary we had been listening to on the hydrogen ice engine. I assume I’ll have a look at an enthusiasm from a few of the oil and fuel corporations down there.

I assume simply possibly simply constructing on that a bit of bit. And I recognize you’ll be able to’t say a lot on this subject, however, you realize, you introduced that third collaboration settlement with an OEM. Can you possibly simply elaborate on that a bit of bit extra? How did that relationship come collectively? How lengthy had you been speaking to them after which possibly only a timeline on the analysis plans there?

David Johnson — Chief Executive Officer

Yeah, positive. Thanks for the query, Chris. And I believe your level on, as an example, varied components of our trade waking up, if you’ll, to the chance that’s hydrogen internal-combustion engines, I really really feel that we’re those waking them up as a result of we have demonstrated so clearly that hydrogen with HPDI can ship extra efficiency and extra effectivity and comparatively easy with the present know-how. And so, after we discuss our clients, that contract that we signed just some weeks in the past and introduced for our third demonstration of hydrogen HPDI, this can be a buyer we have identified for a very long time.

It’s not a buyer that we simply found beneath — shopping for some tree or beneath some rock, proper? This is the connection we have had for a very long time. But we had a brand new provide, proper? We had hydrogen HPDI. And so, the method then of serving to them perceive the potential of that know-how and unlocking their curiosity and getting them to signal a contract and ship us their engine and do the work that is forward of us, this was, I’m going to name it, a 12- to 18-month lengthy course of that actually began again at ACT Expo, the place we unveiled hydrogen HPDI to the world, made it clear and defined, I’ll say, in great technical element how this does, what it does, and the way we ship 20% extra energy, 15% extra torque, 10% extra effectivity, and do it so, as an example, simply with our current HPDI know-how. So, that could be very compelling and, therefore, the power to carry on a 3rd buyer.

You know, having that proof level of Scania’s engine demonstrating 51.5% brake thermal effectivity. You know, mainly, when that press launch hit the wire, we bought calls from individuals we all know, however then like, Oh, there’s precise — that is actually occurring.” So, this is, yeah, super exciting for us. And we’re really compelled by it and looking forward to having great results with the projects we’ve signed. And you’ll be able to see some of those of — the industry will see those at the Vienna Motor Symposium in April.

But there’ll be more coming after that, I’m certain.

Chris Dendrinos — RBC Capital Markets — Analyst

Great. Yeah. Looking forward to hearing more on that. I guess just a follow-up.

On these customer conversations, can you, I guess, provide any color on where the interest level, I guess, is most coming from geographically? You know, is it still heavily in Europe, or is there a pick-up in some other regions? Thanks.

David Johnson — Chief Executive Officer

Yeah. So, one of the ways that I think about this, Chris, is that, basically, the mature markets, the well-developed markets around the world, that means Europe, North America, some parts of Asia, are really keen to get to hydrogen and clean technology. And they need to do so affordably. And so, that is where the primary interest comes from.

But it is, I would say, very global, right? And in the industry, when we talk about heavy-duty long-haul trucking, you know, that’s about 50% of all the trucks made. All the commercial vehicles in the world are heavy-duty long-haul. Those players are global players. They’re not — I would say with the exception of the Chinese, there are companies like Daimler that have trucks all over the world, be it Freightliner trucks or Trayton Group with Scania, MAN, Navistar.

These are global players. And so, we continue. And this week, my team is in Tokyo, for example, at the Fuel Cell Expo. And at the Fuel Cell Expo, we’re showing fuel cell hardware, as well as internal-combustion engines that run on hydrogen.

Chris Dendrinos — RBC Capital Markets — Analyst

Got it. Thank you. Yeah, I’ll leave it there.

David Johnson — Chief Executive Officer

Thank you, sir.

Operator

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

Mac Whale — Cormark Securities — Analyst

Hi. Good morning. Just quickly on the hydrogen HPDI, can you just take us through the broad strokes of what the plan is with these various — three particular partners? I’m just wondering, like, take us through like you have a demo. It takes whatever number of months, and then you progress to the next step.

