Welcome to the Westport Fuel Systems Third Quarter 2020 Results Conference Call. I would now like to turn the conference over to Christine Marks, Westport's Investor Relations representative. Please go ahead, Ms. Marks.
Good morning, everyone. Welcome to Westport Fuel Systems' 3rd quarter conference call, which is being held to coincide with the press release containing Westport Fuel Systems' financial results that that was distributed yesterday. On today's call, speaking on behalf of Westport Fuel Systems is Chief Executive Officer, David Johnson And Chief Financial Officer, Richard Orazietti. 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 reminder, the forward looking statements. So you're cautioned not to place undue reliance on these statements. Information contained in this conference call is subject to and qualified in its entirety by information contained in the company's public filings.
I'll now turn the call over to David. David?
Thanks, Christine, and good morning, everyone. Thanks for joining our conference call to review Westport Fuel Systems' Q3 This is David Johnson speaking. With me on the line today is Richard Orsetti. I sincerely hope that all of you, Last quarter, we talked about strong signals for a green recovery in multiple jurisdictions around the world And stimulus spending to build a better, more resilient and low carbon economy. I'm pleased to say the momentum has continued.
Despite the ongoing impacts of COVID-nineteen and the challenges of second or even a third wave, we are encouraged by signs of recovery We've made meaningful progress in a number of our business objectives this year, Including engine certification in China, growth in our Indian market and significant improvements to our balance sheet. Although the global pandemic continued to have adverse impacts on business, in the Q3, we saw a recovery compared to the Q2 with sales rebounding significantly, Resulting in an 82% revenue increase relative to the Q2 of 2020 and net income once again in positive territory. Customer demand for our aftermarket products and growth on our HBI sales volumes were quite encouraging. 2 of our 3 Italian plants are at higher risk zones in which Travel restrictions were imposed just last week. These restrictions are designed to limit people from traveling between regions.
However, residents can still go to work and are doing so. Our plants are operating at normal capacity. At this time, we don't expect our factories to close. We're closely monitoring guidance and direction from public health officials.
I'm proud
of our team's resilience, hard work and commitment to operational excellence as we continue to maintain a safe and work environment for our team members And first class services support for our customers. We expect continued positive momentum in the 4th quarter, largely driven by HPDI sales As fleets improve the sustainability of their operations with our market ready solution that delivers comparable performance and reduces total cost of ownership. That said, the extent, duration and impact of COVID-nineteen is uncertain. Most of our production is from these three facilities located in Northern Italy Sales from these facilities are primarily Europe in areas that have been significantly impacted by the virus and continue to be challenged to contain the virus We do expect our heavy duty business to be less impacted than our aftermarket and light duty OEM business because of the ongoing need for delivery of freight worldwide. We've implemented a number of austerity measures, which I outlined in the last quarter, and we made excellent progress on shoring up our balance sheet and improving our cash position during this quarter, including new loans with Export Development Canada, UniCredit and Deutsche Bank And a restructuring of our convertible notes, which Richard will walk through in detail later.
Let's turn to a few of the financial highlights. Revenue was significantly impacted in Q2 and still in Q3 due to various shutdowns around the world. But for the 3 months ended September 30 this year, revenue decreased 13% to $65,000,000 from $75,000,000 compared to the same period in 2019. Our light duty OEM and delayed OEM businesses were most acutely affected, which directly reflects the reduced demand for light duty vehicles in the markets we serve. Net income was $800,000 Compared to net income of $5,000,000 for the same period last year.
We recorded positive net income in 2019 and had expected to improve upon this achievement in 2020. However, as I said earlier, the impact of COVID-nineteen has had a significant impact on 2020 results. That said, net income for this quarter was positive And adjusted EBITDA was $4,000,000 for the quarter. Relative to the Q3 of this year, we're expecting continued improvement in revenue and earnings in the Q4 of 2020 and into 2021, but of course this will depend on the strength of the economic recovery and the uncertain but continuing impact of COVID-nineteen. As we respond to ramping customer demand for our products, we remain focused on cost reduction, disciplined cash management and supporting our global team and their communities As we navigate this recovery period.
I'll update you next on a few of our key markets. Let's start with Europe. Europe remains our largest market, representing about 70% of our sales. There are strong signals of market growth and geographic expansion. More and more fleets are purchasing LNG fueled heavy duty vehicles.
