Welcome to the Westport Fuel Systems 4th Quarter and Full Year Fiscal 2020 Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Christine Marks, Westport's Investor Relations representative. Please go ahead.
Thank you, and good morning, everyone. Welcome to Westport Fuel Systems' 4th quarter and year end 2020 conference call, which is being held to coincide with the press release containing Westport Fuel Systems' financial results that was distributed yesterday. On today's call, speaking on behalf of Westport Fuel Systems is Chief Executive Officer, David Johnson and Chief Financial Officer, Richard Onizietti. Attendance at this call is open to the public and to media, but questions will be restricted to the investment community. You are reminded that certain statements made in this conference call and our responses to various questions may constitute forward looking statements within the meaning of the U.
S. And applicable Canadian securities laws. And as such, forward looking statements are made based on our current expectations and involve certain risks and uncertainties. Actual results may differ materially from those projected conference call is subject to and qualified in its entirety by the information contained in the company's public filings. I'll now turn the call over to David.
Good morning, everyone. Thanks for joining our conference call to review Westport Fuel Systems 2020 results for the Q4 and the full year. This is David Johnson speaking. With me on the line today is Richard O'Razetti. Clearly, 2020 was a year filled with challenges.
The COVID-nineteen pandemic challenged the global economy and created headwinds for our business, but there were also unexpected opportunities and our global team demonstrated standing resilient in responding to both the challenges and the opportunities. In spite of the unprecedented events of 2020, it's gratifying to see that the world's demand for clean, low carbon, cost effective transportation hasn't wavered. That continuing demand helped us to finish the year strong. Looking back on the past year, the impact of the pandemic was most severe in Q2 when we and our customers had to pause production due to the crisis. Q3 saw some recovery and the strengthening continued in Q4, shifting us to a record quarterly revenue.
For the year, revenue was down 17% from our record 2019 full year revenue. Overall, nearly 90% of that decline was attributed to the COVID related shutdown in the 2nd quarter. However, our Q4 record revenue was a 13% increase versus the same quarter in 2019, driven by a 32% increase in OEM revenue. Looking forward, we're poised for continued positive momentum in 2021, albeit somewhat tempered in the near term by the lingering effects of the ongoing pandemic and by the global supply chain challenges the automotive industry is facing right now. Aside from the COVID-nineteen challenges, I'm pleased to report that we advanced each one of our 2020 business objectives, including especially sales growth in key market segments and geographies.
And overall, we strengthened the business with balance sheet improvements and cost reductions. In November, we announced new product development work with our current OEI partner to apply HPDI 2.0 to an updated base engine platform designed to meet Euro 6 SEP regulations that take effect in 2024. We read this as our launch customers' confidence in our HPDI systems and the increasing demand of their fleet customers who are realizing the benefits of our HPDI solutions. Our targets for 2020 and for future growth include progress in China, where our joint venture with Weichai Power secured certification for the WP12 natural gas engine powered by HPDI 2.0. As one of the largest suppliers of natural gas engines in China, RGE currently supplies Sparky Bay natural gas engines to leading Chinese commercial vehicle OEMs, and they in turn serve the largest natural gas trucking market in the world.
The WP12 HPDI engine certification sets us up to serve that large and growing market as vehicle OEMs complete certification for their vehicle offerings with our engines. We've also seen growth in India. In 2020, we combined our business with our JV with Unuminda to better serve the market and to realize cost efficiencies. We can now offer a broader range of products to this growing CNG market. And also in 2020, we commenced work on developing hydrogen with HPDI.
I'll cover that later in more detail. As I said earlier, Q4 sales volumes were down at very strong with $2,000,000 In particular, our heavy duty market segment saw very encouraging new sales growth as fleets in the European trucking industry continued to gain confidence as they realized significant operational cost savings as well as carbon reduction benefits made possible with natural gas fueled HPDI solutions. We finished the year with an HPDI sales rate almost double compared to 19, and we're on pace for continued growth in 2021. Net income grew to $4,100,000 versus $3,400,000 in the Q4 of 2019. The work we did earlier in the year to shore up our balance sheet, working with our lenders to secure lower cost of capital and access government subsidies positioned us well to navigate 2020, and we finished the quarter with $64,000,000 in cash and cash equivalents.
