Good morning. My name is Enes, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Westport Fuel Systems Q1 2024 Conference Call. Ms. Ashley Nuell, you may begin your conference.

Thank you. Good morning, everyone. Welcome to Westport Fuel Systems' First Quarter Conference Call for 2024. This call is being held to coincide with the press release containing Westport's financial results that was issued yesterday. On today's call speaking on behalf of Westport is Chief Executive Officer and Director, Daniel Sceli; and Chief Financial Officer, Bill Larkin. Attendance on this call is open to the public, but questions will be restricted to the investment community. You are reminded that certain statements made on this conference call and our responses to certain questions may constitute forward-looking statements within the meaning of 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. With that, I'll turn the call over to you, Daniel.

Thanks, Ashley. Good day, everyone. Today, I will be recapping our Q1 results and providing color on our 2024 strategic priorities. I will also be sharing an update on the joint venture with Volvo and touching on the recently announced zero-emission vehicle or ZEV legislation. Then I'll turn the call over to Bill to walk us through our Q1 results in more detail. So touching first on our financial results. Q1 2024 revenues were down 6% year-over-year, primarily due to decreased volumes in our delayed OEM business as a key customer works through their existing inventory, although we are seeing volumes begin to tick back up here in May. On the cost side of the equation, we have been aggressive in cost-cutting and have begun to make changes. As you well know, some of these adjustments will take time before we see the benefits in our financial statements. As I mentioned at year-end, nothing is off limits with respect to reducing expenditures. We have been reducing costs everywhere from the Board level to the shop floor. I will dig into some examples of where we are seeing success and where we'll be putting more pressure in just a moment. In my first 3 months in the role, I established 3 main priorities for 2024 and beyond, including, number one, driving success via our HPDI joint venture with Volvo; number two, improving operational excellence; and three, reimagining our hydrogen-powered future. To ensure that Westport creates value for our shareholders, we need disciplined operations that flow from a strong strategic plan. These priorities are consistent with that need and are expected to elevate the performance and value of our business long into the future. As you know, we signed the investment agreement for our HPDI joint venture in Q1 and are in the final stage of formalizing the joint venture. We received approval of our competition filing earlier this week, great news, and continue to work towards an expected closing in the second quarter. The investment agreement was a critical step and it solidifies Volvo and Westport's commitment to accelerating the commercialization and global adoption of Westport's HPDI fuel system for long-haul and off-road applications. We continue to work towards an expected closing in the second quarter with some administrative items still being outstanding. Once the JV is closed, this is when the real work begins. In our pursuit of profitability, cost-cutting is not merely a priority. It's an imperative. We recognize that sustainable growth relies on our ability to manage expenses. Therefore, while we are committed to driving top-line growth and operational efficiencies, our foremost focus remains on reducing costs at every opportunity. We have begun to act in a more disciplined way by identifying cost-saving opportunities and making changes. In Q1, we incurred $1.5 million in one-time expenses related to severance and costs associated with setting up the JV. These costs will taper off following the closing of the JV. We have reduced senior management by 6 individuals and announced in our information circular we plan to reduce the Board size by one. We also plan to reduce Board costs in general. Also, we closed the amended Westport and Minda JV in 2024 in the second quarter and are progressing with the restructuring of our presence in India, which is expected to improve our position in that business and generate positive cash flows for the first time in years. Through strategic headcount reductions across the organization, we are streamlining our workforce to increase operational agility. In addition, we are decreasing our reliance on external consultancy, signaling a shift towards internal expertise and resource optimization, and initiating changes in our production lines to optimize manufacturing cost reductions. For example, in Italy, we have brought in an experienced individual dedicated to operations, who, with the team there, is identifying areas of excess and plans, and when and how to reduce the cost without impacting our ability to deliver. Currently, we are evaluating all discretionary costs. And so far, I have updated our hiring policy to focus on limiting hiring to key positions only, focused on ensuring operational continuity, and have implemented travel restrictions to reduce expenses. The goal is to simplify the business and go back to the basics. Westport is fortunate to be part of a compelling industry in which alternative fuels are seeing increased support and investments. We are also fortunate that government policy in key jurisdictions like Europe and North America is heading in the right direction for hydrogen as a fuel source. Recently, here in Canada, we saw the province of Alberta commit $57 million to the development of hydrogen power along with a commitment from Air Products to build hydrogen refueling stations along a key transportation network in the province, demonstrating that hydrogen is essential to decarbonizing heavy-duty