With a strong business case, comparable diesel performance and reduced greenhouse gas emissions, HPDI trucks are being deployed in high mileage applications and demanding duty cycles. The European Commission is striving for climate neutrality by 2,050. To take action today, fleet operators can choose from just 4 long haul trucks offering 4 horsepower or more that run on natural gas or biomethane. But only HPDI equipped engine offers full torque, drivability and the efficiency of diesel engines that fleets demand. We continue seeing growth in LNG vehicle registrations, an increase of 175% in 2019 alone according to NGVA Europe.
There are currently 11,000 LNG fuel trucks on the road in Europe. We know that the build out of infrastructure is critical in the adoption of any technology. Here too, we see encouraging signals that point to faster ramp and market penetration for LNG. For example, with the LNG refilling network in Europe doubling reminder, there are now 331 LNG refueling stations across Europe, spanning 21 countries. By contrast, in the United States, we have just 70 stations is limited product choice and the fuel type price differential between natural gas and liquid fuels is not as compelling.
Purchase incentives of €20,000 in key markets like Italy and the extension of a road toll exemption in Germany for LNG trucks Earlier this year, the German government reminder, we have extended rolled toll exemptions for heavy duty natural gas trucks into 2023. This toll exemption further strengthens the business case for HPDI trucks and accelerates actions on the European Union's clinicals. Recently, however, the EU Commission has announced that it has never approved the toll exemption for gas or electric hybrid trucks And does not intend to support it through 2023. Discussions between the Commission and the German Ministry of Transport, who continue to support the exemption, are ongoing. We and others in the industries believe that any attempt to reverse the legislation exemption will be rightly challenged by fleet, Transport companies and fueling station operators who have made significant investments in natural gas trucks and stations.
We'll continue to monitor this closely. Carbon neutrality will only be possible with policies that include the use of renewable and economic gaseous fuels. Major European companies in the retail and food sectors are increasingly switching Biomethane Fuel Trucks as an affordable solution that's available today and can reduce carbon emissions to net 0. Liquified Biomethane or Bio LNG is now being produced in Sweden, Norway, the Netherlands and France with projects underway in more countries. Royal Dutch Shell's announcement to build 50 new LNG Refilling Stations in Germany and a liquefaction plant are significant investments in the decarbonized freight sector.
And effectively accelerate decarbonization and our hardware is fully capable for bio and LNG applications. Work is underway within the European Commission to determine and finalize the CO2 baseline for commercial vehicle emissions. The commission is expected to publish these baselines for each OEM manufacturer by April 30, 2021. The rate is on to achieve targets And avoid penalties, which come into effect in 2025. During the 1st stages following launch of HPDI in Europe, fleets placed orders for just a few trucks for evaluation purposes.
Then, as evidenced in conference grew, orders increased to 10 at a time and 20 at a time. This year, fleet orders have further increased into the 100. And despite COVID, Sales of HPDI have increased roughly 50% versus last year, which is a continuation of the growth rate we saw in 2018. Our heavy duty products are not in a test or experimental phase. They're mainstream for sale and in use today around the world, and we believe they're an important part of an economic recovery in many markets.
A high proportion of CO2 emissions come from long haul trucks, which don't lend themselves to electrification. HPDI is the solution and with even modest market share growth of vehicles that use our technology, our revenues and profitability will keep growing. In September, we announced our Weichai Westport joint venture had received government certification of the JV's HBDI equipped engine. The next important step in the commercialization process is vehicle certification, which is the responsibility of the JV's customers, the vehicle OEMs. We expect this work to be completed and certification issue anywhere from the next few weeks to the next few months.
And like you, we look forward to these announcements from the vehicle OEMs. We have a great partner, a great technology in a large market to serve in China, and we're looking forward to ramping up sales in this important market in the coming years. The long term potential of HPDI in China, the largest natural gas commercial market in the world remains compelling. We continue to work to serve the growth potential for Nestor Fuel Vehicles in India and are growing our business in India. In September, we announced we are combining our operations of our Rohan BRC business with our existing JV with Unuminda, a large well established Tier 1 automotive supplier To serve both our aftermarket and OEM customers like Rudy Suzuki.