Some growth trends in transportation underpin our confidence in the coming growth opportunities. And perhaps the easiest to understand is the heavy duty trucking business, where investment decisions are pure business decisions and the fuel price differentials of the pump are driving sales and market share gains today. For heavy duty long haul trucks, weight is absolutely a constraint. The other big constraint is cost. Both weight and cost are big disadvantages for the adoption of battery electric technology in heavy duty trucking.
Based on physics and economics, it's perfectly clear that the lightest weight vehicles that go the fewest miles and return to home have the potential to transition to battery electric, particularly as global infrastructure development improves. In contrast, heavy duty long haul trucks are the least likely or hardest to power with batteries. In general, about half of all trucks sold around the world are heavy duty long haul trucks. As populations grow and economic development continues, we'll need to move more freight. The number of trucks will grow and the performance and cost effectiveness of lower carbon solutions will become increasingly critical.
In Europe, The market share of alternative fuel trucks increased nearly 40% in 2020, a stark contrast to the overall commercial vehicle market, which declined markedly due to COVID-nineteen. Governments have a critical role to respond to the challenges of climate change and urban air quality, and at the same time seize the opportunity to turn a green path to reach their economic development goals. We already see strong regulatory support for transportation carbon reduction in Europe, India, China and in parts of the U. S. Governments that properly set the table with economic and regulatory I believe the ability of electric technologies to deliver affordable, effective solutions for heavy duty long haul trucking in markets around the world, combined with the urgent need to decarbonize, will drive the growth of HPDI Systems.
HPDI is ready, in production, for sale and proven right now. No waiting. The growth in our revenues demonstrates the word has gotten out. HBI with natural gas and renewable natural gas works and it works well. It's available now and it's generating operating cost savings and helping fleets achieve their carbon reduction targets.
Fleets vote with their dollars. Take note of what's happening in Europe right now with natural gas, but specifically HPDI. China is next. Light duty OEM sales and our independent aftermarket revenue were slower to rebound, with revenue for the independent aftermarket segment following 15% relative to the same period last year. In particular, customer demand in Western Europe was impacted due to COVID-nineteen.
At this time, we expect to return to 2019 levels with modest growth, thanks to regulatory support in places like Egypt and India and other cost sensitive markets Like Turkey, Russia and China. I'll use India as an example. India's regulatory commitment to emissions reductions from transportation has not wavered through the COVID-nineteen pandemic. The stringent Bharat Stage 6 emissions in came into effect in April 2020 during the lockdown. At the same time, the government has committed to building 1,000 LNG stations in the next 3 years and is doubling its commitment to natural gas as part of its energy mix.
Our largest customer in India, Maruti Suzuki, responded by discontinuing their diesel product lines, which is 30% of their business, a significant commitment to embrace alternative fuels, specifically natural gas. We've seen an uptick for natural gas products across the full suite of offerings in India from ubiquitous 3 wheelers up to the heaviest commercial vehicles. Combined with growth in infrastructure and highly cost conscious consumers who can access a 30% to 50% price savings at the pump for natural gas versus petrol. All of these are excellent market conditions for the success of our products. And in heavy duty trucking, where fleets replace trucks every 3 to 5 years, There simply is no other viable cost competitive alternative that can deliver all the benefits that HPDI does today.
Natural gas, renewable natural gas infrastructure continue to grow, also in Europe, now with nearly 400 LNG stations and 4,000 CNG stations. And now we also see investments being made to create a hydrogen refueling infrastructure. Hydrogen use with HPDI is extremely compelling with near zero greenhouse gas emissions and much lower cost to fuel cell or battery electric trucks, particularly in heavy duty applications. This provides a pathway from phospho LNG to bio LNG to green hydrogen. So before I turn the call over to Richard to review financial results, A few highlights of our progress with Tredegen.
