Thank you for standing by. This is the conference operator. Welcome to the Westport Fuel Systems Second Quarter 2019 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Shawn Severson with alphaDIRECT Advisors, Westport's Investor Relations representative. Please go ahead, Mr. Severson.

Thank you, and good afternoon, everyone. Welcome to Westport Fuel Systems second quarter conference call, which is being held to coincide with the press release containing Westport Fuel Systems financial results that was distributed this afternoon. On today's call, speaking on behalf of Westport Fuel Systems, is Chief Executive Officer, David Johnson; and acting Chief Financial Officer, Jim MacCallum. 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 such forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. Actual results may differ materially from these predicted in the forward-looking statements so you are cautioned not to place any 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?

Good afternoon. Thanks for joining the Westport Fuel Systems Q2 2019 conference call. I'm pleased to share our latest financial results, highlight market drivers that are advancing our clean transportation industry globally, and showcase trends and data points specific to our markets and our customers. Our excellent results validate our strategy. They are further proof that our cost-effective market-ready products combined with stringent emissions standards are driving our company's growth. Let me turn straight to the financial results. With strength in OEM sales and our independent aftermarket channel, transportation revenue was $82.4 million, up 12.6% over Q1 of 2019. Adjusted EBITDA of $8.1 million is our fifth consecutive quarter of positive adjusted EBITDA, and also the second quarter of positive EBITDA. We generated $2.5 million of positive cash flow from operations this quarter compared to consuming $2 million during Q2 a year ago. Our Cummins Westport JV contributed $5.9 million to our bottom line in Q2 and $14.5 million in the first half of this year. Overall, another strong quarter with contributions from across the business. Our financial results aligned well, with market trends that we expect will not only process but will accelerate. We're witnessing a real-time market response to new regulations. Europe's new heavy duty CO2 regulations require truck OEMs to achieve a fleet average CO2 reduction of 15% by 2025 and 30% by 2030, compared to a 12-month baseline that's being created right now. That is from the beginning of last month through the end of June 2020. This regulation is driving OEM decision making. In May, along with Delphi Technologies we presented joint technical paper at the 2019 Vienna Motor Symposium. There were 3 important takeaways for OEMs, customers and regulators. First, using natural gas and a diesel cycle delivers equivalent performance to that of commercial…

Thank you, David. Q2 is a strong quarter on many fronts and I'm pleased to see the continued strengthening of our balance sheet and improvement in operating results. Our businesses performed well, which led to strong revenues, strong earnings and positive cash flow from operations. To review our Q2 results in more detail, I'll begin on Slide 2. We closed the quarter with sales of $82.4 million, a net loss of $2.3 million and positive adjusted EBITDA of $8.1 million. Our fifth consecutive quarter of positive adjusted EBITDA. Our Q2 2019 adjusted EBITDA was an improvement over Q1 2019 and almost matched our strong year ago performance. Improvement over Q1 is a result of strong sales during the quarter. A decrease over Q2 2018 stems primarily from lower margins and lower CWI earnings. Turning to Slide 3 we look at our transportation business segment. Transportation revenue was up 6%, absent the effect of foreign exchange, but due to the devaluation of Euro versus the U.S. dollar we are reporting an increase of 2% as compared to the same quarter in 2018, primarily due to strength in our HPDI and delayed OEM sales. Similarly, the aftermarket business would have been 2% higher, absent the effect of foreign exchange but due to the weaker euro we are reporting a decline of 2%. Q2 2019 OEM revenues increased by $3.1 million or 13% over the prior year quarter. HPDI product sales were the primary driver for the OEM increase. Gross margins were in line with expectations in prior quarters, but were lower than the extraordinary results of Q2 2018, partially due to a favorable warranty adjustment in Q2 2018 and partially due to a change in product mix. As mentioned on our last quarterly update, we continue to experience strong demand for our…

[Operator Instructions]. Our first question comes from Rob Brown with Lake Street Capital Markets.

I think you mentioned on your DOEM business you had a couple of new OEMs. Are these new OEMs to the program? Or are these new model lines and product lines with prior OEMs?