The combination provides synergies in sales, manufacturing and operations. The 3rd quarter sales in India were robust. The country recovered from coronavirus shutdowns and automotive sales were strong. 3rd quarter sales in our Indian JV, which we did not consolidate, were about double the sales in Q3 2019. There are a number of factors at play here.
Some of the sales growth is due to pent up demand and refilling the inventory pipeline. The 3 wheeler market is also growing. With the introduction of Broad Stage 6 emissions regulations, the cost of diesel powered vehicles has gone up and some customers simply find it too expensive CNG fuel price is 30% to 60% lower than diesel. CNG vehicles are easier to operate and the number of CNG fueling stations continues to increase. It's too soon to predict how much of the Q3 sales increase is from coronavirus related pent up demand and how much is longer term shift for diesel to CNG.
This will play out in coming quarters, but we're optimistic that a shift has happened. We see similar positive momentum in the Egypt, a growing market for our technology. Egyptian President, Al Sisi announced in July Egypt will not issue licenses to any new cars unless they run natural gas. The decision, which Al Sisi announced during the opening of a number of national projects, intended to preserve the environment, the natural resources of the state and the lives of citizens. The decisions will apply to any car, whether it's a minibus, In August, Egypt's Ministry of Trade and Industry presented the details of an initiative aiming to replace As a reminder, we are confident that we will be able to execute on our fleet and convert cars to run with natural gas during a meeting with the industry committee at the House of Representatives.
As a result, we are fielding new increases and continue to be encouraged by the adoption We've also seen interest around hydrogen vehicles continue to grow. We already participate in the hydrogen market across all transportation applications and currently sell hydrogen components engineered in Canada and manufactured our facility in Italy While hydrogen faces many of the same challenges that natural gas faced 10 to 15 years ago, fleets need product choices. Our goal is to provide economically compelling traces that offer comparable efficiency to diesel and also deliver substantial CO2 reductions. HPDI with Renewable Natural Gas is the only commercially available solution that does that today. Our specialty is working with gaseous fuel With a robust patent portfolio and decades of engineering experience, and we continue to invest in research and development to power our cleaner tomorrow.
We're working to apply HPDI to deliver hydrogen for internal combustion engine applications. Preliminary simulation modeling shows performance and product attributes Comparable to our existing HPDI platform, hydrogen use in the internal combustion engine with our HPDI fuel system The efficient use of that fuel in the internal combustion engine as the HPDI system is capable of delivering could provide for a competitive alternative fuel cell While at the early stages, we have a proven internal combustion engine platform that could be used With either natural gas or hydrogen, it's certainly an exciting direction with optionality for the future. We're currently completing modeling and plan to begin testing in Q1. We expect the better part of 2 decades successfully tackling similar heavy duty vehicle obstacles as what we see in the hydrogen market, a lack of fueling infrastructure, The challenge to efficiently produce hydrogen, substantial incremental vehicle costs and scaling up vehicle production. Irrespective of the technology direction that is ultimately successful, We're poised to take advantage of Green Hydrogen's potential and that's an exciting place from my perspective.
Now, let me turn it over to Richard to review our financials.
Thank you, David. As David highlighted, consolidated revenue for the 3rd quarter rebounded from $36,000,000 in the second quarter to $65,000,000 driven mainly by growing HPDI sales volumes and a steady recovery in independent aftermarket sales Since the reopening of our factories in Northern Italy. Year over year, consolidated revenue was 13% lower compared to $75,000,000 expect to continue to be in the Q3 2019, mainly due to lower independent aftermarket sales as customer demand continues to recover. The ramp in HPDI revenue continues to grow through higher sales volumes through our initial launch partner, partially offset by lower average selling price of HPDI components due to contractual price reductions and lower engineering service revenues compared to the prior year quarter. Gross margin in the 3rd quarter decreased significantly by $7,900,000 to $10,000,000 mainly due to lower independent Approximately $1,000,000 for a field service campaign.