Although it's rather modest today in the scope of our total revenue, our existing GFI branded Tredegen business supplying components to Plug Power, Ballard and others grew by 75% in 2020. According to the Hydrogen Council, The total addressable market for hydrogen is about $150,000,000,000 while costs for producing green hydrogen have fallen 50% between 2015 2020. So far, hydrogen is produced close to where it's used, and there is limited dedicated transportation infrastructure today. There are only about 5,000 kilometers of hydrogen pipelines around the world in 2016. Compare this to over 3,000,000 kilometers for natural gas.
In 2020, worldwide, there were less than 500 hydrogen refueling stations, a good start. Compare this with existing and growth plans for natural gas infrastructure in Europe, India and China, as I mentioned earlier. There is work to be done with hydrogen. That support for hydrogen infrastructure development is growing with commitments announced in China, Japan and Germany. Hydrogen appears to be well suited for heavy duty applications for ranges over 400 kilometers for common and fast filling is important for the operator.
A few weeks ago, we published a white paper with ABL sharing our initial modeling for thermal efficiency and total cost of ownership. We are confident that the high efficiency hydrogen internal combustion engines have the potential to financially outperform fuel cell EVs in terms of total cost of ownership and also lowers the cost of CO2 avoidance, which is especially relevant in jurisdictions with carbon taxes and other penalties for high emissions. Earlier this month, we announced successful first trials of a hydrogen fueled internal combustion engine with HPDI. Our test cell in Vancouver ran an engine at peak torque and rated power. Combustion was stable and controllable.
Initial test results are highly encouraging and confirm that HP air with hydrogen in an internal combustion engine is comparable in efficiency to fuel cells in heavy duty applications. With this early success fueling our enthusiasm, we'll continue to collect more data. Technical results we shared and reviewed by independent experts at the upcoming BNM Motor Symposium late next month. We also announced the project with Scania to competence development work on their internal combustion engine fueled by hydrogen. We're designing and preparing for that testing program, which we expect to commence in the Q4.
According to a recent research report by Morgan Stanley, If hydrogen truck sales account for just 10% of global sales by 2,030, that would equate to per annum growth of 30% in the next 5 years alone and provide a significant runway of growth over the next decade. Capturing just a fraction of this growth is meaningful for Westport Fuel Systems. The potential for OEMs and others to avoid new and significant investments required to develop and manufacture fuel cells, electric motors and batteries is incredibly exciting and compelling. Other high load applications like mining, green rail have come to rely on the efficiency, power, durability and reliability of diesel engines. And there is no other alternative that offers the same potential to leverage established supply chains, manufacturing investment and infrastructure and economies of scale.
Now let me turn it over to Richard to review a few of our financial results.
Thank you, David. As David mentioned, our record revenues were higher 13% year over year due to strong sales volumes from HPDI Systems and a 7% increase in the euro to U. S. Dollar exchange rate. We also saw a strong recovery in our light duty OEM revenues during the quarter, an increase of 44% over the Q3 of 2020 due to sales in India and Russia.
The strength in sales activity in the quarter was partially offset by large one time contractual price reductions in our contract with our initial launch partner in the Q4 of 2019 and lower year over year independent aftermarket revenues still recovering from the impact of COVID-nineteen on sales volumes. Gross margin decreased mainly due to lower margins real life year over year on HPDI systems, lower HPDI engineering services and lower independent aftermarket sales, partially offset by the large increase in HPDI sales volumes. Net income benefited from $2,700,000 in higher income from a strong quarter in our CWI joint venture due to lower operating expenses and also a $5,300,000 unrealized foreign exchange gain compared to $2,600,000 in the prior year. We generated higher year over year adjusted EBITDA of $8,100,000 bolstered by strong quarterly performance from CWI and lower operating expenses. Our adjusted operating cash flow, which includes the dividends received from CWI, decreased year over year due to increased working capital resulting from a buildup of receivables on higher sales volumes and inventory for our heavy duty OEM business.