transport. We are very well positioned from a strategic standpoint to be part of the hydrogen play as it evolves. In our hydrogen business, we are seeing the support take shape, where, over the past 2 years, we have won 7 development contracts or production programs for new 700 bar hydrogen products, complementing our current 350 bar and low-pressure offerings, where we have also added new programs. Although in early stages, these programs will translate into $70 million in revenue by the end of the decade. With a focus on innovation and staying ahead of the market, we continue to add to and improve our product offering and are now in production for the next-generation 700 bar hydrogen regulators and are beginning on a new line of 700 bar hydrogen manifolds. Recently, we saw new zero-emission vehicle regulations out of the EU, positive news for us and the industry. Our hydrogen HPDI fuel system is compatible with the new ZEV threshold of 3 grams of CO2 per ton kilometer. In addition, our engine management systems for spark-ignited engines and/or hydrogen components for fuel pressure management and regulation are clean mobility solutions designed and manufactured for a diverse set of zero-emission vehicles with hydrogen fuel systems and components for both internal combustion engines and fuel cell applications. The ZEV label conveys valuable benefits to qualified vehicles and fleet operators. It is incentivizing adoption of the cleanest, highest-performing vehicles across the heavy-duty transport sector, aligning with Westport's initiatives. This opens the door for our customers and OEMs to receive incentives as well as funding and other regulatory benefits for incorporating our solutions. While this is a strong step forward supporting a hydrogen future, the continued competitiveness, affordability, and growing availability of biomethane ensures that biomethane fuel heavy-duty vehicles will continue to make valuable contributions to decarbonization of transport well into the future. Finally, I wanted to touch on our current development projects featuring our HPDI fuel systems across multiple modes of transport. These initiatives represent more than just technological advancements. They embody our unwavering commitment to a brighter, greener future for generations to come. These projects are long-term and ongoing. Therefore, I intend to provide updates or answer any questions about each project throughout their duration, although I may not discuss them in depth as frequently as we have to respect our customers' confidentiality. Before digging into some of our key programs, I wanted to touch on our outlook in China. We remain optimistic about the Chinese natural gas vehicle market, which expanded to well over 100,000 commercial vehicles in 2023, and we continue to collaborate with our OEM partner in the Chinese market to provide an affordable low-carbon solution in the future. The parties are currently discussing this work and the obligations of each party going forward. The engine development program continues to evolve and move forward. Moving to our development programs, in November of 2023, we announced a collaboration with a leading global OEM in the rail industry. This partnership aims to adapt our hydrogen HPDI fuel system for applications in locomotives and related equipment used in freight and transit rail sectors. Given the size of these engines, the initial design phase is a large body of work and is currently underway. We anticipate the engine testing to occur later in 2025. In December, Westport announced a monumental development program with a global heavy truck manufacturer. This program focuses on adapting our next-generation LNG HPDI fuel system to meet the stringent Euro 7 emissions requirements for heavy-duty vehicles. This $33 million project is funded by the OEM, and as we work together to diligently integrate cleaner energy solutions into the transport sector. Lastly, we are engaged in a proof-of-concept project with a global supplier of power solutions for marine applications to explore alternative sustainable energy sources for maritime transportation. This project commenced in Q1 and explores the use of our HPDI fuel system fueled with methanol for marine propulsion. The testing of HPDI technology for use with methanol in marine applications is a natural extension of our HPDI technology. We expect that our HPDI fuel system with methanol will be able to provide similar torque, power, and efficiency to diesel, while also potentially reducing NOx emissions. Currently, the engine conversion is being planned with our OEM customer with the intention to run the engine test later this year. As we see it, HPDI is well suited for high horsepower off-road applications as the other low carbon, zero carbon competing technologies in on-highway markets, including spark-ignited fuel cells and battery electric, all have major drawbacks when used in demanding high horsepower applications. Spark injection systems have inherently lower fuel efficiency, which can be an acceptable trade-off in certain on-highway markets, but not in high horsepower applications where the annual fuel use is substantial. Battery electric requires charging time that doesn't work with the daily run time requirements in the high horsepower space. Finally, fuel cells could be a consideration, but high horsepower applications tend to operate at very high load factors, which is where fuel cell efficiency decreases. We believe that high horsepower applications will be most effective when used with diesel cycle combustion, the option with the highest efficiency and durability. Therefore, changing the fuel instead of changing the fundamental technologies for these applications is the best option for decarbonization and functionality, and HPDI is the solution. With that, I'll hand the call over to Bill, who will walk you through our financial results.