Yes, so do we see an expanding interest and our DOEM business is going quite well, and what we're finding and seeing in the marketplace, Rob, is that people -- OEMs are recognizing the need to respond to their customers and the DOEM facility allows them to do that in a very quick way as opposed to a full-on development program they have to execute themselves. So what we're seeing in the new OEMs are I think one of the new model from an existing OEM and another one is a new OEM, but I have to follow up with you specifically on that to be 100% certain.

Okay. Great. And then on the Weichai HPDI program, you said it was kind of coming this year but can you give us a sense of how that roll out might progress just in terms of timing? Is it initial shipments this year and then more of a ramp next year? Or just sort of directionally how do you see that rolling out?

I think you said it well, initial shipments this year to kind of the prime the pump and get the system working and through the manufacturing system at Weichai Westport and then out to their customers, the truck OEMs. I think you probably are well aware that the market in China has been extremely robust with respect to natural gas vehicles there. And our customer, our partner Weichai is very excited to climb the ramp, and get the product to the customers. So we're really excited about that. The launch is in process, so not done yet, but the outlook is very strong.

Our next question is from Colin Rusch with Oppenheimer.

Just looking at the balance sheet there's been a pretty significantly increase in working capital. The cash is balancing up pretty well. Can you just talk a little bit about what's going on there and how that might unwind as you go forward?

Yes. Thanks Colin, for the question. Yes, we certainly had strong sales in Q2, which is driving our receivables balance primarily, and we had some accruals that we spoke about. So that's increasing our working capital. Yes, as we play out seasonality will come into effect a little bit or Q3 is generally a little bit slower than our Q2 results, so we will see some reduction in working capital and hopefully an improvement in cash as we see the pay down in receivables.

Okay. Great. And then just on the DOEM business. Can you talk a little bit about any potential pricing power, margins trajectory, particularly as you start ramping with Weichai, which we understand maybe a little bit of a drag initially on the gross margin line?

Yes, I think it's a good point Colin that you raised. Basically launch phases of any product whether it's a vehicle or HPDI technology for us tend to be an expensive period of time and not the super profitable time. So we will see some pressure on margins from the launches, and frankly we're still in the low volume regime with our European launch of HPDI 2. So that's just the facts. Our DOEM business for us is a good business, we don't break out the margins there but I can tell you that it helps move the margin in those direction, let's say, for the company.

Okay. And then just can you talk about how robust conversations are with any potential new partners? Obviously, you're not going to give us too many details, but it seemed to me that you are building some momentum with some of those folks and getting closer to potential additional licenses so could you give a sense of how that's progressing?

Absolutely, glad to do so. But you're right, I can't have too much, but I'll tell you what I can tell you. Bottom line is that the regulation in the marketplace and what's happening with the build out of infrastructure, the leadership of our lead customer in Europe, the coming products in China with a very, very strong and capable partner Weichai with what they're doing, all of these things are coming together to really accelerate and deepen the conversations and even the work that we're doing with customers to accelerate them for its production. So for us is a very busy time. As you know, in our business of being a Tier 1 supplier, we don't get to make the announcements of when SOPs would be. That's something for our customers to do, but we're looking forward to that and that's -- we can see it coming and unfortunately can't give much more detail than that.

Our next question is from Sameer Joshi with H.C. Wainwright.

Just a clarification in Europe or other for this year most of your HPDI sale will come from Europe, right? China is not going to be a big part of this at all?

That's correct. Most of our sales for 2019 will be European-based.

And what is the cadence? And how are you seeing the ramp up from each partner that you sign up? And do you have any -- like is it similar to the first partner you had? Or are you seeing any differences there and will?

So yes, one thing to comment on that, Sameer, is that in the development phases we can do the development phase more quickly with our second, third and fourth customers than we did with our first one. So I think that's something that our follow-on customers are really appreciating is that it's -- off the shelf would be too easy, but basically it's a developed technology that we can apply to an engine and get to production and it's not research project. So I think that's material in the rollout of the development phases. In the actual production, let's say, industrialization and commercialization phase, that's more dependent on our customer and how they do those processes. And everybody is a little different, but I would say are generically they are -- lot more -- more same than they are different in terms of the cadence, and then it's really driven by the market. So we could imagine, for example, and the signals from China are that we will see a different ramp in China that we've seen in Europe. But it all -- all the guessing game for every industry even the experts so we'll see.