What is that next step and how long does that take? Just trying to get an idea of what the milestones we should be looking for.

David Johnson — Chief Executive Officer

Yeah, Thanks for the question, Mac. Good to hear you this morning. Fundamentally, the steps I would from — sorry, from my career are very traditional. In other words, it starts with a meeting.

We talk about PowerPoints and technology demonstrations and computational fluid dynamics and good engineering stuff. It leads to these demonstrations that we’ve announced. The Scania demonstration, we have completed and published and share those results with the world already. But the work goes on to check other corners of the map and understand, of course, the work that we’re doing with Johnson Matthey to develop an after-treatment system that would couple with our fuel system on a diesel engine produced the cleanest, most affordable way to use hydrogen in long-haul trucking.

This is really critical because OEMs need the full set of solutions, right? And we’re not an after-treatment suppliers, so we knew the after-treatment that goes along with it. I don’t see any technical hurdle, nor does Johnson Matthey. We’ve got to go do the work and show the demonstration. Meanwhile, I do expect in this world of hydrogen internal combustion and the technology that we’re offering that we will have some demonstration programs.

And these demonstration programs will be very important. So, we’ve already demonstrated two trucks, one in North America and one in Europe. I expect there’ll be — we’ll start to see opportunities for fleets of five, 10, maybe more trucks at a time as hydrogen hubs are build out and electrolyzer capacity. And people are going to say, “OK, now, we have generated hydrogen, let’s put it to make use of.” And our solution will be one of the most effective and affordable ways to do that.

And therefore, I expect those demo programs. In parallel with the demo programs, I’ll say, is the normal development of actually, you know, taking the hardware, building multiple sets of prototypes, doing the validation development and validation cycles, passing emissions and bringing it to production. And so, that cycle is on the order of, you know, we’re looking at the latter half of this decade, you know, 26, 27, 28 that we could see first production launches. But there’s always a chance that someone gets aggressive and goes faster.

But typically, in our business, we tend to go a little slower than faster. But we’ll have to see what the regulators drive us to. You know, these new regulations that are proposed in Europe that call for a 45% reduction in CO2 by 2030 and a 90% reduction by 2040, you know, maybe the only way to get there is hydrogen HPDI.

Mac Whale — Cormark Securities — Analyst

So, if we look at scanning, specifically, the demo’s done, you release the results. So, do they — is that now done? And you wait for them to come back to you to say, “OK, we will go and do a fleet of 5,” or I’m just wondering what the nature of that is on an individual basis.

David Johnson — Chief Executive Officer

And so that demonstration that we published with Scania was almost a single-point demonstration. There were a few points, obviously, but it wasn’t a comprehensive demonstration. You start with steady state and you move on to transient. So, we’re continuing to do work with Scania and with their engine obviously at our test cells.

And that work basically expands the understanding and the mapping of the engine across many different modes of operation and the speed load points and so forth and start to work on transient behavior. So, some of those results will be published also at the Vienna Motor Symposium. You know, a year ago, when we published our first hydrogen HPDI results at the Vienna Motor Symposium, again, we were one of like 13 papers on hydrogen internal-combustion engines. We were the only one demonstrating more power, more torque, more efficiency because we were the only one using HPDI.

This year, at the Vienna Motor Symposium, there’ll be two papers presented on hydrogen HPDI. And so, I really expect that will continue to grow as more and more of our customers bring their results to the marketplace and share them with the industry.

Mac Whale — Cormark Securities — Analyst

OK. And then, moving on, just to margin, you talked a lot about it already. I’m just wondering, you know, on a contribution basis, when you look at an incremental volume in both the OEM business and the IEM business, what is the new level of incremental contribution margin you get from an incremental sale? I’m trying to reset sort of outlook and trying to understand if there’s a sort of a permanent shift in the way you’re thinking about margin and how it ramps.

