I was about to apprise Westport Innovations (NASDAQ:WPRT) investors about highlights from the company's last conference call when management unexpectedly revised its full-year revenue guidance downward two weeks earlier.The market couldn't take the shock: Westport stock is now down around 55% over the past month.
But with Westport's story taking such an interesting turn now, investors have even better reasons to dig up key points from the company's last earnings call and weigh them against its latest outlook to understand how things might have changed over the past couple of months. I'm going to do that for you: I'll detail five such points and pit each against where things currently stand.
#1: Path to profitability
Westport's last earnings release was all about how its business units turned adjusted EBITDA positive for the first time, and how it expects its consolidated business to turn positive EBITDA by the end of 2015. The company's conference call gave deeper insights into how it plans to achieve that. CEO David Demers outlined one of the goals as:
Careful management of our investment programs to ensure that operational cash flow from Westport direct sales, as well as our joint venture dividends, will cover investment by the end of 2015 and allow Westport to achieve overall consolidated positive adjusted EBITDA.
In other words, Westport is not relying on a growing top line alone to break even. Having already established a market for its technology, the company is now aggressively streamlining its operations to cut costs. The results are already visible: Westport reduced its second-quarter and first-half operating expenses by a significant 22% and 12%, respectively, year over year.
Furthermore, Westport plans to manage its future research and development spending in a way that it falls within the income the company generates from its business units and joint ventures. If you're wondering what that has to do with Westport's profitability, it's important to understand that aside from three operating business units -- Applied Technologies, On-Road Systems, and Off-Road Systems – Westport runs a fourth unit primarily for research and development programs. Since that R&D spending is included in the company's full numbers, its consolidated business is still in the red even as its operating units combined turned EBITDA positive last quarter. That is why Westport counts managing its R&D investments better as a step toward profitability.
Where things stand now
There's good news, and there's terrible news.
The terrible news is that Westport now expects to generate between $130 million-$140 million in revenue for the full year. That translates into 15% to 21% lower revenue over 2013 – a sharp downgrade from Westport's earlier projection of 7% higher revenue for the year. That leaves no scope for the company's business units combined to make it through the year with positive EBITDA. This was perhaps the last thing Westport investors wanted to hear at a time when they were hoping to see the first signs of profitability. More importantly, when a loss-making company's top line starts trending lower, it's bound to trigger panic.
The good news is that Westport still expects to hit consolidated adjusted EBITDA by next year, backed by prudent cost and R&D management. But for that, the company will have to grow its revenue at a faster rate to make up for this year's shortfall. That looks difficult, considering that demand from key markets like Europe, China, and Russia is sluggish, and one of Westport's big orders for its iCE PACK LNG Tank Systems – a high-potential product for the company – has hit a hurdle.
Long story short, investors will probably have to wait longer to see Westport turn a corner.
#2: ISX12 G is hitting it right
Investors and analysts alike have been scouting around for every little update about the ISX12 G engine ever since it was launched jointly by Westport and Cummins (NYSE:CMI) last year. The attention isn't unwarranted -- The 12-liter natural engine is, after all, the only one serving heavy-duty trucks currently .
While Cummins didn't mention ISX12 G in its last earnings release, Westport management provided the much-needed update. Westport credited "strong demand for the ISX12 G" for the 22% year-over-year jump in its Q2 North American CWI (Cummins-Westport joint venture) shipments.During Westport's earnings call, CFO Ashoka Achuthan further elaborated:
The reaction to the ISX12 G has been positive, and there have been no surprises there as far as we are concerned.
We have evidence that the engine is catching truckers' attention -- PACCAR and Freightliner are extending it to their vocational trucks, Volvo displayed an ISX12 G-powered daycab tractor at ACT Expo earlier this year, and Oshkosh has chosen ISX12 G engine to test natural-gas for its concrete mixer trucks.
Good response to the 12-liter engine is also one of the reasons why Westport projects natural gas to penetrate 3%-5% of the North American heavy-duty truck market this year, up from just about 1.7% in 2013.
Where things stand now
While updating its outlook, Westport also provided some background about its second-generation high pressure direct injection, or HPDI 2.0 technology, which is a lot more advanced than HPDI, especially in terms of cost benefits.
HPDI 2.0 will have an upgraded LNG storage system, which will also go into the ISX12 G engines. The system will reportedly bring with it "significant reduction in costs", which could propel demand for the 12-liter engines. According to Westport, the ISX12 G engine has already "established itself as a strong performer in regional trucking applications", with the CWI currently supplying "virtually all natural gas engines in the U.S. commercial vehicle space."