Right. That's a good segue and my next question, actually, which is about the fleet markets. Are you seeing -- like do you have any visibility on how the fleet markets are approaching the OEMs? And -- are OEMs standing with this -- and giving you this information? Or are you -- you have other sources?

So we have some tidbits and some insights from our various different connections with the industry at the OEM level, both existing and developing customers. But I -- it ends up being a tapestry of typos as opposed to a comprehensive view. So from that perspective we follow the market in the same way you do. And we do hear this LNG infrastructure build out fleets like the ones I referenced that have bought 20 vehicles in Switzerland and [indiscernible] and Ledo. These kind of things, this anecdotal stories of fleets going from, I had one it ran up to 6 months, love it, now I'm going to buy 10 or 20 or 30. We've seen quite a few stories and they may come from time to time and we expect those to continue to increase in terms of the quantity and the frequency and that's already been the track record.

Understood. One last one from me, given the Cummins acquisition of Hydrogenics or pending acquisition I should say, do you see any synergies between CWI and that relationship there?

I'm missing your question. Synergies between -- I'm sorry maybe you could state it again.

Synergies between the Cummins Westport joint venture and the Hydrogenics business.

No. I wouldn't say so. I think these are essentially competing technologies in some way in terms of how to decarbonize, and how to take next generation transportation that's cleaner. But what we do see an opportunity is that basically in all those companies like Hydrogenics and others that are in the fuel-cell business they need to store and regulate and deliver hydrogen to the fuel-cell stack and so this is a business that we are -- consider ourselves a leading provider of those kinds of equipment to those kinds of customers. So we would see the new entity within Cummins to be a customer of ours with respect to our hydrogen capable regulators, valves and so forth.

[Operator Instructions]. Our next question comes from Christopher Souther with Cowen and Company.

I was wondering if you could just walk through kind of the guidance raise, the puts and takes there as far as is it increased activity with HPDI in Europe? Is this kind of better visibility into the ramp with Weichai or is there some of the legacy businesses that are just looking stronger at this point?

Yes. Thanks for the question, Chris, yes, so we've raised our guidance and also narrowed the range that as you've seen and yes, there's a number of things. It's really the result of our strong first half. And we've done -- we've had 2 really excellent quarters in Q1 and Q2, our existing businesses have been performing well, and independent aftermarket, the Light-Duty space and in the HPDI ramp. So we're pleased with however -- how all of our businesses have performed, and we're reasonably comfortable with the guidance range that we've given. David spoke to the Weichai launch, there is some -- we don't know exactly when that timing will be later this year. So it probably won't have a huge impact for 2019. But the rest of the business is performing well, and that's why we've raised the guidance as we have.

Understood. And then you talked about kind of the HPDI not yet profitable. Do you have kind of a breakeven kind of target range either sales in dollar amount or percent of sales or number of customers that you're kind of thinking around this point or is it still kind of developing?

You can be sure we have targets, and we come to work every day to make sure we meet and beat those targets but to kind of come back to what the fundamentals to your question from our perspective it's -- we need more than 1 customer and more than 1 market, and we need the market adoption in order to get to some more volume. Frankly, the volumes outlook we see in both Europe and China are material to us. But perhaps, the outlook is that China could be the real driver for the volume increase that allows us to get their economies of scale that allow us to get the profitability we need on the product. The other thing that is happening is the development programs are -- tend to be paid for by our customers and so that's also good for the business and that will show up as I think as we unroll the business in the months and quarters ahead.

So is that developments come in as revenue to you guys or just they are paying the bills, so to speak?

Yes. Typically, it's revenue coming into us.

Got it and...

They're not all the same. So there isn't just one answer, but yes, there is revenue in those contracts for us typically.