Revenues were lower year over year due to the pandemic's impact on independent aftermarket, light duty OEM and delayed OEM since the pandemic's outbreak. This was partially offset by strong sales growth and the second half of twenty twenty in our heavy duty OEM business unit selling the HPDI systems to our initial launch partner. This is net of price concessions and lower engineering services work, which all had a direct impact on gross margins. Was a further impact to gross margins of a $3,200,000 charge taken on 2 pressure release device field service actions as well. Equity income from CWI decreased slightly in 2020, mainly due to the impact of COVID-nineteen and the related OEM shutdowns in the first half of the year.
Despite a challenging year, a net loss of $7,400,000 was mitigated from Net income in 2019 included a $3,300,000 one time gain and a $2,500,000 unrealized foreign exchange gain. Operating cash flow and adjusted operating cash flow were significantly below 2019 year over year due to the impact of COVID-nineteen. Multiple financing efforts, government support and austerity measures mitigated this impact to secure the liquidity of Westport Fuel Systems. Overall, EBITDA continues to be positive. Notwithstanding the many challenges we faced in the first half of twenty twenty, The positive trends in our EBITDA and adjusted EBITDA reflects the commitment of management to deliver sustainable growth.
Our product portfolio and the performance of our team continues to strengthen and I'm encouraged by our progress on the pathway to sustainable profitability. Now turning to our business segments. OEM revenue for the 3 months year ended December 31, 2020 was $58,800,000 $149,600,000 compared to $44,700,000 $164,700,000 for the same periods in 2019. Revenue growth in the current quarter largely reflected an increase in sales volumes in the heavy duty OEM business from our initial launch partner combined with a 7% increase in the euro to U. S.
Dollar exchange rate that I mentioned. This was partially offset by the price reductions of our HPDI product. The year over year decrease in OEM revenue for the full year 2020 is mainly due to the impact of plant shutdowns in response to the COVID-nineteen pandemic in the first half of the year, combined with lower light duty OEM sales to our German and Russian OEM partners. OEM gross margin increased by $1,300,000 to 6,600,000 or 11% of revenue for the Q4 2020, which compared to $5,300,000 or 12% of revenue for the Q4 2019. The current quarter benefited from volume discounts from HBEI component suppliers achieved at the end of the year and recognized during the quarter.
Turning to our independent aftermarket business. Independent aftermarket revenue for the Q4 of 2020 was $25,100,000 $102,900,000 for the full year 2020 compared with $29,600,000 and $140,600,000 for the same prior year periods. The year over year declines in revenue for the IAM business segment are primarily due to the continuing impact of COVID-nineteen on customer demand in Western Europe and the related shutdowns in the Q2 of 2020, partially offset by the stronger euro to U. S. Dollar exchange rate.
Independent aftermarket gross margin decreased by 2,100,000 to $6,400,000 or 25 percent of revenue for the current quarter compared to $8,500,000 or 29 percent of revenue for the same period in 2019. The decrease in gross margin and gross margin percentage will be the lower sales caused by the impact of COVID-nineteen on customer demand in the higher margin markets of Western Europe. Now turning to our CWI joint venture. Revenue from our CWI joint venture for the 4th quarter decreased by $6,500,000 to 96,000,000 were 6% versus the same period last year due to lower engine sales during the quarter. Unit sales were lower For full year 2020 compared to the prior year, reflecting the impact of OEM factory shutdowns in April May in response to the COVID-nineteen pandemic.
Despite the lower revenues, gross margin for the Q4 2020 was slightly higher year over year at 28,500,000 or 30% of revenue. The increase in gross margin and gross margin percentage resulted primarily from product mix, which more than offset lower revenue than the current year quarter. Net income for the Q4 2020 increased by $5,300,000 to $18,800,000 or 39 percent higher over the same period last year, primarily reflecting lower operating expenses combined with the increase in gross margin. Westport Fuel Systems share of CWI's net income for the Q4 2020 increased to $9,400,000 from $6,700,000 in the same period last year. Now turning to our balance sheet and liquidity.