The decrease in margin was partially offset by a significant increase in HPDI sales volumes Consolidated operating expenses of $13,200,000 for the current quarter we're $6,000,000 lower than the Q3 in 2019, mainly due to the continuing austerity measures and government COVID-nineteen relief wage subsidies of $1,200,000 In addition, we had an unrealized foreign exchange gain of $2,300,000 Net income was $800,000 for the Q3 2020 compared $5,000,000 for the same period in 2019. In addition to the impact of COVID-nineteen, the Q3 2019 results benefited from better margins, Including about $1,000,000 in higher earnings from the CWI joint venture. Prior year earnings were also boosted by a reminder, we expect to continue to expect a one time $3,300,000 gain on the forgiveness of government debt for the development of the HPDI technology. EBITDA was $4,900,000 for the 3rd quarter compared to $11,700,000 after adjusting for non cash and non recurring items such as the foreign exchange gain And the one time gain on the debt settlement to better reflect the change in performance, adjusted EBITDA was $4,000,000 compared to $9,400,000 for the same period last year. Turning to our business segment performance, OEM revenue was $37,400,000 during the current quarter, which increased modestly by 3.3% year over year, mainly due to the growth in HPDI sales volumes, partially offset by lowered average selling price of the HPDI components and lower engineering service revenues that I spoke about previously, we expect to see continued growth in our HPDI Although light duty OEM continues to recover since the reopening of our factories in the 2nd quarter, Revenues were approximately 35% lower year over year.
Consequently, our OEM business generated an operating loss CAD4,800,000 compared to a loss of CAD900,000 in the prior year. Included in that operating loss is the one time charge Independent aftermarket revenue was $28,000,000 for the Q3 2020, A decrease of $11,200,000 or 29 percent year over year, mainly due to lower sales volumes caused by the impact of COVID-nineteen on customer demand. Customer demand has been recovering steadily as quarter over quarter revenues improved by 66% over the 2nd quarter. The resurgence of the pandemic in Europe could potentially dampen the recovery during the Q4 as new social distancing measures get implemented Due to austerity measures and government wage subsidies, independent aftermarket generated an operating income of $1,700,000 TWI's operating income of $6,200,000 was comparable to the prior year. Gross margins were 16% lower year over year due to higher sales mix of Lower margin engine sales versus parts revenue.
Margin pressure was mostly offset by lower operating expenses. Equity income for the quarter from the joint venture was $4,900,000 which was down approximately $500,000 or 9% from the prior year. Reminder, we are now ready
to take our Q3 results.
Turning to liquidity, despite a challenging business environment, we generated adjusted operational cash flows From the loss of gross margins was partially offset by wage subsidies of $1,200,000 and the austerity measures we took to weather the immediate impact of the pandemic. We also had a buildup of receivables from increasing HPDI sales volumes and a general recovery in sales in our other businesses. During the quarter, we had a net cash inflow of $17,400,000 bringing our cash on hand at the end of the period to $46,000,000 mainly due to the numerous financing activities undertaken in the second and third quarters to secure As part of our plans to ensure we have sufficient liquidity during these uncertain times, we have launched an at the market program yesterday to prudently issue shares to raise capital from time to time if needed. We have also expanded our credit facility with 1 of our lenders to help us manage working capital pressure from our growing HPDI demand. Due to the continued growth of HPDI sales volumes, the need for investment in production capacity and R and D for developing new technology for solutions like hydrogen, We continue to evaluate our financing needs to ensure alignment to the long term growth plans of our business.
With that, I turn it back to you, David.
Thanks, Richard. To recap, we've made substantial progress on our business plans Despite COVID-nineteen, we remain focused on a few key priorities for the last months of the year. The successful launch of HPDI in China, Continued cost reduction, new light and heavy duty businesses in key market geographies and the profitable growth of our light duty business for the aftermarket and OEM channels. I'm confident in our team, and we are committed to delivering. With that, I'd like to turn it back to the operator for your questions.
The first question comes from Eric Stine with Craig Hallum Capital. Please go ahead.
Hi, David. Hi, Richard.
Good morning.
Good morning. I guess with my questions, I'll stick with Just one thing I did want to confirm from your remarks. So did you say HPDI volumes up 50 And if so, was that Q3 year over year or is that year to date?
Yes, that's an annual figure, just a rough number to give you an idea of the growth we're seeing from that business in Europe. It's quite exciting to us considering the COVID crisis that we all faced with shutdowns both ourselves and our customer. But to see the market come back with that strong return after a very good year, last year of our 1st full year in 2019. So we're encouraged by that. It's really been a shining star for us as we look at The outlook for our business going forward into 2021.