Okay. And then just the last one the infrastructure activity really seems to be accelerating especially in Europe and you talked about a couple of the key markets where it is expanding. I just wanted to get an idea of in Europe what you're seeing from kind of the OEM in those conversations. Is it your product that's driving some of the infrastructure? Or the infrastructure build out that's driving, people to come to you just understanding kind of the chicken and eggs it seems to be getting soft here. Do you have any idea on that?

The good news, I have -- I can give you a little commentary, the good news that I see is it actually -- we talk about it being chicken or egg it actually doesn't turn out to be chicken and egg, it's more like hand in glove right? They're together. So the signals from the market place from the OEMs and from the fleets are -- I'm going to need fuel in this location in order to use this vehicle and the infrastructure is being built. Meanwhile, the infrastructure being built is enabling the fleets to tell other OEMs I want these products. So certainly the advent of more products like our lead OEM customers brought to the market place in Europe that also drives the cycle. So all of these ingredients are coming together and really supporting one another. What I would tell you right now is I haven't heard a single story from any fleet or OEM that says sales are being constrained by lack of infrastructure. So -- and in fact I was checking the NGVA website or European website today and now it's 212 refueling stations as of August to this date. So it's really expanding quite strongly, they are doing that because they see that the signals of more products, more products being sold, more fleet saying I plan to do this, more trucks lining up to get the fuel, so all these things go like I say hand in glove to build the marketplace and really achieve our goals.

Our next question is from Eric Stine with Craig-Hallum.

So jumped on a little late, I apologize if this has been asked and I to appreciate that you're somewhat limited as to what you can say with your launch partner in Europe. But is this something that we should think about sequential improvement versus the first quarter? And is that something that I guess -- do you expect seasonality in that business? And is that something you expect as you head into 2020?

I don't have a look on seasonality so much. Basically, we see the forecast from our customer. They give that to us and then it moves around and then we deliver to their orders. And so we're really kind of on the tail of this as opposed to the spear -- tip of the spear. And we are a supplier to that customer of ours and we react. But as a general premise, I don't know of any specific seasonality in that marketplace, I'm sure there is some. But I'll be able to tell you more about that in a few years than I can't right now.

Yes. But did you see sequential growth versus the first quarter, is that something you're able to disclose?

Yes. We see some modest growth. So we characterize the launches of ramp and we're in a ramp. So it, of course, we'd always like to see it steeper so -- and we're working towards that with our customers and adding customers. But yes, it's a ramp for sure.

Yes. Okay. And then maybe just bigger picture on HPDI. As you get out in the market you mentioned the presentation you gave as the pipeline builds. I mean do you have any thoughts about where you see the long-term mix, HPDI versus spark in the market?

Yes. I don't have a mix between the two but what I do think about is how do the OEMs comply with the regulation, right. So 2025 is for the OEM business, as you know, right around the corner. Actions need to be taken. Products need to be developed, launches need to be achieved in order for those OEMs to achieve the numbers that are in the regulation for 2025. And when I think about HPDI and natural gas offering, a 20% CO2 reduction and the OEMs needing to achieve a 15% reduction on their fleet seems like the mix got to be pretty high, and so I think that bodes very well for us. And I've been really racking my brain around what other alternatives could be in the mix and certainly there will be other things, but I don't see them on the marketplace today, right? So you can't go by a long haul electric truck or a long haul fuel-cell truck or some other thing, so I'm really scratching my head trying to figure out what else could be in the mix to help the OEMs achieve their goals. So I -- it's very, very bright future for the technology, and we're excited about what we do with our customers kind of behind the curtain right now and then out in the field with our launch customers.

Yes. Absolutely maybe last question for me the -- you mentioned the provision -- the $4.5 million provision to estimated cost to complete and resolve the SEC process, is that something that we should take as a positive sign that you're getting close to wrapping that up?

Yes. We can't say a lot about it, Eric, but currently we have an estimate now that we're able to accrue for the cost that we think that we're going to have to complete and resolve the investigation.

This concludes the question-and-answer session. I would like to turn the conference back over to Shawn Severson for any closing remarks.

Thank you every one for joining us today. If you have any follow-ups or any additional questions please reach out to us at Westport Fuel Systems Investor Relations at 604-718-2046. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.