As mentioned earlier, we have made significant strides to secure the liquidity of Westport Fuel Systems through the past year, which included the restructuring of our convertible debt held by the Cartesian Group. Due to the significant appreciation of Westport Fuel Systems' share price, The Cartesian Group converted $7,500,000 of the $10,000,000 in debt outstanding, dollars 5,000,000 in the Q4 of 2020 and $2,500,000 in the Q1 of 2021. As part of our efforts to improve our liquidity and funding, we are also actively managing our debt profile to align that to our long term capital investment needs and discussing with our lenders about modifying or renewing some of our term loans to extend terms and improve borrowing rates, based on our improving credit profile. Under the asset market program that was launched after we released the Q3 results last year, we issued 5,000,000 shares at an average price of $5.48 for net proceeds of $27,000,000 in equity from the period of November 2020 to January 2021. This equity raise has significantly ameliorated the liquidity of the company to operate as a going concern in the near term and provides a buffer against the continuing challenges of COVID-nineteen.
Recently, We have issued preliminary base shelf perspectives to issue shares from time to time during the 25 month period that this perspective is effective, up to $400,000,000 Due to the outlook of significant growth of our HPDI sales volumes with our initial launch partner and with Weichai, there will be a need for investment to augment production capacity as well as continued investment the evolution of our technology and potential expansion of the application of the technology in other industry verticals beyond on road transportation. We are also excited about the potential industrial and clean energy benefits from applying our HPDI technology and an internal combustion engine using hydrogen. Based on our current and long term prospects, we anticipate additional investments in these opportunities that potentially can create shareholder value and benefits for our current and potential customers. With that, I turn it back to you, Damon.
Thank you, Richard. To recap, I'm immensely proud of our team and the substantial progress we made on our business plans throughout 2020 despite COVID-nineteen. In 2021, our focus will be on continued growth at scale in key markets. For HPDI, that means Europe, China and in North America. And for our light duty business, profitable growth through the aftermarket and OEM channels in markets like Turkey, Russia, Egypt, India and other cost sensitive markets where our products resonate strongly with the needs to deliver affordable transportation and reduce emissions.
The market fundamentals are in place. Societal expectations and regulatory requirements demand a response to the need for clean, cost effective, carbon reducing transportations, and our products provide that response. They're developed, validated, in production for sale and end use today and they meet customers' demand. Operational excellence and exceptional customer service will continue to guide our efforts as well as innovation at the forefront of clean transportation solutions. As Richard said, we think it's a good indicator set up the current rate of growth for HPDI in the head unit OEM business will need to expand production capacity and also fund growth potential of emerging technologies such as Hydrogen HPDI.
I'm confident in our team, and we're committed to building value for our customers and shareholders. With that, I'd like to turn it back to the operator for your questions.
Thank you. We will now begin the question and answer session. Analysts who wish to join the question We will pause for a moment as callers join the queue. Our first question comes from Eric Stine of Craig Hallum. Please go
ahead. Hi, everyone. Good morning, Art.
Good morning. So just Wondering if you can start on hydrogen. You've had a pretty busy start to the year. I mean, clearly, this started in 2020. But in terms of What you've shared publicly in the Scandia announcement.
Just curious what that has meant for your development pipeline. I know you've got a number of potential partners looking at LNG, but giving them the additional path The hydrogen, just curious what that's meant.
Yes. Thanks for the question, Eric. I think it's a really important dynamic for us because
in the
marketplace. There are customers, there are OEMs out there who thought, let's skip it and go straight to hydrogen. And I think now seeing that actually HCI with Hydrogen is not only a good solution, but perhaps are better solutions, one that enables them to reuse all their industrial complex that's already built, all the engine plants, all the transmission plants, All that capability and know how they have with respect to engine combustion engines can now be used with hydrogen based on our initial test results. Of course, there's work for us to do, but I think companies and OEMs that we work with are technically focused in engineering driven in terms of products and the test results are very, very strong. I expect a further balance when we get to the DLL test results at the Animator Symposium Late next month.