Yes. I mean, I guess that implies given that Q2 When you think about that number, how do you kind of break that down? I mean, clearly, you've got fleets that are, as you said, going from the 10s and the 20s looking at orders of 100 plus, you've also got that the baseline was finalized. This is the Q1 it's been finalized. And curious if that means you're seeing more of a push from Volvo in the market, maybe just how that breaks down in your view?
Yes, I guess, as I try to pull back from the day to day and look at the broad picture of what's a reminder, I would like to say, okay, and if COVID didn't happen, where would we be right now, because the COVID is an externality, of course, that we all have to get through, but reminder, it doesn't have anything to do with HPDI or trucks or freight. So when I look at that, we are launching a product That's a new technology for the marketplace. We are a standout product, patent protected. Nobody else has And I think what we're seeing, Eric, more than anything else is this adoption cycle that I can remember talking about at my first days with the company, which was When a new technology is introduced, especially a powertrain technology in the trucking industry in any market around the world, There is a significant adoption cycle where basically these are large capital purchases for fleets And they're going to buy 1 or 2 and try it out perhaps for an extended period before they buy more. And so I'm really encouraged by these 100 unit orders and kind of the little signs that we see in the marketplace because we don't get such rich data from our customer in terms of What they're doing and how they run their business, it's really their business, of course.
But the signs we do see and the volumes we do see and the growth coming back And this is a technology that can is delivering already and has the potential when it's To me, the signs are very compelling and we're looking forward to getting beyond COVID and getting into 'twenty one reminder, continuing that munch curve and growth of this important product.
Got it. And then maybe last Just turning to China, I mean, I know you're waiting on now the vehicle certification that's out of your hands, but confident that that's either weeks Just curious from what you see, what type of actions have been taken, well, certainly by you, but by Weichai And also by some of the truck OEMs. I mean, is this something once that certification is achieved that you reminder, I would like to turn
the call back over to Steve.
Yes, of course, vehicle certification It's important step in the process, but then those vehicle OEMs will have to sell products and take orders from their customers' fleets in China. And I do expect there's an adoption curve there that perhaps could be a little bit more aggressive than what we have seen so far in Europe, Because the market is already well familiar with natural gas trucking in China with nearly 100,000 trucks per year being sold these days With our joint ventures, Spark Advantage Technology. Nonetheless, this is a new technology and so there will be a ramp curve and some conservatism even in China about taking on new technology, improving now before buying tens or even hundreds of vehicles. At the same time, another key factor in that is we do expect multiple OEMs to come multiple truck OEMs expect to buy engines from our JV using HPA technology, and so that could make the ramp a bit more aggressive. So Those are the factors in terms of the actual plans and scale and timing and we really are dependent on our customers to take those actions.
But they are also global players and they see what's happening in Europe and they're familiar with our products and they're eager to have it.
The next question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.
Good morning. Hey, Ron.
Sticking with HPDI in China, how many vehicles are being in the process of getting certification at this point.
Yes, unfortunately, I can't go into the numbers of our customer our JV's customers. So Unfortunately, I don't have a number to share with you, but it's not a one at a time activity. I can confirm that.
Okay. Okay. That's helpful. And then on the margins, they were pretty low in the quarter. There were some one time stuff.
But how I guess, How much of this margin compression is sort of quickly turning around and how much is a result of the ASP decline and takes time for volume to ramp? And I guess where do you sort of see gross margins
It's a changing So we had significant margin reductions close to call it 30% over a 6 call it 9 month period. And the idea always was those margins were going to be offset by cost reductions That were contractual in terms of increasing volume in the scale. So in terms of settling, I mean, we'd like to be north of 20%. Right now, we're not there. The volumes are growing very quickly.
So our European partner is doing well with the product. So We're getting good line of sight. China is critical to this process. Just want to reiterate, we have a relationship with Weichai and it's It's very important for us with regards to being able to generate the sales volumes there to help us
The next question comes from Colin Rusch with Oppenheimer. Please go ahead.