Great. Thank you. Good morning, and thank you, Dan. In the first quarter of '24, we generated $77.6 million in revenue. This is a 6% decrease compared to the prior year period. This decrease was primarily driven by a decline in sales volumes in our delayed OEM and, to a lesser extent, in our fuel storage and our light and heavy-duty OEM businesses. Partially offsetting these declines were increased sales of our electronics products and an increase in our independent aftermarket business, where we saw our sales increase in North America, Western Europe, and South America markets. Gross margin decreased to $11.7 million or 15% of revenue in the quarter. This is down from $13.3 million or 16% of revenue in Q1 of last year. This decline is primarily driven by the reductions in the Q1 '24 revenues, which were partially offset by an improvement in sales mix to higher-profit markets in our independent aftermarket business. Our adjusted EBITDA loss increased by $2.1 million to $6.6 million. In the quarter, we had about $1.5 million of costs related to severance and outside services associated with closing the joint venture. Going forward, we expect to see a reduction in outside services once the joint venture is closed. OEM revenue for the first quarter of '24 was $49.3 million, down $7 million compared to the prior year period. In the quarter, sales volumes decreased in our delayed OEM, fuel storage, and light-duty OEM businesses. Our heavy-duty business sales volumes decreased, which were partially offset by higher engineering services revenue. Sales volumes in our Electronics business increased, driven by higher sales to one of our key customers. Gross margin in our OEM business decreased in the quarter to $4.5 million or 9% of revenue. This compared to $8.1 million or 14% of revenue in Q1 of '23. This decline is largely driven by lower volumes in our delayed OEM business, which traditionally have strong margins. As Dan mentioned, our key customer here entered '24 with excess kit inventory, and they are working through their inventory in the first quarter. As we mentioned on our year-end call, LPG fuel systems deliveries to our global OEM customer began in the first quarter. However, we saw a limited impact on revenue as it is only a partial quarter of deliveries, which included a ramp-up in production that is expected to continue throughout the year. Independent aftermarket revenue for the first quarter of '24 was $28.3 million. This is up $2.4 million compared to the prior year period. Increased sales in North America, Western Europe as well as expansion into markets in South America, primarily in Mexico and Peru, drove this performance, with sales declining in Africa and Eastern Europe. Our gross margin increased to $7.2 million or 25% of revenue compared to $5.2 million or 20% of revenue in the prior year period. This increase was driven by higher sales volumes and an improvement in sales mix to higher margin markets. Total liquidity or cash and cash equivalents at March 31, 2024, was $43.9 million. Cash provided by operating activities was $142,000. This is a significant improvement over the same period last year, helped by continued reductions in net working capital. Investing activities include the purchases of capital assets of $4.9 million, and financing activities were attributed to net debt payments of $5.8 million in the period. Looking forward, we have multiple projects and initiatives either announced or underway that will have a positive impact on liquidity as we continue to prioritize solidifying our balance sheet. To reiterate Dan's statement about cost, in our pursuit of profitability, cost-cutting is not merely a priority; it is imperative. We've been identifying cost-saving opportunities and making changes. And we're already seeing a positive impact of these cost reduction initiatives. With the full effects of these initiatives, it will be more obvious in our financials after we close the joint venture and those one-time costs taper off. All that said, we have a lot more to go. Moving forward, we will continue to be prudent in our liquidity management, and multiple steps are being taken to do so. And we will continue to do what's necessary to ensure that we are adequately and fully capitalized. Thank you. And with that, I will turn it back to Dan.