So it's, I think, a very important dynamic for us and changes the positioning of our product As a long term viable 0 carbon product for transportation to long haul specifically.
Got it. And then maybe just sticking with HPDI and the current offering with your current partner. Well, I guess number 1, I know you don't give out units, but anything you can share? I mean, it seemed if I'm trying to back into some kind of a number. It seems like it was you did see sequential growth in the quarter.
So maybe If you could confirm that. And then maybe just talk about the baseline being set last July 1, I mean, how much Has that been a part of the growth, in addition to obviously fleets just starting to roll out more units?
Yes, I think there's a whole bunch of dynamics that play out there, are playing out, will continue to play out. And one of them is the regulation. Another one is, I would say, normal fleet adoption cycle with respect to new technology like HPDI is for commercial trucking. What we saw, clearly, we shut down and our customers shut down in Q2, and that included our lead HBI customer in Europe. And that was a very slow and difficult time for us.
But when Q3 started up and factories restarted, No, I think there's a clear picture recognizing that 13% lower revenues in Q3 Versus 2019 and 13% higher revenues in Q4 versus 2019. So I think this kind of trend of 13% lower, 30% higher gives you a flavor for what was happening. And as we mentioned in our discussion, That call or that number was really driven by our OEM business. So with that, I think you can kind of, as you say, back
Okay. Got it. Fair enough. Maybe last one for me. You have talked about the investment And it sounds like it's both some internal, but also doing some or some steps Within the supply chain, I mean, is that should we take that as securing more capacity for injectors?
Is it more on tank side. I mean, maybe just dig into the kind of all the things that you're referencing there, if you could.
Yes. Of course, we sell a complete system from the tank to the injector and some electronics along the line. We have capacity challenges in various parts of the system. Injector is a big part of it for sure. We use 6 Thunder B engine, of course.
So that is we're excited about this challenge to our business to say, hey, you need to grow your capacity to respond to demand. I'm thinking that at this point in time, we're servicing 1 customer in one market of the world. And the potential for growth with respect to the Chinese market It's really tremendous. You talked about that this is already in the world the largest natural gas trucking market And the infrastructure there is built out. We are, through our JV, the leading manufacturer of natural gas engines for commercial vehicles.
And those are smart embedded engines. And so when you bring the superior product of HPDI, which improves the economics for the operator, reduces the carbon footprint, And we've already developed and validated in the European market. So we're looking forward to that launch and the volume curve that comes along with that. So we will Be investing. We are investing in expanding that capacity, and we think that's something that we've been looking forward to for some time and are glad the time has come.
Okay. Thanks a lot.
Thank you, Eric.
Our next question comes from Colin Rusch of Oppenheimer and Company. Please go ahead.
Thanks so much guys. In China, can you just speak to the the cadence of the ramp and what that might do to gross margins as you guys scale up from recently low volumes?
Yes. I think the speculating and forecasting the ramp is very challenging, but I do expect that we'll be able to witness that this year and hopefully soon. Basically, We have this opportunity with our JV to supply all the OEMs in China. We have a unique product that should be appealing to many OEMs in China. That differs from our European market, where we have just the one OEM and it's a vehicle OEM.
So that dynamic is different. And then it's also the largest market. So I do think and we're going into it with a product that's had multiple years of experience in Europe. So there's more confidence globally in our industry around the product. So I think we can expect a steeper curve, But yet at the same time, it's still a lunch curve.
So not a lot of specificity there for you, but I think it's important for us and it is factoring into our equations with respect to growing our capacity to support that expected demand. In terms of margins, I won't make any specific comments at this point in time, but the key ingredient for us is to grow the volume to get the economy to scale that will improve our margins. And launching in China is a very important part of that equation for us.