Thanks so much guys. Just continuing on this gross margin question and the cadence for it. Obviously, you're not providing forward guidance, but how should we think about the volume
Yes, let me
Yes, once you handle that, Richard. I do know the number, it's a question of confidentiality.
Yes. We're in a growth phase and yes, we have a number, but we won't be sharing it today. Fundamentally, We need the second customer who need our volume in China to come along to help us get the economy and the scale to get the cost down to get the margin up. It's a pretty straightforward relationship. It's easy to understand.
But we'd love to see these things happen faster, but there's work to be done in terms of getting the product marketplace and getting volumes up and the cost out. And so that's an important part of our business plan and our activities right now As we continue to work with all our suppliers and also work with our customers to get the volumes up and so we can achieve those economies of scale in the margins that we
target. Okay.
Actually, I'll take the supply chain question offline. But just in terms of the customer interest around Hydrogen and the designs, You've identified or talked about the fact that you're already selling into certain programs around a reminder?
Yes, it's a great question. Thanks for asking, Collin. So the hydrogen market in various parts of the world, Europe being among reminder, not lost on the Asia region or North America for that matter is very, let's say, exciting and interesting and there's lots people doing works in labs, developing products and getting ready for the availability of hydrogen Today with leading OEMs as well as their supply base, so in some cases we're Tier 2 to Tier 1 And providing them with prototypes and developing specific hardware for them on the fuel system side, basically getting fuel from a tank As I mentioned earlier in the call, we see an opportunity to leverage our HPDI technology with respect to hydrogen We really have a very compelling product. Our modeling looks very good to us, like we should have something to offer the market that could have some significant legs and really offer some choice to the marketplace in terms of what kind of technology choices, Including the potential of course to reuse existing engine architectures and yet develop a green hydrogen As it develops and we have the data to share with you. Okay.
Thanks so much guys. Thank you.
The next question comes from Sameer Joshi with H. C. Wainwright, please go ahead.
Hey, guys. Thanks for taking my questions. Can you elaborate a little bit on the India opportunity, the consolidation that you have done there and Like what levels of revenues or contribution as a percent of total revenues do you expect from India for the next few years?
Sure. Glad to talk about this is from our perspective, very important development. Let me just talk to the kind of the general scene and what we're doing and strategy And our operations there, and I'll let Richard comment a bit on the numbers that we don't consolidate, so they end up kind of Of the income statement in terms of any details. But in terms of our strategy, so first of all, the market in India has been a natural gas market for quite some we have been developing the infrastructure, so you are probably aware there is on the order of almost a reminder, we are proposing 2,000 CNG stations across the country and they have a build out plan for that, which is a national plan that's 10,000 stations and they're proceeding along that plan. Natural gas vehicles both light duty and heavy duty are already in the marketplace and we're supporting all the different customers that make those today, and we see a tremendous opportunity to grow.
And the impetus for that growth is not just the infrastructure, but the infrastructure Coupled with the economics that are now fully in play because of the advent of the broad standard 6 emission standards. So that's the standard that's like Euro 6 and what it causes is, I would tell you that the dominant engine and fuel in India today is diesel fuel. But when you go from EURO6 or BRATSON excuse me, EURO4 to EURO6 or BRATSON 4 to EURO6, There's a significant cost increase in terms of aftertreatment that really erodes the competitiveness of the diesel engine and therefore puts a spotlight on natural gas So we have been in the market for a long time in India with a division named Rohan BRC that started out as a joint venture, but then became a wholly owned And what we've done is we've rolled that into another entity that we have in partnership with UnoMinda. You know, Minda is more than $1,000,000,000 Tier 1 supplier to the automotive industry in a number of areas, certain number of sectors, technology sectors. But with us, we work on natural gas product to support customers like Liberty Suzuki.
And so we've rolled in our capability from our reminder, we have a loan sub into our JV with Unalinda and we think that positions us quite well to serve the market even better than we could do And so it's a bit of a consolidation right at the time when the market is starting to pop. And frankly, we're truly pleased with the results we saw in Q3 With the growth in that market and our progress there, frankly, faster than I thought it would come following COVID in India, COVID is not actually over in India as it isn't over anywhere else in the world. And so that's an ongoing pressure, but nonetheless, the numbers were Quite positive and we're pleased about that. So we think we're strategically positioned well and have a great partner and we have a market that's Really expanding right now as a result of the new emission regulations that came into effect just this year.