Thanks, Bill. Finally, I wanted to close on a few key points. Westport is part of a compelling industry with a bright future and we are driven to make a material impact on the decarbonization of the transport industry. Although revenue was a miss this quarter, it wasn't permanent. And we're making the necessary changes to optimize operations, cut costs and ultimately close on the HPDI joint venture. Our short-term goal is to stabilize the business. Long term, we will be focused on building a sustainable and profitable future. Driving our 3 key pillars with a culture of discipline and excellence, we'll deliver the objectives we established. I want to take a moment to thank everyone for being here today. And with that, I'll turn it over to the operator to open the call for questions.

Your first question comes from Colin Rusch with Oppenheimer.

I appreciate the comments around customer inventories. Can you talk a little bit about what you're seeing in terms of sell-through on that inventory and when you think it will be fully cleared?

Bill, you want to jump in on that one?

Sure, we're beginning to notice an increase in sales driven by demand. One of our customers has experienced significant growth in the Italian market, which has led to some challenges as they navigate this expansion. We're assisting them during this transition. They've acquired excess inventory and are in the process of managing that. We are starting to see those orders for the kit inventories being placed again, and we expect this to continue to increase in the latter half of the quarter.

Okay. And that's some very specific stuff. But yes, in general, one of the things that we have done is implemented an inventory committee because inventory is one of our top priorities, working capital, obviously, overall, it's a top priority for us. And we are digging in and setting new targets to manage inventory better, having a better connection between a customer order and a supplier order to be more disciplined in how we manage inventory overall.

That actually is a good dovetail into my second question, which is really around working capital. So as you guys look forward, how big an opportunity is there over the next couple of quarters to generate cash from the balance sheet and the existing working capital exposure?

I think we do. We've made a lot of progress calling over the last, call it, 12-plus months and improving our working capital and continuing to generate that and turn that into cash. We still have a lot more work to do. As you saw, we had a fairly significant reduction in our receivables during the quarter, which definitely helped from a cash flow perspective. But I think inventory is an opportunity for us to continue to reduce our net working capital, enhance our liquidity. And as Dan mentioned, that's a high priority for us to tackle that and try to reduce inventory, improve turns, but it's going to be a team effort to drive down the inventory to levels that we can efficiently manage what we can still deliver on our customer demands.

Yes. I would like to elaborate on that because one of the key aspects of promoting discipline in our business is to make many of these processes routine rather than exceptional. We shouldn't wait until we realize that we have excessive inventory; instead, we need a process that prevents such buildups from occurring in the first place. Then we can effectively manage the balance between customer orders and supplier orders, making it a regular practice rather than an outlier.

Your next question comes from Chris Dendrinos with the RBC Capital Markets.

I guess I wanted to begin here. You had some commentary in the prepared remarks around your China partner. And so I guess I wanted to go back to that. And specifically, I think you mentioned you're discussing the work and some obligations that each of you all have moving forward. So could you maybe discuss that in a bit more detail, what are the kinds of commitments or obligations here from the parties? And maybe how should we think about things progressing?

Well, let me start by saying that we currently have no production orders from them in the system. We have received more development orders for their engines, and that trend will continue. We are working with them on planning and determining the direction of that development moving forward.

Okay. And then maybe shifting gears a little bit to the H2 opportunity and you highlighted maybe $70 million of revenues by the end of the decade. I guess maybe what's sort of underpinning that assumption set? And then what's the cadence or how are you guys thinking about the cadence of that opportunity? What are the kinds of levers that would, I guess, accelerate that opportunity going forward?

Sure. The H2 numbers we are discussing relate to the components used in hydrogen systems, which we are supplying to major Tier 1 companies worldwide. We have been involved in development projects with them, and now we are receiving production and prototype purchase orders to advance those projects into production across several OEM platforms. We have determined that our hydrogen components are recognized as the best in the world. Consequently, we are encountering far more opportunities than we can manage. As the hydrogen ecosystem develops, these components will be essential for increasing production in the coming years.

Your next question comes from Rob Brown with Lake Street Capital Markets.

I just want to follow up on the cost cuts. I think last time you talked, you were still getting into it, but do you have a sense on maybe the goals on the cost cuts ultimately or sense of when you can get to profitability?