David Johnson — Chief Executive Officer

So I’ll make a few comments, maybe Bill would like to. So, first of all, Mac, I think, you know, one of the things that is complicated to understand about our business is that we have all these different businesses, right? So, there isn’t just the Westport Fuel Systems contribution margin. Of course, when you put them all together, you get one number, right? I understand that. But in our business, actually, we’re managing a portfolio of products, a portfolio of businesses, and therefore a portfolio of contribution margins.

All of which are contributing to paying our bills, but none of them are contributing — in aggregate, they’re not contributing enough, obviously, right? So, I would say the biggest lever in that is our HPDI business where we’ve been living with and abiding by a contract and year-over-year price reductions that started, you know, when we signed the contract back in 2015 and when we started production in 2018. And, you know, frankly, the price has just been going down. And we have a chance to reset that and reevaluate that and make the right thing. And fundamentally, look, we’re — I would love to have lots of low-cost product with good margins, but right now, we have low-volume product in the case of HPDI.

And so we cannot access the economies of scale that we need to make that product as profitable as it needs to be and should be. And so, in this low-volume area, we have to have higher prices. And so, we have that conversation going on now.

Mac Whale — Cormark Securities — Analyst

OK. Those are all —

David Johnson — Chief Executive Officer

That’s — I don’t know, Bill, if you want to add on that.

Bill Larkin — Chief Financial Officer

[Inaudible]

Mac Whale — Cormark Securities — Analyst

Great. Thanks, guys.

David Johnson — Chief Executive Officer

Thanks, Mac.

Operator

Our next our next question comes from Jeff Osborne of TD Cowen. Please go ahead.

Jeff Osborne — Cowen and Company — Analyst

Yeah. Good morning, David. A couple of quick ones. Just on the housekeeping side, I was wondering, it might be buried in the MD&A, but what’s the percent of revenue that hydrogen components made up in 2022? Is there a rough number you can give for that 60% growth?

David Johnson — Chief Executive Officer

Yeah, I don’t know that it’s buried in the MD&A. We don’t specifically call that out, but I don’t know if we have a number. It’s sub-10% for sure.

Bill Larkin — Chief Financial Officer

Yeah, you’re right.

Jeff Osborne — Cowen and Company — Analyst

OK, got it.

David Johnson — Chief Executive Officer

But the growth rates been really strong, right? So it will not be sub-10% forever. We definitely see that as an increasing part of our sales mix, and looking forward to having that showing up more clearly in the financials in the future.

Jeff Osborne — Cowen and Company — Analyst

Looking forward to that. And then, how do we think about — you gave the capex guidance and some comments on seasonality. How should we think about the expense run rate through the year?

David Johnson — Chief Executive Officer

So operating expense or —

Jeff Osborne — Cowen and Company — Analyst

Correct. Opex.

Bill Larkin — Chief Financial Officer

You know, it should be — you know, I think a lot of the variation that we’re going to see in our opex is going to be more in the R&D, you know, as we, you know, invest in various programs. And so, as I look at each of the line items, you know, G&A, sales and marketing, that should be relatively consistent throughout the year. But R&D will fluctuate depending on levels and investments in each of these various programs.

Jeff Osborne — Cowen and Company — Analyst

You mean to say you’re trending higher through the year?

Bill Larkin — Chief Financial Officer

I mean, it depends on the timing of the programs, the level of effort, if we need to make any investments in capex. So, you know, it’s going to vary.

David Johnson — Chief Executive Officer

And what I would add on to that, Bill, is that — and, Jeff, is that basically, the more customer projects we do, the less R&D we have capacity for, right? So, if you think about kind of our engineering staff on a global basis as some kind of fixed costs, actually, you know, it does vary, as, you know, the staff changes in size here and there. You know, we add a few people as we grow, for example. But fundamentally, when we get more projects with customers like the one we announced a few weeks ago, that takes away from our capacity to do R&D. And so, we have to manage that and balance that because obviously we don’t want to be not investing for the future.

