Earnings Update: Did Westport Innovations Have a Great Quarter or a Bad Quarter?
Westport Innovations finally reported what looks like a big quarter after a series of rather dismal releases in 2013. The company soundly beat analyst expectations, growing sales almost 40%, increasing gross margins to almost 30%, and cutting its adjusted EBITDA loss to $1.6 million, after averaging more than $9 million per quarter for the past two years. However, there are a few things investors should take note of before deciding what to do.
Someone's buying natural gas trucks and LNG components
Sales at CWI, Westport's partnership with engine maker Cummins, were up 79% in the quarter, and the JV shipped 2,480 engines -- some 1,100 more than the year-ago period. In the earnings report, Westport said "the increased quarterly volumes in North America were driven by higher sales in all segments, but mainly in truck applications." This indicates that the ISX12 G -- launched in April 2013 -- is contributing to growth in a big way.
Additionally, the company's On-Road Systems unit reported strong growth, increasing sales a whopping 277%. The company pointed at three areas of strength:
- iCE PACK LNG tank systems for heavy trucks.
- Increased revenue from WiNG sales (formerly BAF)
- Increased shipments to Volvo for the V60 and V70 bi-fuel station wagon.
Two steps forward, one step back?
The Applied Technologies unit actually reported a 6% decline in revenue, and management pointed squarely at Italy. However, COO Nancy Gogarty also said that the Chinese and Russian markets both showed strong growth. So it's important to note that the company's expanding footprint into diverse markets is providing protection against exposure to weak markets, such as Italy right now. Gogarty, when talking about the Tata relationship, which should begin paying dividends in coming quarters, said that it's a series of small steps versus one or two giant steps:
But as we talked about with Tata, we have now got the 580 controller on that, and that's a positive step. And we are seeing similar steps along the way. But at this point in time unfortunately we don't have any real giant steps at the moment, but it's a continuation of real strong small steps, and success with multiple OEMs.
Recently, Westport issued a press release announcing that it was filling an order for four of its LNG tenders, but only one of these shipped in the first quarter. The Off-Road Systems business segment reported revenue growth of 18%, but it was by far the smallest of the operating groups, with only $1.3 million in sales in the quarter. Since LNG tenders are very high revenue products, the shipment of the remaining three units alone would be a massive boost for this business unit.
However, a $200,000 bump in sales, which is less than the LNG tenders are expected to sell for, indicates that there could be some softness in sales of the company's 2.4 liter engine for forklifts and power generation. It's worth paying closer attention to this going forward. There is some potentially great news that isn't getting much attention, though, to address this possible weakness. In the press release, Westport announced that it was partnered with Hyundai to build a natural gas/LPG version of its 3.8 liter industrial engine, taking Westport further upstream in the forklift and off-road engine market for power generation, construction, and oil & gas.
JV margins are getting squeezed: Will the trend reverse?
CWI recorded a $15 million warranty charge in the quarter, which meant Westport received no income from the JV. According to CFO Bill Larkin, Westport would have received $4 million in profits from the JV if not for this charge. He also noted that the charge was related to the 8.9 liter engine, and not the new 12 liter engine, and that historically the 8.9 liter engine had been very profitable. Historical indications are that this will be a one-time charge, and that coming quarters will indeed profitably contribute to Westport's bottom line.
WWI, the Chinese joint venture, is another story. WWI has been growing at a very high rate up until this quarter, but margins have been very low. Unfortunately, Westport management doesn't seem to expect this to change, and is deferring to its Chinese partners when it comes to pricing in the Chinese market. However, the addition of the HPDI engines (12 liter in 2015, 10 liter to follow in another year or two) will have a positive impact for Westport.
The reason? Westport Innovations is selling the HPDI components to the JV, so it will collect revenue and profits at the business unit that sells these components to WWI. This is above and beyond the share of profits that the company collects from the WWI joint venture. "Double-dipping," if you will.
Final thoughts: Cup looks more than half-full
It's always tough to balance good and not-so-good in an earnings report like this. However, let's take a few things at face value:
- Management executed on its pledge to narrow adjusted EBITDA losses.
- Consolidated revenue grew almost 40%.
- A lot of partnerships with OEMs are filling the pipeline for continued growth.
However, I think it's fair to say we need to see this kind of forward momentum in a sustained way. One quarter of growth doesn't make a turnaround, but it's definitely a start in the right direction. If you're looking to start a position, it could be a good time to do so -- even with the huge post-earnings pop. This is a better-positioned company than it was a year ago, and the shares are still marked way down.
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