Yes. Our goal is to flex our costs effectively in response to the fluctuating volumes in the automotive and mobility markets. We need a disciplined system that adjusts our costs in line with these changes. Currently, we are stabilizing the business by aligning our costs with our current operations, and we will implement a system for ongoing cost flexibility. This management of costs should be a routine practice rather than an exception; it can't wait until the end of the quarter to address. In the short term, our objective is to align our overall costs with our business size, as our costs and overhead were previously too high for our current business scale, and we are making those necessary adjustments.

Rob, regarding your question, we cannot solely rely on cost-cutting to resolve our issues. We must also focus on increasing revenue. Therefore, we will adopt a balanced strategy that involves both reducing costs and rightsizing the business, while also prioritizing top-line growth to achieve profitability.

Okay. Regarding the European heavy-duty market, it declined in the quarter you mentioned, but there are some signs of improvement in that market. How do you view its recovery and growth this year?

Yes. I mean, we're all watching every day what's happening both in the heavy-duty and the light vehicle markets on volumes. It's pretty volatile. Our goal is to be prepared if the volumes do come that we're ready to supply whatever the customer needs. Do I think the market is going to rebound in heavy trucks? I'm hoping so. I don't have that crystal ball. We rely completely on our OEM customers to let us know exactly where they're going and what they plan on for volumes.

Your next question comes from Amit Dayal with H.C. Wainwright.

Dan and Bill, regarding the Euro 6 and 7 deliveries, have they started? You mentioned that these deliveries were expected to begin in 2024, so I'm curious about the current status.

Euro 6 has begun. Euro 7 is going to be ramping up. We did see a bit of a delay in the launch of some of the new programs with our OEM customer, our biggest OEM customer over there, but we do expect those to ramp up faster now that the delay has put some pressure on them in the marketplace. So Euro 6 has started and Euro 7 is coming.

I know the first quarter was a little bit weaker year-over-year. But for 2024, should we continue to anticipate year-over-year growth as some of your customers who may have delayed orders, et cetera, come back and other initiatives sort of start ramping for you guys?

Will, you want to?

Yes, I'll take that. In terms of the year, Q2 presents some reporting challenges as we aim to provide clarity on the current state of the business and its future outlook. We acknowledge that Q1 was a weak quarter, but we anticipate an improvement in Q2, following the usual seasonal trends we experience in our business. Typically, activity increases in Q2, then tapers off in Q3 due to holidays across much of Europe, before ramping up again in Q4.

Just one last one for me on the China side. This was a big part of the narrative a few years ago, and then there wasn't much progress. This time around, is there potentially a way to accelerate this relationship and opportunity from development-type work into production orders? Just trying to get a sense of whether this is coming back to potentially really contribute in terms of revenues and margins, not in 2024, but maybe 2025 and beyond.

I believe we will see business ramp back up in Q4.

What are the catalysts that are driving sort of this service revival in this relationship and opportunity?

Yes. So I think when you said 2025, I think you hit it right on. I think that's when we're still working on engine development activities. And we don't know or can't speak to specific timing of when that customer will kick off production of that model. But we still have a good relationship. We're still doing development work. They're still looking to use our technology for the new platform. But as I said earlier, we have no orders today on production for within 2024, but the development will continue in a positive way. We're still working very well with them.

Your next question comes from Jeff Osborne with TD Cowen.

Just 2 quick ones on my side. I was wondering, Bill, if you could frame the OpEx run rate post the announcements that you detailed on the call. Is there a way to think about the dollar value of costs that's been taken out of the business?

Yes. Right now, we're not in a position to quantify what that is. We expect to see as we progress on these cost reductions, we do expect our G&A sales and marketing run rate to decline on a comparative basis. And I suspect we'll huddle up internally and on future calls, I'm sure we'll continue to provide updates on how we're progressing on our cost reduction initiatives.

And would there be any updates on how we're progressing on our cost reduction initiatives?