But it does, in the near term, decrease our R&D expense and move some of the R&D expense to cost of goods sold, essentially.

Jeff Osborne — Cowen and Company — Analyst

Got it. That’s helpful. The last question, David, you made a lot of comments about China and hydrogen, which was great to hear. Can you just give us a quick update on what you’re seeing in China and the natural gas side of the business?

David Johnson — Chief Executive Officer

Yeah. So, we have seen for sure some really encouraging developments with respect to fuel price in China, where basically the advantage of natural gas has been largely reestablished, much like we’re seeing in Europe. Maybe not to 100% level there, maybe it’s like an 80% level. And then, there’s, I would say, generally speaking, for, you know, a guy running a fleet of, you know, 50 or 100 or 500 trucks, there’s some — you know, is it going to stay this way, right? So, should I buy natural gas trucks? Is it going to stay this way? So, the market is — for natural gas trucks is starting to come back, but it’s not coming back as like step function like, “OK, now, purchase a pure fuel truck.” So, that’s happening in a, I would say, modest way.

At the same time, you know, we were hugely excited to see our customer show a natural gas engine with the highest brake thermal efficiency I’ve ever seen for engine for a long-haul truck kind of application. So, this announcement by way to a power of 54.16%. I love the specificity of the brake thermal efficiency. You know, it’s such a great number.

I mean, for years, decades, we’ve been trying in the industry. As an example, the U.S., DOE has had multi-hundred million dollar programs with leading OEMs, like Daimler and Navistar and Cummins, to develop an engine that delivers 50% brake thermal efficiency with diesel. And for Weichai to come out and show an engine at 54.16 is just an amazing accomplishment, and I’m super, super proud of them. And so, I think this bodes well for the future of natural gas engines in the Chinese market.

And we’re looking forward to supporting and helping that process go forward and unlock all the efficiency that a technology like HPDI can offer the marketplace.

Jeff Osborne — Cowen and Company — Analyst

Great to hear. That’s all I had. Thank you so much.

David Johnson — Chief Executive Officer

Thanks, Jeff.

Operator

Our next question comes from Bill Peterson of JPMorgan. Please go ahead.

Bill Peterson — JPMorgan Chase and Company — Analyst

Yeah. Hi, good morning, and thanks for taking my questions. I might have missed this in the intro, so my apologies. But on the LPG opportunity, you mentioned the global OEM for a couple of programs, Euro 6 and Euro 7.

Can you help us size the opportunity and help us understand, like, when does this start? Just any kind of comments on the contribution of this opportunity would be helpful.

David Johnson — Chief Executive Officer

Yes. I’m going to do my best to recollect all the numbers, Bill, but we’ll certainly point you to the actual press release that has the numbers. Basically, the production is scheduled to start in the fourth quarter of this year with the Euro 6 for a number of this OEM’s applications. I think our number was like 35 million euro for about two years of production.

We have since secured the follow-on business, which I think starts in late ’25, early ’26. I can’t remember the timing exactly for that. It’s a Euro 7 application. So, the Euro 7 timing is still under discussion.

The regulation isn’t fully in place yet, but certainly that Euro 7 product will be ready to support the regulation and our customer. But that business then grows from the first contract we won for Euro 6. And I don’t remember the number. I apologize.

Ashley Nuell — Senior Director, Investor Relations

Forty, 40 million annually —

David Johnson — Chief Executive Officer

Forty million annually as opposed to 35 million or 38 million for the whole contract, right? So, like almost a doubling from Euro 6 to Euro 7 in terms of top line revenue figures that we expect from that — those contracts.

Bill Peterson — JPMorgan Chase and Company — Analyst

Yes. Thanks for that incremental information. I want to come back to HPDI, but in this case, for the region of North America. So, we know that natural gas really is, you know, kind of relatively small.

And then, obviously, you have the hydrogen programs that look like they’re kind of dominated by Europe and maybe China. But if you think about natural gas prices in the U.S., they’re low and declining. Is there any opportunity for nat gas HPDI for you — do you see over the horizon? And then, for hydrogen, how do you see that progressing? I think, you were supposed to have a collaboration with Cummins last year. I’m not sure if that occurred.