Understood. Richard, were you going to talk about the revenue contribution?
Yes. Why don't we do that on our call separately?
And then during the last quarter, you mentioned the ESG report and the initiative. Has there been any can you give us an update on that? And is there investor interest activity on that front?
Sorry, I missed the first part of your question.
Could you say it again?
The ESG initiative, Just an update on that. Yes. So
we consider ourselves, you know, borrowing ways as an ESG company. The nature of what we do is we are trying to clean up transportation around the world. And so having a report to then chronicle the work that we've been doing over the past decades and And to continue to build our positioning as and I'll say, it's not just positioning, but actually having people know Through the basis of our reporting about our ESG credentials, if you go in the marketplace. So that's an important part of what we're doing as a company.
The next question comes from Jeff Osborne with Cowen and Company. Please go ahead.
Hey, good morning guys. A couple of questions on my end. I was wondering if you could just touch on the CWI margins. It's been a lot of discussion about HPDI, but can you just touch on what the moving pieces were sequentially on CWI?
The major difference, Jeff, was the just there was a greater reminder, the proportion of the sales mix for engine sales versus parts and that drives
most of the margin difference.
The joint venture tried to offset that with, we'll call it, just managing their operating costs. We're expecting that trend to reverse a little bit in the Q4 and get back to more sort of normal margins that you were seeing in the first half of the year.
That's helpful. And then, can you just talk about the linearity within the quarter? And the reason I ask is, Normally, your day sales outstanding are less than 90 days. Obviously, last quarter was a bit of a challenge and I would assume it was a back end loaded quarter. But can you just touch on this quarter, the receivables seem to be a bit bloated relative to normal times.
So Was that the stimulus on the pass car side kicking in or was HPDI back end loaded? Can you just touch on what drove The higher receivable account terms as measured by days sales outstanding?
For sure. So the DSO is increasing specifically because of the European launch partners. There's a sort of traditional 90 day and it depends on when a sale falls in, but that creates a little bit of a working capital pressure. You would have heard me mention actually that we increased the we have a credit facility. We don't factor our receivables, but we actually And then when we collect money from the customer, we pay down the So it's fairly cheap financing, but we increased that by $10,000,000 because of the sales are starting to increase.
And we're paying our vendors 45 days. So there we unfortunately have an asymmetry regards to when we receive money versus when we're paying on. And so we're trying to address that with the customer.
Got it. I think you alluded in a prior question that pricing as you have greater volume pricing goes down based on Predetermined contracts and you need China to kick in. Yes. Two part question. Was it down 30%?
I thought I heard that number Does it go down another 30%? I'm just trying to understand what the trajectory is, especially if China is slow to ramp up for whatever reason?
I guess there was a view and a risk that was taken. So there is no there are some future ones, but they're small. The biggest ones have been taken already with that particular contract. With regards to that, I think we're okay for the So now the question is how much of volume we will get with the European customer and then obviously Weichai, which Things are progressing along that we have this $18,000 Take and Pay agreement that we're currently negotiating with them to figure out what's the sort of the right cadence of And what we will sell into the JV.
Got it. And the last question I had was just can you touch on you alluded to in your prepared remarks stimulus. Can you touch on what you saw on the PASCAR side as it relates to either Germany or France or any individual countries that might have been bright spots In the Q3?
The bright spots for us definitely, the Italian market is a big one for us, which is roughly 20%. So that's where we're definitely reminder, we've got a great distribution network and a sales team that sells into that and we saw that recovery. It was quite significant From the Q2, effectively Europe was almost comatose for quite a bit of it in the second quarter. That is coming back and it looked good. They actually had even a strong October, which was promising.
The reason why we provided some caution in our statements is because of the sort of resurgence of COVID-nineteen You would have seen throughout Europe, there's we'll call it people are taking a pause again just to stop the virus's Propagation. So that's Jeff, that's our biggest concern right now. So it is doing well. Turkey for us is doing well. Russia as well as that market improved significantly, but it's a lot it's very dependent more so right now on people's
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 everyone for joining us today. If you do have any follow-up questions, please feel free to reach out to me and the
This concludes today's conference call. You may disconnect your lines.