Okay. Thanks so much guys. And then can you just give us
a state of state
on how you're thinking about the medium duty market? Certainly, there's a lot going on all across Different class of vehicles, but as you have the potential to address both metric acid and hydrogen, It seems there's probably an opportunity for you to creep into some different vehicle designs as you go forward. So just wondering where you're at with that opportunity.
Yes. The medium duty market is, I'll say, 2 things, more fragmented and I'll say, more economically challenged in terms of In order for the economics to work for any fuel based product like ours, where we're saving money every mile you drive, The more you drive, the more mass you carry, the quicker you get your payback. So that's where in the medium duty market, it is more challenging. There's more diversity of applications, some which don't go very far at all and some which approach
kind of,
I don't know, half the distance of long haul, so quite a significant reduction. They also use the vehicles longer, tend to have longer cycles for winter turning over the fleet. So I do think There clearly that's on our radar, but I think actually with HPDI, we could see the opportunity to move in the other direction towards mining and rail and other applications that are kind of bigger engines and really see excellent economics there with HPDI.
Our next question comes from Rob Brown of Lake Street Capital Markets. Please go ahead.
Hi, good morning.
Good morning.
Good morning, Rob. Just following up on the European market, maybe if you could Give some more color in terms of the demand drivers there. Are you seeing this any RNG activity in that market? Or is this sort of a cost savings driven market, maybe a sense of what the demand drivers are in that market.
Yes. I think For sure. Okay. So let's just be real clear, right? Still trucking.
So the economics are the supreme ingredient, I'll say, after your confidence in the technology and the product to deliver the reliability, durability that the truck fleets expect. If you can't deliver the freight, it doesn't matter how efficient it is or how clean it is. So that's number 1. Number 2 is the economics. And then I would say, in Europe especially, There is a tremendous societal pressure and momentum with respect to greening transportation.
And this works for us both on the front of our current product with LNG as well as the potential for that product to respond to 0 carbon hydrogen, green hydrogen in the future. So I think those dynamics are very much in our favor, and we're really happy to be with our partner in Europe And to have launched when we did and be able to ride this pressure in the marketplace and to do it on the basis of a great product that delivers for the fleets and saves the money.
Thank you. And then on the capacity additions you're thinking about, could you give us a sense of the scaling there? Is it doubling, tripling, kind of multiple current capacity? Or how do you sort of see that overall capacity additions playing out in the next year or so?
Yes, it's a really important parameter to manage for any supplier is to match your capacity meter demand as closely as possible. We don't want to be running any part of our manufacturing system or our suppliers' manufacturing system at 10% of capacity. And we also don't want to run into a bottleneck where we can't supply the demand that occurs. So that's the general equation. As we look at it, we are expecting multiples of growth because right now we're moving from 1 customer, 1 market to 2 customers or maybe when you think about the vehicle OEMs in China that we'll be able to serve.
And so we're making those plans carefully, but there's also some challenge. So I think you can imagine that we'll be leaning forward a bit on capacity so that we can serve every unit demand that That's come to us in the near term.
Okay. Thank you. I'll turn it over.
Thanks, Ryan.
Our next question comes from Amit Dayal of H. C. Wainwright. Please go ahead.
Thank you. Good morning, David. Hi, Richard. With respect to clearance of revenues in 2021, how should we think about the quarterly revenue that may play out Given that you are seeing recovery in your segments, HPDI is getting traction, but at the same time, there are Some supply chain challenges that are also in the market right now. So any color on how to model for the next 4 quarters would be helpful.
Thank you.
Yes. Absolutely glad to kind of try to paint a picture a little bit of what we expect. First of all, we are still dealing with some COVID situations around the world. We're fully recognizing how wonderful the vaccines are, and We expect those to have an effect. But in the meantime, our factories in Italy, for example, and our customers around those factories and so forth and our distributors, They're in orange and red zones.