But I’m wondering what opportunities could exist as we look out in the future for HPDI — hydrogen HPDI into the North America market?

David Johnson — Chief Executive Officer

Yeah. So, let me just start maybe at the end in terms of hydrogen in North America. It was only I think less than a year ago that we basically had the announcement of the IRA with the hydrogen hubs and the significant spending. And so, frankly, there’s an infrastructure build out that’s started, and plans are being made and announcements are being made.

And companies like our customer Plug Power are investing to create that infrastructure in that hydrogen economy in North America. We think that as that capability to offer hydrogen in the marketplace grows and as the cost per kilogram of hydrogen comes down as is the forecast in many jurisdictions around the world, maybe every jurisdiction around the world, that hydrogen HPDI will play an important role. And this is not lost on the industry that makes trucks as they look at, you know, what about a fuel cell? What about a battery electric? How do I do long haul? How do I respond to the CO2 regulations? What will the CO2 regulations be? What will a zero emissions vehicle actually be defined as? So, all these things are in play. And so, in North America for sure.

But I want to just point out that in North America, basically, you have, you know, four major brands that dominate the marketplace for long haul trucking. And all of them are ones that we have ongoing relationships with and would expect that the products that they make today in this jurisdiction, this jurisdiction being Europe, can be brought to North America. And so, sure, there’s some work involved with that. But the answer in the long run is for sure.

And I do think, coming back to your natural gas side of the question, as our customers integrate our HPDI hardware into their engines, there is a natural step that says, “Now that we have your {hardware} within the engine, why do not we do pure fuel and biogas proper now?” Because that will help respond to the regulations and respond to our customers with an affordable alternative. So, yes, but it’ll come.

Bill Peterson — JPMorgan Chase and Company — Analyst

OK. Thanks a lot.

David Johnson — Chief Executive Officer

Thank you.

Operator

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

David Johnson — Chief Executive Officer

Yes. Thank you very much, everyone. Thanks for your time this morning. We fully recognize that the numbers we’ve posted in 2022, I’ll say at the top line are somewhat encouraging, far from the growth we expect and that we plan for.

But fundamentally, you know, to offset the loss of Russian business, to continue to grow in the challenging environment we’ve had in 2022 and in prior years for us is a positive sign but not nearly as positive as we’d like. And when we get to the bottom line, for sure, we have work to do. There’s no question about it. That really is largely making sure we’re efficient as a company, but also making sure we grow to the opportunity that’s in front of us with HPDI and then hydrogen HPDI.

You know, when I think about the marketplace, our developing markets are really looking for affordable technology that’s clean, and the well-developed markets are looking for clean technology they can afford. So, for us, that looks like a world of opportunity. And as mentioned in my opening prepared comments, you know, we do see — we do believe in this eclectic future that there’s going to be more than one technology. And so this myopia that exists in some pockets of the world still that says, “Hey, it is all battery electrical.” This must be dispelled.

And I believe we’re doing a superb job of that by bringing HPDI to {the marketplace} and serving to individuals perceive that’s for now and into the longer term. So, with that, I’ll shut. And thanks very a lot on your time as we speak. We’re wanting ahead to speaking to you once more on the subsequent quarter.

Operator

[Operator signoff]

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Ashley Nuell — Senior Director, Investor Relations

David Johnson — Chief Executive Officer

Bill Larkin — Chief Financial Officer

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Rob Brown — Lake Street Capital Markets — Analyst

Eric Stine — Craig-Hallum Capital Group — Analyst

Amit Dayal — H.C. Wainwright and Company — Analyst

Chris Dendrinos — RBC Capital Markets — Analyst

Mac Whale — Cormark Securities — Analyst

Jeff Osborne — Cowen and Company — Analyst

Bill Peterson — JPMorgan Chase and Company — Analyst

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