So Westport's lower revenue guidance has nothing to with the ISX12 G, and it continues to be a promising product for the company.
#3: Railways may take a decade to switch to natural gas
Yes, you read that right. In Demers words: "I'd say the rail industry is certainly longer term. For a truck fleet, it might be a few years. For the rail industry, it might be a decade."
While the locomotives industry is warming up to the idea of natural gas, Westport believes dual fuel (diesel/natural gas) will need to fill in until adequate LNG infrastructure helps natural gas find its niche as a stand-alone fuel. That may explain why stalwarts like General Electric and Caterpillar are testing dual-fuel engines for their locomotives. Demers further explained how dual fuel may not be a long-term technology, but "it certainly can let people get used to the idea of running on natural gas." That also tells us how vital adequate infrastructure is to promote the cause of natural gas.
For now, it looks like trucking will be the key to Westport's growth over the next few years.
Where things stand now
Westport's guidance update reflects near-term woes, and doesn't really change its views about railroads. While Westport focused entirely on the trucking industry while providing updates about HPDI 2.0 system, I found it interesting when it said how the ISX12 G engine is "encouraging the development of both LNG and CNG infrastructure."
As I mentioned earlier, how fast natural gas picks up steam as a fuel will depend a lot on infrastructure. If the ISX12 G can push more truckers toward natural gas, it could encourage companies like Clean Energy Fuels that are at the forefront in building refueling stations to invest more in infrastructure. That will mean a greater number of easily accessible refueling stations, which could help attract vehicle operators that are currently shying away from natural-gas technology.
#4: China is slow, but still a priority
Westport's joint venture with China-based Weichai is one of its key sources of revenue. After growing 71% in 2013, revenue from the venture has hit a roadblock this year – It fell 5% year over year during the first half. While Westport blamed "softer macroeconomic conditions, credit tightening, and higher natural gas prices in China" for the slow down, it continues to be bullish about the market.
During Westport's last earnings call, Achuthan mentioned how the company "continues to invest in China to capture the significant market opportunity there." An example is the launch of its first -ever HPDI engine in China earlier this year. Weichai-Westport plans to test the waters by releasing 30 HPDI-engine powered trucks in China this year, and start commercial production by next year.
Where things stand now
Weakness in China is one reason why Westport lowered its guidance. The market is clearly under pressure, which doesn't bode well considering that it's also among the company's primary markets.
That said, the latest update is that the Weichai-Westport HPDI 12-litre engine has received the China V emissions standards certification, which gives the company the go-ahead to deliver its 30 test trucks.
In any case, despite current headwinds, China remains a big opportunity. As highlighted in a recent Westport presentation, Navigant Research projects annual sales of light-duty natural-gas vehicles in China to nearly triple by 2023 (as shown in the first graph below), backed by 40% compounded average growth in the number of refueling stations over the period (as can be seen in second graph below).
With Westport's President, Nancy Gougarty even calling China one of the company's "growth engines", investors should pay close attention to any development in the market.
#5: A growth year
Westport's revised outlook aside, 2014 has been a significant year for the company so far. As Demers summed up during Westport's last conference call:
2014 is the beginning of our phase in the development of our long term vision of high-performance Westport natural gas vehicles in markets around the world.
Of course, steering its operating business units toward positive EBITDA last quarter remains Westport's biggest achievement so far. But the company hit several other milestones this year, including
- Launch of its first HPDI engine in China and delivery of its first HPDI locomotive to Canadian National Railway.
- Consolidation of its Ford WiNG Power System assembly plants into one location at Dallas, Texas to curb costs. Westport also added Ford's hot-selling F-150 pickup to its product line this year.
- A deal with Delphi Automotive to co-develop high-pressure fuel injectors that will be a part of the HPDI 2.0 system.
Where things stand now
Westport has, undoubtedly, made huge headway this year in terms of product advancements, with HPDI 2.0 even touted to be a game-changer for the company. Westport's technology remains as promising now as it was a month ago, especially with the trucking industry's growing interest in the alternative fuel.
Unfortunately, Westport's weak outlook was a big blow to investors who waited so long. That's understandable, because it requires great deal of risk tolerance and patience to put your money in a company that's earning nothing. Whether you're still holding on or not, make sure you tune into Westport's next conference call, which should be up in a couple of weeks, as that could help you decide your next course of action.