And so that COVID impact is still with us, and we see that affecting our light duty and aftermarket business. On the heavy duty side, we've seen a bit more stabilization, and you can see that the growth is coming through in kind of the 4th quarter, And we expect a good year for HPDI going forward. And then maybe the other thing that's important to mention is As you've heard in the media, there are supply side challenges that all the OEMs are facing, and that includes us. And we're managing that on a daily basis to try and make sure that we can meet our customers' demand. But I think there is risk that, that could impact us and constrain us in Some days, some weeks, hopefully not any month from achieving everything we want to achieve in 2021.
I think we are back to full normal. And so kind of the normal seasonality you might see and expect So it will be still perturbed by COVID this year. I think those are kind of the factors at least that are on my mind with respect to the market outlook for 2021.
That's helpful. Thank you, Sumitry. And then Richard talked about some concessions On the margin front that may have been provided in the Q4, are these behind the company? And Do you see gross margin bouncing back in 2021 relative to the Q4?
Yes. The price reductions were made in the Q4 of 2019, and they were significant. And we saw sort of muted sort of the growth That we had, especially in the second half. Going into the new year, there was a question with the rates. I wouldn't go into specific contracts, but There is, we'll call it, a little bit of near term gross margin pressure that then yields to better economics As more volume starts ramping up and the numbers start getting significant that we have contractual price savings with our supplier base.
Okay. Just one last one, I guess then. With respect to the China milestones for 2021, can you share any key highlights that we should be looking for?
Yes. In China, I think we've made good progress. Of course, we had substantial delays through 2020 with COVID and other challenges with the certifications. But we expect to see the certification on the vehicle side shortly and then thereafter, so through this year, start the project process of launch and production sales. So We're looking forward to
that, but I don't think
we have any more specific stuff here than that today.
Okay, understood. Thank you, David. That's all I have. Thanks, Ana.
Our next question comes from Thomas Boyes of Cowen and Company. Please go ahead.
Hi. Thanks for taking my questions. Most have been asked, but I wanted to maybe just follow-up on the last question about China, Just in case, obviously, you're going with the certification through the wayside change that you think it was accomplished. At the OEM level, how long do those tests usually take on their side? Is it Different for everyone who's testing the engine or just most of them completed in say a quarter or something like that?
Yes. So I think the process is not a short process, but we are aware that there are cases with specific OEMs where the So then it's just a matter of, let's say, getting the paperwork through the officials and having them bless it and issue the certification. And I can't comment on those timelines. It's challenging for us to see and it's also challenging for the For our JV and the OEMs will see into that process. But the testing is done at least in one case.
Perfect. And then, it was nice to see everything that Amazon had ordered around 700 vehicles through the JV with Cummins. I just wonder if you could talk maybe how that business is secured and how you've been seeing potential discussions with other customers just obviously given the rise of e commerce and the pandemic. Out of markets.
Yes. I think it was a real promising report from Reuters That order, because I think what it says is that fleets, large fleets in North America consider and according to the report, our purchasing natural gas product to green their fleet. The economics in North America, because our fuel prices are relatively low and the fuel price differential is not so great, the economics are more challenging and not as compelling. Nonetheless, you have a big fleet, whether it's UPS, we made their announcement previously, and now this report from Reuters about what Amazon It's doing. These are really good signs that fleets are taking their responsibility with respect to carbon emission very seriously and taking action and recognizing that natural gas is an important part and an important step and works for them in their fleet operations, where again, even for Amazon, UPS or any other fleet in North America, The number one thing is get the freight there on schedule and don't pass up capability and the liability to try and get to low cost or green.
And so I'm real compelled and real excited about the opportunities in North America, and we look forward to the chance to bring HPI to North America and go a step further than you can with the
Spark United Natural Gas engine. Fantastic. Appreciate it. Thank you.
Thanks, Thomas.
This concludes the question and answer session. I would like to turn the conference back over to Christine Marks for any closing remarks.
Thank you, operator, and thank you everyone for joining us today. If you do have any follow-up questions, please feel free to reach out to us at the Westport Investor Relations team hotline. And thanks again so much for your interest and that's part of your system.
This concludes today's conference call. You may disconnect your lines. Thanks for participating and have a pleasant day.