And the scope of our cost reduction activities, as I said in the opening, it's from the Board right down to the shop floor, there's nothing off limits, and we're very aggressive in cutting costs. And as you know, many times when you go about this, you're taking on a bunch of one-time costs to get there. We're still mapping out the run rate, but we're in the middle of this cost cutting, right? It's an aggressive effort across the company. And as we get through it, we'll get a better feel for what it's going to look like longer term.

Got it. I assume you couldn't touch on, is there any cash severance that we should be modeling in or one-time charges for the upcoming quarter?

I don't expect the severance costs to be significant. We did incur some severance in the first quarter. Regarding one-time costs, we are still using outside services related to the joint venture to reach the finish line and start it up, and we should see those costs start to decrease in the third quarter.

And my last one is just, is there any notable technical progress that you could update us on the hydrogen ICE engine platform more broadly?

Yes, I think the latest market news indicates that our OEM customer is continuing to develop hydrogen, with the hydrogen ICE engine being a crucial part of their future strategy. We're receiving strong interest from multiple OEMs regarding the hydrogen HPDI as a solution for the next 5 to 10 years. Development is ongoing, and this makes us very optimistic about the long-term outlook.

Your next question comes from Mac Whale with Cormark Securities.

Just one quick one for me. Dan, I'm just wondering, as you rightsize the organization, where do you think the biggest risk lies for the business? Is it potentially a negative impact on sales? Or is it that you make these changes and don't get any impact on margin? I just want to understand the risk versus the goals you're after?

Yes, sure. So that's one of the reasons it's not like hitting a light switch, Mac. We're looking at each part of our business, each discipline, each region, figuring out where we can cut without affecting our ability to continue to grow the business. As Bill said, we can't cut our way to prosperity. But we have to right-size the business. So each discipline is being looked at to get it rightsized to the business we are today with a view forward to where the growth opportunities are. So while we're trying to cut corporate overhead as an example, we're trying to get that rightsized and where on the technical side, the engineering side, we're keeping our team focused on these big development projects. As we talked about, we have a bunch of big development projects that are really going to lead to our future. So we're not cutting those, but it's just rightsizing every discipline to the business we have.

Okay. As a follow-up, Dan, can you provide a timeline on how long that process takes? Is it a couple of quarters before we transition to this new organizational structure, and then do you anticipate it will take a year or two to start seeing the benefits from that? How should we approach our thinking on this?

Yes, that's probably a good way to describe it. I think that the corporate type cost-cutting is happening faster than some of the operational cost-cutting because while we look at our operations to get those fine-tuned, you can't cut them as fast because you're delivering product every day. So, to me, it's 2 different buckets. Getting the corporate overhead rightsized, we can do pretty aggressively; the operational stuff takes longer, putting in place some of the disciplined manufacturing processes we want to use, as I mentioned, like inventory management and getting that process between when a customer orders and we order from a supplier, getting that efficiently balanced. Those things take longer time. So it's going to be into next year before we see some of those benefits. We'll see the corporate cost-cutting benefits by the year-end, and then we'll roll into next year with the continued focus on the operational side.

Your next question comes from Eric Stine with Craig-Hallum.

I know we have covered a lot during this call, but I am curious about the Chinese OEM. This is definitely the most you have discussed it in a long time. I realize that LNG sales in China are quite high and the outlook is very positive. Am I wrong in thinking that this increase in engagement may relate to LNG? I ask this because, before your time, Dan, there was a view that Weichai might skip LNG and move directly to hydrogen. It seems that this perception may be changing, with LNG now seen as a viable and appealing opportunity.

Yes, I believe that LNG in the Chinese market will continue to grow, and the transition to hydrogen, similar to other parts of the world, depends on the timing of infrastructure development and the reduction in hydrogen prices. These factors must align for hydrogen to gain traction, and I am confident it will. In the meantime, LNG will be the primary growth driver for China. Our technology is versatile enough to accommodate both fuels, which we refer to as bridge technology. I want to emphasize that currently, we do not have any production orders from Weichai; we have been providing them with development parts for trials. We are making progress on our development efforts and are hopeful to transition from development to production eventually, but at this moment, we do not have any orders.

Thank you. There are no further questions on the line. Please proceed.

All right. Well, thank you very much, everyone, for your questions. I know I'll be talking to a bunch of you throughout the day, and look forward to it. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.